Marketing of

Agricultural Products

RIC H A R D L. K 0 H L S, P II , D ,

DEPARTMENT OF ACRICULTURAL ECONO:!lIICS

PURDUE UNIVERSITY

A8GR \L
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'The Macmillan Company, New York

COPYRIGHT, 195'5', BY THE MACMILLAN COMPANY

PUBLISHED SIMULTANEOUSLY IN CANADA

All rights reserved-no part of this book may be reproduced

in any form without permission in writing from the publisher,
except by a reviewer who wishes to quote brief passages in
connection with a review written for inclusion in magazine
or newspaper.
PRINTED IN THE UNITED STATES OF AMERICA

FIRST PRINTING
MY GRANDPARENTS-
TO WHOM lOWE MY INTEREST
IN AGRICULTURE
PREFACE

In this time of ever-increasing emphasis on the marketing phase of our

economy, no explanation is needed for the addition of another book to the
field of study of agricultural marketing. This book is written primarily for
those who are just beginning their study of the marketing of farm products.
It is also designed for the use of both students who have had little or no
previous contact with economics and those who have had elementary eco-
nomics. The chapters on elementary price theory may easily be omitted
for the latter group.
The viewpoint taken is that of the farm producer and those most
interested in the farmers' problems and well-being. It does not lay claim
to being a complete text adequately covering all phases of marketing. The
commodity chapters must of necessity treat inadequately some things
which many instructors feel important. For after all, entire texts are de-
voted to the study of individual commodities. Those who have a primary
interest in food processing, wholesaling, and retailing should seek elsewhere
for detailed treatment. These areas are presented here in a summary form.
However, the chapters on government, food processing, and food whole-
saling and retailing are included because agricultural students must be
brought into contact with the entire picture. The belief is far too prevalent
among farm groups that marketing is completed when the farmer sells his
products and what occurs after this point is of no concern to them.
The approach of the book is a mixed one-partly functional, partly
institutional, and partly by commodities. Part I, "The Framework of the
lvlarketing Problem," attempts to sketch in a broad way the nature of
producers and consumers which the marketing structure must serve. Part
II, "Some Functional Problems," discusses the development and problems
in securing adequate performance of some of the marketing functions.
Part lIT, "Commodity and Institutional Problems," particularizes these
m8.rketing problems from the standpoint of the several agricultural com-
modi tic; and business and government structures. Marketing often has a
reputation of being a stuffy, dry area of study. This is not because of the
subject matter, but rather because of our shortcomings in its presentation.
vii
Vlll PREFACE

It is the author's conviction that marketing cannot be successfully taught

in a completely abstract framework. Students do most of their learning in
the framework of the familiar-hogs, milk, the retail food store, and so on.
lt is hoped that the mixed approach of the text wiII make the subject area
more palatable and in doing so wiII enhance the learning process.
A conscious cffort has been made to document the text rather heavily.
No claim is made for complete bibliographies and references. Rather it is
hoped that those presented wiII encourage further study, or at least call
attention to the immense volume of marketing literature which is now
flowing forth. On the other hand, many specific details have been omitted,
since any marketing teacher worth his salt wiII supplement any text heavily
with iIIustrations and data which have particular application to his
students.
The author presents this text with great humility and recognizes, at
least in part, many of its shortcomings. The challenge to set down on a
relatively few pages a word picture of this highly diverse and complex field
is a great one. The author has sought and received much help and counsel
from his colleagues at Purdue University. Dr. J. '\T. \Viley of the Depart-
ment of Economics was of immeasurable assistance in developing the chap-
ters on price theory and imperfect competition. Dr. C. B. Cox, who directly
contributed the material on cotton and tobacco, also aided greatly in
preparing the chapter on agricultural cooperation. Professor J. C. Bottum
advised on the presentation of price policy. Professors J. \\T. Hicks, P. L.
Farris, and C. E. French also gave of their time and advice in many areas.
To the administrative staff of the University the author also owes a debt
of gratitude for their understanding attitude, for only with such under-
standing can most staff members at a land grant institution find the neces-
sary time to complete such a project. And to his wife, Irene, who read the
manuscript and challenged him to present the material in as simple and
understandable language as he could, the author acknowledges a very
special debt. Of course, the author accepts all the responsibility for what
finally has been presented.
R. 1. KOHLS
Purdue University
CONTENTS

PAR T I: THE F R A :tvl E \V 0 R K 0 F

THE MARKETING PROBLEM

1. The l'vlarl~eting Problem 3

\Vhat is Marketing? ~Iarketing is Complex and Costly; J\farketing is
Productive; Growth of Marketing; Marketing Defined; Marketing Effi-
ciency. Historical Bench ~Iarks in Agricultural Marketing. The Farmer
and Marketing. The Approach of This Book.

2. Analyzing Marketing Problems

Major Marketing Processes. Approaches to :t-,Iarketing Problems: The Func-
tional Approach; Use of the Functional Approach, The Institutional Ap-
proach; Middlemen of the :t-,!arketing Processes, Organization of the
Marketing Machinery, ;I,!arkcting Channels, Use of the Institutional
Approach; The Commodity Approach. Marketing Principles.

3. Consumers of Agricultural Products

Incomes and Food Expenditures. Population and Income: Distribution of
People and Incomes; Population Growth; Growth of Urban Population;
Income Distribution; Income Levels and Food Consumption. Regional
Differences in Food Consumption. Other Factors Affecting Consumption
Patterns: Religious Differences; Race and Nationality Differences; Effect
of Special Days_ Changcs in Consumption Through Time. Foreign 11arket
for Agricultural Products.

4. Agricultural Production 49
The Production Plant: The Production Unit. Characteristics of the Prod-
uct: A Raw ;l,Iaterial; Bulky and Perishable Products. Characteristics of
Production: Total Output; Annual Variability in Production; Seasonal
Variability in Production; Quality Variation; Areas of Production; Adjust-
ment of Production to Changing Conditions.

5. The Cost of II.'Iarheting 66

TIle Famler's Share: Changes in the Farmer's Share TIuough a Period of
Time; Differences in the Farmer's Share Among Commodities. Composi-
tion of the ~!arketing :t-,!argin: Labor Costs in il.1arketing; Profits in :1\1arket-
ing; A Basic Reason for a Large ;\Iarkcting ;\!argin. Reduction of Market-
ing Costs: Inflexibility of ;\[arkcting :t-,!argins; TIle Farmer's Share as a
iI.!casure of l\Iarketing Effieicncy; Opportunitics for Reducing Costs.
IX
 x CONTENTS

PART II: SOr-.'IE FUNCTIONAL PROBLEMS

6. The Exchange Function-Price Discovery

Prices in a Competitive Economy: The !I.'leaning of Demand; The !l.lcaning
of Supply; The Equilibrium Price. Changes in Demand and Supply.
Elasticity of Demand and Supply. Summary.

7. Competition in Food Marl,eting 100

Perfect Competition: Assumptions of Perfect Competition; The Indi·

vidual Fiml; The Market Area and the Law of One Price; Relationship of
Prices to Costs. Departure from Perfect Competition: Monopoly and
Oligopoly; Imperfect Competition and Product Differentiation. Competitive
Conditions in Agricultural l\farketing: Examples of Imperfection in Com-
petition. Usefulness of the Competitive Model.

8. Agricultural Prices
Agricultural and Nonagricultural Prices. Individual Commodity Prices:
Nature of Supply and Demand; Cyclical Price Fluctuaticns; Seasonal Price
Fluctuations.

9. Government Price and Marketing Programs

Background For Aid. Agitations of the 19::o's. The Depression Develop-
ments: Development of Parity; Support Programs; Surplus Disposal Pro-
grams; Marketing Orders and Agreements; Price Controls. Effect of Pro-
grams on i\farketing; Efficiency of the Pricing Mechanism; Efficiency of
the Marketing Machinery.

..,../
10. Standardization and Grading
Importance of Standardization: 'Weights, Measures, and Containers; Quality;
Early History of Standards; Advantages of Standardization. Determina-
tion of Standards; Objective of Ideal Standards; Criteria for Good Stand-
ards. Problems of Agricultural Standardization: Lad: of Relationship
Between Price and Quality; Determining Consumer Preference; I\leasuring
Grade Factors; Determining the Limits of Grade; Quality Deterioration;
Health Regulations and Quality Standards. Farm Selling on a Graded
Basis. Place of Govemmel.~ in Standardization. The Consumer and Grad-
ing. The \Vholesale Trade and Grading.

11. Collection and Use of Market Information

The Role of Marketing Information. Securing Adequate l\farket Informa-
tion: Area to Be Covered; Price Information; Information Dissemination.
Collection and Dissemination Agencies: Private Agencies; Public Agencies.
Information Needs and Problems: Extension of Coverage; Keeping Abreast
of Changing Conditions; l\fethodology of Collection; Dissemination of
Information.
 CONTENTS xi

12. Transportation
\Vho Does the Job? Trucking to Initial Markets; Trucking to Terminal
Markets; Rail Transportation; \Vater Transportation; Air Transportation.
Freight Rates: The Freight Rate Structure; :t\Iaking of Rail Freight Rates;
Freight Charges and Agricultural Prices. Reduction of Transportation
Costs: Rates and Methods of Transportation; Other Approaches to Cost
Reduction; The Transportation Bill Will Remain High.

13. Storage
Storage Operations: Seasonal Production and Storage; \Vhere Commodities
are Stored; Public \Varehouse Supervision. Costs of Storage. "'ho Should
Store? Reducing Storage Costs. Storage and Seasonal Price Variations.

14. Risk and the Futures Exchanges 202

Types of Market Risk: Product Destruction; Product Deterioration in Value.

The Futures Market: Exchanges and Their Organization; The Futures
Contract; Relationship Between Cash and Futures Prices; Hedging; The
Place of the Speculator; Commodities Adaptable for Futures Trading. The
Futures Ma~ket Controversy: Argument For and Against Futures Trading;
Effects on Prices; Effects on Marketing Costs; Government Supervision of
Exchanges.

PART III: COMMODITY AND

INSTITUTIONAL PROBLEMS

15. Livestock Marketing

The Product-Its Production and Usc: Production; The Products of the
Livestock Industry. Marketing of Livestock: Assembly of Live Animals;
Local Cooperative Associations, Country Dealers, Auctions, Concentration
Yards, Terminal Public Markets, Packing Plants, Retail Meat Dealers,
Farmers; Slaughter of Live Animals; \Vholesaling and Retailing of Meat.
Changes in the Assembly Structure: TIle Growth of the Terminal Market;
The Growth of Direct Marketing; Reasons for the Development of Direct
Marketing; Arguments Against Direct Marketing; \Vhere is the Best Place
to l\Iarket Livestock? Problems Crcated by Decentralization. Problems of
Standardization and Grading: Difference Between Live and Carcass Value;
Selling of Livcstock on Basis of Carcass \Veight and Grade; The Develop·
ment of l\Iore Adequate Standards.

16. Dairy Marheting

Milk Production and Use: Utilization; The Production of l\Iilk. Countrv
Assemcly of Milk and Cream. Fluid l\Iilk: Nature of the Product and It~
Ma:;,et; Pricing and l\Iarket Regulation; Fluid :t\Iilk Distribution. l\Iilk
Used for :t\Ianufactured Products: :t\Iarketing Structures; Product Develop.
ment; Pricing Problems.
xii CONTENTS

17. Poultry and Egg Marlwting

Egg Marketing: The Product and Its Production; 1-.1arketing Channels;
Problems of Quality. Poultry Marketing: The Commercial Broiler Indus·
try; The Turkey Industry. Problems of Integration and Pricing.

18. Grain Marketing

The Products-Their Production and Use: Product Utilization; Variable
Production. The Marketing Channels: Country Elevators; Cash Grain
Commission Merchants; Terminal Ele\'ators; Processors and Millers. Grain
Grading. The Storage of Grain. Country Grain Buying.

19. Cotton Marketing 286

TIle Product and Its Use: United States Production; Cotton Standards;
Consumption of All Fibers; Utilization of Cotton. Location of r..mling.
Iviarketing Channels: Channels Used; Local Markets; Central Markets.
Marketing Margins: :rviargins Included in Farm Prices; Cotton Merchan·
disers' J\Iargins; Ivianufacturing Margins; \Yholesale and Retail Margins;
Consumer's Cotton Dollar by Cost Items. J\Iarketing Cottonseed. Foreign
Production and United States Exports. Cotton I\Iarketing Problems: Pro·
ducer Knowledge of Grades; Producers Do Not Force Price Competition;
Producers Sell in Small Lots; Excess Gin Capacity.

20. Tobacco Marketing

The Product and Its Use: United States Production; Classification of To·
baccos; Domestic Consumption. Farm Marketing Methods; On·Farm
Sales; Hogshead Selling; Loose Leaf Auctions; Cooperative Associations.
Marketing Channels. Tobacco Manufacturing. Marketing Margins of
Cigarettes: Manufacturer's and Leaf Dealer's Margins; Distributor's Mar·
gin; Federal and State Excise Taxes. Acreage and Price Control. Intcr·
national Trade: United States Exports. Major Marketing Problems.

21. The Place and Problems of Agricultural Cooperatives

\Vhat is a Cooperative? Distinctive Characteristics of American Co·
operatives; Kinds of Cooperative Business; l\Iarketing Cooperatives, Pur·
chasing Cooperatives, Processing Cooperatives; Type of Cooperative Organ·
ization; Independent Local Associations, Federated Associations, Central·
ized Cooperative Associations, l'vIixed Associations. History and Present
Status of American Coope:1tion: Early Development; The Active Period,
1910-1925; The Consolidatlun Period, 1925-1940; The Period of Economic
Growth, 1940-?; Cooperation by Regions and Commodities. \Yhat l\Iakes
For a Successful Cooperative Association? Criteria for Long·Run Success;
Establishment of a Successful Cooperative. Problems of l'vlodem Coopera·
tion; Size and Growth; Financing; Management; Membership Relations;
Relations with the General Public.

22. Government and Agricultural Marketing

Areas of Regulation: Regulations to l'viaintain and Police Competition or
Prevent Monopoly; Regulations to Control or Offset ::--'lonopoly Conditions;
 CON TEN T S xiii
Regulations to Facilitate Trade and Provide Services; Regulations to Protect
the Consumer; Regulations to Directly Affect Comm'.Jdity Prices; Regula-
tions to Foster Economic and Social Progress; The Problem of Perspective.
United States Department of Agriculture: Agencies of Ceneral Interest;
Agencies of Specific lVlarketing Interest; Agencies of Limited Marketing
Interest.

:3. Food Processing Industries 353

The Industry Structure: Location of Food Processing; Organization and
Firm Size. Food Industries and Marketing: Buying Operations; Selling
Operations; Agencies for Effecting Change.

24. Wholesaling and Retailing of Food

Food \Vholesaling: Types of \Vholesalers; Structure and Operation. Food
Retailing: Prices Ultimately Determined at Retail Level; The Job of Re-
tailing; Structure and Operation. Changes in the \Vholesale·Retail
Structure: The Corporate Chain Store; TIle Voluntary Chains; Self-
Service and the Supermarket.

25- Summing Up 379

The Big Picture Again. Problems of Change: Decentralization; Integra-
tion; Increasing l\Iarket Size. The Primary Role of the Consumer; Con-
sumer Education; Influencing Consumer Demands-Agricultural Advertis-
ing. Marketing Improvement: Increasing Efficiency.

INDEX
Part I

THE FRAMEWORK
OF THE
MARKETING PROBLEM
CHAPTER ONE

'The Marketing Problem

WHAT IS MARKETING?
Have you ever watched a housewife shop in a modern supermarket? As she
pushes her cart down the aisles, she casually picks and chooses from among
literally hundreds of different canned items. She may stop at the dairy case
and select her cheeses from among dozens of different varieties. At the meat
counter she must decide not only between the various cuts of fresh meat but
also from a tremendous array of all types of luncheon and precooked meats.
Continuing on, she may pick up a can of frozen orange juice and a carton of
frozen shrimp from the deep freeze cabinet. At another rack she may be
faced with perhaps hventy to thirty different kinds of fresh produce. On her
way out she may pick up a loaf of bread which was baked just today. Or she
may decide that she wants to do her own baking and can choose between
either ready-for-baking biscuits packed in a vacuum tin or a box which con-
tains all of the dry ingredients ready for mixing.
Then listen to this housewife at the check-out counter. She makes no
comment concerning the tremendous variety of goods at her disposal.
Rather, she is more likely to make some bitter remark about her favorite
brand of frozen peas being out of stock! Then, with perhaps a parting
remark about the high cost of food, she pays her bill and departs. This
scene could be one in Ne\v Yark City or in a small middle western town.
It could be happening in the heat of the summer or the cold of the
winter.
Here we see the end product-goods available for consumption-of the
tremendou:; marketing organization of the country. Here also, in the house-
wife's casual acceptance of this vast array of foods at her disposal, we have
t11e vote of confidence of the American consumer that the system \varks.
3
4 MARKETING OF AGRICULTURAL PRODUCTS

Marketing Is Complex and Costly

The machinery which brings this vast array of food products together
and places them at the disposal of over 160 million consumers is very ex-
tensive and complex. The initial production of the raw materials for these
foods took place on over 5 million farms scattered throughout the country.
Some farms produce extremely small amounts of a great many commodities.
Other farms produce large amounts of only a single commodity. The prod-
uct itself is often perishable and widely varying in quality. To a considerable
extent the bulk of this production is highly seasonal arid takes place in
areas that are great distances away from the areas where consumers are
concentrated. These products from the nation's farms must be collected,
sorted, and swiftly moved before they spoil, or, as the case may be, stored
until they are needed. Nearly three-fifths of these farm products must be
processed further before they are ready for consumers.
To do this job some 20,000 firms buy these farm products in the pro-
duction area and send them fonvard to other concentration points. Approxi-
mateiy 50,000 manufacturers are engaged in processing food. Food products
are then assembled into the hands of about 60,000 food wholesalers, who
in turn supply some 500,000 retail food stores and 350,000 restaurants and
eating places.
To accomplish such an operation costs large sums of money. In 1953,
the retail value of all farm foods was estimated at 44 billion dollars. Of this
amount 24.5 billion dollars went to pay for the costs of processing and
marketing. This meant that for each dollar the consllmer spent for food,
about 45 cents went to the farmers to pay for the raw farm products and
about 55 cents went to the above-mentioned marketing agencies to pay for
processing and handling. 'However, when one stops to think about the job
which is accomplished~-its high cost is not the outstanding factor. Rather,
it is amazing that sllch a task is accomplished at almost any cost!

Marketing Is Productive
Unfortunately many look upon those who are engaged in the many
marketing jobs such as grading, transporting, storing, arranging for the
transfer of title, and advancing and collecting credit, as being parasitic on
those who really "produce" the goods. Farmers often decry the "profits of
middlemen" because they think that farmers alone produce the food which
people eat. Of course, we realize that they produce only the raw materials
from which the consumer's food is finally made. The farmer who produces
a hog in Iowa has not produced pork for a housewife in New York. Many
things must be done to the hog before it is pork in New York. These other
 The Marketing Problem 5
activities are the contributions which the packers, railroads, truckers, live-
stock commission men, and retail butchers make to pork production.
i Economists have defined production as the creation of utility-that
is, 'the process of making useful goods and services. The utilities created in
the productive processes are further classified into form utility, place utility,
time utility, and possession utility.
The farmer who produces "hogs adds form utility. The packer who
slaughters the hogs and cuts them into pork carcasses also adds form utility.
They change the form of raw materials and create something usefu1.
The railroad or trucker that moves the hogs from Iowa to the packing
plant, and then, after processing, moves the cuts of pork on to wholesalers,
retailers, and finally to consumers adds place utility. The product is more
useful because of the activities of these agencies in getting the product to
where it is most desired.
The packer furthermore may freeze some of the pork products for later
use. The pork is more useful by being held from periods of relative plenty
to periods of relative scarcity. Time utility is added to the product. Grain
elevator and warehouse operators and even the previously mentioned super-
ma,rket operator through his inventory holdings add time utility to products.
'"When the Iowa hogs are shipped to the terminal markets they prob-
ably ~re consigned to a commission man. This commission man seeks out a
packer who needs the hogs and helps transfer the hogs from the farmer to
the packer. A meat wholesaler facilitates the movement of meat to the
retailer for distribution to the final consumers. These people through their
efforts to transfer the product to those who could better use it add posses-
sion utility. Because of these actions the product is placed in the hands of
others who can add still other utilities to it.
Most people accept the activities of the farmer and the manufacturer
as being productive. They create visible changes in products. However, the
other individuals who see that the product is moved through the various
handlers, is sent to the needed place, and is available at the needed time
also are productive. All of their activities are necessary to produce the final
utility that the pork has for the New York housewife in feeding her family.
So those engaged in the marketing process, too, are producers in the sense
that they add usefulness or utility. To argue which group is more important
is rather senseless. Both groups, the producers of raw products and the mar-
keting agencies, are necessary to the creation of the final products for con-
sumption. Both create something useful for which society will pay a price.
Both groups are productive in the real sense of the word. Confusion arises
largely because of the different form of the output which stems from their
a:tivity. It is common practice to resen'e the term "producer" for those
6 MARKETING OF AGRICULTURAL PRODUCTS

who are primarily engaged in the creation of form utility. \Ve, too, will
follow this practice. This, of course, does not mean that the other groups
are not productive.

Growth of Marketing
rvIarketing has developed in importance and complexity as specialization
of activities has increasingly separated producers of goods from the potential
consumers of those goods. The early pioneers of our country did not have to
concern themselves with marketing problems. Each family grew its own
food and fiber and built its own shelter. Producers and consumers, if not
actually the same individuals, lived next door to each other.
Very early in the development of any community, however, people
realized that some were better adapted to certain kinds of activities than
others. Thus, they specialized in their work. This specialization increased
the output of goods but it also broke down the self-sufficiency of the family
unit. As different people specialized in different activities, methods had to
be devised to exchange the surplus production for other desired goods which
other specialized workers produced. Here, then, was the beginning of the
marketing task and the group of people who specialized in its performance.
Another aspect of specialization is the growth of urban areas. 'Nith the
disappearance of the necessity of a man to produce all his basic needs, he is
able to leave the land and congregate in larger groups. Here his work may be
carried on more efficiently, and the remaining people on the farms can
more efficiently produce his food and fiber. Of course, this increasing urbani-
zation further complicates the task of those engaged in the marketing
process.
One of the limiting factors to the urbanization of our country has been
the development of adequate transportation and communication facilities.
Throughout most of our early history, one of the pressing agricultural
marketing problems was that of providing adequate transportation facilities
at a reasonable cost to move the increasing output of our farms to the
consumers in our growing cities. Here we find an early in~erest of govern-
ment in helping the marl:nting system function adequately. First turnpikes,
then canals, and then railroads were subsidized through government help.
This public concern has continued even to the present day as various gov-
ernmental units have actively pushed both highway and air transport de-
velopment.
]'vIarketing and mass production techniques have moved hand in hand.
A complex and costly marketing machinery is not necessary in situations
where the volume of production is limited. On the other hand, assembly
line mass production is not feasible until the marketing machinery opens
 The Marketing Problem 7
the doors to the broad mass market. Many people have viewed with alarm
the impersonal relationships of our huge factories, the growing proportion
of our population living in cities, and the increasing numbers who are en-
gaged in the marketing trades and services. Such developments, however,
are usually the marks of the more productive countries with increasing
standards of living. It is the countries which are hovering near the subsist-
ence levels of living which have a relatively small proportion of their people
engaged in the job of marketing.
Table I shows the proportion of our working population employed in
the various areas. In 1950 over half were engaged in lines other than manu-
facturing and in the working of our land and natural resources. This was
a substantially larger proportion of our people than were so occupied fifty
years ago. As one views this fifty-year period, certainly he cannot conclude
we are now poorer in the good things of life. We have many problems, to
be sure! But certainly we cannot conclude that this increased portion of
our people working in the trades and services has been associated with a
declining standard of living.

TAB LEI. Employment of People in the United States

APPROXIMATE PERCENT OF
OCCUPATION OR INDUSTRY TOTAL GAINFULLY EMPLOYED

rVlanufacturing 3:!
Trade, transportation, public utilities 34
Domestic, professional, public service 20
Forestry and mining 2 2
Agriculture 37 12

SOURCE: U. S. Census (differences in 1900 and 1950 data permit only approxi.
mations) .

Marketing Defined
As we have seen, marketing is essentially the production of time, plac;:e,
and possession utilities. vVith this in mind, then, marketing can be defined
as the performance of business activities that direct the flow of goods and
services from the producer to the consumer so as to reach the consumer at
the time, place, and in the form he desires at a price he is willing to pay.
In a society organized on a competitive framework such as ours, the final
consumer is the ultimate director of the process. The end product of all
productive processes is consumption. Each individual person who is engaged.
in marketing is interested in maximizing his own individual gain. However,
in a very real sense in the long run, he who serves the consumer best
plu£its most.
8 MARKETING OF AGRICULTURAL PRODUCTS

The principal concept of the American marketing system is that of

consumer direction. The consumer is allowed the freedom to allocate his
income among various goods and services as he sees fit. Production and
marketing patterns will respond to consumer wishes. Some segments of the
production machinery respond slowly and sluggishly to consumer desires.
Other parts are quite sensitive and respond quickly. But all successful
segments in time do respond in some degree in a system which is built
upon the freedom of people to enter or leave an enterprise and the freedom
of consumer choice.
This leading role of the consumer does not mean that all passively
bend to the whim of the consumer. Not at all! A dynamic society means
change. Much of the effort of the marketing machinery is directed toward
the job of changing the consumer's mind. Though much homage is paid
to "Mrs. Consumer" as making the final decision, every effort is made to
influence that decision. The marketing function of selling assumes that
consumers can be changed and new demands can be created. A company
develops a new product. Is it desired by consumers? \Vho can say, since
they have not had the opportunity to try it? Advertising and salesmanship
are brought into play to persuade the consumer that she does want the new
product. But when all the chips are down, the final success of the produc-
tion and marketing of that product rests with the consumer's decision to
buy!
The essence of marketing is the making of decisions by people. The
phrase "marketing machinery" implies a mechanical and automatic opera-
tion. Such is not the case at all. Marketing is the performance of business
activities. And business activities are the relationships and decisions of
people. At what price should I buy or sell? Should I sell immediately or
store and sell later? Should I sell on this market or on another? Should I
extend credit or sell only for cash? How much should I spend on advertis-
ing? These are questions upon which information must be brought to bear
and a decision made. Whether the correct decision has been made will be
answered by the profit-and-loss statement. And because people are not
infallible, neither will be the operating results of the market process. \Ve
shall have to conclude that our marketing machinery is not perfectly com-
petitive and that many problems need correction. The powers of govern-
ment often must also be used to assure satisfactory operation.

Marketing Efficiency
Nearly all changes which are proposed are based upon the grounds of
increased efficiency or lower costs. Those who oppose these changes base
their opposition on the assumption that the change will decrease efficiency
 The Marketing Problem 9

or raise costs. In a great many cases, efficiency is confused with marketing

costs. As we shall see when we later examine these costs in more detail,
whether marketing costs are great or small gives little or no indication of
the efficiency with which the marketing job is accomplished.
What is efficient marketing? First, we must again recall that the ulti-
mate objective is to satisfy consumer wants. To a very considerable extent
the consumer determines the size of the marketing bill. Efficient marketing,
then, might be defined as that minimum input of various economic re-
sources which will result in the satisfaction in goods and services which the
consumer desires. Anything which reduces thecosts of marketing 'while
maintaining or increasing the desired levels of consumer satisfaction would
then meet the requirements of increasing marketing efficiency. On the
other hand, increased costs because of the adding of new and more costly
services, if they are demanded by consumers, may also represent increased
efficiency.
Marketing efficiency can be subdivided into two different categories
of technological efficiency and economic efficiency. Technological efficiency
is concerned with the various contributions which science and technology
can make toward reducing the costs of resources necessary to accomplish
a given job. A new method of storing grain is developed which will reduce
waste and quality deterioration. An improved method of crating is devel-
oped which will reduce both weight and damage in transportation. A new
method of doing a job which reduces the labor required is worked out.
These are merely examples of the many potentialities of increased efficiencies
possible in the technological phases of marketing.
Economic efficiency is concerned with maintaining the competitive
aspects of marketing. The best measure of the satisfaction output is prob-
ably what consumers will pay in the market place. But the reliability of
this measuring stick is dependent upon two conditions. One, the consumer
must be provided with alternatives from which she can choose. And two,
the price tags on the choices must adequately reflect the costs involved.
Improvements in this area are concerned with the policing and control of
monopoly powers and the ethics of business operations. This is the area of
marketing policy, since many times in our modern society it seems that a
compromise must be reached between the areas of maximum technological
efficiency and maximum economic efficiency. Such might be the case, for
example, where there are increasing opportunities for increasing techno-
logical efficiency as the size of the firm gets larger and larger. But as the
firm gets larger, some of the other competitive firms may be forced out of
the field. Such actions may restrict the consumer's freedom to choose
among alternatives as well as reduce the effectiveness of the price system.
10 MARKETING OF AGRICULTURAL PRODUCTS

It is not the purpose of those concerned with improving the perform-

ance of marketing to dictate what should be done. Rather, their purpose is
to help find ways by which the job desired by consumers can be done with
minimum economic waste. For example, milk can be obtained either from
the route man at the doorstep or at the grocery store. Suppose it can be
shown that in terms of dollars it would cost much less to sell only at the
grocery store. However, what if the consumer wanted home delivery and
were willing to pay the extra cost? Under the guise of increased efficiency
should it be recommended that home delivery be abolished? Obviously,
the consumer should be provided with both methods of delivery using the
best combination of resources which technology can provide at prices which
reflect costs. Then the consumer can "vote" in the market place for her
choice of which way or ways she desires the marketing machinery to do the
job. To abolish one and reduce consumer satisfaction certainly cannot be
considered as increasing marketing efficiency.

HIS TOR I CAL BEN C H rvI ARK SIN

A G RIC U L T U R A L i\1 ARK E TIN G
The history of the growth and development of agricultural marketing
is a rich and exciting one. Only a broad, sweeping picture can be presented
here:, But the study of marketing history serves a very useful purpose.
Knowing the marketing problems confronted by our grandfathers and
great-grandfathers will help prevent us from believing that our current
problems are the only difficult ones which have ever begged solutions. The
study of past developments also helps emphasize that changes are con-
tinually undenvay. New developments from many different sources
always have challenged the existing marketing organization to adapt
or di~.
Up through the end of the first half of the nineteenth century the
pattern was one of small industry with transportation and communica-
tion and other marketing problems of a largely local nature. Tobacco, as
one of our first surplus crops, presented one of the earliest marketing
problems. In seeking sO\itions, colonial governments and growers tried
price controls, production regulations, and struggled with grading prob-
lems. Colonial flour milling also had problems of rate fixing, monopoly,
and product adulteration.
However, immediately following the Civil \\Tar, a whole new set of
problems developed as the foundations were laid for the modern nation-
wide commercial marketing system. Agricultural production grew tremen-
dously with the opening of new western lands. Land in farms jumped from
about 294 million acres in 1850 to 536 million acres in 1880. The number
 The Marketing Problem 11

of farms increased from about 1.5 millions to 4 millions during the same
period. Outlets for this potential production bonanza had to be found in
both our own growing cities and in foreign countries.
About this time many of the large food industries were established.
In 1865, the Union Stockyards at Chicago were formed and soon were the
largest in the world. The Chicago Board of Trade was founded in 1848
and quickly developed into the nation's leading grain market. By 1870, ice
was being used to preserve meat, and by 1880 the use of the refrigerated
railroad car made the large national packers possible. In 1870, there were
only a few flour mills at r·vlinneapolis. By the late 1880'S, Minneapolis was
the milling center of the country, and the pattern of organization for the
modern giant milling and grain corporations was established. With the
introduction of tin cans and other canning equipment in 1880, large-scale
canning of fruits and vegetables got underway. The development of ciga-
rette-making machines in the 1880'S helped make possible the growth of
huge companies in the tobacco industry.
'Vhile these changes were occurring, transportation also expanded
tremendously. During the decade of the 1870'S, the mileage of railroads
almost doubled. The two coasts were joined and transcontinental shipments
became possible. Telegraph communications were rapidly expanded. Exten-
sive highway development, how~ver, was to await the automobile.
This was a turbulent period_The extraordinary expansion of the farm
production plant made suddenly available vast amounts of agricultural raw
materials. The many technological developments made possible the rapid
growth of a great number of processing firms. The marketing system was
put under great pressures to move this productive capacity into the hands
of consumers. The rapid growth of the food processing firms and their
search for outlets led to cries of monopoly and unethical practices. To this
situation was added a seve~e agricultural price depression during much of
the l~tter part of the century.
Farmers organized to --protest these situations. Railroads were bitterly
attacked for charging exorbitant and unfair rates. In 1889, one of the farm
organizations, the Farmer's Alliance, demanded government O\vnership of
the means of communication and transportation in order to correct alleged
abuses. Bitter attacks were made on the alleged evils of the middlemen.
Congressional investigations of the practices of the meat packing and other
companies were instigated. Demands were made for all kinds of corrective
and regulative measures. The immediate result of this agitation was federal
regulatory action. The Act to Regulate Commerce which, among other
things, authorized the Interstate Commerce Commission and the surveil-
hnce of interstate freight rates, was passed in 1887. In 1890, the passage
12 MARKETING OF AGRICULTURAL PRODUCTS

of the Sherman Act laid the basis for our antimonopoly policies and made
private business activities a matter of public concern.
'Vith an improvement in general economic conditions, the tension
eased. And in the ensuing years until 'Vorld \Var I, the marketing system
was allowed time to grow up to its job. Agricultural production continued
to expand, but there were no upheavals of the cxtent of the post-Civil 'Var
period. This period was one of changing emphasis in marketing. Previously,
much of the effort of those working in agricultural marketing had been
directed toward developing foreign markets for our exportable surplus. Now
the emphasis was shifted toward developing the domestic outlets of our
growing country. Recognition of this changing emphasis came in 1908,
when the name of the Division of Foreign I'vIarkets in the USDA was
changed to the Division of Production and Distribution. In 1914, Congress
officially set up the Office of Markets to collect and disseminate information
concerning the marketing of farm products.
After World War I, the attitude toward agricultural marketing took a
still different perspective. It now appeared as if our production capacities
had outrun our consumption capabilities. Throughout the twenties, many
schemes were proposed to permit us to dump our excess production abroad.
Domestically, however, improvement in the marketing machinery was to be
the answer. Governmental blessings were given the cooperative movement
as one way for mOre effective and orderly marketing. Such regulatory laws
as the Packers and Stockyards Act and the Commodity Exchange Act were
passed to prevent abusive practices by the marketing agencies. Increased
marketing efficiency was the goal.
The depression decade of the 1930'S further increased the troubles of
moving the products of agriculture into consumption at satisfactory prices.
Attention was nOW turned away from marketing to production. Develop-
ments in the marketing area could not solve the problem. We simply pro-
duced too much. Public attention was now directed toward perfecting
various schemes which would reduce the amount of production.
With the demands of World War II, however, efforts were made to
produce all that our reSOl'Tces would permit. After the war-time demands
had receded, the marketing machinery again came in for increasing public
attention and criticism. There is now widespread belief that improvements
in production have outdistanced improvements in marketing. \Vays have
been found to make two blades of grass grow where one did before, but
no way has been found effectively to market the extra blade. The feeling
is that all that can be produced can be consumed at satisfactory prices jf
the marketing system is functioning well.
The current scene again is one of far-reaching changes in almost every
 The Marketing Problem 13
phase of marketing. The technique of quick-freezing foods may revolution-
ize part of the food industry as much as the successful use of tin cans did
in the 1880'S. More and more processing is being done by the food indus-
try-less and less by the housewife. By 1948, more than a fourth of the
total consumer food purchases was in the form of completely or partially
prepared and ready-to-eat foods. The retail food industry has been drasti-
cally changed. By 1952, nearly half of the food was sold through self-service
supermarkets which were only in the experimental stages before World
\Var II. The emphasis has been on the mechanization or the distribution
system in §_uch a way as to reduce labor costs which have been proportion-
ately very high.
If the reader wiII stop and think of the changes which have occurred
in the decade of the 1940'S, he must conclude that we are again experienc-
ing revolutionary changes. The increasing concentration of population in
the urban areas and the increasing specialization of production have put a
still greater premium on a smooth-working and efficient marketing system.
Improved transportation and communication systems have changed most
marketing problems from ones of local or regional concern to those national
in scope. In 1946, Congress officially gave recognition to this new emphasis
on marketing when it passed the Research and Marketing Act. Under this
Act, additional funds for expanding research into all phases of marketing
were authorized. Once again the American people have thrown the chal-
lenge to those engaged in marketi~g~.

THE FARMER AND :CvlARKETING

The farmer and those engaged in advising and helping him have a
tremendous stake in an efficient marketing system. The income from the
raw products which farmers sell is a function of the smooth operation of
the marketing system. As one author has phrased it, the effective and
efficient marketing system from the farmers' viewpoint is one which will
induce the production of those products and quantities which, when sold
to consumers, will result in maximum returns after the deduction of mini-
mum marketing charges and farm production costs. 1
A knowledge of marketing and its problems wiII help farmers make
needed business decisions. Some of these decisions are as follows:

1. 'Vhat to produce. For example, some fruit varieties are more desired
than others. Some hog types wiII produce a more consumer-desired pork
than o~hers. Farmers who know these market desires can adjust their
production accordingly.
1 F. L. Thomsen, Agricultural Marketing (New York, McGraw-Hili, 1951), p. 4.
 MARKETING OF AGRICULTURAL PRODUCTS

2. How to prepare products for markets. TIle degree of maturity at harvest

often influences the value of products. The kind of harvesting equip-
ment used may have an effect on the damage and spoilage of some
products. Certain packing practices may influence the amount of trans-
portation damage. Fo11owing such practices wi]] permit the farmer to
reduce part of the marketing costs.
3. vVhen to se11 or buy. Different products have different high and low
periods of prices throughout the year. Breeding and production patterns
may be changed to take advantage of these price patterns. Storage prac-
tices may be reviewed in light of cost and return possibilities. Costs of
things that farmers buy may be reduced by knowing whether there is a
usual period of low prices.
4. \\There to se11 or buy. Many alternatives are usua11y available. \\Thich
outlet wi]] help maximize returns? What factors should be taken into
____
account in making the decision?'
-

Also, familiarity with marketing may help farmers make wiser decisions
as members of a group. Should a cooperative be formed to help do a market-
ing job? \\That part should government play in control and regulation?
\\That position should be taken toward a new method or development? A
broad knowledge of the objectives, organization, and operation of market-
ing is needed to judge wisely the proper actions which need to be taken.
These are just a few of the contributions which a knowledge of market-
ing can make toward more profitable farming. The objective of production
from the producer's standpoint is profit. And profit is not realized until the
product is sold. Coordination of those activities which occur within as well
as those which occur outside the farm fence is necessary for maximum
returns.

THE APPROACH OF THIS BOOK

In the main, the following chapters wi]] be devoted to a discussion of
the practices and problems encountered in the marketing of agricultural
food products. Part of th~ chapters address themselves to the appreciation
of the general problem, for only when the whole picture is understood can
the parts have meaning. The commodity chapters are limited largely to a
description of the marketing activities and problems which appear to have
the most immediate bearing on the farmers. Discussions of the processing
industries and food wholesaling are dealt with separately, for it must be
recognized that the marketing of farm products is not completed until the
raw product is processed and in the hands of the final consumer.
This is not a complete book on agricultural marketing. No text should
 The Marketing Problem 15
claim to be. Rather, it is hoped that the issues discussed will furnish a
starting point for understanding the many problems peculiar to particular
regions or special interests. \Vith this understanding, better farm and public
decisions can be made. Many tables and charts are used on the theory that
a close study of these will tell more than many printed pages. These deserve
careful study. Many such books as this are boring reading indeed. It is
hoped that this book will keep boredom to a minimum and that on the
whole you will find it an interesting excursion into a very useful and im-
portant field.

SELECTED REFERENCES
Agnew, H. E., H. A. Conner, and \V. L. Doremus, Outlines of !vIarketing, 3rd
ed. (New York, l'vIcGraw-Hill, 1950), Chap. l.
Black, John D., Introduction to Economics for Agriculture (New York, :tvIac-
millan, 1953), Chap. 2l.
Hotchkiss, G. B'., Milestones of Marketing (New York, :tVIacmillan, 1938).
Taylor, H. C., and Anne D. Taylor, The Story of Agricultural Economics in the
United States, 1840-1932 (Ames, Iowa State College Press, 1952), Parts 1
and 5.
Vaile, R. S., E. T. Grether, and Reaves Cox, iHarketing in the American
Economy (New York, Ronald Press, 1952), Chap. 32.
\Villiamson, Harold F., The Growth of the American Economy (New York,
Prentice-Hall, 1944)'
CHAPTER TWO

Analyzing Marketing Problems

The difference between an orderly closet in which one can find what is
desired with a minimum of effort and a disorderly one in which nothing
can be easily found can often be traced to an adequate system of hooks,
hangers, and shelves. The study of a complex marketing problem can be
as frustrating as looking for a special item in the disorderly closet unless a
system of hooks and shelves is devised on which we can organize our
thoughts and ideas. It is to these organization devices that we now give our
attention.

MAJOR MARKETING PROCESSES

All marketing activities can be classified into three major processes.
These are the processes of concentration, equalization, and dispersion.
The process of concentration is essentially one of assembly and pro-
curement. The raw materials produced on the nation's farms are assembled
by local agencies and sent forward to our great wholesale centers near the
consumption areas. Food processors may secure large amounts of the de-
sired product from these concentration points.
The equalization process consists of those activities which match the
flow of production with the rate of consumption. Many products are pro-
duced seasonally but consumed year round. Processors, wholesalers, and
retailers must acquire inventory stocks at the right places so that they
always can be ready to meet the demands of their customers. Such holding
operations are part of the major process of equalization.
Dispersion in a sense is the counterpart of concentration. Where con-
centration was the process of assembling goods into large units at central
points, dispersion is the process of breaking down these large units and
distributing them to the various consumers. Products must be channeled
16
 Analyzing Marketing Problems 17

out through the many wholesalers and retailers into the hands of con-
sumers. These activities make up the process of dispersion:
Perhaps the nature of these processes will be clearer if we follow a
commodity from its initia1 production through to its final consumption.
For example, let us examine these processes as they occur in the marketing
of wheat. Wheat is produced in amounts ranging from a few bushels to
thousands of bushels on thousands of farms scattered throughout the coun-
try. Farmers sell their wheat to country elevators. The elevators usually wait
until they have accumulated considerable volume and then ship the wheat
forward by the carload to larger terminal elevators, which are capable of
holding hundreds of thousand of bushels, located in our larger milling cen-
ters. This has been the concentration process-wheat has gradually been
assembled from widely scattered production points into large holdings
centrally located.
It will now remain in storage until it is needed by mi11ers. Or evcn
after milling, the flour may be stored for a short time. These activities are
part of the equalization process. Then the flour may be shipped in varying
quantities to bakers. Here, after baking, the bread will be sold to retailers.
These retailers will then sell the bread, loaf by loaf, to consumers. This
gradual breaking down into smaller and smaller units is dispersion. How-
ever, during this dispersion process equa1ization a1so was continuing as
some flour was probably held in stock by bakers and to a limited extent
so was some bread.

APPROACHES TO
MARKETING PROBLEMS
There are three major approaches to the analysis of marketing prob-
lems. These are ·the functional approach, the institutional approach, and
the commodity approach. All three are merely ways of breaking down a
complex marketing problem into its parts so that it can be better under-
stood.

The Functional Approach

One method of classifying the activities which occur in the marketing
processes is to break the processes down into functions. A marketing func-
tion may be defined as a major specialized activity performed in accom-
plishing the marketing processes of concentration, equalization, and dis-
persion.1
'1 The origination of the functional idea is usually credited to A. \\T. Shaw in his

article, "Some Problems of r'larket Distribution," Quarterly Journal of Economics, August,

19 12 , pp. 703-76;. This article is also given in a condensed form in Changing Pcrspec-
tir~: in Marketing (Urbana, University of Illinois Press, 1951), p. 32.
 MARKETING OF AGRICULTURAL PRODUCTS

Any listing of functions must be recognized as an arbitrary one.

Authors list from as few as eight to as many as three or four times that
number. Each composer of a list, of course, believes his list best. Others
disagree and propose a list of their own. 2 \Ve are looking for hooks and
shelves on which to arrange our ideas. The exact terminology of the list is
not of great importance as long as the scope of the individual functions is
understood. \Ve shall follow a fairly widely accepted classification of func-
tions as follows:

A. Exchange Functions
1. Buying (assembling)
2. Selling
B. Physical Functions
3. Storage
4- Transportation
C. Facilitating Functions
5. Standardization
6. Financing
7. Risk-bearing
8. Ivfarket information

The exchange functions are those activities which are involved in the
transfer of title to goods. They represent the point at which the study of
price determination enters into the study of marketing. These functions are
never performed in our economy without a judgment of value, usually ex-
pressed at least partially as a price, being placed on the goods. Both the
buying and selling functions have as their primary objective the negotiation
of favorable terms of exchange.
The buying function is largely one of seeking out the sources of supply,
assembling of products, and the activities which are associated with pur-
chase. This can either be the assembling of the raw products from the
production areas or the assembling of finished products into the hands of
other middlemen in order to meet the demand'S of the ultimate consumer.
The selling function must be broadly interpreted. It is more than
merely passively accepting the price offered. In this function can be grouped
all of the various activities which sometimes are called merchandising. Most
of the physical arrangements of display of goods are grouped here. Adver-
tising and other promotional devices to influence or create demands are
also part of the selling function. The decision as to the proper unit of sale,

2 See, for example: P. D. Converse and H. \V. Huegy, The Elements of Marketing,
3rd ed. (New York, Prentice-Hall, 1946), p. 56; E. D. l\[CCurry, "Some Functions of
:t-.Iarketing Reconsidered," Theory in 'tIJarketing, ed. R. Cox and \V. Alderson (Chicago,
Richard D. Irwin, 1950), pp. 263-279.
 Analyzing Marketing Problems 19
the proper packages, the best marketing channel, the proper time and place
to approach potential buyers-all are decisions which can be included in the
selling function. Here also might fall the market research activities which
are undertaken primarily to ascertain where an article can be sold and how
much will be taken.
The physical functions are those activities which involve handling and
movement of the actual comI~odity itself. They are involved in solving the
problems of when and where in marketing.
The storage function is primarily concerned with making goods avail-
able at the desired time. It may be the activities of elevators in holding
large quantities of raw materials until they are needed for further processing.
It may be the holding of supplies of finished goods as the inventories of
processors, wholesalers, and retailers.
The transportation function is primarily concerned with making goods
available at the proper place. Adequate performance of this function re-
quires the weighing of alternatives of routes and types of transportation as
they might affect transportation costs. It also includes the activities in-
volved in preparation for shipment such as crating and loading.
The facilitating functions are those which make possible the smooth
performance of the exchange and physical functions. These activities are
not directly involved in either the exchange of title or in the physical
handling of products. However, without them the modern marketing sys-
tem would not be possible. They might aptly be called the grease that makes
the wheels of the marketing machine go round.
The standardization function is the establishment and maintenance of
uniform measurements. These may be measurements of both quality and
quantity. This function simplifies buying and selling, since it makes the sale
by sample and description possible. It, therefore, is one of the activities
which makes possible mass selling, which is so important to a complex
economy. Effective standardization is basic to an efficient pricing process.
A consumer-directed system assumes that the consumer will make his wants
known largely through price differentials. These differentials must then be
passed back through the marketing channel so that marketing agencies and
producers can know what is wante_d. Only if a commodity is traded in well-
defined units of quality and quantity can a price quotation do this job effec-
tively. Standardization also simplifies the concentration process, since it per-
mits the grouping of similar lots of commodities early in movement from the
producing points. Besides their establishment, the use of standards must be
policed. Such :}ctivities as quality control in processing plants and inspec-
tions to maintain the standards in the marketing channel can be considered
part of this function.
 20 MARKETING OF AGRICULTURAL PRODUCTS

The financing function is the advancing of money to carry on the

various aspects of marketing. To the extent that there is a delay between the
time of the first sale of raw products and the sale of finished goods to the
ultimate consumer, capital is tied up in the operation. Anywhere that
storage or delay takes place, someone must finance the holding of goods. The
period may be one of a year or more, as in the operations of the canning in-
dustries, or a relatively short time as in the marketing of perishables.
Financing may take the easily recognizable form of advances from various
lending agencies or the more subtle form of tying up the owner's capital
resources. In either instance, it is a necessary activity in modem marketing.
The risk-bearing function is the accepting of the posibility of loss in
the marketing of a product. These risks can be largely classified into two
broad classifications-=p]1J'§_~~~__risks and l11_a_rkeLrisks. The physical risks are
those which occur from destruction or deterioration of the prod~ctitself by
fire, accident, ''lind, earthquakes, cold, and heat. ~rar!zet ri~ks are those
which occur because of the changes in value of a product as it is marketed.
An unfavorable movement in prices might result in high inventory losses.
A change in consumer taste might reduce the desirability of the product. A
change in the operation of competitors might result in a loss of customers.
All of these risks in varying degrees must be borne in the marketing of a
product. Risk-bearing may take a mor~. conventional form such as the use
of insurance companies in the case 6f physical risks or the utiljzation of
future ~~h<ll1ges in the case of price risks. Or, as is often tru~ the-e~tre-
-prene~r himself may bear the risk without the aid of any of these specialized
agencies. The function of risk-bearing is often confused with the function
of finance. Their differences can be kept clear, however, if it is remembered
that the need for financing arises because of the time lag between the pur-
chase and sale of products while the need for risk-bearing arises because of
the possibility of _lo_:;s during the holding period.
The market information function is the job of collecting, interpreting,
and disseminating the large variety of data which are necessary to the
smooth operation of the marketing processes. Efficient marketing cannot
operate in an information ,'acuum. An effective pricing mechanism is de-
pendent on well-informed buyers and sellers. Successful decisions of how
much to pay for commodities or what kind of pricing policy to use in their
sale require that a large amount of market knowledge be assembled for
study. Adequate storage programs, an efficient transportation service, and
an adequate standardization program all depend to a considerable extent on
good information. Much of the market research which is carried on to
evaluate the possible alternative marketing channels which may be used,
the different ways of performing other functions, the market potentialities
 Analyzing f."larketing Problems 21

for new products, may be classified as part of the broad function of market
information. As with other functions, this function may be performed by
those who specialize in its performance. On the other hand, everyone in the
marketing structure who buys and sells products evaluates available market
data and therefore performs this function to some degree.

USE 0 F THE FUN C T ION A LAP PRO A C H The functional ap-

proach considers the jobs which must be done; it is not concerned with the
agency which performs them. Some marketing agencies specialize in per-
forming specific functions. For example, cold storage warehouses are
operated to perform the storage function. A potato broker may specialize
in the selling and market information functions. On the other hand, some
marketing agencies may perform all of the functions to some degree. The
retailer is a good example of this latter group.
Analyzing the functions of various middlemen is particularly helpful in
evaluating marketing costs. Retailing is usually much more costly than
wholesaling. The functional approach, however, points up the greater com-
plexity of retailing by focusing attention on the increased extent to which
the retailer must perform his various functions. The use of the functional
concepts also aids in comparing the costs of two similar middlemen. Cost
comparisons are meaningful only when they are related to the job done.
Retailer "A" may operate at lower costs than retailer "B," but does retailer
"A" perform the same functions as "B"? Perhaps "A" is a cash-and-carry
merchant while "B" extends credit and delivers. As such, "A" probably
performs considerably less of the functions of financing, risk-bearing, and
transportation than "B."
The functional approach is also useful in understanding the difference
in marketing costs of various commodities. For example, a perishable prod-
uct is often more costly to market than one which is less perishable. Much
of this difference may be due to the greater difficulty in the performance
of the transportation, storage, and risk-bearing functions.
But probably of greater importance, the breaking down of a complex
marketing task into its component functions greatly aids in efforts to im-
prove the performance of the marketing machinery. Again in reference to
our retailer, perhaps retailer HB" is losing money even though other re-
tailers having similar operations are not. A function-by-function study of
"B's" business might show that the cost of its credit function is unduly
high because of unpaid accounts. Or a careful analysis of his selling function
may show he has not kept up with new methods in merchandising his
products and thus is losing out to his competitors.
Marketing functions are activities which must be performed in market-
22 MARKETING OF AGRICULTURAL PRODUCTS

ing. Functions cannot be eliminated. Their performance may be simplified.

The duplication of their performance can be corrected. In any case, changes
may be made toward performing functions with greater efficiency. Keeping
this idea in mind will help in evaluating the various schemes for improving
marketing by "eliminating middlemen." The man may be eliminated, but
not the functions which he performs. These may be done better and
duplication reduced, but the various functional jobs must still be done by
someone.
The reader can check his grasp of the above ideas if he will pause now
and try to put them into practice. Choose a familiar commodity and
enumerate the various functions which are performed by the different
agencies in moving the commodity into consumption. In listing, do not
forget the marketing functions which the farmer himself might perform.

The Institutional Approach

Another method of analysis is to study the various agencies and busi-
ness structures which perform the marketing processes. \Vhere the func-
tional approach attempts to answer the "what" in the question of "who
does what," the institutional approach to marketing problems focuses at-
tention on the "who." Marketing institutions are the wide variety of busi-
ness organizations which have developed to operate the marketing ma-
chinery. The institutional approach considers the nature and character of
the various middlemen and related agencies and also the arrangement and
organization of the marketing machinery. In this approach the human
element receives primary emphasis.

MID D L E MEN 0 F THE MAR K E TIN G PRO C E SSE S Middlemen

are those individuals or business concerns which specialize in performing
the various marketing functions involved in the purchase and sale of goods
as they are moved from producers to consumers. Our concern here is with
the place in the marketing processes which the middlemen occupy. There
is no limitation as to the way in which they have organized for doing busi-
ness. They may operate as individual proprietors, partnerships, or coopera-
tive or noncooperative corporations. The middlemen of particular interest
in food marketing can be classified as follows: 3

A. Merchant Middlemen
1. Retailers
2. \Vholesalers

3 The definitions that follow are substantially those as reported by the American
Marketing Association, Definitions Committee, Journal of Marketing, October, 1948,
p.211.
 Analyzing Marketing Problems 23
B. Agent Middlemen
1. Brokers
2. Commission men
C. Speculative Middlemen
D. Facilitative Organizations

Merchant middlemen take title to, and therefore own, the products
they handle. They buy and selI for their own gain. The retailer buys prod-
ucts for resale directly to the ultimate consumer of the goods. He is the
producers' personal representative to the consumer. As such, his job is very
complex. From the functional viewpoint, the retailer may perform all of the
marketing functions. This group of middlemen, consisting of about 500,000
units, is the most numerous of the marketing agencies.
The wholesaler sells to retailers, other wholesalers, and industrial users,
but does not seH in significant amounts to ultimate consumers. \Vholesalers
make up a highly heterogeneous group of varying sizes and characteristics.
One of the more numerous groups of wholesalers (about 18,000 in 1948)
are the local buyers or country assemblers who buy goods in the producing
area directly from farmers and ship the products forward to the larger cities
where they are sold to other wholesalers and processors. In this group are
such agencies as grain elevators, poultry and egg buyers, and local livestock
buyers. Another group of wholesalers is located in the larger urban centers.
These may be "full-line" wholesalers who handle many different products
or those which specialize in handling a limited number of products. They
may be cash-and-carry wholesalers or service wholesalers who will extend
credit and offer delivery and other services. Such terms as "jobbers" and
"car-lot receivers" are often used synonymously with "wholesalers." In 1948,
there were approximately 31,000 merchant wholesalers of agricultural com-
modities (apart from country assemblers) and grocery products.
Agent middlemen, as the name implies, act only as representatives of
their clients. They do not take title to, and therefore do not own, the
products they handle. "'hile merchant wholesalers and retailers secure their
incomes from a margin between the buying and sel1ing prices, agent middle-
men receive their incomes in the form of fees and commissions. Agent
middlemen in reality sell services to their principals, not physical goods to
customers. In 1948, there were approximately 24,000 which could be classi-
fied as agent middlemen. In many instances, the principal stock in trade of
the agent middlemen is market knowledge and "know-how" which he uses
in bringing the buyer and seHer together. Their services are often retained
by a buyer or scHer of goods \vho feels that he does not have the knowledge
or opportunity to bargain effectively for himself.
Though the names may differ somewhat, agent middlemen can be
 MARKETING OF AGRICULTURAL PRODUCTS

broken down into two major groups, commission men and brokers. The
difference between these two types of agent middlemen is largely one of
degree. The commission man is usually granted broad powers by those who
consign goods to him. He normally takes over the physical handling of the
product, arranges for the terms of sale, collects, deducts his fee, and remits
the balance to his principal. The broker, on the other hand, usually does
not have physical control of the product. He usually follows the directions
of his principal closely and has less discretionary power in price negotiations
than commission men. In agriculture, livestock commission firms and grain
brokers are good examples of these two classifications of agent middlemen.
Speculative middlemen are those who take title to products with the
major purpose of profiting from price movements. All merchant middle-
men, of course, speculate in the sense that they must face uncertain con-
ditions. Usually, however, wholesalers and retailers attempt to secure their
incomes through handling and merchandising their products and to hold
the uncertain aspects to a minimum. Speculative middlemen seek out and
specialize in taking these risks and usually do a minimum of handling and
merchandising. Several names are given to these middlemen such as
"traders," "scalpers," and "spreaders." They often attempt to earn their
profits from the short-run fluctuations in prices. Purchases and sales are
usually made at the same level in the marketing channel. For example,
the livestock speculator may buy hogs today and sell them back either today
or tomorrow in the same yards. The grain scalper may buy and sell grain
futures seve~al times within the trading day. Speculative middlemen often
perform a very important job as a competitive force in the maintenance of
an adequate pricing structure.
Facilitative organizations aid the various middlemen in performing
their tasks. Such organizations do not, as a general rule, directly participate
in marketing processes either as merchants or agents. One group of these
organizations furnishes the physical facilities for the handling of products
or for the bringing of buyers and sellers together. They take no direct part
in the buying and selling of the products themselves. However, they estab-
lish the "rules of the game" which must be followed by the trading middle-
men, such as hours of trading and terms of sale. They may also aid in
grading, arranging and transmitting payment, and the like. They receive
their incomes from fees and assessments from those who use their facilities.
Examples ~f this group are the stockyard companies, grain exchanges, and
fruit auctions.
Another group of organizations falling in this general category is the
trade associations. The primary purpose of a large majority of these or-
ganizations is to gather, evaluate, and disseminate information of value to a
 Analyzing Marketing Problems 2.5
particular group or trade. They may carry on research of mutual interest.
In many cases they also may act as unofficial policemen in preventing prac-
tices which the trade considers unfair or unethical. Though not active in
the buying and selling of goods, these organizations may often have far-
reaching influence on the nature of marketing.
Food processors, though not included in our list of marketing middle-
men, cannot be omitted from consideration. Apart from their manufac-
turing activities which one might classify as being outside the boundaries of
marketing, food processors do take an active part in marketing. Some, such
as meat packers, flour miilers, and fruit and vegetable canners often act as
their own buying agents in the producing areas. And on the other hand, it is
increasingly common for this group to undertake the wholesaling of their
finished products to retailers. Too, many of the processors through their
advertising sales work attempt to reach the ultimate consumer. So the
processing in itself is only part of the activities of food manufacturers. They
are also important institutions in marketing. As we shall see, the production
aspects and changes of the farm production unit itself have important bear-
ing on marketing. Similarly, the technology of food processing and its
changes have important influences upon the marketing processes. The
advent of frozen foods, for example, has had important effects on both
the performance of marketing functions and the institutions which perform
them. It will be recalled in this connection that the perfection of refrigera-
tor cars ,had important and far-reaching effects on the organization and
operation of the meat packing industry.

ORGANiZATION OF THE MARKETING MACHINERY The above

discussion of the place of the food processor has brought out one of the
more important aspects of the organization of marketing-that of the
degree of integration. As has been pointed out, individual functions may be
performed by specialized individuals, or one individual may perform several.
Also in the operations of marketing institutions, one firm, such as a food
processor, may undertake the work of several middlemen. This combining
or grouping together of various agencies and activities is known as integra-
tion.
There are two basic kinds of integration. Vertical integration occurs
when a firm combines activities which are unlike those it is currently per-
forming. Such integration is illustrated by the meat packer who decides to
reach backward toward the producer and set up his own livestock buying
points in the countryside and forward toward the consumer as he under-
takes to wholesale meat to retailers. Horizontal integration occurs when a
firm absorbs other firms which are performing similar activities. The de-
26 I\I ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

velopment of the line elevators in which many individual elevators are

operated by one managemcnt as a chain is an example of horizontal
integration. A large national grocery chain organization is illustrative of
both types of integration. i\Iany retail units are brought together by hori·
zontal integration. The chain may also vertically integrate by operating
food processing activities such as canneries and its own wholesaling set-up.
Integration offers opportunities to incrcase efficiency. On the other hand,
it also poses many policy problems in the area of pricing and competitive
practices.
The levels of the marketing channels in which middlemen operate also
are institutional considerations. The classification of local, wholesale, and
retail markets is often used as an institutional framework.
The local market refers largely to the agencies operating in the pro-
ducing area. These agencies buy products from farmers and in turn ship
them to the larger wholesale centers. To many farmers these firms represent
the entire marketing process. However, it should be clear by now that the
local market is usually just the beginning.
\Vholesale markets usually develop in the relatively large consuming
centers. It is to these middlemen that the local markets ship their goods.
In the larger wholesale centers, middlemen specializing in different prod-
ucts often tend to group themselves in different areas of the city. In such
cities as Chicago and New York, we find poultry streets, fruit and vegetable
streets, garment trade areas, livestock marketing and packing areas, and so
forth. Such grouping often offers advantages to both buyers and sellers of
the particular commodity. On the other hand, grouping often furnishes
some of the real problems in marketing improvement. rvlany such areas
take on all the aspects of the union closed shop. Newcomers find contacts
very difficult to make. Such areas also, \'lith the passing of time, may be-
come too poorly equipped and located to conduct business efficiently.
Retail markets, of course, are familiar to all of us. Originally such
middlemen tended to group themselves in the "downtown area." In recent
years, there has been the decentralizing influence of the suburban shopping
center. In food retailing, llle large supermarket located by itself has been
the newest development.

ARK E TIN G C II ANN E L s The various agencies which handle a com-

I\[

modity as it moves through the major marketing processes make up the

marketing channel. Flow charts are often used to show the relative amounts
of a commodity which are handled by each of the marketing agencies in
the marketing channel. Such presentations of the paths that are used in
marketing a commodity are often valuable in appraising the complexity of
 Analyzing Marketing Problems 27

the marketing machine and the relative importance of its various parts.
Such data are presented in the various commodity chapters, since a grasp
of the basic movement pattern is one of the stepping stones toward better
understanding of marketing problems.
National flow charts for a commodity must be used only for what they
are-a generalized picture of the average channel at a given time. Marketing
channels of a commodity may also change over a period of time. New
technological developments, new products, and changing market institu-
tions are examples of many factors which may cause the old pattern to
change. The widespread ownership ~f trucks has been one of the factors
which have changed livestock marketing channels. The development of
the corporate grocery chain store along with its affiliated wholesaling and
processing agencies has been instrumental in changing old-established chan-
nels for both fresh and canned fruits and vegetables. The channel of a com-
modity may be considerably different in one region than in another. The
channel may also vary seasonally. If one is seeking answers to a specific
problem, these differences may be far more important than the aggregate
average.

USE 0 F THE INS TIT UTI 0 N A LAP PRO A C H The recogni tion
of the various kinds of marketing organizations and the way in which they
organize themselves furnishes another useful tool in analyzing marketing
problems. Very often, the why of certain marketing practices must be
answered in terms of the characteristics of who performed it. Such analysis
has the advantage of preventing the personal aspects of marketing from
being ignored.
Attitudes toward change or improvement must often be examined in
the light of the characteristics of the various marketing institutions. One of
the greatest hazards to market improvement comes from institutions with
large vested interests in the status quo. Marketing institutions give voice
to the marketing machinery. From them develop "pressure" and "educa-
tional" groups attempting to mold public opinion. One of the cardinal
rules to be followed in the analysis of any marketing controversy is first to
ascertain which groups are vocal in the controversy and what they might
stand to gain or lose.

The Commodity Approach

Another v,'ay of approaching the analysis of the marketing processes is
to study theal commodity by commodity. Under this method, both the
functional and institutional aspects of marketing are analyzed in detail
for a particu1ar commodity such as livestock or cotton. This approach is
 MARKETING OF AGRICULTURAL PRODUCTS

an excellent way to organize and study a large amount of descriptive detai1.

Several chapters of this book are devoted to commodity analysis, since a
great many people are interested in the marketing of a specific commodity.
Commodity analysis helps focus attention on the differences in mar-
keting which arise because of differences in either the commodity or its
production. Perishability, seasonality, and the size of the basic production
unit may influence the way functions are performed and the type and
organization of institutions which perform them. The separate study of a
large number of commodities also will often help point up the similarity of
the many marketing problems which exist. For example, a commodity-by-
commodity analysis points out that retailing usually is the most costly single
step in marketing. This finding helps emphasize the importance of a
critical evaluation of the retailer as a middleman and the functions he
performs.
In the final analysis, all three approaches-functional, institutional,
and commodity-are necessary to obtain the most complete understanding
of marketing. Functional analysis may have meaning only when combined
with institutional and commodity analysis. Thus, it may be a simplifying
procedure to think of the functions of storage or financing in the abstract.
However, a complete grasp of a particular problem may not be possible
until the characteristics of the various business organizations and the prod-
uct itself which are specifically involved are considered.
In order to make real progress in marketing improvement we must deal
with the world "as is," not as it theoretically should be. In striving for
improved technical efficiency we must work with the commodity and the
functions which must be carried out. In aiming at improved economic
efficiency we must work with the existing business world and the people
who operate its institutions.

MARKETING PRINCIPLES
The complex problems of marketing mean that many fields of study
can contribute to their ;:,olution. From economics we can utilize the large
body of theory which helps explain prices and price behavior. Firm analysis,
regulations of output, advantages of size and integration-all of these are
problems of economics. Also from the closely allied fields of business
management and cost accounting, marketing secures many of its useful
tools.
From psychology we can utilize the various theories of individual
behavior motivation. If marketing agencies are to influence demand suc-
cessfully, the knowledge of why people act as they do is of prime impor-
tance. From sociology we can utilize much of the body of knowledge
 Analyzing Mctrketing Problems 29
which has been developed concerning populations, community growth and
relations, and so on to answer such marketing questions as proper location
and extent of trading areas.
The physical technological aspects of marketing are of great impor-
tance also. How cold should a warehouse be to store apples? What kind of
wrapping is best for prepackaged meat? What causes breakdown of canned
foods? How much strain must the crating for oranges be able to bear during
transit? For help in these areas, marketing people must turn to the various
physical sciences for aid and guidance.
Agricultural marketing and other marketing fields often have much
in common. Many of the results of industrial marketing studies may find
useful application in agriculture. Studies made of a problem in Illinois
may have full or partial application to problems in Ohio. We must not turn
up our nOses just because the study does not directly apply to our region
or product. As we shall see, the area of marketing study is really one of
coordination of many other areas rather than an isolated and specialized
area of its own.
SELECTED REFERENCES
Clark, F. E., and L. D. H. Weld, Marketing Agricultural Products (New York,
Macmillan, 1932), Chaps. 2 to 7.
Converse, Paul D., "Development of Marketing Theory-Fifty Years of Prog-
ress," in Changing Perspectives in Marketing, ed. Hugh \Vales (University of
Illinois Press, 1951).
Duddy, E. A., and D. A. Revzan, Marketing, 2nd ed. (New York, McGraw-Hill,
1953), Chaps. 1 and 2.
Vaile, R. S., E. T. Grether, and Reavis Cox, Marketing in the American Econ-
omy (New York, Ronald Press, 1952), Chaps. 2, 3, and 5.
CHAPTER THREE

Consumers of Agricultural Products

The ultimate job of those engaged in marketing is to move products into

consumption. Consumption, however, is something more than a cold
statistic. Consumption is accomplished by consumers who are very-much-
alive human beings. This job of moving products into the hands of con-
sumers, too, is more than a process of matching aggregate totals. The ques-
tions of where, when, and what kind are all important aspects. The total
market for our agricultural production is made up of both domestic and
foreign consumers. Domestic consumers take the great majority of our
agricultural products. However, for some of our products, the foreign
market is very important.
Consumers imply both number of people and their purchasing power.
In addition there arc many other factors which may influence the what,
when, and where of the market for food. Among these are the geographic
location of population and incomes, the degree of urbanization, and the
differences which may arise from various regional, racial, and nationality
backgrounds and various habits and customs. These are the principal fac-
tors to be discussed in this chapter.

INCOMES AND FOOD EXPENDITURES

The aggregate amount of dollars spent for food moves up and down
with the variations in the total incomes received by consumers. Figure 1
shows that over a long period of time covering both the depression of the
thirties and the war period of the forties, consumers spent roughly about
25 percent of their disposable income for food. In the deep depression year
of 1932, per capita disposable income was $381 and expenditure for food
was $91-a 24 percent expenditure. In 1952, disposable income was about
$1,680 and expenditure for food slightly above $4oo-a 27 percent expendi-
ture. The important lesson here is that in order to obtain more total
30
 Consumers of Agricultural Products 31

FOOD COSTS & CONSUMER INCOMES

$ PER PERSON

800

400
o
PERCENT FOOD COSTS AS % OF DISPOSABLE
40
20

o 1930 1935 1940 1945 1950

A.NNUAL .QA,7E lOR 3D QUARTfIi OF 19$2

FIG U REI. The relationship of food expenditures

to income. (Courtesy USDA.)

dollars for agricultural products we must look largely to maintaining a

high level of consumer income. This is true regardless of whether there is a
large or small total volume of products to be marketed in any given year.

POPULATION AND INCOME

Distribution of People and Incomes
Where are the people? How much do they have to spend? These are
two basic questions which affect the operation of the marketing machinery.
Neither people nor incomes are distributed evenly throughout the United
States.
The area roughly outlined by the Ohio River on the south and the
:tvlississippi River on the west includes the great mass market for all kinds
of agricultural products. In this area, which is roughly one-eighth of the
total area of the country, are concentrated over two-fifths of the total
population and over one-half of the total income (Tables IA and IB). The
income per square mile of this area, which is a good measure of market
potential, is well above twice that of the average of the country.
Much of the southern area of the country has above average popula-
 MARKETING OF AGRICULTURAL PRODUCTS

tion, but the per capita income is low. On the other hand, though the
income of the mountain regions is nearly that of the United States average,
the population is so sparse that it has a very low concentration of income
per square mile.

TAB LEI A. Concentration of the Domestic Market, 1950

LAND INDIVIDUAL
REGION AREA POPULATION INCOME PAYMENTS

PERCENT OF U. S. TOTALS

New England 2.1 6.2 6·7

Middle Atlantic H 20.0 24.0
East-North Central 8.2 20.2 22·4
'Vest-North Central 17. 2 9·3 8,9
South Atlantic 9-0 14.1 11.1
East-South Central 6.1 7. 6 4. 6
'Vest-South Central 14·5 9. 6 7·7
I\Iountain 28.8 3·4 3. 2
Pacific 10·7 9. 6 11.4
United States 100.0 100.0 100.0

TAB LEI B. Concentration of the Domestic Market, 1950

POPULATION PER INCOME INCOME PER
REGION SQUARE MILE PER CAPITA SQUARE MILE

PERCENT OF U. S. AVERAGE

New England 29 1 108 315

Mid-Atlantic 59 2 120 7 10
East-North Central 245 III 27 2
'Vest-North Central 54 96 52
South Atlantic 15 6 79 12 3
East-South Central 126 60 76
'Vest-South Central 67 79 53
Mountain 12 94 II
Pacific 89 118 106
United States '" 100 100 100
'" Population per square mile, 50.7; income per square mile, $73,000; income per
capita, $1,436.
SOURCE: From data in Statistical Abstract of the United States, 1951, and Survey
of Current Business, August. 1951.

The marketing machinery must be adapted to supply the Northeast

with huge quantities of all kinds and qualities of commodities. In the
South it must be prepared to meet the demand for larger amounts of lower
quality products. In much of the rest of the country the marketing or-
ganization must solve the problem of servicing few people scattered
throughout an extensive area.
 Consumers of Agricultural Products 33

Population Growth
The population of the United States has grown rapidly. It almost has
doubled during the first half of this century.
The fact that the country has been growing is an important one for
an expanding market for agricultural products. However, in this growing
process, the western regions have been growing much more rapidly than the
older eastern and southern regions. The Pacific coastal area has grown
phenomenally especially during the decade of the 1940's (Figure 2).
The changing population pattern means that the marketing machinery
also must change. Fifty years ago, almost all of the production of the West
had to look eastward for its market. Although, as we have seen, the eastern
area is still the principal market area, an increasing amount of western

Millions

140
U.S. Population

60
40
20~~ __~__~__~~~~__~__~
1870 1900 1950
Percent of U.S. Percent of U.S. Percent of U.S.
r-----..,
New England 16 10
14 8
8
12 6
6
10

14

12 §:====.x:><:::!
10
8
2 =..L.JL.-l............-J.-I
1870 1900 1950 1870 1900 1950 1870 1900 1950
FIG U R E 2. Total United States population and proportionate
distribution in different geographic regions, 1870-
1950. (Source: U. S. Census.)
 LINE OF EAST-WEST MOVEMENT*
APPROXIMATE GEOGRAPHIC BOUNDARY TO WHICH WESTERN
PACKER BUYERS MUST COME INLAND TO BUY THE LIVESTOCK
SLAUGHTERED IN THE 12 WESTERN STATES

CATTLE
AND
CALVES

SHEEP
AND
LAMBS

HOGS

• fOI liMITATIONS IN THIS ilLUSTRATION.

SEE USDA 'U.lICATION 'SHIFTS IN THE
T.... OE IN WESTERN SlAUGHTER LlVfSTOCIC'

FIG U R E 3. The effect of regional population changes on

the production-consumption balance of live-
stock. (Courtesy USDA.)
34
 Consumers of Agricultural Products 35
production can find a market nearer home. This situation is illustrated by
Figure 3. YVith the passing of time, the l~nes which represent an East·
\Vest production-consumption balance for livestock have been moving
eashvard. In 1925 nearly all of the hogs in the com belt moved eastward
for consumption. Now considerable numbers from the western areas of the
corn belt move to the West Coast.

Growth of Urban Population

Fewer people on the farms are responsible for producing food for an
increasing off-farm population. In 1910, 35 percent of our total population
lived on farms, 19 percent lived in towns of under 2,500, and 46 percent
lived in towns and cities 2,500 and larger. By 1950, these percentages had
changed to 16, 20, and 64 respectively. During the ten years from 1940 to
1950 the population in the larger towns and cities increased about 19 per-
cent, in the smaller towns 33 percent, while the farm population decreased
16 percent.
More and more people are living in the largest cities. In 1910, about
17 percent of our people lived in the thirty-seven cities of 250,000 or more.
By 1950, there were thirty-nine cities of this size accounting for 23 percent
of our total population. In addition, the suburban areas surrounding these
cities have grown at an even faster rate.
Along with this urban development have come smaller living quarters
and family units. In 1950, one-sixth of the urban population lived in
buildings which had five or more dwelling units; slightly over one-fourth
was living in three rooms or less. In 1910, the average family consisted of
4.5 persons; in 1950, the average family had 3.6 persons.
This trend toward city living has its impact upon marketing. It has
been estimated that about 22 percent of our retail food sales occurs in the
metropolitan districts of over 1,000,000 people. 1 Nearly one person in every
five must be supplied with food under conditions of urban congestion.
The smal1er urban family living in crowded conditions has resulted in an
increased demand for smaller packages and more prepared and semiprepared
foods. For example, there has been a trend toward smaller-sized cans for
canned foods. Breakfast foods are now packed in individual servings for the
family which cannot use a large box before its contents lose their freshness.
In a study of potato purchasing habits of Chicago consumers, three out of
four bought potatoes in units of five pounds or less.2 Not many years ago,
the peck was the common unit of sale. The retail experimentation \vith cut-
1 Estimates from retail food store data, \Veekly Digest of Food Distribution, i\lay
31, 1952·
~ North Central Regional Publication 2.f, Consumer Acceptance of and Preferences
for Potatoes, North Dakota Bulletin 374, 1952.
 MARKETING OF AGRICULTURAL PRODUCTS

up chicken and turkey halves and quarters has come about largely through
the effort to satisfy the desire for a smaller purchasing unit. In one city, it
was found that 72 percent of the interviewed families said they would eat
turkey more often if it were available in smaller units.3 Such developments
usually neither simplify nor reduce the cost of marketing.

Income Distribution
Though some sections of the country have high average incomes and
others low, all families in each area do not have high or low incomes. Vvide
variation in incomes is characteristic of practically any particular place.
Table 2A indicates the wide range of incomes which exist. In the rela-
tively prosperous year of 1950, 13 percent of the spending units made less
than $1,000 annually. This group accounted for only 2 percent of the na-
tion's income. On the other hand, the 6 percent of the units which made
$7,5°0 or more accounted for over 20 percent of our total incomes. In 1950,
it required nearly three-fourths of the units to account for one-half of the
total income. As would be expected, incomes varied widely among the
various occupational groups (Table 2B). The median income of the pro-
fessional or self-employed person was over twice that of the unskilled
laborer.
These income differences are also reflected in the marketing structure.
Retail grocery stores adopt different practices and handle different items
in serving the different income groups. It has been estimated that food
expenditures take about half of the incomes of city families having less
than $2,000 per year. These people must watch what they buy very care-

TAB L E 2 A. Income Grouping of Spending Units, 1950

INCOME AFTER
UNITS INCOME FEDERAL
INCOME TAX
AN:s'UAL INCOME PERCENT CUMULATIVE PERCENT CUMULATIVE PERCENT
BEFORE TAXES IN GROUP PERCENT IN GROUP PERCENT IN CROUP

Under $1,000 13 2 2
$1,000-1,999 17 3° 7 9 8
2,000-2,999 19 49 13 22 14
3,000-3,999 19 68 18 4° 19
4,000-4,999 12 80 16 56 16
5,000-5,999 14 94 23 79 23
7,5 00-9,999
10,000-over
3
3
97
100 }21 } 100 }IS
i\Iean Income $305 00
Median Income 3,000

3 L. E. Dawson and C. B. \Vood, Merchandising Turkey Quarters, Indiana Bulletin

537, 1949·
 Consumers of Agricultural Products 37
TABLE 2B. Distribution of Spending Units and Income among
Occupational Groups, 1950

MANAGERIAL, SKILLED, CLERICAL,

ANNUAL INCOME PROFES- SELF- SEMI- SALES FARM
BEFORE TAXES SIONAL EMPLOYED SKILLED PEOPLE UNSKILLED OPERATOR

PERCENT OF UNITS

Under $1,000 4 5 2 2 11 36
$1,000-1,999 8 11 11 14 33 22
2,000-2,999 14 11 19 29 28 15
3,000-3,999 17 15 30 19 18 9
4,000-4,999 14 12 20 12 7 4
S,000-7,499 24 23 17 17 3 6
7,S°0-over 19 23 1 7 8
Median Income $.f,500 $4,SoO $3,660 $3,::00 $::,200 $1,900
Spending Unit: All persons living in same dwelling and belonging to same family,
who pooled incomes. Does not include armed forces on military reservations; hospital,
religious, or penal institutions; or people living in hotels, large boarding houses, etc.
Income: Sum of net money earnings from civilian emplo}ment; does not include
income received in kind, value of farm inventory changes, or capital gains or losses.
SOURCE: Federal Reserve Survey of Consumer Finance, August, 19S1.

fully and make every penny count. On the other hand, families having
incomes above $7,500 spend only 17 percent of their income on food. These
families can well afford the so-called food luxuries and fancy qualities.~
Generally, those stores serving higher income groups will stock more pre-
packaged and higher quality produce and meats. The stores of a New York
City grocery chain located in high income areas handled twice as many
fresh vegetable items as those in low income areas. 5 Also in New York City,
it was found that only 11 percent of the apples handled by retailers in low
income areas graded U. S. No. 1 or better. However, 80 percent of the
apples handled by retailers in the high income areas graded U. S. NO.1 or
better.6
Such income variation means there are always buyers for cheaper,
lower quality foods as well as for the more expensive, higher quality foods.
Commercial grade beef and bargain counter fresh vegetables have a market
as well as prime steaks and fancy vegetables. The job of the marketing
machinery is to assure that each kind finds its potential buyers.
Many who would improve marketing focus their attention only on
improving quality, providing more services, and making fancier packages.
4 Low Income Families and Economic Stability, Joint Committee on the Economic
Report, Slst Cungress, 1St Session, p. 5.
5 M. P. Rasmussen, Consumer Purchases of Fresh Vegetables at Retail, New York
Bulletin 849, 1948.
6 M. P. Rasmussen, F. A. Quitslund, and E. \V. Coke, Some Facts Concerning

Competition Between Apples and Other Fruits at Retail, New York City, 1939, Farm
Credit Administration, USDA Misc. Report 2S, 1940.
 MARKETING OF AGRICULTURAL PRODUCTS

Just as the market for mink coats is limited, so is the market for expensive
foods limited. One of the facts of agricultural marketing is that the bulk
of food products must be sold to the large group of low and middle income
people.

Income Levels and Food Consumption

Studies of food consumption of people at different income levels have
been made with varying results. Table 3 gives the results of some of these
studies. The data in this table are presented in terms of the variation from
the average instead of in actual pounds per capita. This allows a better com-
parison of the changes which occur at the different income levels.

TABLE 3· Per Capita Food Consumption by Income Level

(1935-39 Average Consumption = 100) *
INDEX OF CONSUl\1PTION PER CAPITA IN CONSUMER
UNITS WITH INCOMES OF

UNDER $5°0- $1,000- $1,5°0- $2,00()- $3,000- $5,000

FOOD GROUP $5 00 $999 $1,499 $1,999 $2,999 $4>999 AND OVER

(1935-39 average = 10O)

Dairy products:
Fluid milk & cream 54 78 97 III 117 12 7 143
Cheese 49 67 85 109 12 7 135 147
Evaporated milk 66 95 12 9 13 8 13° 106 89
Ice cream 22 63 10 9 141 179 213 26 4
Potatoes 98 100 111 96 96 86 82
Beans, dry 143 126 12 7 114 9° 76 60
Fresh fruits 31 50 72 88 117 13 2 166
Canned fruits 70 84 10 3 120 13 8 136 149
Dried fruits 41 70 91 100 10 7 118 134
Fresh vegetables 95 9° 93 96 98 -,
1"' 164
Canned vegetables 61 100 122 142 149 15 6 179
Eggs 70 87 10 5 114 120 12 3 126
Meats, poultry, fish:
Beef & veal 39 63 83 102 119 12 7 133
Lamb & mutton 5 17 32 45 7° 113 17 0
Lean pork 74 102 122 12 7 13 2 141 148
Chicken 90 98 10 3 104 109 137 15 6
Fish 110 1'"':' 94 88 97 98 94
Flour & cereal products 124 116 104 97 97 91 91
Butter & other fats:
Butter 48 55 72 80 87 10 5 114
Margarine 10 7 15 2 1~ 15 2 114 65 38
Sugar and sirups 89 100 1°3 104 106 112 12 5
Coffee 82 97 110 115 118 120 13 6
All foods 72 86 99 1°7 115 1::3 139
* Based on consumption patterns of the 1935-36 and 1942 studies of consumer
purchases.
SOURCE: From data appearing in Consumption of Food in the United States, USDA
l\fisc. Publication 691.
 Consumers of Agricultural Products 39
The total quantity of food consumed per person increases as incomes
rise. \Vhile it may be true that the human stomach can hold only so much,
this point is evidently not reached by very many people in our society. It
should be noted that for each change in the income group there is a change
in the total amount of food consumed. The level of income at which people
would not consume any additional amounts of food is not known.
However, consumption of all kinds of food does not increase with
rising incomes. The consumption of some foods actually declines. For
example, the consumption of fluid milk, which is a highly desirable product
for most people, increases rapidly with rising incomes. On the other hand,
the consumption of condensed milk increases for a while and then falls off.
Potato and dry bean consumption generally decreases as incomes rise. On
the other hand, the consumption of fruits and vegetables rises sharply.
These same tendencies of increasing and decreasing consumption are found
in comparing meats with fish and butter with margarine.
A study conducted in 1938-1939 found that low income families
bought 310 pounds of white potatoes per family while high income families
bought only 164 pounds. It also was found that low income families pur-
chased about 151 pounds of other fresh vegetables while high income
families purchased about 217 pounds. 7 Another example of consump-
tion differences related to income is found in the consumption of
frozen orange juice concentrate. Only 35 percent of the families having
incomes under $7,200 used the concentrate while 48 percent of the families
having incomes above $7,200 used the product. The first group consumed
forty-eight ounces of the product yearly; the latter, eighty-eight ounces. s
There are then two generalizations which can be made concerning
family income level and food consumption. First, higher income families
purchase a greater total amount of food than do lower income families. Per-
haps they waste more also, but this is not a point of great concern to the
marketing machinery. And second, the more desirable luxury type foods
are purchased in increasing amounts by people with higher incomes, while
the purchases of relatively cheaper, so-called staple foods remain relatively
constant or fall as incomes increase.
REGIONAL DIFFERENCES IN
F 0 0 D CON S U 1\1 P T ION
There are definite differences in food consumption patterns between
one region of the country and another which cannot be explained on the
basis of income or other common factors. National meat packers point out
7 Rasmussen, op. cit.
tiK. A. Fugett, J. A. Bay ton, and H. 'V. Bitting, Citrus Preferences Among Cus-
tomers of Selected Stores, Texas Bulletin 722, 1950.
 MARKETING OF AGRICULTURAL PRODUCTS

that different sections of the country prefer different weights in beef car-
casses. New York and Boston prefer the heavy animals weighing from
1,100 to 1,500 pounds. The Southeast, however, prefers animals which
weigh from 600 to 800 pounds; Chicago consumers like cuts from animals
which weigh from 750 to 850 pounds. Pacific Coast consumers prefer the
heavier animal weighing from 900 to 1,200 pounds.9 Lamb consumption
is very largely limited to the East and West Coasts with very little being
consumed in the interior areas. Boston housewives prefer brown eggs
while New York housewives prefer white ones.
Table 4 indicates consumption differences for persons of like incomes
in four cities in different regions of the country. Consumers in Birmingham
ate more pork and less beef than consumers in any of the other cities.
People in San Francisco were relatively heavy lamb and poultry con-

TAB L E 4. Average \Veekly Quantities of Selected Food I terns

Purchased Per Person in Families Having $2,000 to
$2,999 Incomes in Four Cities, \Vinter, 1948

MINNEAPOLIS,
BIRMINGHAM, BUFFALO, ST. PAUL, SAN FRANCISCO,
ITEM ALABAMA NEW YORK MINNESOTA CALIFORNIA

POU!'IDS PER PERSON PER WEEK (EXCEPT

WHERE NOTED)

Whole milk (qts.) 1.3 6 3-3 8 3. 6 5 3. 20

Buttermilk (qts.) .7 1 .03 .05 .03
Evaporated milk 1.08 .4 1 .21 ·49
Cheese .24 .3 1 .27 .63
Butter .09 .24 ·35 .18
IVIargarine .3 2 .15 .12 .19
Eggs .5 8 .5 0 .5 0 ·53
Plain flour 1.04 ·47 .63 .3 2
Cornmeal 1.06 .01 .03 .06
\Vhite bread 1.3 1 1. 67 1.49 1.11
\Vhole wheat bread .13 .04 .19 .3 2
Beef .87 ·97 .9 1 1.09
Lamb .03 .13 .04 ·43
Pork, fresh .64 ·5° ·45 .21
Salt pork ·3'; .03 ·°3 .02
Poultry .29 .4 2 .14 ·44
Fresh fruits 1.82 2.3 8 2.46 2.19
Potatoes 1.20 2.58 :Z·5 1 1.6 5
Sweet potatoes .61 ·°9 .07 .12
All other fresh vegetables 2.20 2·33 1.7 2 3·4°
Canned fruits, vegetables 1.77 2.63 :Z.I3 2.3 8
Total sugars, sweets 1.86 1.31 1.°9 ·95

SOURCE: Family Food Consumption in Four Cities, Pre1imip.ary Report No. 7,

USDA, Bureau of Human Nutrition and Home Economics, 1949.

o From a Mimeograph of the Agricultural Research Department, Swift .md Company.

 Consumers of Agricultural Products 41
sumers. Buffalo and Minneapolis consumers were heavy potato eaters,
while Birmingham people consumed more sweet potatoes. Further study
of Table 4 will show several other rather decided differences in eating
habits among the four cities.
What determines these differences? Some are undoubtedly the effect
of regional production patterns. Whatever the cause, however, such
preferences must be recognized by the marketing agencies in getting the
right things to the right places.

OTHER FACTORS AFFECTING

CONSUMPTION PATTERNS
Religious Differences
Catholics eat no meat on Friday but do eat fish and sea foods. Conse-
quently, the fish and sea food industry is especially geared to meet this
demand. Movement of the sea products into the retail channels is scheduled
to be on hand for the Thursday and Friday trade. The Lenten season also
affects the eating habits of many consumers.
The dictates of the Jewish religion are also of great marketing im-
portance. Jewish people do not eat pork, and the other meat which they
consume must be "kosher." Kosher meat is that which has been slaughtered
according to Jewish religious regulations under the supervision of a rabbi
or his representative. Fresh kosher meat is usually consumed within seventy-
two hours after slaughter. When the seventy-two-hour period has expired,
a special religious dispensation can extend the period during which the
meat may be consumed by orthodox Jews.
Kosher requirements mean that normal slaughtering procedures in the
packing plant must be altered. The time limit means that livestock, which
would otherwise be slaughtered near the production areas in the mid-west
and shipped as carcasses, are shipped alive into the consuming area for
slaughter. Slaughter there permits the distribution through the retail trade
and into the hands of the Jewish consumer before the time limit expires.
The large kosher trade for chickens is a factor which maintains a large
retail market for live chickens in many of our cities. For the non-Jewish
trade, the retailers can buy and sell the dressed bird.

Race and Nationality Differences

Many of our large cities and certain sections of the country have large
groups of foreign-born people who have retained the consumption habits
of their native lands. Though these differences are becoming less important
as these people are absorbed into our society, they still can be factors of
considerable importance to the marketing machinery.
 MARKETING OF AGRICULTURAL PRODUCTS

For example, in studying the retailing of chicken in Philadelphia, it

was found that stores serving foreign elements usually handled live poultry.
Nearly two-thirds of operators of stores which handled meat but did not
handle frying chickens gave nationality and racial preference of their cus-
tomers as the reason.lO Consumption of fluid milk also varies with racial
and national groups. Northern European and Jewish groups are relatively
large consumers of milk, while southern Europeans and Negroes consume
smaller amounts. Negroes are much greater consumers of canned milk,
while the Jewish people use much less. 11 Certain of the middle eastern
national groups prefer lamb or mutton with little or no fat which most
of us would consider highly unpalatable.

Effect of Special Days

Different consumption patterns have grown up around the different
holidays. Probably the most important of these are Thanksgiving and
Christmas. Cranberries, nuts, candies, and other food luxuries move in
increased amounts at that time. Turkey is the traditional meat, and the
large majority of the turkey production is consumed during November and
December. In a study of the cities of Baltimore, Trenton, and New York,
it was found that 78 to 90 percent of the families served turkey at Christ-
mas.!!! This same survey found that pork was preferred at Easter, and
chicken on the Fourth of July.
The marketing machinery must be geared to meet these extra demands
during the particular season. Such consumption habits, once established,
may become very hard to change. The turkey industry is faced with this
situation. \Vith increased turkey production, the industry has attempted to
persuade consumers to accept turkey as a regular item of their diet. How-
ever, turkey has been associated with holiday meals for so long that it has
been very difficult to obtain its acceptance as a meat for year-round con-
sumption.
CHANGES IN CONSUMPTION
T H R 0 UGH T I 11 E
All of the factors which have been discussed are important in deter-
mining what, when, and how much people will eat. However, we must not
get the impression that consumption patterns and habits are firmly fixed

10 \V. T. McAllister and R. O. Bausman, The Retail fl'larketing of Frying Chickens

in Philadelphia, Delaware Bulletin 275, 1948.

11 North Central Regional Publication 10, \Vllat IIJakes the Market for Dairy Prod-

ucts? \Visconsin Bulletin 477, 1948.

12 H. D. Smith, Consumer Preference and Buying Habits for Chicken, Maryland
Extension Publication 8, 1951.
 Consumers of Agricultural Products 43
and never change. This is not so. Over the years, consumption habits do
change.
The composition of our aggregate diet is considerably different now
from what it was forty years ago. A study of Figure 4 will show that the
per capita consumption of fruits and vegetables and dairy products has been
increasing steadily. On the other hand, the consumption of grain products
and potatoes has been steadily declining. Up until about 1940, the con·
sumption of eggs and meat had changed very little. During the last ten
years, the consumption of these products also has increased.

TRENDS IN OUR EATING HABITS*

125

75

50~~~~~~~~~~~~~~~~~~~

1910 1920 1930 1940 1950 1960 1970

$-YR. MOVING AV. CENTERED. DATA. FOR YEA.R USl SHOWN BY sYMBOL •
• PER CAPITA CIVILIAN CONSUJ,APTION. 1I.S. (USING IU1-1'1 RETA.IL PRICES.U WEICHTS).

FIG U R E 4. Changes in our eating habits through time.

(Courtesy USDA.)

Table 5 indicates the changes which have occurred in the consumption

of specific foods. In the meats, beef consumption is down somewhat, pork
up a little, and lamb consumption has held its own. Apple consumption
has decreased sharply, while the consumption of oranges has climbed phe-
nomenally. Snapbeans and tomatoes have increased; potatoes, wheat flour,
and rice have declined.
All of these changes taken together mean that generally Americans are
eab1g better. They are eating more of the more desirable foods and less of
the less palatable foods. \Vhy have these changes taken place? There are,
44 MARKETING OF AGRICULTURAL PRODUCTS

no doubt, several reaSOns. Such changes definitely indicate a rising standard

of living in the United States. The most efficient source of nutrients is
generally the cereals. Countries, such as China and India, which must work
hard to supply the bare food necessities, are large rice and cereal consumers.

TAB L E 5. Changes in Per Capita Consumption of Twenty

Selected Foods, 1910-19 to 1940-49

PER CAPITA CONSUMPTION 1940-49

FOOD !TEll! 19 10- 1 9 1940-49 AS PERCENT OF 1910-19
LBS. LBS. PERCENT

Beef 50 . 0 47-4 95
Lean pork 41.9 46 .1 110
Lamb ,·5 5·5 100
Chicken 19.0 24.6 13 0
Eggs 36 .4 42 .8 118
Fluid milk 26 3. 0 306 .0 116
Evaporated milk 3. 2 16·9 528
American cheese 2.8 4·4 157
Apples, fresh 56 .2 32·3 58
Oranges, fresh 14·4 37-4 260
Peaches, fresh 14·9 13.6 91
Snapbeans, fresh 6·9 " 8·9 12 9
Tomatoes, fresh 19. 6 " 23-3 119
Potatoes 155·4 116·9 75
Dry edible beans 6·3 8·4 133
\Vheat flour 194.0 147.0 76
Wheat cereal 3. 1 3.6 116
Rice 6.8 5·3 78
Sugar, refined 76 .5 87-7 115
Coffee 8·7 13. 8 159

" 19 2 0- 2 4.
SOURCE: Data computed from Consumption of Food in the United States, USDA
Misc. Publication 691.

Many things have contributed to this changing pattern. Efficiency of

production has increased which gives consumers more for the same amount
of money, or in many cases less money. Faster transportation and improved
refrigeration have made the fruit and vegetables grown round the year in
various sections of the country available in every city nearly every day of the
year. Other new technologies have increased the number of uses of many
products.
Even with the great improvements over the years, nutritional experts
point out that many American diets are not adequate. One study sum-
marized by saying that the average individual of a family earning less than
$1,000 yearly is seriously undernourished. Also, there is a tendency of all
income classes to consume less than the optimum quantities of the protec-
 Consumers of Agricultural Products 45
tive foods such as dairy products, tomatoes, citrus fruits, and leafy green
and yellow vegetables. It concluded that these deficiencies in the diet
stemmed from two basic causes, (1) insufficient income and (2) insufficient
knowledge. ls

FOREIGN MARKET FOR

AGRICULTURAL PRODUCTS
At one time during our history, we were a great exporter of farm
products. Agricultural exports were much larger than agricultural imports.
The foreign market was then a major factor in the total market for our farm
products.

U. S. AGRICU LTURAL EXPORTS

PERCENT OF VALUE OF TOTAL EXPORTS

80

60

40

20

o 1890 1930 1940

YEAR BEGINNING JULY I.

FIG U R E 5. The changing composition of the exports of the

United States. (Courtesy USDA.)

During the latter part of the nineteenth century, agricultural exports

made up about 75 percent of our total exports. Since that time a smaller
and smaller portion of our total exports have been agricultural products.
During the five years immediately following World "Var II, agricultural
exports made up only slightly over 25 percent of our total exports (Fig-
ure 5). The proportion of our agricultural production which has been sold
abroad also has fallen sharply. During 19°0-1914 approximately 18 percent
of the total farm output was exported; during 1921-1929 about 15 percent;
13 W. \V. Cochrane, High-Level Food Consumption in the United States, USDA
~,Iisc. Publication 581, 1945, p. 13.
 MARKETING OF AGRICULTURAL PRODUCTS

during 1930-1939 about 8 percent; and during 1940-1950 about 9 percent. 14

In fact, during much of this century we have been a net importer of farm
products-the value of agricultural imports exceeded that of agricultural
exports.
However, the fact that foreign markets are not very important in terms
of our total agricultural production does not mean that foreign outlets are
not of considerable importance for some commodities. Figure 6 shows the
pattern of agricultural exports since 1914. It also shows the breakdown of

COMPOSITION OF U. S. AGRICULTURAL EXPORTS

$ SIL.

4 OTHERS

i ~ I{MAJOR LIvESTOCK
~, ~:; j PRODUCTS*
3 1---1'/1------------ !% {FRUITS, VEG. e. -
. ,,~F, -- PREPARATIONS

2 --(S'I--------I'~--
~ _~ J~
;; U
_. . .
_
{TOBACCO (UIIMFD.)
COTTON AND -
~ ; Pi LINTERS
;; ~ r-
4~ {GRAINS AND
- ~ - - 1+-' PREPARATIONS-

o 1914 1919 1924 1929 1934 1939 1944 '49 '51

* ANIMAL FATS AND OILS, OAIRY PRODUCTS. M£ATS AND PRODI.ICTS. AN;) EGGS AND PRowcr$.

FIG U R E 6. The composition of United States agricultural

exports. (Courtesy USDA.)

these exports into major commodity groups. Our greatest individual agri-
cultural export commodities are cotton, tobacco, and wheat. During 1947-
1951, these commodities accounted for 56 percent of the value of agricul-
tural exports.
Figure 7 indicates the importance of the foreign markets in terms of
the total domestic production for agriculture. \Vhile foreign exports may
not be a major outlet for agricultural products in the aggregate, they are
of importance for many commodities. Producers of wheat, cotton, tobacco,
rice, and some fruits look upon the foreign market as a major outlet. From
this we can easily see why tariffs and export-import policies have always been
a major concern to agriculture. Sizable groups of politically powerful pro-
ducers, such as the wheat, cotton, and tobacco interests, find their markets
14 S. E. Johnson, "A !'.lid-Century Look at U. S. Agriculture," Journal of Farm
Economics, November, 1951, pp. 649-662.
 Consumers of Agricultural Products 47

u.s. EXPORTS OF SELECTED AGRIOULTURAL

COMMODITIES AS A PERCENT OF PRODUCTION
PERCENT
o to 20 30 40 50 60

~~~~ ~mB
AV.
MILLED 1935-39

RICE 1952 ~1~H~l~ ~f£lt@If2I ~~~~ ~H~I~~ ~~lMm ~ml

AI(

WHEAT
1935-39 DODI
1952 DDOO DOOO on
AV.
1935-39 ~ID~f§ ~~5&~ ~IDOO 19~IDJ?J ~
COTTON
1952 OO~j@ %7iJ~.w
AV.
~
TOBACCO 1935-39
(jJJfYCf)(jJ (/)~N)(/J rflfJ&¢ ~,
1952 rj)(jJJ(j)fJ rj)(!J(j)~
AV.
SOYBEANS935-39 ddd61
1952
AV.
dddd"
LARD
193!J-3 si3888J

RAISINS
1952
AV.
1935-39
i3~!38 0000 EI
$ ••• $$••
1952 ~$ ••
~ ••
• $.$ •• $$ $$$~
1935-3 9f3\3GG tJGGCJ tJ\3G'J Of:H:3~
AV.

PRUNES
1952 GGGG GOGO CJGGf
AV.
ORANGES 1935-3
9000
1952 OQa Each symbol represents
9fJ@~(H
AV.
1935-3
2i2 percent
APPLES
1952 ~
I I
PEARS
AV.
1935-3 9666d 666da MARKETING YEAR FOR THE RESPEcrlVE
COMMOOtrY, fEXCEPr LARO WHICH IS
011 CAUNOAR rEAR BASIS}.
1952 d I I I

FIG U R E 7. The relative importance of the export marhet for

selected agricultural commodities. (Courtesy USDA. )

closely tied to foreign conditions. \Vhile we shan not devote much space
to thi" problem, its importance is great and must not be overlooked in the
evaluation of marketing programs and policies.

SELECTED REFERENCES
Bay ton, J. A, "Consumer Preference Research in the Deparment of Agricul-
ture," Agricultural Economics Research, October, 1950.
 MARKETING OF AGRICULTURAL PRODUCTS

Bilkey, 'V. J., The Basic Relationship in Consumer Expenditure Behavior

(Cambridge, Harvard Studies in IVIarketing Farm Products, No. 4-H, 1951).
Burk, Iv!. C., "A Study of Recent Relationships Between Income and Food
Expenditures," Agricultural Economics Research, July, 1951.
"A Food and Nutrition Program for the United States" (series of papers), Jour-
nal of Farm Economics, February Proceedings, 1947.
Ka tona, George, Psychological Analysis of Economic Behavior (New York,
McGraw-Hill, 195 1), Chap. 5.
Lever, lVI., H. G. Moulton, and C. 'Varburton, America's Capacity to Consume
(\Vashington, Brookings, 1934)'
Pitkin, \Y. B., The Consumer, His Nature and His Changing Habits (New
York, McGraw-Hill, 1932).
Schultz, T. 'Y., Economic Organization of Agriculture (New York, McGraw-
Hill, 1953), Chap. 4-
Taylor, H. C., and Anne D. Taylor, 'Vorld Trade in Agricultural Products
(New York, Macmillan, 19.f3).
Thomsen, F. L., Agricultural Marketing (New York, McGraw-Hill, 1951),
Chap. 2.
'Vaite, \Y. C., and R. Cassady, Jr., The Consumer and the Economic Order,
2nd ed. (New York, IVIcGraw-Hill, 1949)'
CHAPTER FOUR

Agricultural Production

Fully as important as a knowledge of the consumers of agricultural products

is the knowledge of the nature of agricultural production. Only with an
understanding of production problems will some of the difficulties of the
marketing processes be fully appreciated. Agriculture would have been
saved from some unsound suggestions for solving its problems if the people
advancing the cure-alls had been familiar with the production side of the
picture.

THE PRODUCTION PLANT

Many people think of farms and land area as synonymous. The United
States is a big country; hence it is commonly believed that there is a rela-
tively unlimited amount of farm land upon which to produce food. This,
of course, is not true. Nearly two-fifths of the land area of the country

TAB LEI. MaioT Use of Land, United States, 1950

LAND USE PERCENT OF TOTAL AREA

Land in fanns:
Cropland
Pasture
'Voodland, fannlots, etc.
Total in farms

Land not in fanns:

Grazing land 22
Forest and all other
Total not in fanns _l2_
Total U. S. land 100

SOURCE: H. H. 'Vooten, "How Our Land Is Used," Agricultural Situation, Feb-

ruary, 1952.

49
,..
-"\ c111.2..
50 \_(;'~" ~:~;{A"RKETi-N~~O)F AGRICULTURAL PRODUCTS
_v / " __ ,_ )~ \
receives lessv~han t\'.Tent);~"lnches of rainfall annually, and therefore has very
limited agriCultural potential from j:liat ,standpoint alone. The National
Resources Bba~ has estimat~d; th.a~'4T percent of our land area is non-
arable because1ott~~pgrai>llj:;- moisture, soil conditions, an~ so on, and
only 16 percent of the land "IS rated good or better for agrIcultural uses.
Table 1 shows the way our land is actually used. Only one-fourth of the
total is in cropland. About half is available for grazing.

The Production Unit

The principal unit of agricultural production is the so-called family
farm. In 1950, only 22 percent of the total people working on farms were
hired labor. The other 78 percent were family workers. About three-fourths
of our total commercial output comes from farms which are operated as a
family unit. The remainder comes principally from large-scale aggregates.
Part-time or very small units contribute very little.
This means that the average farm operator is the manager and laborer
all rolled into one. The sale of farm products is largely done by the operator
who must know something about both production and marketing. And for
the average farmer, the amazingly complex job of agricultural production
demands most of his attention. There is little time for him to become a
specialist in marketing.

TAB L E 2. Distribution of Farms and Production by Type of

Farming Group, United States, 1945

TYPE OF FAR~!INC CROUP NUMBER OF FARMS VALUE OF PRODUCT

PERCENT OF U. S. TOTAL

Fruit and vegetable farms 3·9 8.8

Horticultural specialty and forest product farms 0.8 1.5
All other crop farms 31.8 32·9
Livestock farms 13.8 23. 1
Dairy farms 9·5 12.6
Poultry farms 4·7 5. 2
General farms 11.8 12·5
Subsistence and nonclassified 23.8 3·3
All farms 100.0 100.0

SOURCE: F. L. Thomsen, Agricultural Marketing (New York, J\kGraw-Hill),

adapted from table, p. 53.

Even in its production organization, the average farm is considerably

less specialized than are firms in manufacturing. Table 2 classifies farms as
to their major source of incomes. The large bulk of the commercial farms
are crop, livestor1• ']nn 2eneral farms. This group, though, encompasses a
ANGRAU Central L'b
I rarv
Hyderabad .
G942
1liJllll 1111 /1111 11111 1111 1111
 Agricultural ~_rpduction - -51 -
, ; ,

wide range of specialization. Some of the crop farms m,ay be wheat farms;
some of the livestock farms, hog farms. But many crop farms will raise
several types of crops-many livestock farms several kinds'QE~~nimals.
Another fact must bc added to this picture of many'rehi.tjvely small ---
and highly diversified production units. The amount of products 'sold in any
one year from the great majority of farms is very small (Table 3). In 1950,
less than one-fourth of the farm units sold products worth $5,000 or more.
In 1945, it was estimated that the top third of the farms accounted for
78 percent of the total value of farm production; the lower third, only 5
percent. The number of farmers who are actively interested in selling large
amounts of products is considerably less than the total number of farmers.
The near-subsistence farmers, though making up nearly one-fourth of the
farms, are not an important part of the commercial marketing machinery,
since they contribute only about 3 percent of the total product.

TAB L E 3. Farms Classified by the Value of Products Sold,

United States, 1950

VALUE OF PRODUCTS SOLD PERCENT OF TOTAL FARMS

Commercial farms:
$25.000 and o\'cr 2.0
$10,000 to $24,999 7. 2
5,000 to 9,999 13·5
2,5 00 to 4,999 16·4
1,200 to 2,499 16.6
250 to 1,199 ,. 13.1
Total commercial farms 68.8
Part·time farms t 11.9
Residential and abnormal farms _:2:l_
All farms 100.0

'" Operator working off farm less than 100 days and farm sales greater than other
income.
t Operator working off farm 100 days or more and other income exceeding farm
sales.
SOURCE: "A Better Picture of Our ·Small·Scale Farms," Agricultural Situation,
}_iarch, 1952.

All of this adds up to two very important facts which have a great
impact upon the marketing of faml products. The first is that much of our
production is sold in relatively small lots from a large number of units. The
hog marketing machinery cannot get all the hogs from farm group "A"
and the poultry marketing machinery get all the poultry from farm group
"B." Some poultry must be assembled from "A" and some hogs from "B."
The marketing machinery must be set up to serve both groups for both
products.
 MARKETING OF AGRICULTURAL PRODUCTS

The second observation is that the farmer is by nature-and probably

by necessity-a man primarily interested in production and only secondarily
interested in marketing. He either sells very small amounts at a time or very
few times a year. This attitude helps explain why obvious shortcomings in
marketing continue for long periods of time without some effort being
made for correction.

CHARACTERISTICS OF THE PRODUCT

A Raw Material
The output of agriculture is largely a raw material which will be used
for further processing. It has been estimated that only about 28 percent of
the total volume of agricultural food production moves to consumers in a
nonprocessed form. The remaining 72 percent will undergo some processing
before it reaches consumers.1 This processing may be limited, as in the con-
verting of livestock into meat. It may be highly complex as in the convert-
ing of wheat into "\Vheaties." Regardless of the complexity, however, the
product sold by the farmer soon loses its identity as a farm product and
simply becomes "food."

Bulky and Perishable Products

Compared to most nonagricultural products, agricultural products are
both bulkier and more perishable. Bulk affects marketing functions which
are concerned with physical handling. Products which occupy a lot of space
in relation to their value almost automatically raise unit transportation and
storage costs. A truckload of drugs would be considerably more valuable
than a truckload of wheat. In this sense, fruits; vegetables, grain, and meats
are all quite bulky.
Perishability, too, can be measured only in relation to other products.
All products after a period of time deteriorate. Some agricultural products,
like fresh strawberries or fresh peaches, must move into consumption very
quickly or they completely lose their value. \Vheat, on the other hand, can
be stored for a considerable length of time without much deterioration.
Even the most storable of agricultural products, however, are usually more
perishable than other industrial products.
These characteristics have their effect on the facilities which are nec-
essary to market farm products. Bulkiness, plus the varying production
which will be discussed later, requires large storage capacities. Perishable
products require speedy handling and often special refrigeration. Quality
maintenance often becomes a real and costly problem.
1 Allen B. Paul. The Economic Structure of the Food Processing Industries, Illinois
rVIirneograph FT 5, p. 5.
 Agricultural Production 53

CHARACTERISTICS OF PRODUCTION
Total Output
The total output of the nation's farms has been gradually increasing
throughout the years (Figure 1). From 1910 to 1940 the trend in total
agricultural output was slowly upward with the exception of the drought
years of the mid-thirties. Since 1940, agricultural production has increased
as much as it did during the entire previous thirty years.
Percent of 1935-39

60
19~10~--~--~19~2~0----~---1~93-0----~--~1~94~0~--~--~19~5~0--~
FIG U REI. Total United States agricultural production, 1910-
1952. (Source: Bureau of Agricultural Economics,
USDA.)

During the past decade or so a revolution has occurred in agricultural

production. Practically the same amount of land is under cultivation as in
1910. Farm employment actually declined about 20 percent from 1910 to
1950. However, during the 1940's, crop production per acre increased 15
percent and production per animal unit 10 percent. Much of this has been
due to the replacement of the horse with power equipment. Other great
improvements have been made in seed variety, livestock nutrition, fertiliza-
tion, and a multitude of other areas making agriculture more productive.
Truly, technology has shown how to grow two plants where one grew
before. But it also has put greater pressures on the marketing machinery to
move this added production into consumption.

Annual Variability in Production

Total agricultural output is relatively stable from year to year. How-
e\(;;, marketing agencies do not handle totals-they are generally specialized
to handle individual commodities or groups of commodities. Livestock
54 J\IARXETING OF AGRICULTURAL PRODUCTS

TAB L E 4. Year-to- Year Variation in Gross Farm Production, by

Groups of Products, United States, 1910-1950

AVERAGE VARIATIONS AVERAGE VARIATIONS

FRO1\[ PRECEDING FROll! PRECEDING
PRODUCT YEARS PRODUCT YEARS

PERCENT PERCENT
Total gross farm pro- Truck crops 5. 1
duction 5. 1 Vegetables, except truck 11.0
Product added by meat Tobacco 14·7
animals and animal Fruits and tree nuts 15.1
products 2·7 Feed grains 15-4
Total crops 8.0 Cotton 17·4
Food grains 1'2·7

SOURCE: T. 'V. Schultz, Economic Organization of Agriculture (New York, rvlc·

Craw.HilI, 1953), p. 217.

TABLE 5· Pattern of Annual Production Variability of Selected

Products, United States, 1910-45

'"U... ...<
U'l
"l
::0 Z
Q
< ::I ~ ~
00: Z H
CHANGES IN >< Z < '" <:>
u Z
'"0"'I
PRODUCTION
FROll! PRE·
'"'
;..
0:
""...
... U'l
<
!-<
<
!-<
<
I<l Z
......
'" <
~ "'I
u
< ......
0 !-<
<
...
0:
...'"
P '-' :z: P '-'
:;;Q 0'-' I>l 0 0 0 0
CEDING YEAR
'" ~ ::I ~ U 0: ;>
I'< '" u
'"
PERCENT NUMBER OF YEARS

+31 and more :: :: 4 4 3 ::

+21 to +30 2 :: 3 2- :: 3
+16 to +::0 4 3 :1- 2- 3 3
+11 to +15 1 4 :1- 5 :1- 5 4 4
+6 to +10 8 9 3 3 5 4 4 2
from 0 to ±5 36 25 18 14 9 7 7 7 5
-6 to -10 4 3 ; 3 3 5
-11 to -15 3 2 3 3 3 6
-16 to -20 :1- 3 :: 3
-21 to -30 1 2 2 3 2- 5 2-
-31 and less 2 2 l

Average change
in percent * 2.1 4. 1 5·9 13. 1 16.1 16.:: 15·3 16.2 14-5

'" The apparent disagreement of some of these data with those in Table 4 can be
explained by the difference in time period covered.
SOURCE: T. \V. Schultz, Production and \Velfare of Agriculture (New York, Mac·
millan, 1950 ), p. 73.
 Agricultural Production 55
handlers and meat packers are only vaguely interested in the wheat crop.
Elevator operators, millers, and bakers spend very few sleepless nights over
the vegetable situation. It is the amount of production variation of indi-
vidual commodities which is of importance to marketing.
Table 4 shows that while aggregate production varies only about 5
percent on the average from year to year, production of the specific com-
modity groups has a much greater variability. Table 5 shows this variability
in greater detail for individual commodities.
There is stability in total agricultural production largely because of the
wide diversity of products and large area involved. vVhen one commodity
or area is down in production, the chances are that some other commodity
or area is up. The pattern of annual variability is different for various
commodities. The handlers and processors of dairy products are assured of
relatively minor annual change in volume. In contrast, the flour miller
found that in seven of the thirty-six years covered in Table 5, the wheat crop
varied more than 20 percent from the preceding year.
This production variation means that the marketing machinery must
be prepaJ;Cd to handle the varying volume. Referring again to our wheat
example, transportation and storage facilities must be available to handle
the big crops as well as the average ones. An organization which must be
ready to handle largely unpredictable variations in volumes cannot be as
fully utilized and efficient as one which has a large measure of control over
the volume handled.

Seasonal Variability in Production

In addition to the annual supply variability, agricultural production is
highly seasonal. The period of availability of fresh strawberries is quite
short. \Vheat is harvested over a period of four to eight weeks and the great
bulk of it moves immediately into market channels. Apples are harvested
within a relatively short period. Egg production is markedly higher in the
spring than in the late fall. Almost a11 agricultural products have an uneyen
distribution of production throughout the year due to the dependence upon
the climatic conditions and biological nature of production.
To the extent that the product is storable, storage capacity must be
furnished to hold the product until it is consumed. This means that during
part of the year, storage will be used at near capacity. At other times it will
be practically empty. To the extent that the product cannot be stored, the
product must be consumed immediately. This means that transportation
and refrigeration facilities must be available to moYe it rapidly to the can-
s:.:mer.
.---_w ___ _____________ ....-..
! . ,,'::.;J \_ ;i :~/, L 1" I '.
'_.- I .,
"'I "c"-
.. - ••..•

!
/bCC: 1\! t) Z
II Dnte:
Ja=o==--.'-==...c:===~========::'
 }'I ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

TIle United States has a wide range of climatic conditions. By taking

advantage of this, the season of availability of many commodities can be
extended. For example, some strawberries are available in Florida as early
as December. Then berries become available from Louisiana and other
southern states. The season continues to move up through the central states
and finally into vVisconsin. By this method, the effective strawberry market-
ing period is extended over months instead of two or three weeks. But this
means that the marketing machinery must be a flexible one, geared to
procurement and movement from a widespread and changing area.

Quality Variation
The general quality as well as the total production of agricultural
commodities varies from year to year. During some years the growing con-
ditions are such that the crop in general is of high quality. In other years
unfavorable conditions prevail and the crop is of much lower quality.
Such variations in the quality of production make it very hard to apply
uniform standards for grades from year to year. If the quality of the apple
crop is uniformly high, the standards for top grade apples may be strictly
adhered to. On the other hand, if the quality of the apple crop is poor,
grading standards may be relaxed somewhat to permit some apples to be
marketed as top quality.
Variations in the quality also may change marketing patterns. For
example, during a year in which corn does not properly mature, large
amounts of "soft" corn are harvested. The corn will spoil if not used before
the following spring. Farmers then may buy additional feeder stock in
order to utilize this corn. The marketing pattern of these feeders, however,
will be different from the usual pattern as the feeding period is adjusted
tc the condition of the corn.

Areas of Production
It was found that there was a concentration of our domestic popula-
tion and income. Th(;re is also considerable concentration of agricultural
production. Figure 2 shows the national production picture as measured by
the value of farm products sold per square mile.
The eastern concentration is due largely to such intensive agricultural
crops as milk, eggs, broilers, and vegetables. The middle western area rep-
resents the highly concentrated agricultural region. There is considerable
justification for the claim of the central "corn-belr' region to the title of
food basket of the country. The twelve north central states account for
over two-fifths of the total farm marketings of the country.
 Agricultural Production 57

FIG U R E 2. The geographic distribution of total agricultural

output in the United States-showing the area of
each state proportional to the value of farm products
sold, 1950. (Courtesy U. S. Dept. Com.)

Figure 3 is a series of maps showing where several important commodi-

ties are produced. These should be studied carefully as the story they tell is an
important one. They, too, show considerable concentration within relatively
limited areas. When one gets the production picture in mind, the trans·
portation problem of moving products to consumption areas becomes
evident.

Adjustment of Production to Changing Conditions

Agricultural output comes from many small units operated inde-
pendently. The production is to a great extent dependent on weather and
biological patterns of reproduction. The farmer may wish to change his
output and attempt to do so by planting more or fewer acres or by breeding
more or fewer sows. However, the final output is considerably beyond his
control, as weather, disease, and other relatively non·controllable factors
will affect yields per acre and the productivity of his animals. The fact
must be faced that it is not possible quickly to shut off or turn on agricul-
tural production. This means that marketing agencies in the aggregate must
adjust themselves to the supplies rather than adjust supplies to suit their
needs.
A tomato canner must estimate how much of his product he can sell
at a price estimated nearly a year in advance. From this estimate he then
can contract suitable acreage with his producers. If his estimation of the
UNITED STATES TOTAL
~12.114.902.IOI

HOGS SOLD

UNITED STATES TOTAL

65.511.711 I oOT-IO.OOO HEAD
(COJt1TY UNIT e:"SlS)

FIG U R E 3. Geographic distribution of the production of

selected important agricultural commodities.
(Courtesy U. S. Dept. Com.)

~8
 CATTLE SOLD

UNITED STATES TOTAL

36,316,636 IDOT·5,OOO HEAD
Ulurr1 un e~S)

SHEEP SOLD

UNITED STATES TOTAL

20,003,070 DOT'5,000 HEAD
(COlJNTY IJN!T e:.sJSl

FIGURE 3, (continued)

59
 CHICKEN EGGS SOLD

UNITED STATES TOTAL

2,409,646,763
(COUNTY WaTT ~S)

UNITED STATES TOTAL

68,529,441,179

FIG U R E 3, (continued)

60
 VALUE OF ALL CROPS SOLD

UNITED STATES TOTAL

$9.802.844.913 I DOT-S2.000.000
(C01)Mty \HiIT 'SASIS1

UNITED STATES TOTAL

I DOT -10.000 ACRES
71.161.061 CCOONTY lNT e:.s:S1

FIG U R E 3. (continued)

61
 ALL PURPOSES
CORN ~~~EAGE'1949

U"ITED STATE 5 TOTAL

" 83,336,045

UNITED STATES TOTAL

35,331,447

FIG U RE 3· ( continued)

62
 HARVESTED FOR BEANS·

UNITED STATES TOTAL

10,147,760
(COUNTY UNIT BAS:S)

TOBACCO HARVESTED

UNITED STATES TOTAL

I DOT-I,COO ACRES
1,532,298
rr::::c:.;av llNlT 6A~

FIG U R E 3' (continued)

 MARKETING OF AGRICULTURAL PRODUCTS

conON HARVESTED

UNITED STATES TOTAL

26,599,263 I DOT' 10,000 ACRES
1CCU~T'I' UMT BASlSI

FIG U R E 3. (Continued)

market conditions and yields turns out correctly, he will pack and sell as
planned, But his market estimates could be wrong. The weather could be
unfavorable.
Aside from such short-run adjustment problems, it takes long periods
to change materially the production of some commodities. Fruit groves are
planted years in advance of their coming into production, The market
situation may change during this period, The expansion of milk production
is a slow process, Once investment is made in buildings, equipment, and
the herd, changes are very difficult and expensive to make.
This inability to adjust quickly to changing conditions creates a high
risk element in agriculture. The market for which a long-time production
plan is made may be nonexistent when the production is finally available.
Changes in consumer tastes may find large amounts of agricultural re-
sources being devoted to the production of something wl1ich is no longer
so greatly desired. High prices due to shortages of production may destroy
the consumer market for that good when it finally arrives in quantity. This
relative unpredictability and uncontrollability of production volume helps
explain many of the actions which have been taken to strengthen the posi-
tion of farmers. Some of the implications of this inability to adjust quickly
to changing conditions are taken up in the discussion of prices in Chap-
ter 6. The reader should compare the price theory developed there with
the practical problems outlined in this chapter.
 Agricultural Production 65

SELECTED REFERENCES
Barger, H., and H. H. Landsberg, American Agriculture, 1899-1939, A Study of
Output, Employment and Productivity (New York, National Bureau of Eco-
nomic Research, 19.P).
Christensen, R. P., Efficient Use of Food Resources in the United States, USDA
Tcchnical Bulletin 9 63, 1948.
McElveen, J. V., "Changes in Production During \Vorld \Var II by Size of
Farm," Agricultural Economics Research, July, 1951.
Pearson, F. A., and Don Paarlberg, Food (New York, Knopf, 1944), Chaps. 4,
5,6, and 7·
\Vilcox, VI. \V., The Farmer and the Second \Vorld \Var (Ames, Iowa State
College Press, 1947).
CHAPTER F IV E

'The Cost of Marketing

In the preceding two chapters, we have discussed the basic characteristics

of the agricultural market. We examined the agricultural production plant
-where and under what conditions the raw products are produced. We
studied in some detail the consumers of agricultural products-where they
are and various factors which affect their consumption habits. The scene is
now set for the marketing of agricultural products, since the role of market-
ing is to move the goods from the producer to the consumer. The focal
point of interest in this picture is that of marketing costs.
The difference between the price which the consumers pay for a
product and the price the producer of that product receives is generally
referred to as the marketing margin. This margin includes a11 of the costs
of moving the product from the point of production to the point of con-
sumption, of any processing which may be undertaken, and of handling
at all levels in the marketing machinery. In other words, it represents the
cost of performing the various marketing functions and of operating the
various agencies which were outlined in Chapter 2.

THE FARMER'S SHARE

At almost any given time, somebody is investigating the "high cost of
marketing." If the times are prosperous and prices high, labor and consumer
groups are the active agitators. If the times are depressed and prices low,
farmer groups are probing into the situation.
Regardless of the interest group, attention is usually focused on the
farmer's share of the consumer's food dollar. An increase in the share is
taken as evidence that farmers are the real cause of rising food prices. A
decrease in the share is taken as clear proof that middlemen are getting rich
off the farmer again.
66
 The Cost of Marketing 67

In an elementary sense, the farmer receives what the consumer pays

for food after the various costs of marketing are taken out. This residual
amount expressed as a percentage of the retail food dollar is referred to
as the "farmer's share." The most widely used source of information on the
retail cost of food, the marketing charges, and the farm value is the Agricul-
tural Marketing Service series of the "Market Basket of Farm Food
Products." This series reflects the prices and marketing charges of the
quantity of food equal to the 1935-1939 average annual purchases of a
family of three average consumers.!

Changes in the Farmer's Share Through a Period of Time

A study of Figure 1 will show that the retail costs of food have varied
widely through a period of time and have moved up and down with the
general economic health of the country. (\Ve may refer again to Figure 1
in Chapter 3 and recall that the dollar outlay for food moves up and
down with the fluctuations in the disposable incomes of consumers.) It also

FARtv1 FOOD THE MARKET BASKET*

$
PRODUCTS MARKETING CHARGES

400Hr-----+------~
o Farmer's Share of Food
Dollar
o Family Markel
Basket
CONSUMER'S FOOD
DOLLAR
400

1915 1930 1945

• ANNUAL 'URCHASES OF FAMILY OF 3 AVERAGE CONSUMERS. 1935·3V
o 1AlCES PAID BY PROCESSORS AND fQUIVALEH1 PAYMEN1S 10 F"IIMEU

FIG U REI. Changes in the farmer's share of the consumer's food

dollar showing the relative fluctuations of the retail
value, the marketing charges, and the farm value of
food. (Courtesy USDA.)
1 See R. D. Been, Price Spreads Between Farmers and Consumers, USDA Agricul-
tural Infomlation Bulletin 4, 1949.
68 MARKETING OF AGRICULTURAL PRODUCTS

shows that the farmer's share moves up and down with changes in the
amount of the consumer's outlay at the retail level. The share has varied
from a low of 32 cents in the depression years of 1932 to a high of 54 cents
in the war year of 1945. In other words, when the retail expenditure is
reduced, the farmer receives a smaller percentage of the reduced consumer
outlay. 'Vhen the retail expenditure is increased, the farmer receives a
larger percentage of the increased consumer outlay.
The basic reason for this relationship is the relatively inflexible nature
of the marketing charges. Though it is true that these charges also move
up and down with changing business conditions, the change is relatively
quite small. :Marketing charges are "sticky." As the consumer outlay at the
retail level increases, the marketing charges do not increase as much. There-
fore, as a percentage of the consnmer dollar, marketing charges will de-
crease and the farmer's share will increase. The reverse situation will be true
when the retail expenditure declines. This relationship is illustrated in
Table 1.

TAB LEI. Relationship of Retail Value, Marketing Charges, and

Farm Value of Market Basket of Farm Foods in a
Period of Low and High Prices

LOW PRICE HIGH PRICE PERCENT

PERIOD PERIOD CHANGE
(193 2 ) ( 1948) (1932 TO 1948)
Retail cost $28 5
:Marketing charges 195
Farm value 90
Farmer's share of consumer's dollar 32 ¢

TAB L E 2. Changes in Retail Value, l'vIarketing Charges, and

Farm Value of Two Products in a Period of High
and Low Prices

LOW PRICE PERIOD HIGH PRICE PERIOD PERCE:"T CHANGE

(193= ) (194 8) (193 2 TO 1948)
PRODUC'l' PRODUCT PRODUCT PRODUCT PRODUCT PRODUCT
WITH WITH WITI! WITH WITH WITH
S!>IALL LARGE S!>IALL LARGE Sl\L~LL LARGE
SHARE SHARE SHARE SHARE SHARE SHARE
(BREAD) (BEEF) (BREAD) (BEEF) (BREAD) (BEEF)

CENTS CENTS CENTS CENTS

Retail cost (lb.) 7·3 24.2 14·) 73·7 + 99 + 20 4

Marketing charges 6.8 13.2 11.9 20·7 + 75 + 57
Farm value 0·5 11.0 2.6 53.0 +4 20 +3 8 2.
Farmer's share of
consumer's dollar 7. 0 45. 0 18.0 72 .0 +157 + 60
 The Cost of Marketing 69

This "sticky" nature of marketing charges also helps explain why the
farmer's share of some commodities fluctuates so much more than that of
others. Generally, the larger the marketing charges which must be sub-
tracted from the consumer's dollar, the greater the percentage change in
the farmer's share will be. A study of Table 2 shows the difference in share
change of a commodity with a relatively large marketing charge and one
with a relatively small marketing charge.
In both of these situations, the change of the share through a period
of time and the differences in the change of share among commodities, the
change can come about without any change in the physical organization of
the marketing system.

Differences in the Farmer's Share Among Commodities

Besides the attention which is given to the changes in the farmer's
share, the wide variation in the size of the farmer's share among different
commodities often draws the fire of investigators. Table 3 gives the market-

TAB L E 3. Marketing Charges and the Farmer's Share of the Con-

sumer's Dollar Spent for Selected Foods, 1952

FOOD PERCENT OF CO!'lSUMER'S DOLLAR

MARKETING CHARGES FARMER'S SHARE

All foods
Beef
Eggs
Pork
Fluid milk
Potatoes
Evaporated milk
Tomatoes, fresh
Flour, white
Cabbage, fresh
Margarine
Oranges
Tomatoes, canned
Corn flakes
Bread, white

SOURCE: !I'larketing and Transportation Situation, B.A.E., USDA, January, 1953.

ing charges and farmer's share for several commodities and illustrates this
wide variation. For example, the farmer's share of the consumer's dollar
spent for beef is more than four times the size of the share received from
the sale of bread.
Upon a minute's reflection, however, the reason for these variations
becomes obvious. The marketing job for some products is more complex
 MARKETING OF AGRICULTURAL PRODUCTS

than for others. Only if all commodities were alike in all respects would the
marketing charges and farmer's share be alike. To a large degree, differences
in the size of the farmer's share reflect the effect of the product characteris-
tics on the complexity of the marketing functions which must be performed_
The major product characteristics which contribute to this difference might
be classified as fo11ows:
1. Processing. The more work which must be done in changing the form of the
product to satisfy the consumcr, the grcater the marketing charges will be.
... Perishability. The marketing of perishables is usually more costly than that
of nonperishables. Spoilage is greater. Expensive refrigeration may have to
be used both in transportation and in the various stages of the marketing
channel.
3. Bulkiness in relation to value. Some products will require more space in both
transportation and storage. This would tend to increase cost.
4· Extreme seasonality of production. Commodities which must come to
market within a very short time rcquire facilities to handle the peak period
of production. These same facilities may be only partially used during the
rest of the year. 1£ such commodities are also perishable, increased spoilage
costs also will result.
Other factors not attributable to the product itself may also cause
some of the differences. Institutional factors such as a high degree of ver-
tical integration or a highly organized system of accurate market informa-
tion might result in difference in the size of share. The demand by con-
sumers of a large amount of special services in some commodity areas may
result in higher costs. Of course, most commodities represent a combination
of these factors. It is the rare case where everything else would be the same
except perishability or amount of processing and the like. But a re-examina-
tion of Table 3 with these factors in mind will aid in explaining many of
the differences among the farmer's share of the various commodities. For
example, much of th;:: great difference between the beef and bread share
referred to before can be attributed to the difference in the amount of
processing done; much of the difference between the farmer's share received
from the sale of tomatoes and that from potatoes, to the difference in
perisha bili ty.

COMPOSITION OF THE
MARKETING MARGIN
The marketing margin can be broken down in many ways. Two of the
most common classifica tions are on the basis of specific cost items and on
the basis of jobs performed at the various levels in the marketing channel.
Tables 4 and 5 break down the marketing margins for several products on
these two classifications.
 TAB L E 4. Breakdown of Marketing Margins for Farm Foods by
Various Services, 1939 (Arranged in Order of Process-
ing Necessary)

LOCAL TRANS-
PRODUCT RETAILING WHOLESALING ASSEMDLY PORTATION PROCESSING

PERCENT OF TOTAL MARKETING CHARGES

All fa rm foods 38 ,7 11.0 5. 8 10·4 34. 1

Eggs 34. 6 26.8 27.1 11.5
Fresh fruits & vegetables 47-1 14-0 9·7 29.2
Chicken 4 2 .8 12.6 16.8 6,7 21.1
Fluid milk -64·9- 13·7 21·4
Butter 36.1 21.6 9.8 4·5 28.0
Cheese 4 6,9 21.8 3·9 2·3 25.1
i\leat 49. 0 1l.8 8.8 3°·4
Flour 29.0 10·5 5·5 21.1 31.9 ,.
Canned beans 26,5 14·9 4.0 2·3 51.4
Prepared cereal 25·5 8.1 2.8 6,3 57·3
Bakery products 18.8 II.8 0·9 2.1 66,4

" Includes 3.1 percent of terminal storage.

SOURCES: Series of flIargins and Costs Studies by Commodities, USDA Technical
Bulletins 93 6, 93 2 , 934, 9 69, 1946-48.

TAB L E 5. Breakdown of Marketing !vfargins for Farm Foods by

Various Cost Items, 1939 (Arranged in Order of Proc-
essing Necessary)
CONTAINER,
\VRAPPER,
"'AGES, " TRANS· ADVER· MATERIAL OTHER
PRODUCT SAL~RIES PORTATION PROFITS TISING COSTS EXPENSES f
PERCENT OF TOTAL MARKETING CHARGES

All farm foods 4°·2 10·4 8.8 6,5 34. 1

Eggs 43. 6 11.5 16.; 28·5
Fresh fruits &
vegetables 38 .2 29.2 8,3 24·3
Chicken 4 6 .6 6,7 15·4 ~ 4 1.3
Fluid milk 58,4 H 2.0 12.; 19·7
Butter 36.1 4·5 6.2 8·9 44·3
Cheese 44·4 2·3 13.6 8.2 31.5
]\Ieat 53-1 11.2 35·7
Flour 30 .8 21.1 10.8 5·7 31.6
Canned beans 34·7 2·4 11.4 4. 8 19.2 27·5
Prepared cereals 28.8 6·3 12.0 10.0 4 2.9
Bakery products 4°·9 2.6 9. 8 4·3 6,4 36 .0

" Exclusive of wages and salaries in transportation agencies.

t Includes taxes, depreciation, interest, etc., and in cases where not broken out sepa·
rately, profits, advertising, container costs, etc.
t Feed charges of live chickens while held for processing.
SOURCES: Series of Margin and Costs Studies by Commodities, USDA Technical
Bul1ctins 936, 932, 934, 969, 1946-48.
72 MARKETING OF AGRICULTURAL PRODUCTS

The amount of the margin which can be attributed to processing, of

course, varies widely. Fresh fruit and vegetables have no processing costs,
while bakery products have a very large processing bill. However, for a11
of the products the portion of margin absorbed by retailing stands out
because of its consistently large size. For all food, retailing accounts for
nearly two· fifths of the total margin. On the other hand, the amounts taken
by the wholesaling operations and by the agencies involved in the country
assembly of products are relatively smal1.
When the margin is broken down by various cost items, another fact
becomes clear. \Vages and salaries account for the largest part of the total
margin. Two-fifths of the marketing margin of all foods can be attributed
to wages and salaries. In all of the listed commodities, the importance of
this item of cost is illustrated.
There are always those who immediately will question data which arc
not "up·to·date." However, various margin studies in recent years have
merely confirmed the results of these earlier studies. It appears that while
there might be minor changes with the passing of time, the relative im-
portance of the various items remains unchanged.

TAB L E 6. Breakdown of Total Marketing Margins for Meat,

1932, 1939, and 1947

1939 1947
PERCENT OF TOTAL MARGINS

Breakdown by services:
Retailing 50 .0 44·9
'Wholesaling 12.1 11.6
Processing 37-1
Local assembly 6,4
Breakdown by cost items:
\\'ages and salaries * 5302
Transportation * 11.2
Other costs 35. 6
* Not available.
SOURCE: Kathryn Parr, Farm to Retail Margins fOT Livestock and Meat, B.A.E.,
USDA,1949·

A study which compared the composition of the marketing margin

for meat in a low price period, 1932, a "normal period," 1939, and a high
price period, 1947, found the same relative importance in the breakdown
of the margin for all periods. Table 6 shows that over the fifteen.year period
and under widely different economic conditions, ret2iling was the most
costly service performed, and that wages and salaries made up the largest
single item of cost.
 The Cost of Marketing 73
Table 7 summarizes the results of various other recent studies. These
products involved very little if any processing. Local assembly costs in some
instances cover the costs of sorting and packaging the product for ship-
ment. Here, again, the large amount of the share taken for retailing stands
out. The fact that the job of retailing is relatively so expensive proves noth-
ing about its relative efficiency. To a considerable extent, the expense of
retailing merely reflects the complexity of the job done. A retailer performs
all of the functions of marketing in some degree.

TAB L E 7. Breahdown of Marketing Margins by Various Services

for Selected Commodities

LOCAL TRANS·
PRODUCT AND AREA RETAILING WHOLESALING ASSEMBLY PORTATION

PERCENT OF TOTAL MARKETING MARGIN

Apples sold in Pittsburgh, Pa.,

1949-50, from:
Pacific northwest" 30 .8 11·3 30 . 1 27.8
Eastern sta tes * 43. 8 11.2 6,9 38 . 1
Appalachian region t 43. 6 11.5 6,4 38 ,5
Apples sold in Chicago, Ill.,
1947-48, from:
\Vashington state + - 4 8' 5 - 19·4 p.l
Fresh vegetables sold in Calif.: S
Asparagus from Calif., 1949 51.1 16., 5. 1 27·3
Celery from Calif., 1948-49 54·5 2':.:' 9·4 13.8
Wisconsin eggs sold in: II
A southern city, 1949 21..f 41.8 36 .8 .. *
An eastern city, 1948 25·4 40 .6 3+ 0 **
\\'estern turkeys sold, 1948-49, to: ([
New York 'P·3 13· 3 22.0 t t 22·4
Chicago 49. 8 4·7 25.1 tt 20·4
San Francisco 50.:? 14·7 29·3 5. 8

" H. 'IV. Bitting and H. T. Badger, f.,laTketing Charges for Apples Sold in Pitts·
burgh, USDA Agricultural Information Bulletin No. 47, 1951.
t H. H. Reizenstein and H. 'IV. Bitting, Farm to Retail !t.Jargins for Appalachian
Apples, USDA Agricultural Information Bulletin No. 44, 1951.
t H. H. Reizenstein and H. 'IV. Bitting, Farm to Retail IIIargins for \Vashington
Delicious Apples Marketed in Chicago, USDA Agricultural Information Bulletin No.6,
1949·
SJ. Foytik, California Celery-J\Iarketing Channels and Farm to Retail Margins
and Califomia Asparagus-Marketing Channels a1ld Farm to Retail Margins, California
t!imeographs 117 and 116, 1951.
II 'IV. P. l\!ortenson and T. F. Graf, Marketing Eggs in a Southern City, \Visconsin
Mimeograph, and Marketing Eggs in the Lake States, \\'isconsin Bulletin 168, 1950.
C[ J. O. Gerald, Farm to Retail Margins for Marketing \Vestern Turkeys, USDA
Agricultural Infornlation Bulletin No. )' 1949.
* * Transportation costs arc largely included in the wholesaling and assembly costs.
t t Includes dressing expenses.
7-+ ]II ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T :s

Labor Costs in Marketing

The large portion of the total marketing margin which is attributable
to labor costs makes this item one of the focal points in any effort to reduce
the costs of the marketing process. Not only in the total figures are labor
costs high, but at each level of the marketing process they are the major
item of expense. In a study of ninety-two grain elevators, 43 percent of the
total margin taken went for wages and salaries. Of the margin taken by
meat packers, \vages and salaries accounted for nearly 47 percent. Nearly 50
percent of the total margin taken by eight cooperative egg and poultry
marketing associations was needed to pay labor costs; 38 percent of citrus
packing house expenses also went for this item. Of the total margin of
138 meat markets, 59 percent was needed to pay for labor.:! Such examples
could be multiplied many times, but all would demonstrate the major im-
portance of wages and salaries ill the marketing margin at all levels of
marketing.
It should be no surprise that marketing margins wiII tend to increase
or decrease as the wage bilI in marketing moves up and down. This relation-
ship is illustrated in Figure 2. As the unit labor cost has increased, up have
gone the total marketing charges.

Profits in IVlarketing
No discussion of the composition of the marketing margin would be
complete without some reference to the profits taken by the various agencies
of the marketing system. Profits long have been used as a public "whipping
boy" not only by critics of marketing, but in all other fields of economic
endeavor.
It has become popular to treat profits as a "residual"-something which
is nice to have, but which can be reduced or eliminated without any effects
upon the business system. This ignores the function of profits in an econ-
omy such as ours. 3
:l\dodern accounting procedures often include the return to both capital
and management under the accounting breakdown of profit. Profits in this

2 The studies from which these examples were taken in the order mentioned are:
E. C. Byer, C. B. 'Wood, and C. S. Abshier, A Financial Business Analysis of Indiana
Grain Elevators, Indiana Bulletin 547, 1950; G. :tv1. Lewis, Financial Results of the Meat
Packing Industr)" 1950, American Meat Institute, Mimeograph, 1951; H. E. Ratcliffe,
Cooperative Marketing of Eggs and Poultry in Ohio, Farm Credit Administration, USDA
Bulletin 59, 195 0 ; J. K. Samuels and G. L. Capel, Citrus Packinghouse Costs in Cali-
fornia, Farm Credit Administration, C-q8, 195'1; K. Bjorka, t-.Jarketing Margins and
Costs for Livestock and Meat, USDA Technical Bulletin 932, 1947.
3 \Ve are not here concerned with profits as developed in the strict theoretical sense.
Those who wish to explore that area should tum to appropriate theory sources.
 The Cost of Marketing 75

fOOD MARt(IETING C~~ARGES

$ SIL.

DATA ARE fOR DOMESTIC fAIM fOODS

.OTHER COSTS ANP "O"'S °UClUPING UANSPOIIATION LAIOI COSTS

FIG U R E 2. The composition of food marketing charges showing

the importance of changing labor costs. (Courtesy
USDA.)

sense are as necessary in attracting capital for the maintenance and growth
of a company as wages are necessary to attract workers.
Profits are reported on varying bases. lvlost businesses like to present
their earnings on the basis of a percentage of total sales. This permits a
large dollar profit to appear infinitesimally small, especially if the sales vol-
ume of the firm is very large. For example, the meat packing industry earn-
ings in 1950 were 95 million dollars, but this was only 1.1 cents for each
dollar of sales. 4 This small figure can then be used to emphasize how unim-
portant profits are in the consumer cost of meat. It is possible that this
de-emphasis of the importance of profits on the part of business has con-
tributed to the widespread feeling of the unnecessary nature of profits.
Another way of presenting profits is on the basis of net worth. This
tends to give the more valid picture of returns on the capital which is at
work in the company. It is on this basis that the earnings are shown in
Table 8.The data in this table are for the '\Torld 'Var II and immediate
postwar period. This was a period when complaints about exorbitant profits
were commonplace. The earning records for these various food enterprises
4 Lewis, op. cit.
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 The Cost of Marketing 77

do not seem terribly out of line. Excessive profits of the marketing and
processing firms cannot be logically used as a major cause of excessive costs.
On the other hand, neither can the apparent reasonableness of the earning
record be used as the basis for arguing that the profit levels are "correct"
and that any lower level would invite disaster.

A Basic Reason for a Large Marketing Margin

Other parts of the marketing margin, such as transportation and re·
tailing, will be discussed in detail in subsequent chapters. However, some
general conclusions about the size of the marketing bill can be proposed
at this time. Even with a perfectly functioning and highly efficient market-
ing machinery, the total costs would still be great. The fundamental reasons
for this have been outlined in the two preceding chapters.
The physical arrangement of the production and consumption pattern
of this country are responsible for much of the costs of marketing. The
bulk of the food production is concentrated within a relatively small area.
The major areas of consumption are also concentrated within a limited area.
These two areas are some distance from each other. Foods must travel long
distances. Losses from spoilage and deterioration are great.
Also fundamental to high marketing costs is the principle of consumer
supremacy. The consumer's wants will be satisfied as long as he will pay
for them. Habits and tastes vary, as we have discovered. Consumers desire
a considerable amount of services. Matching production to such a situation
will always be an expensive process.

REDUCTION OF MARKETING COSTS

Inflexibility of 1\iIarheting Margins

vVe have seen how the relatively stable nature of the marketing margin
results in an exaggerated fluctuation in the farmer's share as the retail prices
change. Not only is the total margin relatively inflexible, but the charges
taken by each level of the system are relatively sticky. To many, this in·
flexibility of the margin is one of the greatest shortcomings of our market-
ing system.
There arc some basic reasons why marketing costs do not move up and
down easily and proportionately with the change in dollar value of the
goods handled. Many of the costs of performing a particular marketing
function are related to the physical volume handled rather than the dollar
value of that volume. This is true of both the processing and nonprocessing
establishments of the marketing channel. In a stockyard, for example, the
same lahor force in the yard and in the offices must be employed to handle
 !\I ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

1,000 hogs on a day thcy arc sold at $25 as on the day thcy bring $10. It
takes substantially thc same plant and labor outlay to pack fruit at a time
whcn the value is high as when the valuc is low. It takcs the same amount
of transportation space to haul 1,000 cases of eggs at 25 cents a dozen as at
50 cents. This situation results in many markcting charges being levied on
a physical unit basis such as per bushel or per animal, instead of on a
percentage of dollar volume. Such charges become more difficult to adjust
to the changing value of the products handled.
The relative degree of competition or monopoly control in the market-
ing structure also has a bearing on inflexible margins. Increased unioniza-
tion of labor will probably lead to greater rigidity both in wages and em-
ployment practices. Though probably a more flexible cost structure in the
marketing system would be desirable, there seems to be little reason to
believe that much improvement in this area will be made.

The Farmer's Share as a Measure of Marl,eting Efficiency

It should now be evident that changes in the farmer's share over a
period of time are not an adequate indicator of changes in marketing
efficiency. In fact, there is reason to believe that in very prosperous timcs
when the share is relatively large the machinery may be less efficient than
in depressed times when the share is small. Prosperous periods often en-
courage poor management and organization, since large profits come easily.
Hard times furnish the impetus to operate as efficiently as possible. Neither
is the difference in the size of share among the various commodities an
indicator of relative efficiency. Rather in most cases it merely reflects the
complexity of the job which must be done in marketing the product.
It is doubtful whether the statistics of the farmer's share merit the
attention that they receive. The important thing is not the size of the share,
but rather the total return which is received by agricultural producers from
the sale of their products. Higher marketing costs and a more prosperous
agriculture are compatible ideas. It is very probable that as the standard
of living rises, increasec! demands for more processing and marketing serv-
ices will increase marketing costs. In some instances, maybe enough is not
being spent to market the product to its best advantage. This situation
could be true regardless of the size of the farmer's share. Businessmen in all
fields are continually attempting to discover new ways of attracting and
influencing the consumer. In a sense, they are ahvays asking the question,
"Does marketing cost enough?" Again we must recall what was said in
Chapter 1 concerning marketing efficiency. It is not a matter of low
dollar costs alone but rather of getting the marketing job done with the
best combination of resources. And the end product of the marketing job
T
The Cost of Jvfarlwting i9

is the movement of goods into consumption with top priority given to

consumer satisfaction.

opportunities for Reducing Costs

Though the knowledge of the size and composition of the marketing
margin is not, of itself, a measure of efficiency, it can be helpful to the
study of marketing efficiency. Cost and margin data help indicate areas
where efficiency problems exist. Such data when properly coupled with the
functions performed may furnish a comparison of the relative efficiency of
various organizations and methods. G
The breakdown of the margin on the basis of services performed at
the various levels suggests that one of the more fruitful areas of effort to
reduce margins may be in the retailing operation. In the past, many of the
efforts to reduce costs have been directed toward wholesaling and local
assembly. The breakdown of the margin shows that these areas are of
relatively small importance in relation to the total. The breakdown of
the margin on the basis of cost items suggests that the greatest increases
in efficiency might be made in attacking the problem of labor utilization.
In reducing marketing costs, it is generally recognized that little can
be gained from a blanket, across-the-board approach. Simply because the
costs of retailing are high does not mean there is some panacea to be used
in securing substantial savings. A general reduction in wage rates is an
unrealistic approach to the problem of high labor costs. The problem is
rather the tedious one of securing a saving here and improving a special
operation there. A large number of sman contributions will be the way
progress is made.
One major approach toward increased efficiency of the marketing
system is the determination of the optimum number and size of firms to
carry on the job. :Much \\'ork has been done to ascertain the economies of
scale of various types of business. For example, a study on citrus packing
house costs found that as the volume packed increased from under 200,000
boxes to over 600,000 boxes, total cost fen from 94 to 83 cents per box. It
suggested that substantial savings could be realized by combining four
small packing houses into one large one. G Integration of some of the func-
tions and agcncies into one business organization often is offered as a
technique to reduce costs. The large food chains which operate processing
and wholesaling divisions as wen as their retail outlets are an example of
an attempt to reduce margins through integration. Though many studies
5 An evaluation of the usefulness and limitation of cost and margin research can be
found in the report of the l\Iarketing Research \Vorkshop on Marketing l\Jargins and
EtJicicnc)" USDA, Agricultural Research Administration, 1950.
6 Samuels and Capel, op. cit.
80 MARKETING OF AGRICULTURAL PRODUCTS

haye pointed out the possible cost savings through increased size and fewer
and integrated firms, there has been very little work toward determining
the optimum number of firms for effective competition. In the modern
business world there may have to be some compromise between secming
the maximum economies of scale and maintaining an effective competitive
structme. Undiscriminating worship at the shrine of the economies of
scale may bring still greater costs by fostering weak and impotent com-
petition.
Another major approach toward increased efficiency is in the improv-
ing of the operational methods and layouts of individual firms. The end
product of such improvements can be the more efficient utilization of
labor. The same study on citrus packing house costs reported that the
number of men needed for operation could be reduced through the use
of proper machinery. A study of the operations of the receiving rooms in
milk plants concluded that with an improved arrangement, the job which
previously had taken four or more men could be done either with one or
two men. 7 Through the proper training of peelers in tomato canning fac-
tories it was possible to increase productivity 20 percent.s Examples of
possibilities of improving the way labor is used, the handling of materials,
and the layout of plants are numerous.
That efficiency of labor with resulting reduction in costs can be im-
proved in marketing is demonstrated by Figme 2. Unit labor costs have not
risen as mnch as have wage rates. Hourly earnings increased 125 percent
from 1940 to 1950; unit labor cost increased 100 percent. This means that
the output per man of the marketing labor force has been increased.

TAB L E 9. Changes in Man-Hours Expended Per Unit of Output,

Selected Industries

PERCENT CHANGE
r:-;nUSTRY 1949 FROM 1939
Flour and grain mill products +::0·5
Condensed and evaporated milk + ::.8
Sugar + 1,4
Beet sugar - +3
Confectioncn' -r.p
l\IaJt liquors" -20.2
Canning and preserving
Ice cream

SOURCE: Bureau of Labor Statistics, U. S. Department of Labor.

7 C. E. French, C. B. \\'ood, and V. C. l\Ianhart, LaboT Utili:::ation in Receiving

Rooms of Indiana l\Iilk Plants, Indiana Bulletin 576, 195:!..
8 L. J. Haverkamp and L. S. Hardin, Simplifying Tomato Canning Factory Oper·
ations, Indiana Bulletin 528, 1948.
 The Cost of Marketing 81
Table 9 shows the changes in labor productivity which occurred
during the ten-year period, 1939 to 1949. This illustrates the sharp differ-
ences which exist among the different industries. The flour and grain mill
firms actually were using 20 percent more labor per output unit in 1949
than in 1939. On the other hand, the ice cream industry had increased
its labor productivity by 28 percent.
It can safely be concluded that the opportunities for increasing the
efficiency of the marketing machinery have just begun to be explored. Such
work may not result in lower marketing margins if additional marketing
services are demanded. But it may allow these additional services to be
supplied without any marked increase in the margin.
There is nothing on the horizon which promises any drastic improve-
ment and lower costs in marketing. There are no cure-alls for high costs.
The basic job is too large and complex. But there is little reason to be
more pessimistic about continued gradual improvement in marketing than
in any other segment of the economy.

SELECTED REFERENCES
"Beha"ior of Marketing Margins" (series of papers), Journal of Farm Eco-
nomics, December Proceedings, 1952.
Lazo, H., and Ivl. H. BIetz, \Vho Gets Your Food Dollar? (New York, Harper
and Brothers, 1938).
"An Outline of Distribution Costs" (Committee Report), Journal of Ivlarket-
il1g, July, 1951.
Report on Distribution AJethods and Costs, Part 1, Important Food Products,
Federal Trade Commission, 1944.
Stewart, P. 'V., and J. F. Dewhurst, Does Distribution Cost Too Much? (New
York, Twentieth Century Fund, 1939)'
Part II

SOME FUNCTIONAL
PROBLEMS
CHAPTER SIX

'The Exchange Functiolt-

Price Discovery

The exchange functions of marketing. bll~'ing and selling. are the heart
of marketing. As goods 1110\'e through the many hands before reaching the
final user, title changes several times. Each time title changes, a price must
be decided upon. This means that pricing is an integral part of marketing.
Price analysts claim that marketing is an important branch of the study of
prices. Marketing people claim that pricing is a major branch of the study
of marketing. Regardless of viewpoints, the study of marketing and of
prices go hand in hand. One really cannot adequately understand market-
ing without some grasp of the fundamentals of pricing.
It is the objective of the next few pages to prescnt briefly some of the
basic concepts which arc needed for price understanding. For many of you,
this will be merely review. For those of yon who have not come in contact
with these concepts before, more careful study will be appropriate.

P RIC E SIN A C 0 j\[ PET I T I VEE CON 0 j\[ Y1

The operation of any modern economic organization in which speciali-
zation of production exists requires that certain instructions be given.
Instructions must bc givcn as to how the factors of production-land. labor.
capital, and management-arc to be used. \Vhat should be produced and
how much? As we ha\'e already mentioned, consumers ha\'e the final word
in gi\'ing these directions by their indications of what will be consumed
and in \vhat amounts. The people selecting and channeling goods through
the marketing system Blust be told what is expected of them. Too, con-

1 'nit: assumptiolls of competition along II'ilb 3n appr:lisal of thl: degree of compcli-

'ion prt:scnt in the marketing of agricultural products will be dilcmscd in the next
chapter.
86 MARKETING OF AGRICULTURAL PRODUCTS

sumers must have information on the relative costs that producers incur
in snpplying them with different goods so they can make their decisions
on how to allocate their limited incomes on a basis of more than sheer
desire. In a competitive economy the pricing machinery is expected to
transmit these orders and directions. Briefly, then, fluctuating competitive
prices have the following three major jobs to perform:
1. They are to guide and regulate production.
2. They arc to guide and regulate consumption.
3. They are to guide and regulate the distribution of goods both over a
period of time and from place to place.!!
Economies organized in some other fashion-such as socialistic and
communistic organization-still must find some way to give direction to
the workings of the system. The area of disagreement is not over what
orders are necessary, but rather over how and who should give them.
If a competitively functioning price system is allowed to give the direc-
tion, it has the advantage of being impartial. The idea of "fair treatment" is
left to the composite judgment of the market place rather than to the
decisions of individuals in positions of political power. Such a system of
direction also has the advantage of being in continuous operation-there
is a continuous adjustment to changing conditions. This is in contrast to
the sluggish "after-the-fact" type of direction which usually occurs when
the direction job is delegated to various public agencies.
The heart of price formation under competition is the supply-and-
demand analysis. There is probably no more overworked and misunder-
stood phrase in economics than the "law of supply and demand." To some
it is a form of magic or divine guidance \vhich is invoked to explain away
any major problem or dilemma. To others it is something which can be
used or ignored depending upon the desires of the moment. It is to these
fundamental ideas of supply and demand that we shall now apply ourselves.

The Meaning of Demand

Demand is a schedule of different quantities of a commodity which
buyers will purchase at different prices at a given time and place. The law
of demand merely formalizes the logical relationship between quantities
taken and prices. The lower the price the more will be purchased; and
conversely, the higher the price, the less will be purchased.
2 Boulding develops a \'cry forceful illustration of the control functions of prices.
He uses thc analogy of the flow of \vater in and out of a tank. Production is the flow
coming in; consumption, the flow going out. Price is the float system which equalizes the
rate of intake and outgo. See K. E. Boulding, Economic Analysis, 2nd ed. (New York,
Harper & Brothers, 1948), p. 117.
 The Exchange Function-Price Discovery 87

Table 1 gives a hypothetical demand schedule of prices and quantities

which might exist for corn at any given time and place. Of course, for any
one time period a definite amount of corn will be purchased at the stated
price-say 1,750 million bushels at $1.30. But the demand schedule shows
what amounts would have been purchased if the price had been different.
TAB LEI. Hypothetical Demand Schedule for Corn

.\MOUNT PURCHASED
PRICE PER DUSHEL (lIIILLIO:-; BUSHELS)

$1.60 1,5°0
1.5 0 1,570
1.40 1,660
1.3 0 1,75 0
1.20 1,9°0
1.10 2.,030
1.00 2.,190
.9 0 2.,4°0

Figure 1 is the graphic presentation of the demand schedule given in

Table 1. This is the demand curve for corn. If the law of demand is valid,
the demand curve will always slope downward and to the right on a graph
similar to Figure 1.
Cents per
Bushel

Millions of Bushels Purchased

FIG U REI. Hypothetical demand curve for com.

The demand curve in Figure 1 and the demand schedule in Table 1

both illustrate the nature of the relationship between quantity and price as
it is est2blished by prospective buyers. If the price were $1.60, 1,500 million
88 .\1 lI. H K E t I :\ G 0 F .\ G HIe U L 'i' U R.\ 1 PRO D tJ c T S

bushels would be purchased; if the price were $1.40, 1,668 million bushels
would be purchased and so on for any other possible prices assuming that
all other things remained unchanged. The demand schedule and curve do
not indicate what the price and quantity are but only what the effect of
different prices will have on the quantity purchased. The price which will
exist has not yet been established and demand alone cannot establish it.
Several important points, then, must be kept in mind if the idea of
demand is to be llsed correctly. First, it is a series, or schedule. of amount-
price relationships. To forget this will lead often to the very common
error of associating a price change or a consumption change alone with
demand.
Secondly, demand indicates the differing amounts that will be pur-
chased at differing prices, and not simply the amounts needed by pur-
chasers. The demand which is important in marketing is what is often
termed effective demand. Effective demand is the desire of the consumer
for the commodity backed up by purchasing power. Effective demand,
then, is the quantity that would be purchased at the existing price. The
people of China both need and desire many things-more rice, better
clothing, better homes, and so on. However, the Chinese demand for these
things is very limited, since they do not have the purchasing power to make
their needs and wants effective. The pertinent marketing question is always,
"How much will be bought at a price?" and not, "How much will be
needed or desired?"

The Meaning of Supply

Supply is a schedule of differing quantities which will be offered for
sale at differcnt prices at a given time and place. The law of supply is
simply the logical relationship which exists in these circumstances. The
higher the price, the more will be offered for sale; the lower the price, the
less will be offered for sale. \Vhile demand indicates the relationship
between quantity and price from the buyers' viewpoint, supply indicates
a similar relationship fr0111 the sellers' \'iewpoint.
As we did for demand, we can make a supply schedule of quantities
and prices and from this plot a sllpply curve. This is illustrated in Table :::
and Figure :::. Here, too. it must be remembered that at anyone time and
place only one point on this curve represents the actual situation. But the
curve presents what would be the effects of different prices on amounts
offered. If the law of supply is valid, the supply curve will always slope up-
ward and to the right on a graph which is similar to Figure z.
Even more than in the case of demaIld. common usage has confused
the meaning of suppk It is a commonly accepted practice to label changes
 The Exchange Function-Price Discovery 89

in production as changes in supply. For example, the amount of hogs avail-

able today on the market is widely referred to as the supply available. To
be realistic, we must accept this terminological confusion, but we should
keep clearly in mind just what is meant. When supply is used in the
economic sense, it always represents a series of price-quantity relationships.

TAB L E 2. Hypothetical Supply Schedule for Com

AMOUNT OFFERED FOR SALE

PRICE PER BUSIlEL (~nLLlO~ BUSHELS)

$1.60 2,030
1.50 2,000
1.-1 0 1,980
1.3 0 1,94 0
1.10 l.g00
1.10 1,860
1.00 1,79 0
.9 0 ____________________1~,7°0______________

160

14D

120

100

80
1500 1700 1900 2100
Millions of Bushels Sold
FIG U R E 2. Hypothetical supply cun'e for COTII.

Time is a very important consideration in supply analysis. One should

remember that supply exists at a given time. These given time periods can
be of different lengths usually designated as the very short TUn, the short
run, and the long run.
The major limitation on supply for the very short run is the existing
q,::tntity of goods which is already produced and on hand. Since this stock
of goods exists. costs which have been previously met in its production
90 :\1 ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

should not influence price. However, replacement costs and storage costs
may influence the seller's judgment and therefore influence the supply
schedule.
It is the interrelationship with future time that brings cost into the
supply picture. \Vhen the given time period is future time, analysts usually
consider two additional periods, the short mn and the long mn. The short
run is that time during which goods can be produced only with existing
production facilities. The long run refers to that time during which the
production facilities themselves may be expanded or contracted. In the
short run the cost of the existing facilities is not an element influencing
the seller's decisions with respect to supply. In the long-mn period, how-
eyer, the costs of all things used in production enter into the determination
of supply.
Since the supply schedule of amounts to be produced refers to a period
involving the passage of time, it must take into consideration the time
necessary to initiate and complete the production process. For some com-
modities like broilers, this may be only a period of weeb; for others like
cattle, it may be a period of several years. And as we shall point out later
and as is obvious from the preceding discussion of time and cost, the
supply curve for the same commodity will be different for the different
periods of time under consideration.
The time element greatly complicates the analysis of agricultural
supply. Unwary observers who notice that large receipts on today's market
move at lower prices, or that a large crop brings lower average prices, con-
clude that the law of supply is not valid. However, these situations point
up the problem of determining the proper time lag between the price
stimulus and the quantity response. High livestock prices on the market
today will result in larger receipts one and two days later because of the
time necessary to initiate the shipment from the farm. The proper supply
schedule in this instance would probably be one which related to day's
prices with receipts two days later. The hog production coming to market
during the fall monLllS is in response to conditions which existed far
enough in the past that hog producers changed their breeding plans. The
supply schcdule in this case would relate current prices with the level of
production forthcoming at least twelve months later.

The Equilibrium Price

The forces at work on the buyers' side and the forces at work on the
producers' side have often been referred to as the two blades of a scissors.
As it takes both blades to cut effectively, so also must both demand and
supply be considered in the determination of a price. Table 3 shows both
 The Exchange Function-Price Discovery 91

TAB L E 3. Hypothetical Demand and Supply Schedules for Corn

AMOU~TS OFFERED
AMouNT PURCHASED FOR SALE
(MILLION BUSHELS) PRICE PER BUSHEL (MILLION BUSHELS)

1,500 $1.60 2,03 0

1,57 0 1.5 0 2,000
1,660 1.40 1,9 80
1,75 0 1.~O 1,94 0

1,900 1.20 1,9 00

2,030 1.10 1,860

2,19 0 1.00 1,79 0
2,400 .9 0 1,700

the demand schedule of Table 1 and the supply schedule of Table 2. The
question is what will be the price of corn, given these two sets of conditions.
As we run down the list of prices we find that at $1.20 per bushel, buyers
will take 1,900 million bushels. At this same price sellers will produce and
offer for sale 1,900 million bushels. At $1.20 buyers will take all that sellers
\vill offer. There will be no unsold corn-the market will be cleared. This,
then, will be the price which will be established if the forces of competition
are allowed to function. This is the equilibrium price-the point where
demand and supply are equal. Figure 3 graphically presents the same pic-
ture. '\There the demand (d-d) and supply (s-s) curves intersect, (p) is
the equilibrium price.

Cents per
Bushel

1500
I
1700 1900
I
2100 2300
I II
Millions of Bushels
FIGURE 3· Hypothetical supply and demand curves for corn,
illustrating the equilibrium price.
 ~{ ARK 10 TIN G 0 FAG RIC U L T U R .\ L PRO Due T S

\Vhy must the price come to rest at $1.::0 in this illustration? Suppose
prices tried to come to rest at $1.30' At this price sellers would be willing
to sell more corn than buyers would purchase (Table 3: 1,940 compared
to 1,75° million bushels). The desire of these extra sellers to sell at some
price above $1.::0 would result in price concessions to attract buyers. Any
price lower than $1.20 \vol1ld find additional buyers but fewer sellers. In this
situation the desire of eager buyers to secure corn at what they considered
advantageous prices would result in the bidding up of prices. At $1.::0 both
the buyers and sellers who are willing to enter the market at all would be
satisfied, and 1,900 million bushels would change hands. This price would
be an equilibrium price.
The equilibrium price is not a point readily found nor easily main-
tained. Rather, prices are always overshooting the mark in their search for
the price which will clear the market. Changes may be small but they occur
frequently as buyers and sellers search for the market-clearing price. It is
more correct to say that the equilibrium price is that price toward· which
actual prices will tend to move.

C HAN G E SIN D E 1\1 AND AND SUP PLY

\Ve have carefully pointed out that demand and supply schedules and
curves have meaning only for a .given time and placc. At a later time, for
example, buyers and sellers may have an entirely new series of price-quan-
tity relationships. The different supply-and-demand situations for ice cream
in the summer and winter might be used as an illustration of this. Demand
and supply have hcrc changed with the season.
If more of a commodity is purchased at the same or higher price than
previously, demand will increasc. For example, refcrring to Table 1 again, if
buyers now purchase 1,600 million bushels at $1.60. 1,670 million bushels
at $1.50, and so forth, demand for corn will increase. If this new schedule
\vere plotted on Figure 1, thc new demand curve would be to the right of
the original one. \Vhen less of a commodity is purchased at the same or
lower prices than orit;inally, demand will decrcase. If wc turn again to am
corn illustratioll in Figure 1, a decreased dcmand curvc would hc shown to
the left of the original curve.
A large number of factors can cause changes in demand. Generally
such factors can be grouped as follows:

1. A change in population (providing the per capita purchasing power re-

mains unchanged) .
2. A change ill the incomes or purchasing power of people.
3. A change in the tastes and preferences for particular products.
 The Exchange Function-Price Discovery 93
4. A change in the relative costs of products which are substitutable for
each other.
5. A change in the expectations of buyers as to the future levels of prices.

The first two factors would generally either increase or decrease de-
mands for all products. The next two factors would largely affect shifts in
demand among individual commodities. The last factor could affect either
the general or the specific demand situations. As we shall see later, the
most important single factor influencing demand for agricultural products
is a shift in the general income levels of the country.
Supply may also increase or qecrease. If more of a product is offered
for sale at the same or lower prices than before, supply will increase. Refer
to our corn example in Table 2. If 2,200 million bushels are offered at $1.60,
2,100 at $1.;0, and so forth, supply will increase. If this new schedule were
plotted on Figure 2, the increased supply curve would fall to the right of
the original. \\Then less of a commodity is offered for sale at the same or
higher prices than before, supply will decrease. The curve for this decreased
supply would fall to the left of the original curve.
As is the case for demand, many factors can combine to increase or
decrease supply. Generally, they may be classified as follows:

1. In the very short period, there may be a change in the various factors
which would induce sellers to offer their available stock of goods at a
different schedule of prices. These would include such factors as costs
of storage, the sellers' need for cash, and the general expectations as to
the future situation.
" In the short run, there may be a change in the cost of production of
the commodity itself based upon the availability of various resources
for production as well as the degree of competitiveness of other firms.
3. In the long run, there may be changes in all of the factors mentioned in
(1) and (2) plus changes in the availability of resources for altering
productive facilities and the ease of making these changes.

Changes in demand and supply have their real importance in their

effect on the equilibrium price. Figure 4 shows the effect on equilibrium
price of four possible supply and demand shifts. The changed curve is aI-
\vays ~hown by the broken line and the new equilibrium price by p'. These
examples can be expanded to show the results of all sorts of combinations
of supply and demand changes. To be sure that these illustrations are
c1 ncierstood, the student should list the factors which could have caused
thc,e shifts.
94 ;\1 ARK E T rN G 0 FAG RIC U L T U R ALP ROD U C T S

Price Price

Quantity Quantity
A. Demand increases B. Supply increases
Supply remains unchanged Demand remains unchanged
Result: Increased quantity Result: Increased quantity
moves at a higher price moves at a lower price

Price
sIs'

Quantity Quantity
C. Demand decreases D. Demand increases
Supply increases Supply increases
Result: The same quantity Result; Increased quantity
moves at a lower price moves at the same price

FIG U R E 4. Supply and demand situations illustrating. some

effects of changes in supply and demand.

ELASTICITY OF DEMAND AND SUPPLY

\Ve have yet to discuss one additional and very important concept
relative to demand-and-supply analysis. Both demand and supply are
schedule relationships of prices and quantities. The law of demand states
that as prices go down, the quantities purchased wil1 increase. The law of
supply states that as prices go down, the quantities offered for sale will
decrease. But how much will the quantities respond to changes in price?
The relationship of the changes in quantity to the changes in price is the
concept of elasticity .
. Generally, demand curves are usually classified according to their
elasticities into two broad groups. These broad groups represent demand
which is elastic and demand which is inelastic. The dividing point between
these two classifications is unit elasticity. This latter we shall discuss first
for the light it sheds on the meaning of our dual classification.
 The Exchange Function-Price Discovery 95

Demands with unit elasticity are those in which the changes in quan-
tity taken are of the same magnitude as the changes in price. The elastic
demands are those in which the changes in quantity taken are proportion-
ately greater than the changes in price. The inelastic demands are those
in which the changes in quantity taken are proportionately less than the
changes in price. For example, let us assume price has decreased by 10 per-
cent. The law of demand indicates that the quantity taken will increase.
But how much will it increase? The changes in quantities taken for com-
modities with demand curves of different elasticities would be as follows;3

1. \Vith unit elasticity, amount taken would increase exactly 10 percent.

2. \Vith an elastic demand, amount taken would increase more than 10
percent-say 12 or 15 percent.
3. \Vith an inelastic demand, amount taken would increase less than 10
percent-say 5 or 7 percent.

Commodities with inelastic demands are often those \vhich fall into
the classification of necessities and which have few substitutes. Consumers
want them and are relatively insensitive to price changes. Commodities
with elastic demands are often those whose use is not directed by necessity
or habit and which have several close substitutes. Consumer response for
such products is more sensitive to price changes.

Price per
Unit

20 40 60 80 100120
Quontity
A. Unit elosticity
FIG U R E 5. Demand curves of B. Inelostic
C. Elostic
different elasticities.
Elasticity can be mathematically calculatcd. \Vhcn so p.resent<;d, unit ela~ticity is
3
-1; an elastic demand is something more than - 1 ; and an mclastlc demand IS some-
\y.
thing less than - 1 . For a more complete discussion of elasticity analysis see C. \Vaite
and H. C. Trelogan, Agricultural flfarket Prices, 2d ed. (New York, John \\"lley, 195 1 ),
cD. 3.
 '>1.\ It " E T 1 :\ COl· .\ C RIC U L T U R.\ 1. I' ROD U C T S

On graphs of the same scale, the more inelastic the demand, the
steeper is its plotted curve (Figure 5). The most important implication of
demand elasticity is its effect on the total amount of money received from
selling different quantities at varying prices. \Ve can easily see this by study-
ing the results of a 10 percent cut in prices on three hypothetical com-
modities of different elasticities. For a commodity with a demand of unit
elasticity, the quantity taken would increase 10 percent and the total re-

Total
Ret,#"ns

500 f-

:r ~/
2oof- ~
100f- / "
I I I I
o 20 40 60 80 100 120
Quantity
FIe U R E 6. Total retuT11 Clln'es fOT
A. Curve for unit elasticity the demand curves of
B. Curve for inelastic demand different elasticities
C. Curve for elastic demand
shown in Figure 5.

turns from sales under thc new situation would be exactly the same as be-
fore the price cut. For a commodity with an clastic demand, the quantity
taken would increase more than 10 percent and the new total returns from
sales would be greater than before. However, for a commodity with an in-
elastic demand, something less than 10 percent more of the commodity
would be taken and the total returns would be less. The total return curves
which would be derived from demand curves of different elasticities arc
shown in Figure 6.
Demand curves for the same product often are not of the same
elasticity throughout the entire curve. For example, demand for an agricul-
tural commodity may be inelastic when the price is very high, elastic when
the price is in the middle ranges, and inelastic again when the price is
extremely low. Such a situation would mean decreasing returns through
part of the curve, increasing returns through the middle section, and de-
creasing returns again through the lower part of the curve as quantities and
prices change. Elasticity may also change over a period of time. Thus.
many things which were once luxuries with elastic demands may shift into
the necessity category with inelastic demands.
 The Exchallge FUllction-Pricc Discol'c1'Y 97

\Vill a largc crop return Illore money to grow~rs than a small one even
though prices are lower? \\That will be the effect of restricting output on the
total returns from sales? Should a store seek to lower its prices to sell more
goods? Knowledge of demand elasticity and its relationship to total returns
is the key to the answers to such questions as these.
Thc same elasticity framework also can be applied to supply. Com-
modities which are very responsive to price changes have elastic supply
curves. Those which respond relatively little to price changes ha\'e inelastic
supplies. As for the different elasticities of demand, on graphs of the same
scale the more inelastic the supply the steeper the plotted curve.

Price Price Price

Quantity
A Short-run, within
Quantity
/ Quantity
B. Intermediate, C. long-run. extending
a given production extending over two over several
period or three production production
periods periods

FIG U R E - IIr/Jotileficu/ SUPIJ/Y curres illustrating the effect of

time 011 elasticity.

Time is a very important factor in supply elasticity analysis. Generally

as the time period under consideration lengthens, the supply curve tends
to be more elastic. For example. the supply curve for hogs for the period
September through December is nearly perfectly inelastic. Regardless of
price changes, little can be done to change the number of hogs a\'ailablc
for slaughter. If an eighteen-month period is considered, farmers can
change their breeding plans in response to price, and the cun'e will be somc-
\"hat more elastic. If a period of five or six years is considered, more hog
hcuses can be built. morc equipment can be obtained. and the supply CllI\'C
will be' more clastic. Such situations might he illustrated 1)), the supply
curvc:; in Figure 7.
\Vithin thc ,'cry short period, the elasticity of the supply curve of
scllers' offerings 011 the market will ,'ary ",ith the difference in storability
 MARKETING OF AGRICULTURAL PRODUCTS

of a product. An owner of a perishable product has little choice except to

movc the product at almost any price. The supply curvc in this instance
would be almost perfectly inelastic (similar to situation [AJ in Figure 7).
If the product is storable, however, owners havc marc control over the time
when they may sell it and can respond more readily to price changes. The
supply curve in this instance would be more elastic than for the perishable
product (similar to situation [B] in Figure 7).

Price Price

Quantity Quantity
A. With inelastic supply B. With more elastic supply
price change is great price change is less

FIG U R E 8. Hypothetical supply-and-demand situations

illustrating the effect of demand change in
situations with different supply elasticities.

The probability that there will be perfectly inelastic supplies for many
agricultural products in the very short period has two major implications.
First, it means that changes in demand are of tremendous importance in
changing the equilibrium price. Secondly, it means that price fluctuations
resulting from changes in demand are much more severe than when the
supply curve is more elastic. Figure 8 illustrates the effect of an equal de-
crease in demand in tv:o situations-one with a perfectly inelastic supply
(A) and the other with a somewhat more elastic supply (B). Notice the
difference in the degree of price change (p and p') as the demand changes.

SUMMARY
Vie may now briefly summarize the major points in the fundamentals
of price determination under competition as follows:
1. The law of demand is a statement of consumers' tendencies to buy
less as prices increase.
 The Exchange FU1lctio1l-Price Discovery 99
2. The law of supply is a statement of the producers' tendencies to sell
more as prices increase.
3. The equilibrium price is the result of the interaction of supply and de-
mand. It is that price at which buyers will take all that producers will
offer.
4. Demand and supply may change independently. A change in demand
or supply or both will result in a new equilibrium price.
5. Demand-and-supply curves have different elasticities. Elasticity dif-
ferences will affect the total returns secured from selling different
amounts at different prices. They also will influence the degree of
change in equilibrium price as demand and supply shift.

SELECTED REFERENCES
References for this Chapter and Chapters 7, 8, and 9 are listed at the end of
Chapter 9.
CHAPTER SEVEN

COl11pCtitioll Hl Food Marl~etillg

The cffecti\'C working of mllch which was discussed in the previolls chapter
assumcs perfect competition. Under this assumption. prices will not onl~'
do the threefold job laid out for them, but they \vill also assure an efficiently
functioning economic system. Businesses will operate 'It their optimum
size, neither smaller nor larger. New technologies and other improvements
will be snapped up and adopted immediately by all firms if they arc to
remain in business. The benefits from such improvements would also be
quickly dispersed throughout society because of the pressure of the com·
petiti\'e pricing mechanism. \Ve must assess hO\v closely the existing'
marketing machinery approximates the ideal of perfect competition. The
first part of this chapter will outline the assumptions and results of the
competiti"e system. The second part will attempt to assess the extent and
kind of competition operating in the actual marketing system.

PERFECT COMPETITION

Assl1mptions of Perfect Competitioll

'I11e attainment of perfect compctition rests on certain assnmptions
which may be broadly stated as follows:
I. There are a great numbcr of both buyers and sellers no olle of which
is large enough to influence price through his action alone.
Both buyers and sellers have perfect and equal knowledge of all the
factors which affect market conditions. Also. they will utilize this in-
formation in an economically rational manner so as to maximize their
own individual gain.
3. There arc no collusive or restrictive agreements among either buyers
or sellers. In fact. there arc so many buyers and sellers that coalition
100
 Competition iT! Food lv/urketillg 101

by any relatively large group of them would be administratively in-

feasible.
4- There is no product differentiation. This does not me;m there are
no differences in quality. However, products of like quality will not be
differentiated by brand name, advertising, extra services, and so on.
). The factors of production are perfectly mobile and free to leave one
industry to enter another in which they could secure greater returns.
No barriers to the flow of capital, labor, and management exist.

The Individual Firm

Under perfect competition the individual business firm, whatever its
nature, can sell all of its production at the' market price. If its price is
slightly above the market price it can sell nothing. If slightly below, it will
be swamped with buyers. The individual business, since its output cannot
affect price, can have no price and selling policy. The demand curve of
the individual firm would be a horizontal straight line.
'Vith the selling side of operations thus simplified, the firm would
devote its time to adjusting its production. Since there is perfect knowledge
and freedom of entry and exit from business, the firm will adjust its output
to that point at which total profits are maximized. It would be forced to
adopt improvements and pass on their benefits. In other words, under con-
ditions of perfect competition, the place of the individual business is to
accept the prevailing market conditions and adapt itself to them.

The Market Area and the Law of One Price

The term "market" is another of that large category of terms which
has many meanings. It often is used in the sense of price, as in "the market
\Vas strong today." Or again it may be used as a designation of a selling
point, such as "the Chicago hog market." In economic analysis, though,
market area has a special meaning. It refers to that area in which buyers
and sellers have the facilities to trade with each other. It is not a point
or a city, but rather an area. The size of this area will be limited by the com-
munication system and the transportability of the product.
Used in this sense, then, markets may be local, regional, national, or
international in extent. Bulky hay has a small market area severely limited
by hi~h transportation costs. The perishability of fluid milk limits its market
area. Livestock can be shipped widely, and its market is probably national
in scope. \Vhen world trade was relatively free from restrictions, the wheat
and cotton markets were international in scope. \Vith our highly developed
'~'')mmnnication and transportation systems the tendency is for market areas
to increase continually in size.
102 ]\1 ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

The prices of a particular commodity in a perfect market would be

uniform throughout the area at anyone time, after transportation costs
to points of consumption are considered. At anyone time, then, we should
expect prices at all points within a market area to be the same if the
appropriate transportation costs were added or subtracted. This latter idea
is often called the "law of one price."
If the assumptions of competition are valid, the logical proof of this
proposition is simple. If prices at one point in a market area were to
become too high, additional sellers would be attracted to that point while
prospective buyers at that point would transfer their orders elsewhere. This
process would continue until prices were forced down and the point was
again in line with other prices plus or minus the transportation costs in
the market area. If the price at a point were too low, additional buyers
would be attracted, but many sellers would reroute their offerings to
another point. These actions would tend to raise the price back into line
with others within the market area. Thus under conditions of perfect
competition, it would make no real difference at what particular point
within the market area that commodities were sold.

Relationship of Prices to Costs

The relationship of prices to costs under conditions of perfect com-
petition is frequently misunderstood. :~vlany assume that perfect competi-
tion assures a profitless and lossless situation. Such is far from the situation
that is most likely to exist. In fact, the persistence of profits or of losses
for a long time is more likely to exist, especially if we take into considera-
tion the time necessary to move productive factors into and out of an
enterprise. In fact, one of the necessary freedoms under competition is
the freedom to leave an enterprise or to fail. Perfect competition \vauld
guarantee the right of any firm to enter into any field of endeavor, but it
would not guarantee its monetary success.
In order to show the possibilities of long-time persistence of profits
or losses, let us again refer to the three time periods mentioned in our
supply analysis in the previous chapter. In the very short run period, goods
have already been produced and are on hand. The level of demand may
be such that sellers can dispose of their entire holdings at a profit. During
this very short interval of time there can be no more goods produced and
sold in order to capture part of the profits and as a consequence drive
prices doviD. The supply is very inelastic, and for the individual sellers
price may be very high. The same situation may exist in the opposite
extreme. A low level of demand may mean that goods must sell at a loss.
Therefore, in the very short run there is no necessary relationship between
 Competition in Food Marketing 103

costs and the prices received in the market. In agriculture, the perishable
and seasonal nature of production makes these very short run profit and
loss possibilities quite likely.
In the short run, it will be recalled, production can be altered within
existing firms with existing technology. If demand is high, producers may
expand production up to the point where rational conduct tells them to
stop-that is, where the additional cost of another unit is equal to the price.
At this output profits will be maximized. If the level of demand is so low
that prices will not cover the direct costs of production such as seed and
fertilizer, the producer may not produce at all. Or if the price will cover
the direct proportion of his costs but not his fixed costs, he may produce
up to a point where his losses are minimized. In either case under the
assumptions of perfect competition, no one producer by his individual
decision to produce or not to produce can influence price. Price is imper-
sonal and competition is a ruthless distributor of rewards and penalties.
No man can change the relationships between cost and price that result.
In the long run, however, new firms may enter an industry or old
ones leave it. Existing firms can change their size and seek the most efficient
technology. Under such a long-run consideration, if demand and prices are
high and high profits are being enjoyed, production will be increased as
more firms enter the industry and existing firms expand. Thus, prices will
be under pressure from the increased production and eventually a profitless
situation will result for all firms in a competitive industry. Similarly, if
firms are operating at a loss, eventually enough firms will be forced out
so that the remaining ones will share in the industry demand under con-
ditions where there no longer are losses, but also no profits. Therefore in
the long run, production will adjust so that average prices will tend to equal
average costs.
The problems facing an apple orchard operator offer a good illustra-
tion of these different time period relationships. Once fruit is harvested
the operator has the alternative of either selling at the market price or not
selling at all. The demand situation may be such that he may enjoy large
profits or suffer substantial losses, but he cannot alter his previously made
decision to produce. And with so many other se1lers, he cannot influence
price by withholding part of his apples from the market.
In the short run as the harvest season approaches, the orchard operator
can take certain actions if the price appears too low. He may cut out part
of his spraying activities. He may decide to pick and pack only the better
fruit-or in an extreme case, none at all. Or if the prices are high he may
c;·;~rt every effort to handle his crop so that he can harvest as many high
quality apples as possible.
 I-.1 .\ R h E T I :-; C 0 F :\ C It leu L T U R :\ L PRO Due T S

In the long run, if the prices have been persistently very low, he may
abandon his orchard completely or reduce his tree replacement program.
Or if the prices have been very high, new orchards may be started for
production. As has been mentioned previously, the length of the long-run
period varies depending upon the nature of the costs and equipment in-
volved. In some cases it may be only a few years. Or as in the case of
apple production it may be ten or more years.

DEPARTURES FROM
PERFECT COMPETITION
It doesn't take a particularly astute observer to recognize that the
assumptions necessary for perfect competition are not fully attained in the
real world of business activities. Furthermore, the natural tendency of men
is to try to escape from the ruthlessness of the mechanism of perfect com-
petition into some situation in which they have some control over their
destinies as economic beings. In fact, it seems doubtful whether the per-
fectly competitive situation has ever existed except upon the pages of
economic texts.
There are two major categories of departure from perfect competition.
On the one hand is monopoly. In this situation, the control of production
of an industry is by a single firm. Similar to monopoly in many of its
effects is oligopoly. In an oligopolistic situation such a significant propor-
tion of the production of an industry is controlled by a few firms that at
least one of these dominant firms can influence price by changing its
production. In the case of pure monopoly or simple oligopoly, no attempt
is made by the firm to control demand. Demand is accepted and the firm
determines the quantity which can be offered at prices which will maximize
profits.
On the other hand is imperfect competition with product differentia·
tion. In this situation a firm strives to make its product different in some
respects from the products of other firms of the industry. In this way the
firm attempts to achieve some influence over the demand for its own
products regardless of what other firms in the industry do. Each firm
attempts by differentiation to create a monopoly for its own product. But
the demand for this product is very elastic since there are many close sub-
stitutes from the other firms in the industry.

Monopoly and Oligopoly

:\ monopoly is not likely to exist for any length of time except where
established or protected by the power of government. 1Ionopolies could
come into being if one firm controls the sole source of an important raw
 Competition in Food Markctillg 105
material. .Mollopolies can also be created by the ownership of a patent
for a very important technical process. If the technology of an industry is
such that drastic economies of scale arc possible, eventually one firm may
control the output as it continually drives for larger volume and lower costs.
Or the sheer financial power of one firm may drive all others out of the
field. In the United States our basic beliefs have materialized into laws
which make monopoly unwanted and illegal except in special cases (see
Chapter 22). Public utilities, such as water companies, are monopolies
which exist because of the sanction of the government.
Oligopolies are composed of firms which are conscious not only of their
own individual influence on price but also of the influence the other rival
firms might have. An oligopolist in any of his actions must always consider
the potential retaliation of his rival firms. In a true ologopolistic situation.
the real business challenge to the individual firm is how to live with its
competitors and not to fight them. A fight among giants may cnd by
crippling all concerned with no one benefiting. In effect, tacit collusion
cxists among the few largc dominating firms that leads to a stability of
price and production which may not represent profit maximizing for any
one firm but rather a profit situation in which all can find tolerable
existence. Such a situation forces oligopolists to turn to other forms of
competition than price, such as product differentiation and service.

Imperfect Competition and Product Differentiation

Product differentiation may be defined as that condition under which
a firm gets some particular recognition from consumers due to some spccial
attribute that its product or service has which is not shared by the products
of other firms. Factors which create differentiation may be classified as
follows:
1. Genuine physical differences in products. _
2. Assumed differences in products such as brand names, established repu-
tations, good will. and so on.
3. Special services offered with products.
-+- Habits or customary ways of doing things.
). Locational advantages creating "local monopolies."

The individual firm with a differentiated product faces a demand

curve for its output which is not the horizontal straight line of perfect
competition but instead has some downward slope. However. the curve
llsually is highly elastic. A slight increase in price might result in such a
decline in quantity sold that profits would disappear. A slight decrease
in price might result in a tremendous expansion in sales if the finn were
106 1\1 ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

prepared to increase its output ~nd if its competitors did not retaliate. The
firm is also usually forced into extcnsive expenditures to maintain the level
of its demand. These expenditures may take the form of advertising,
product improvement, offering of additional serviccs, and so forth. These
costs of maintaining its differentiated product exist regardless of changes
in the level of raw material costs and tend to make cost and price structures
somewhat inflexible.
Some succcssful firms may perpctually enjoy large profits. Other firms
may not be so successful and barely hang on in the industry. Firm mortality
rates may be high. However, firms in such circumstances are likely to be
quite progressive in their search for and application of new techniques and
improvements. The successful "differentia tor" must continually keep per-
snading the consuming public that his product is better than ever before.
The market acceptance of a differentiated product is likely to be quite
dynamic, and for a firm to lag behind its competitors is to die.

C 0 1,,1 PET I T I V E CON D I T ION SIN

AGRICULTURAL MARKETING
Agricultural producers have long been used as examples of firms
operating nearest to the concept of perfect competition. They meet the
requirements of numbers and undifferentiated products very well. Each
farm firm can sell its output without influencing the price received for it.
But many students of agricultural marketing and prices have carelessly
generalized this situation to the whole food marketing structure. To assume
near-perfect competition of the agencies and firms engaged in processing
and selling agricultural products is to assume away many of the real prob-
lems of marketing.
A great many segments of the marketing machinery do not accept their
prices as being "discovered" in the market place. Neither do they take
market prices as something over which they have no control. Prices are
man-made, not God-given. Prices are established by a firm, tested for
correctness, and then accepted or revised.
Marketing firms do have a price policy and attempt to follow some
market strategy. Many firms realize that the demand curve for their output
is not a horizontal line, but rather has a downward slope. They cannot sell
all they could produce at the same price, but rather must take a lower price
for larger outputs. The questions of elasticity of their demand curve and
what output will maximize profits become the important ones to be
answered. They may be price leaders in their industry or follow the leader-
ship of other firms. They may decide not to compete on the basis of price,
but rather on non-price items such as delivery, advisory services for their
 Competition in Food Marheting 107

customers, and the like. Large advertising expenditures may be used to

attract and influence customers. Through their trade organizations they
may attempt to police and control the form that competition will take.
One writer criticized those who concerned themselves with the mechanics
for price discovery rather than with the price-making forces.! However,
it may well be that many of the unsolved problems of marketing lie within
this area of mechanics. The laws of supply and demand cannot be "re-
pealed," but they can be distorted and circumvented for considerable
periods of time.
One of the results of perfect competition is the impersonal relationship
of the competitors. l'.Iarketing during the great majority of the time, how-
ever, is a very personal affair. Your competitor consists of people with whom
you have business dealings, conversations, and other relationships. And as
Stigler points out, economic relationships are never perfectly competitive
if they involve any personal relationships between economic units. 2

Examples of Imperfection in Competition

There is a strong temptation to emphasize those examples of the most
drastic departures from competition. The concentration of economic power
as measured by the proportion of the total business done by a few firms
is widely cited as evidence of oligopolistic activity. And agricultural market-
ing does have examples of this kind of concentration. A reference to Table 4
in Chapter 23 will show that the top three companies control a
high proportion of productive assets in important segments of the meat
packing, baking, and dairy industries. Also, agricultural marketing and
processing firms have not been immune from suspicion of illegal acts in
restraint of trade. The antitrust dockets have had a Eberal sprinkling of
cases involving meat packers, millers, canners, bakers, milk distributors,
and others. Some have resulted in convictions; some have not.
One does not have to go to the processing giants for evidence of trade
restraining actions. l\Iany of the regulatory laws affecting central markets,
future trading, and so on, which will be discussed in Chapter 22, are
the outgro\vth of practices which were believed not to be conducive to
vigorous competition. There is no real reason to believe that price fixing,
market sharing, following the leader, economic coercion by some members
of an industry of "undesirable clements," and other actions attributed to
industry in general are not practiced at least to some degree by firms
engaged iu marketing agricultural products.

1 F. L. 1110mscn and R. J. Foote, Agricultural Prices (New York, .t>.IcGraw-Hill,

195~), p. 119_
2 C. L. Stigler, The Theor), of Price (New York, .t>.1acmillan, 1947), p. 24'
108 ;\f .\ It K E l' I N G 0 FAG RIC U L T U It ." L P It 0 Due T S

Trade barricrs havc often laid the groundwork for competitive imper-
fection. \Vhether by intent or not, many regulatory actions by states or
local units have the effective result of restricting freedom of entry and the
free flow of goods. In this way some degree of monopoly power is obtained
by the favored firms. City milk ordinances, state grading regulations, and
truck size regulations which vary widely from state to state are merely
examples of these artificial barriers.
Howevcr, probably the greatest amount of competitive imperfection
stems from product differentiation either real or assumed, from various
kinds of serviccs offered with the product, from locational advantages, and
from the power of habit and ignorance. These arc neither illegal nor spec-
tacular, and often arc ignored.
Product differentiation in agricultural marketing has on occasion been
de-emphasized because effective branding of farm products themselves is
very difficult. However, we have seen that farm products are raw materials
for the food marketing machinery. The great majority of our food by the
time it reaches the consumer has been differentiated by brands and pack-
aging. Even meat and fresh fruits and vegetables are not completely
immune. Packers work hard on the public to build acceptance for their
particular brands of ham and bacon. The label "Sunkist" is stamped on
oranges. Canners attempt to make their various labels synonymous with
different kinds of packs and qualities.
Effective differentiation is not limited to products alone. Marketing
concerns make every attempt to separate their particular firms from others
by offering special services, easier credit, and so on. This is done by retailers.
wholesalers, and even commission men.
As we have indicated above, the end product of most differentiation is
to remove the emphasis from price. The purpose of much advertising is to
associate the name of a product or firm with the buying urge and reducc
association with the price. \Ve are urged to buy from a particular store
because the clerks are friendly, because it is sparkling clean, or because it
stays open after 6:00 P.M. \Ve are told to buy bread "X" because it is made
by a company which bakes only "quality goods." How do the prices in
this particular store or of this particular bread compare with other stores
or breads? \Vhat a question! \Ve should trust the store and the baker
always to treat us fairly!
Locational advantage furnishes thc foundation for many departures
from competition. Spatial monopoly need not be regional or nation-wick
to be effective. :i\Iany country buyers of farm products can pay lower prices
because of their location. \'lan1' retail outlets can charge higher prices
because of their location. Some 10cational advantage arises because CllS-
 Competition in Food fo..JarketilIg 10C)

tomers are willing to pay extra for convenience. Other locational advan-
tages arise because of the limited area over which products can be trans-
ported. But some of the competitive power of location arises because of the
lack of nearby competitors. Such firms have limited monopoly power in
exploiting their limited territory. A baker in a very small town or an isloated
livestock buyer in the country may have more effective monopoly power
than a huge baking concern or the agencies in a large central market. One
should not make the mistake of associating power to exploit only with size.
Habit can lead to imperfection in competition. The power of habitual
action can take many forms. For example, at one time the quality of cotton
coming from southeastern :Missouri was quite poor, and this therefore
became a low price area. However, buyers continued to bid low in this
area long after the quality problem had been corrected. Similarly, a section
of Iowa historically was associated with low quality butter and low prices.
After the quality differences disappeared, however, the price structure re-
mained below that paid for similar quality in similar locations.
Habit can also be a factor in establishing the general pricing structure.
The pricing of butter is an example. Originally a large amount of the
nation's butter was marketed through the Chicago and New York ex-
changes. The quotations of these exchanges were widely accepted as cor-
rect indicators upon which to base butter prices throughout the country.
\Vith the passing of time, the marketing structure of butter has changed
and now only a very small amount is sold through these exchanges. Trade
pricing habits have not changed in step, however, and country buyers still
rely heavily on the old quotation patterns.
:i\Iargins taken by various marketing agencies often become habitual.
In time, a given margin receives trade acceptance as being "fair." The "fair"
margin often tends to exist long after the marketing activities and structure
which gave rise to it have changed. It was partly the resistance to changing
margins in line with changed practices which led processors and retail chain
organizations to by-pass the service wholesaler and set up their own whole-
saling agencies (see Chapter 24).
Product differentiation, location. and habit can gain monopoly ad-
\',mtages largely because of the lack of knowledge on the part of buyers
and sellers. \Vith a lack of standardization and poor informational services.
buyers and sellers cannot fully appraise alternative opportunities. It is often
suggested that when alternative opportunities arc available to the buyer
or seller, competition must be effective. TIlis need not be so. Numbers
themselves do not fully prevent collusion or the tacit adoption of a live-and-
let-live policy among rival firms. Neither do numbers assure that buyers
and sellers will have the necessary facts to appraise alternatives adequately.
110 MARKETING OF AGRICULTURAL PRODUCTS

USEFULNESS OF THE
C 0 l\I PET I T I V E 1vl 0 DEL
As one becomes marc familiar with the agricultural marketing ma-
chinery, it is evident that dcpartures from the model of perfect competition
arc the rule rather than the exception. Diagrammatically, the marketing
structure can be represented as in Figure 1. At one extreme is perfect
competition and at the other is perfect monopoly. ·With the possible

Perfect Competition

Monopolistic
and
Imperfect
Competition

1 . Diagrammatic distribu-
tion of conditions under
which agricultural mar-
Perfect Monopoly keting occurs.

exception of government monopolies, extremely little if any business is

transacted under either of these extreme conditions. The individual farm
firm probably lies as close to the perfect competition pole as any. The
great bulk of business activity is carried on between these extremes under
varying degrees of concentration of business with product differentiation
of some type.
How useful, then, are the ideas of how prices are formed and business
operates under perfect competition? Its principal use is as a model Of
measuring stick against which to compare the actual situations. The
analysis of equilibrium prices, the one-price nature of a market area, and
the nature of the relationships between cost and prices are all useful tools
in studying price behavior. By isolating the nature of the departure from
the model, we may be better able to see the cause and to prescribe a COf-
rection if one is really desired.
There is real usefulness, too, in the knowledge that the agricultural
marketing machinery does not operate perfectly. \Vhy are new techniques
not accepted eagerly by marketing firms? \Vhy do consumers not share
 Competition in Food Marlwting 111

rapidly in improvements? \Vhy do tremendous inequalities exist year after

year? Questions such as these find many of their answers in the imperfect
competition which exists. Such knowledge also prevents us from thinking
of the marketing machine as an impersonal affair which will react in a
precisely predictable fashion to given economic forces. It also should pre-
vent us from believing blindly that a "hands-off" policy is always best.
l\Jarketing is carried out by individuals who take economic forces as some-
thing to struggle with and to mold to their advantage and not as some-
thing to obey without question. After all, Adam Smith, one of the fathers
of modern economics, in explaining how each individual struggling to
benefit himself would benefit all of society, had to fall back on his cele-
brated reference to the "guidance of the invisible hand."
It is this imperfectly competitive machinery which is the basic model
of business activity in the United States. It is this machinery which has
been, in the aggregate, so successful in creating the rapid advancements and
high standards of living which we enjoy. Competition exists and is a force
even though it is not perfect. ll1e perfect competition of the textbook is
not a realistic goal for a modem society. However, we must have some
criteria for judging when competition is effective and when situations have
developed which are not desirable. How can we decide when competition
is "adequate" or "effective"? Edwards 3 has evolved the following as guide-
posts for judging an effectively competitive system:
1. There must be an appreciable number of buyers and sellers. They do
not need to be so numerous as to have no individual market influence,
but the number must be great enough to provide alternative possi-
bilities.
2. No trader must be so powerful as to be able to coerce effectively his
rivals.
3. Traders must be responsive to incentives of profits and loss-they must
not be so huge that they can ignore commercial incentives over long
periods of time.
4- There must be no agreements on commercial policy among rivals.
5. Entry must be free from handicap except that which is automatically
created by the existence of already established firms.
6. There must be free access of buyers with sellers. There must be no
substantial preferential treatment of any particular trader or group.
The idea of competition represented by the above criteria accepts the
real life l1ropositions that wide differentiation in products does exist, that
3 C. D. Edwards, [vfaintailling Competition (New York, r.lcGraw-Hill, 1949),

PP·9- 10 •
11: .\[ .\ R K E T I" G 0 FAG HIe U L T U HAL l' ROD U C T S

both price and non-price competition is used, and that large firms will
develop as they exploit the" economies of scale which are the result of
modern technology.
There will be the continuous problem of evolving and maintaining
an effective competitive situation. The conditions which may result in
effective competition for one industry may not give the desired results in
another. How many buyers and sellers are required for an "appreciable num·
ber"? How powerful must the trader be to be able to "coerce effectiyely" his
rivals? \Vhat handicaps are "automatically created" by established firms
and what are not? \Vhat is "substantial" preferential treatment? These are
difficult questions-many would say questions which are impossible to
answer. But such an ostrich, head-in-the-sand attitude will only ignore
some of the most difficult marketing problems.
CHAPTER E I G H T

Agricultural Prices

The preceding two chapters have set forth some of the rudiments of the
price making forces and a general appraisal of the competitive structure
of the marketing machinery. This chapter will briefly outline some of the
characteristics of agricultural prices. This is not a text of agricultural prices,
and the student who wishes to study that field in detail will find several
books completely devoted to the subject. However, some understanding of
the nature of farm product prices is necessary background to the following
chapter on government farm price and marketing policies and programs.
J\Iany of the attitudes of agricultural people toward the rest of the economy
find their origins in the relationship of agricultural prices to nonagricultural
price3. 1\l3ny of our more serious marketing problems are those which stem
from the price aspects.

AGRICULTURAL AND
NONAGRICULTURAL PRICES
One of the outstanding characteristics of the American economy has
been the wide fluctuations in its business health. Periods of depression,
recovery, boom, and recessions in prices and business activity have becn
the historic norm. Long periods of stability in prices and busincss activity
have been rather unusual. As the general price level of the country has
moved up and down, so have agricultural prices.
A study of Figure 1 will show that with each major war the level of
prices has tended to almost double. This sharp increase has been followed
by sharply falling prices. Agricultural prices, too, have been pulled up and
down in thi5 general sweep.
Such :,weeps in prices would not necessarily adversely affect the pros-
perit)· of farmers or :my other group if all clements of the costs and returns
of different industries adjusted themselves quickly to the changing level.
113
 MARKETING OF AGRICULTURAL PRODUCTS

Five-dollar hogs would not be disastrous if taxes and prices of fertilizers,

machinery, and the like also were reduced by comparable amounts. Such
adjustment, however, does not easily or quickly occur. The returns to some
groups of our citizens are more sensitive to the economic ups and downs
than are others.
Since 1915, there have been two periods of sharply rising prices which
were associated with the two world wars. There have been two periods of
sharp price declines. One followed \Vorld \Var I and the other was during

Wf-lOlESAlE PR ICES
% OF 1910-14

200 ~ All commoditi5-:._

100
~l
o
1800 1840 1880 1920 1960
SOURCE, WARREN AND PEARSON, 1798·1889, BLS, 1890 TO DATE
DATA FOR 1953 ARE PREliMINARY

FIG U RE 1. \Vholesale prices in the United States, 1780 to 1953,

showing the wide fluctuations which have occurred
in the wholesale price level. (Courtesy USDA)

the 1930's. Figure 2 shows how agriculture and industry reacted to these
changes. \Vhen these two industries are compared, a major difference be-
comes evident. Agricultural production rose gradually throughout the
period with only very minor short-run changes. Agricultural prices fluctu-
ated violently. Industrial production, too, has tended upward throughout
the period. But it was reduced substantially during the early thirties and
rose sharply during \Vorld War II. \Vhen industrial prices are compared
to agricultural prices, we see that they did not fluctuate as violently. The
difference, then, can be summed up quite briefly. Agriculture reacts by tak·
 Agricultural Prices 115

ing nearly all of the impact in the prices for its product while maintaining
production without much change. Industry attempts to lessen its price
fluctuation by adjusting production.
This difference does not mean that the industrial segment profits
from depressed conditions. Incomes in both agriculture and industry are
a result of both prices and the volume of goods sold at those prices. Sus-
tained output with very low prices in agriculture and reduced output at
sustained prices in industry both result in low incomes and profits. Part

U. S. PRODUCTION AND PRICES

1920 1930 1940 1950 1920 1930 1940 1950

OPRIr:ES RECEIVED ST JI'.I2U'aJ
O'ARII. OUTPUT
t WHOLESALE ""ICES OF UHUUCTURfO pa"""cn

FIG U R E :1.. A comparison of agricultural prices and production

with industrial prices and production showing the
relative stability of agricultural production and the
relative instability of agricultural prices. (Courtesy
USDA.)
of the reason for the difference in taking adjustments becomes evident
when we consider the differences in the competitive and cost structures
of these two sectors of our economy. In manufacturing there are few
enough firms in each industry so that a considerable oligopoly element
exists. Each firm, conscious of the effect of its own production on price,
reduces production as demand declines. Or a producer of a differentiated
product with just a "little monopoly" cannot sen as much of its special
product as before and yet hesitates to reduce price for fear either of re-
116 MARKETING OF AGRICULTURAL PRODUCTS

taliation from other firms or_ of spoiling the customary relationships of the
market. In agriculture the many producing firms have no power over price.
The farm firm also has a large portion of its costs fixed and a smaller portion
which are variable. Under these circumstances, it continues to produce in
order to recover as much of its costs as possible and will not withdraw
from production until after a very long-run period of losses.

FARMERS' PRICES
% OF 1910-14
300r-------4--------r------~------

2001----

% OF PARITY
150 f------I--

100
50 ~~~~~~~~~~~~~~~~~~~~~

1910 1920 1930 1940 1950

.. MONTHLY DAtA.
61HC1UDES INTEREST, "'XES. AND WAGf .A.TES. ANNUAL AV. OArA. r910'''1
SY OUAtrEPS. ,9U.jd. Sf MONrHS, (PJl ro DArr

FIG U R E 3. Prices received by farmers and prices paid by farmers

showing how prices received fluctuate through wider
limits than do prices paid. (Courtesy USDA.)

But the agricultural industry is not an isolated group. It sells its

products to nonagricultural groups and it must buy the things it needs
from these groups. With agricultural output relatively stable, variations in
the gross income to farmers will come largely from changes in the prices
they receive for products. \Vith agricultural production relatively stable,
the volume of things which farmers need to buy for production purposes
also will not fluctuate drastically. Farm production expenses, then, will
be closely related to the prices of things farmers have to buy.
Under these circumstances, the relationship which exists between
prices farmers pay and those they receive is a major factor in determining
their net income. Figure 3 shows the relationship between prices farmers
 Agricultural Prices 117

paid and prices they received. \\Then the level of business activity rises,
the prices farmers receive for their products rise faster than those they pay.
Gross farm income rises more than production expenses and so net income
to farmers also rises. '\Then business activity falls, the prices farmers reo
ceive decline more than the prices they pay. Gross farm income falls more
than production expenses, and net income therefore declines even more
sharply.

INDIVIDUAL COMMODITY PRICES

As we have discussed above, the average level of all farm prices is
primarily determined by the conditions of the total economy. Total agri-
cultural production does not vary much from year to year. Production of
individual commodities varies considerably more from year to year. But
even for individual crops, the activity level of the whole economy, as
measured by the general price level alone, will explain a large share of
their price fluctuation. Fundamentally, then, prices of each individual
commodity tend to move up and down together with the price level.

TABLE 1 . Pattern of Annual Price Variability of Selected Prod·

ucts, United States, 1910-46 *

til
~
r< en ~
OJ ...l
0 0:
::> z -< r<
0
0 -< :;; 0
CHANGE IN 0:
Po
><
0:
z-< ...-<
Z
-<
0
Z
to
~
0
PRICE FROM
PRECEDIXG
~
0: "'
...l '"
...-< ::: Z
s,_. '"~
OJ
u
-< ...
0
'"
-<
::> '-' ,:;
YEAR <
0
0,-,
Po ~
~
~ ~ '"
0
OJ '" ::>
~ Z ...
0 '"
0
u '"
0
p,

PERCEXT XUMBER OF YEARS

+31 and more 3 4 3 3 5 10 11

+:1 to +30 2 4 3 3 6 2. 5 2.
+16 to +20 4 2 1 5 2. 1
+11 to +15 3 4 6 5 4 3 3
+ 6tO+10 4 4 2 4 5 3 2. 3
from ° to±5 15 11 12 6 7 10 10 10 3
- 6to -10 2 3 2. :2 3 2 3
-lItO-IS :1. 3 5 1 2. S 4 1
-16 to -20 2 3 1 4 1
-21 to -30 3 2 4 2 4
-31 and less 2 3 4 2 4 7
Al'erage change
in percent 10.:! l::'.~ 15. 1 18.0 21.0 15.6 18.2 2:?.1 35. 2
~ 'Vith exception of wheat, corn and, potatoes, which are for 1910-45'
SOURCE: T. 'V. Schultz, Production and 'Velfare of Agriculture (New York, tlIac-
millan, 1950), p. 78.
118 ]If ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

vVide fluctuations in farm commodity prices is the rule, not the

exception. Table 1 shows the extent of year-to-year price fluctuations which
have occurred over a long period of time. These data are considerably
different from the data showing the pattern of production which we have
studied previously. The wiele fluctuation in prices shown here again demon-
strates why agriculture is so price-conscious.

Nature of Supply and Demand

For an explanation of much of this wide price fluctuation, we may
turn to the characteristics of the supply-and-demand curves for different
commodities in addition to the character of competition in agriculture to
which we have already referred. vVe have noted that because of the nature
of agricultural production, the supply curve within any given production
period is, for all practical purposes, perfectly inelastic. Even for longer
periods, the supply curve tends to be on the inelastic side.
For crops, the response of production to prices is a very tenuous one.
After all, to a large extent the factors such as \veather, disease, and so on,
which affect yields are largely beyond the control of the farmer. A farmer
may respond to price by changing his acreage, but acreage often is only a
small factor in determining total production changes. The data in Table 2
indicate the complicated way in which the acreage of some crops may
respond and also the limited degree to which acreage is associated with
production. For example, the value (price received per bushel times the
yield) per acre of wheat last year and this year wiII together explain
29 percent of the change in faIl wheat acreage planted this fall. Farmers
do attempt to respond somewhat to recent price experience. However,
because of weather and other factors, the production realized next year is
not related to this acreage. Farmers may plant less acres, but because of
a good year end up with more wheat!
To this we must add the fact that the amount of feed production is a
major factor in determining the level of livestock production. High level
livestock production call come only from high level feed production. Prices
alone do not fatten livestock or produce milk and eggs. A large corn crop
wiII set off a chain of reactions which, either directly or through the ratio
of corn prices to livestock prices, will increase the number of cattle on feed,
the number of sows to be farrowed, and the size of the poultry laying flock. l
On the other side of the picture, agriculture is faced with demands
for its products which are highly inelastic at the farm level. There is con-

1 Sec Kohls and Paarlberg. Short-time Response of Agricultural Production to Price

and Other Factors. Indiana Bulletin 555, 1950, for detailed livestock response relation·
ships.

---
 Agricultural Prices 119

TAB L E 2. Response of Acreage of Selected Crops to Various

Price Factors >';:

PERCENT OF
PRODUCTION
lIiOST 11liPORTANT PERCENT OF ACREAGE ,'ARIATION
FACTORS RELATED VARIATION EXPLAINED EXPLAINED
CROP TO ACREAGE BY FACTORS BY ACREAGE
CHANGE

Spring wheat March price in 23 13 t

planting year
Fall wheat Value per acre 29 4t
same and preceding
year
Corn November-January 8 t 37
prices for 1 an d 2
preceding years
Oats ruly-September 24 t 74
prices for 1 and 2
preceding years
Potatoes December price 2
preceding years; 57 78
August price
preceding year
Cabbage Price preceding 54 72
vear

~ All prices are corrected for the price level.

t These relationships are not statistically significant.
SOURCE: R. L. Kohls and Don Paarlberg, Short-time Response of Agricultural Pro-
duction to Price and OtTter Factors, Indiana Bulletin 555, 1950.

siderable evidence that the consumer demand for food and services at
retail levels may approach unity. (Recall that consumers spend a percentage
of their income for food which is remarkably stable from year to year-
Chapter 3, Figure 1.) The value of the raw commodity at the farm
level is derived from the value of that commodity at the consumer level.
Farm value is substantially consumer value minus the marketing charges.
These marketing charges, it will be recalled, tend to be on a fixed dollar
amount rather than on a percentage basis. Such a situation would result
in demands which are more inelastic as one moves from the retail level
back through the marketing channel to the farm leveJ.2
Even though there is considerable disagreement among researchers
as to the exactly correct figures, there is wide agreement that the demand
curves for a great many farm products tend to be inelastic-some of them
highly so. Only a relatively few products have been found to have elastic
2 For a more complete discussion of derived demands and elasticities see F. L.
Ti,omsen and R. J. Foote, Agricultural Prices, :d ed, (New York, i\fcGraw-Hill, 195:),
eh. ).
120 !-.I ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

demands at the farm level. This means that a 10 percent change in farm
prices will result in substantially less than a 10 percent change in amount
taken. And more importantly it means that a small crop or reduced pro·
duction will bring higher total returns than a large crop or high production.
(See Chapter 6, Figure 6.)
\Vith wide variations in incomes and purchasing power as the economy
moves through its wide swings, the demand curve for agricultural products
shifts sharply. \Vith production dependent on factors beyond man's con-
trol, supply of individual commodities also will shift from year to year.
\Vith the inelastic nature of the two curves, such shifts will give wide
variations in farm prices. (See Chapter 6, Figure 8.)

Cyclical Price Fluctuations

Certain farm prices fluctuate m rather regular patterns through a
period of time in addition to fluctuating erratically from year to year.
Livestock production and prices, especially, have more or less regular
cycles in production and prices. That is, they tend to move up and down
over a period of years regardless of outside factors. The price cycle runs
opposite to the production cycle-when production is increasing, prices are
decreasing. After a time these movements will reverse themselves and pro-
duction will decline as prices rise. Figure 4 illustrates these cyclic move-
ments in cattle and hogs over the past several years.
In general, these cycles can be explained by the tendency of producers
to base tomorrow's production plans on the profits of current or recently
past operations. The length of the cycle is dictated, however, largely by the
biological nature of the commodity.
For example, let us suppose that hog production is relatively low and
hog prices high. People ;n the hog business look at their favorable earnings
of the past year and decide to expand their hog enterprise. Others who
previously had left the business decide to re-enter. But to expand hog
production means that more gilts must be withheld from market and bred.
Time must elapse before pigs can be born, fattened, and sent to the market.
All in all, some two to three years will elapse before the full, intended
expansion may result in additional hog supplies on the market. By that
time increasing supplies will be driving prices down. Producers will be
appraising the situation as unprofitable and decide to raise fewer hogs.
The faint of heart may liquidate their hog enterprises altogether. The
cycle will then reverse itself; production will decline and prices will increase.
Such cycles are possible only in those commodities in which pro-
ducers have considerable control over production. There arc no well-
defined price production cycles in most crops. The wheat grower referred
 AgriGultural Prices 121

to earlier has only partial control over his wheat crop, and therefore cannot
respond with regularity to price encouragement. The cattle cycle has
averaged about fifteen years in length (from peak to peak or from trough
to trough), with individual cycles varying from twelve to twenty years.
Since the middle twenties there appears also to be a cycle in dairy cow

Million Head. Dollars per

Januar 1 Hundredweight
CATTLE
70
(excluding Milk cows)

60 9

50 7

40 5

30 14 3

1910 1920 1930 1940 1950

Million Head Dollars per
Slaughtered Hundredweight

HOGS 9
100
8
80
7

5
40
7--:l 4

1920 1930 1940 1950

FIG U R E -f. Cyclic moyements in cattle and hog numbers dnd
prices showing the length of the number cycles.
(Prices have becn corrected by the index of priccs
Tcceiyed by farmers.)
122 MARKETING OF AGRICULTURAL PRODUCTS

numbers and prices which move with the total cattle cycle. The hog cycle
has averaged about five to seven years in length. Some writers also list a
poultry cycle of two to three years.
A study of Figure 4 and Table 3 will show that cycles are not highly
regular either in amount or length of their fluctuations. Extraordinary con-
ditions such as a sharp reduction in feed supplies because of droughts may
extend a contraction or stifle an expansion in numbers which may have
been undemay. Sharply expanding demand during wars may prolong an
expansion or cut short a contraction phase of a cycle which is undenvay.
At best, cycles are important "tendencies." Turning points are evident in
many cases only after they have been reached and passed. Such limitations,
however, do not prevent them from being useful tools for the market
analyst.

TAB L E 3. Regularity of C)'clic Movements in Cattle and Hog

Numbers, United States

CATTLE HOGS

YEARS IN YEARS IN YEARS IN YEARS IN

YEAR YEAR DOWN PREVIOUS YEAR YEAR DOWN PREVIOUS
OF OF ]\IOVE- UP ~lOVE' OF OF UOVE· UP 1\[OVE·
PEAK LOW ~IENT ~IENT PEAK LOW ~1ENT ]lIE:-'-T

18 90 18 96 6 19 00 19 02 2
19 04 19 1Z 8 8 19 08 19 10 2 6
19 18 19:. 8 10 6 19 12 19 14 2 2
1934 193 8 -4 6 19 16 19 17 ::
1945 194 8 4 7 19 19 19 21 2 ::
19 23 19 26 3 2-
19 28 1931 3 ::
1933 1935 :: ::
194 0 1941 r
-'
1944 1945 3
194 6 194 8 2

Seasonal Price Fluctuations

Seasonal fluctuations are more or less regular patterns of price fluctua-
tions which occur within a year. Because of the dependence of agricultural
production upon climate, there are definite periods of high and low pro-
duction for different commodities. Corn must be planted in the spring and
is ready for harvest in October and November. Chicks purchased in the
spring will start laying late in the year and reach their peak production
the following spring. Pigs are farrowed in the spring and fall and are ready
for slaughter about six months later. As we would expect, the counterpart
of these shifts in suppl~' is an opposite pattern of prices, as demand for
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 MARKETING OF AGRICULTURAL PRODUCTS

most food is relatively constant year around. Table 4 gives the long-time
average seasonal pattern of prices for selected commodities. Most students
will want to substitute the seasonal patterns for the commodities in which
they are particularly interested and which apply to their particular area.
However, patterns for different areas will usually differ only in degree.
Seasonal prices reach their low points during harvest or peak produc-
tion periods. TI1en they will begin a slow rise until just before the next
peak production period. For example, the low period for wheat is in July,
for corn in November, and for cotton in October. TI1e peak period for
wheat prices is reached during IvIarch and April, for corn during August,
and for cotton during July. Hog prices have two periods of high and low
prices during the year corresponding to the two-litter farrowing system.
The amount of seasonal price fluctuation is the combined result of
the violence of the seasonal production plus the storability of the com-
modity. Reference again to Table 4 will help illustrate this. Certainly the
production pattern of grains is a violent one. An the wheat is harvested
within a period of a few summer months. The peak harvest time of snap
beans and tomatoes also occurs during a brief period of late summer.
However, wheat prices fluctuate only about 10 percent from low to high
while snap bean prices are three times as high during the peak price period
as in the low period. The principal reason for this difference is that wheat
is storable while snap beans are not. Theoretically, the perfect seasonal
variation will just cover the cost of storage if the product is storable.
Like cyclic patterns, seasonal patterns are not 100 percent accurate.
The average pattern is just an average of many observations. The average
represents the pattern most likely to occur if history repeats itself. Too,
all seasonals are not of equal reliability. Neither are all months of the
seasonal price pattern of equal reliability. Generally, the average can be
relied upon to point up correctly the direction of price movement but not
the amount. Seasonal patterns may also change over the years. New pro-
duction patterns or improved storage techniques would affect changes.
For example, as better Fork production methods have shortened the time
necessary to produce a market hog, the peak in the seasonal price pattern
has changed. It once was in October and now in many states it occurs in
August. Knowledge of these patterns, even with their limitations, is among
the most useful of marketing facts available to farmers. Every worker in
agricultural marketing should be thoroughly familiar with them. However,
he should also use them in relation with other pertinent facts which may
be known about the current supply-and-demand picture.
CHAPTER NINE

Governmental Price and

Marketing Programs

In this chapter we want to discuss briefly the highlights of the various

governmental programs which have been proposed or adopted to affect
directly the price and marketing structure for farm products. Government
also affects marketing through many other regulatory laws and programs,
but we shall discuss those in a later chapter. Here we will limit our dis-
cussion to those developments since World War I which have aimed
directly at protecting the price position of agriculture. In limiting our
attention to this comparatively recent period, however, we must realize
that agitation to aid agriculture is as old as the industry itself. Many of
the devices considered as new developments have been tried in various
forms throughout history.

BACKGROUND FOR AID

Throughout the last several chapters several points have been devel-
oped which seemed to farmers, at least, to be pertinent to their situation.
\Ve are now in a position to summarize some of these background factors
which are so important in explaining attitudes and which ultimately de-
termine legislative policy.
1. Farmers are very price-conscious. 'Vith relative stability in production
and the relative lack of control over it, both gross and net incomes
have been associated with the level of prices. High and rising prices
mean farm prosperity. Low and falling prices mean farm depression.
To a large segment of agriculture it is as simple as that.
z. Farmers increasingly believe they are the tail of the economic dog.
They cannot divorce themselves from the rest of the economy, and
12 5
126 MARKETING OF AGRICULTURAL PRODUCTS

they receive the most severe jolts as the price and business levels zoom
up and down over the years. Prices they receive are much more sensitive
than those they pay. Depressions of the whole economy appear to have
accounted for a much greater amount of agricultural failure than either
poor husbandry or management. Vlith increasing industrialization and
urbanization, agriculture finds itself less and less self-sufficient and more
and more closely tied to the general economy.
3. Prices of individual commodities are extremely unstable. \Vide fluctua-
tions both within the year and from year to year are the normal pattern.
And since many farnlers produce only one major product, such as wheat,
cotton, tobacco, cattle, and so on, what these individual prices do is
a matter of great concern. \X/ith the inelastic demands for many com-
modities, shifts in supply have resulted in wide sweeps in prices. And
what is more, high levels of production have often been associated
with low total returns from sales. The logical question then arises
as to whether controlled production will net greater income than full,
uncontro1led production.
4. The individual farm is a small competitive unit operating in a general
structure of larger units with varying degrees of market control. Full pro-
duction to the individual farmer is logical since, being so small, he can
sell all of his output at the same price. He, acting alone, has no eco-
nomic power to affect prices. In contrast, the farmer has always be-
lieved that the marketing machinery does have some degree of control
over prices and takes advantage of him. He looks upon the large share
of the consumer's doBar taken by marketing agencies as evidence of
this. How to meet "power with power" in the market place has become
a major issue.

AGITATIONS OF THE 1920'S

\Vithin two and a half years after \Vorld \Var I, prices farmers re-
ceived had fallen 52 percent from their postwar peaks. Prices paid by
farmers had declined only 18 percent. Net farm income in 1921 was only
39 percent of its 1919 peak. Though prices received recovered somewhat,
the relationship between prices received and prices paid remained about
15 percent below the prewar relationship throughout the 1920'S.
The cry for agricultural relief arose out of this difficult price and
income situation. Several bills which were poured into the legislative
hoppers by farm-sensitive Congressmen aimed at relieving the situation.
However, the one principal plan which was debated throughout the decade
of the twenties was based upon separating the domestic and foreign
markets. Domestic prices were to be pegged at a "fair" level. All that could
 Governmental Price and Nlarketing Programs 127

not be sold domestically at that level were to be purchased by the govern-

ment. This excess amount would then be sold on the world market for
what it would bring. High tariffs were to protect the domestic markets
from foreign imports. The government loss between the domestic support
prices and the world prices was to be shared equally through various
methods among agricultural producers. The net price to farmers would
then be the domestic support prices minus the losses suffered in the world
market. This basic idea was introduced into Congress as the McNary-
Haugen Bil1. The bill passed both houses of Congress both in 1927 and
1928 but was vetoed both times by President Coolidge.
Though the McNary-Haugen plans never became law, they merit
attention because they represented the opening guns of the battle to
guarantee a "fair" price for agriculture. They also laid the groundwork for
the concept of splitting markets which later was to be worked out domes-
tically within the framework of marketing orders. In order to see how such
a program was supposed to benefit agriculture we must fall back upon our
demand curve analysis. The assumption was that domestic demand was
inelastic while the world demand was elastic or at least less inelastic than
domestic demand. By restricting amounts and raising prices, the total
returns from the domestic market could be maximized. If the world
market demand for U. S. farm products were more elastic, selling more
there would increase the total returns. Because the domestic price level
would be substantially above the world price level, the total dollars for
the wheat crop would be increased. This idea is not dead. In the early
1950'S proposals along this line were seriously made again.
In 1929, with the passage of the Agricultural Marketing Act, emphasis
changed from the two-price approach of the McNary-Haugen plans to
one of "orderly marketing." The basic philosophy of this law was that
agricultural problems were due to the disorganized methods of distri-
bution. If products could be stored by farmers and released in an orderly
fashion throughout the year, higher price and income levels could be
secured. As a means of obtaining this goal, farm cooperatives were to be
vigorously encouraged.
The Federal Farm Board was established to put the program into
effect. TIle Federal Farm Board was given an initial appropriation of 500
million dollars to undertake loan-storage programs to stabilize farm prices.
However, the newly established Board was just taking its first tottering
steps whcn the depression struck. By 1933, it had spent all of its funds,
acquired large stocks of commodities, and prices still had fallen drastically.
The Board died when Congress did not grant it additional funds.
12.8 MARKETING OF A.GRICULTURAL PRODUCTS

THE DEPRESSION DEVELOPMENTS

Starting in 1930, prices began to slide again. By early 1933, prices
received by farmers were 62. percent below 192.9. Prices paid, again lagging
behind, were only 32. percent lower. Net farm income in 1932. was 70
percent below 192.9. And this decline was taken by an agriculture which
had not been considered particularly prosperous anyway. For those whose
memories are only of the recent price levels, a look at the depression prices
of several commodities will help in gauging the seriousness of the situation.
The United States average farm prices for several commodities in 1932
were as follows:

Corn $ ·32
Oats .16
\Vheat .3 8
Cotton .07
1ililk 1.28
Hogs 3·34
Cattle +25
Though we are here concerned with agricultural developments, we
must not overlook that the whole country was on its economic knees.
Businesses failed; banks shut their doors; one out of every four workers
was without a job. The agricultural program which developed was only a
part of a broad program which included social security and unemployment
insurance for workers, special legislation for banks, and the National Indus-
trial Recovery Act for other businesses. The latter, NRA as it was widely
known, was designed to control "bad" competition and foster "good"
competition. The bad competitor was in reality one who competed on the
basis of prices. The good competitor was one who largely restricted his
efforts for securing more business to the more gentlemanly non price
techniques. NRA encouraged industries to join together and formulate
"fair" trade codes and to take cooperative action to police their trade
against "unfair" competition. After a short life NRA was declared uncon-
stitutional but the issues it raised left its mark both on the marketing
structure and the men who operate it.!
The legislative development of the 1930'S signaled a change in the
basic approach to the problems of a depressed agriculture. During the
192.0'S the two-price system was offered as a device by which our agricultural
production could have a protected domestic market and yet secure what
1 See A. J. Eddy, The New Competition (Chicago, A. C. McClurg, 1915), and
O. F. Rost, Distribution Today (New York, Whittlesey House, 1933), for interesting
contemporary writing in this arca.

-----------,---~--
 Governmental Price and fvIarheting Programs 129
it could get from the world market. The Federal Farm Board proposed to
solve the problem by helping farmers to level out the peaks and valleys of
their marketings and thereby stabilize the prices of agricultural products.
The basic approach which was now to be followed was to reduce produc-
tion. In this manner, demand and supply were to be brought into balance
at prices which were "fair" to farmers. Though many camouflaging terms
were used, the basic concept of curtailing production prevailed.
The pressure for all-out production during \Vorld War II halted the
desire to restrict output. Agriculture during this war period experiencerl
unprecedented prosperity. However, with the growing agricultural prob-
lems in the postwar period, the old question again came to the fore. And
this question simply stated is: ':ViII consumers absorb the fun productive
capacity of the agricultural plant at prices which wi11 give agriculture a
reasonable degree of prosperity? It is to the definition of the fair price and
the mechanics for securing it that we now give our attention.

Development of Parity
The Agricultural Adjustment Act of 1933, established the criterion
for a fair price for agriculture. Parity, or fair price, was that price which
would give agricultural commodities the equivalent purchasing power over
articles which farmers bought that they had in the base period. The base
period for the great majority of products was established as the five-year
period from August, 1909, to July, 1914-
To find the parity ratio for agriculture as a whole was then a simple
process as fo11ows:'~
Current index of prices received (1910-14 base) p"
C urrent III
'dex 0 fpnces
' pal'd (1910-14 base) X 100 = anty rabo.

Obviously, the parity ratio for 1910-1914 would be 100. \Vhenever prices
receivcd by farmers did not rise as much-or fell more-than prices paid,
the ratio would fall. Conversely, when prices received rose more-or fell
less-than prices paid, the ratio would rise.
The parity price for an individual commodity also could be calculated
as follows:
Average price current
recei\'ed for index of
X
the commodity prices
during 1910-14 paid
--=---'----=--=---- = Current parity price.
100

'Vhen the actual current price was below the price obtained from the
above calculation, the commodity was below parity. The market price was
 MARKETING OF AGRICULTURAL PRODUCTS

not one which would give the commodity the same purchasing power as it
had in 1910-1914.
As time passed, it became obvious that such a formula had a great
shortcoming. There was no provision for taking into account any changes
which had taken place since 1910-1914 in either the demand or the supply
of the commodity. For example, the parity or fair price of horses in 1953
under the above formula would still be the price which would be com-
parable to the purchasing power which horse prices represented in 1910-
1914. But with modern mechanized farming and the reduced demand for
horses this was a ridiculous goal for a fair price. The example is an extreme
one, but it shows the problem of handling change when only a fixed period
in the past is used.
In 1948 the parity formula for individual commodities was changed.
Though the desired purchasing pO\ver was still tied to the 1910-1914 base,
the base period for prices of a commodity was to be calculated for the
most recent ten years. Therefore, the formula for calculating the current
parity price of a commodity would be as follows:

Average price of
commodity, most
recent 10 years Current index ..
-o----:---,-d--f~- X f ' 'd = Current panty pnce.
Average in ex 0 0 pnces pal
all prices received,
most recent 10 years

A little experimentation with the above formula will demonstrate how

changes which have occurred in the supply-demand pattern of a commodity
are incorporated into the parity price. For the parity ratio for all agricultural
prices, calculations remain unchanged, since 1910-1914 is still the bench
mark for over-all purchasing power.

Support Programs
Here then is a formulized method for arriving at the "fair" price.
But merely doing the calculations does not make the price on the market
equal parity!
The Commodity Credit Corporation (CCC) was set up in 1933 to
take over the activities of the old Farm Board in supporting prices. Two
broad programs have been undertaken by the CCC to support prices. In the
case of most storables, the nonrecourse loan was used. Under this system,
the farmer "seals" his commodity in acceptable storage. He then obtains
a loan reRecting the amount of the support price. If the market price rises
above the loan rate, the farmer may sell and repay the loan. If the market

_-
 Governmental Price and Marketing Programs 131

price never reaches the loan rate, the farmer delivers the commodity to
the government and thereby fulfills his obligations. This has been the basic
program used to support prices for most grains, tobacco, and cotton.
The other major program has been one of direct market purchase.
In this case, the government buys directly from processors and handlers
at prices reflecting the desired levels of support prices. The CCC then
attempts to dispose of these commodities through other "noncompeting"
outlets. If they cannot be disposed of, it either stores them if possible
or, as a last resort, destroys them. This program has been used for a wide
variety of products such as eggs, turkeys, butter, and beef.
Until 1937, the levels of support were at the discretion of the admin-
istration. In 1938, support levels as definite percentages of parity for a few
products were written into law. After our entry into \Vorld \Var II, the
Steagall Amendments set the support level at 90 percent of parity for a
wide range of products. One might say that the "90 percent," which later
was to become so controversial, was a war baby!
The level of support-not the parity idea-has become the contro-
versial issue. In 1948, Congress passed a new law which provided for
flexible support levels instead of the fixed 90 percent. Under its provisions,
the support level was on a sliding scale which varied inversely with the
production of a commodity. If the production was below the average of
a recent period of years, the support price would be at a higher percent of
parity. If the production was above this average, the support level would
be at a lower percent of parity. A fixed high level of support ignored the
fact that it would take lower prices to move a large supply into consump-
tion. It also ignored whatever effect prices might have on guiding future
production. The flexible provisions were an attempt to provide support
and yet recognize the economic jobs that fluctuating prices are presumed
to perform.
The law of 1948 never was al10wed to become effective, as it was
superseded by a new law passed in 1949. In the Agricultural Act of 1949,
the "basic commodities"-corn, cotton, wheat, tobacco, rice, and peanuts-
were to be mandatorily supported at a fixed 90 percent of either parity
formula, which ever was higher. This was to be in effect for a limited
period of time after which the revised parity formula and the flexible
support provisions were to become effective. A few other commodities
were to be mandatorily supported at flexible levels ranging from 75 to 90
percent of parity. The great bulk of perishables and nonbasic storables were
left without any definite support provisions. The Secretary of Agriculture
!Could support these latter commodities at his discretion and in light of
funds available to him. Succeeding amendments, however, have extended
 MARKETING OF AGRICULTURAL PRODUCTS

the 90 percent support provisions, and the flexible support provisions for
basic commodities did not become effective.
In each of the laws, provision was made for compulsory production
controls when production exceeded a predetermined level. The controls
were of two levels in severity. In instances of moderate overproduction,
farmers would receive an acreage allotment which would reduce the acres
planted. Compliance with these allotments would be voluntary, but only
those farmers who did comply would be eligible for price support loans.
In years of severe oversupply, however, marketing quotas would be used.
Under marketing quotas, the extent of necessary reduction would be an-
nounced and a referendum of affected farmers held. If a majority of the
farmers voted in favor of the scheduled restriction, compliance with its
provisions would be compulsory for all farmers. Penalties then could be
inflicted on those farmers who did not comply. If a majority did not favor
the restriction, it would not go into effect and the support prices would
be sharply dropped to lower levels.

Surplus Disposal Programs

Congress has spelled out the methods and prices at which the CCC
can dispose of its stocks which have been accumulated from the loan and
purchase programs. If market prices exceed the support levels plus CCC
cost, the CCC can sell its holdings in the normal marketing channel. If
market prices never reach this level, it can move its holdings into other
"noncompeting" outlets.
Surpluses have been available for use in foreign aid and relief pro-
grams. The School Lunch Program provided that stocks purchased in price
support operations could be used for distribution to schools for supplying
100v cost lunches to the children. For a time the Food Stamp Program
attempted to move surplus commodities by increasing the consumption
of low income families. Under the Food Stamp Plan, stamps were issued
free to poor families to "spend" in addition to their regular food expendi-
tures. These stamps were usable as money for purchasing designated com-
modities which were in surplus supply. Under such an arrangement these
families could then consume these additional commodities at no addi-
tional cost over their usual food expenditures.
As an outlet of last resort, some food perishables have been offered
at very low prices for use as livestock feed. And in some unfortunate and
highly publicized instances, commodities have been either lost through
spoilage or destroyed.
 Governmelltal Price alld Marketillg Programs 133

Marketillg Orders alld Agreemellts

The legislation of the 1930's also permitted fanners and processors
to organize and establish marketing orders and agreements for exercising
control over the marketing of commodities and be exempt from antitrust
prosecution. This was an effort to answer the problem of how to establish
power of agricultural producers to offset the market power, real or
assumed, of handlers and processors. Such agreements and orders have
found wide use in the marketing of fluid milk and commercial fruits and
vegetables. A detailed discussion of the extent and operation of fluid milk
marketing orders will be found in Chapter 16. Here we shall observe
what this approach attempts to do by inspecting its development in fruits
and vegetables.
In general, the marketing order for fruits and vegetables set up the
machinery for the control of production and how it is to be marketed.
An estimate is made of how much the various consumers will take at the
price considered to be fair. An attempt is then made to limit the amount
offered for sale to this estimate. In many cases, only a given percentage
of the crop will be harvested for market. In addition to the total volume
control, the proportions of the total which will go into various geographic
regions or into various uses, such as for canners or for fresh consumption,
are controlled. The quality to be marketed also can be regulated. Penalties
are provided to force compliance of the order's provisions by growers and
handlers.
The vValnut Marketing Agreement is one of the oldest and more
successful marketing control programs, having been in continuous opera-
tion since 1933. The following explanation of its operation will illustrate
how such programs are administered: 2
The program is administered by a Control Board representing both growers
and handlers. Funds to cO\u the expenses of the Control Board are acquired by
assessing each handler onc-tenth of a cent for each pound of walnuts handled.
This board is the agency of the Secretary of Agriculture in administering the
order. It prescribes pack specifications including minimum standards of quality
and no handler is permitted to handle any walnuts except those certified as
merchantable by the Board.
The Board prior to the beginning of each marketing year estimates both
the total potential supply and the total trade demand. In line with these esti-
m::tilcS the Secretary of Agriculture then establishes the salable and surplus per-
centage~ of merchantable walnuts which he believes will result in the greatest
total returns to growers. The salable percentage represents the quantity that can

2 Extracted from H. C. Kiger, California YValnut Growers' Association, Farm Credit

Administration, USDA Circular C-146, l'vJay, 1952, pp. 21-24.
 ]\1 ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

bc legally sold on thc domestic:; in-shcll markct. Thc surplus percentagc is eithcr
shellcd or exported. Grmvcrs normally gct a grcatcr rcturn from walnuts sold
in-shell than from thosc sold in thc shcllcd markct. Thc perccntage of diversion
from the domestic in-shell markct has ranged from 9 to over 30 percent of the
total crop over the years.
Such allocation increases total returns, since shellcd walnuts arc a year-
round itcm and customers do not shift from in-shell to shellcd purchascs
because of small price changes. Also percentage changcs in supplies in the two
markets do not cause cqual percentage changcs in their prices. T1le control pro-
gram does not materially affect the total supplies of walnuts available to con-
sumers, but it docs control the form in which they are sold in order to get
maximum returns for growers. \Vithout these allocations, prices of walnuts of
comparable quality in the two outlets would tend to be the same; however, the
program controls thc supply going into each outlet which results in a two-price
market.
Under such unified action, producers-cooperatively organized for
order participation-may have the pmver to affect the price they receive.
They now have the prerequisite control over production for securing
monopoly returns. Ivluch of the justification of such control rests upon
the assumption that there is not one demand curve of a given elasticity
for the commodity, but several curves of different elasticities. There may
be different curves for different cities, different qualities, different uses, and
different times of the year. By controlling the amounts offered each outlet,
different prices may be established which will maximize the total returns
trom all. Generally it is the two-price system of foreign and domestic
markets proposed in the twenties applied at home and carried to much
greater refincments.
Basically, the technique involved here is one of price discrimination.
\Vithin the framework of whatever other goals the discriminator may
have in mind, profit maximization will be striven for by following two
lines of action. First, the general market must be divided into two or more
submarkets. 111is subdivision must be made in such a manner that sales
at a low price in one market will not attract buyers away from the other
higher priced market or result in resales out of the low price market
into the higher priced market by other groups seeking to take advantage
of the several price situations. 111is is quite possible whenever one of the
markets is a domestic market protected by tariffs, quotas, or transportation
cost barriers which prevent re-entry of the exported portion. It is also
possible whenever the product itself is so differentiated in the several
markets that consumers actually consider it as two different products. Such
evidently is the case in the above illustration of the markets for in-shell
and shelled walnuts. Such also is the case in the techniques of pricing milk
according to its use which will be discussed later.
 Governmental Price and IvIarketing Programs 135
Secondly, the different elasticities of demands in each market must
be considered in adjusting prices in order to maximize profits. If demand
is relatively inelastic in one market, limited quantities will be withdrawn,
bringing about a proportionately higher price and therefore a greater total
dollar return. These amounts taken from the market of inelastic demand
will be added to the offerings in the market of more elastic demand without
much reduction in the price so that total dollar returns will be increased.
This substitution between markets will be carried to the point where the
addition to net revenue (after costs have been met) obtained from selling
one more unit will be the same in each submarket. Here net returns or
profits will be maximized and any further shifting of products from one
submarket to the other will only result in profit reduction. Of course, such
exact adjustments for maximum profit can rarely be achieved with the
imperfect knowledge and limitations of the real market. But some advan-
tage can be acquired whenever such discriminative monopolistic practices
can be employed.

Price Controls
Practically all agricultural legislation has dealt with how to raise prices.
During war periods, however, the problem has been how to keep prices
from rising too fast or too high. The Office of Price Administration (OPA)
during 'VorId 'Var II and the Office of Price Stabilization (OPS) during
the Korean vVar are the two most recent direct attempts to control rising
prices.
In initiating a control program, prices are "frozen" as of a given date
by government order. From these freeze points, adjustments up or down
are made as needed. The enforcement technique is simply to make it illegal
to charge above the legal levels. The simplicity of the technique, however,
belies the simplicity of the job. Effective price control is immeasurably
complex. Agricultural products have presented real headaches in efforts
to control them. vVith wide annual and seasonal variation in production,
differences in quality, and numerous and small producers, price ceilings
always seemed to be out of adjustment at some place or time. To secure
their operation, a rationing and subsidy system had to be devised. A con-
tinuing flow of orders from the central control agency was necessary to
allocate available supplies among those who needed them. Though break-
downs and confusion occurred, price control will probably remain a much
Llsed technique in times of inflationary duress.
1)6 1\1 ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

EFFECT OF PROGRAMS
ON MARKETING
'\Thether or not such programs as the above are socially desirable is
not of particular concern here. Neither need the consideration of such
program details such as fixed versus flexible supports receive our attention
as such. VVe are interested in the impact of these various programs on the
marketing of farm products. And they do have important effects. These
we will attempt to summarize briefly.

Efficiency of the Pricing Mechanism

If we accept the model of working competition as resulting in an
efficient pricing mechanism, then any departures from this ideal will give
us something less desirable. Government programs which attempt to limit
price fluctuations through floors and ceilings make the threefold direction
job of prices more difficult. Price floors maintained above the market level
of prices will move commodities into government ownership instead of into
consumption. The government will become the most profitable outlet.
Price ceilings below market price levels will make some sort of ration and
subsidy system necessary in order to allocate available supplies in some fair
fashion among those who need them.
:Many of the price programs are undertaken to offset shortcomings
or undesirable features of the unregulated price mechanism. :Most of the
so-called orderly marketing schemes, including storage programs, aim at
eliminating some of the drastic short-run supply changes which cause
violent fluctuations in prices. l\/larketing agreements fundamentally attempt
to equalize market power in markets which were not completely competi-
tive in the first place. It is wrong to evaluate all government price programs
simply against the assumption that the previously existing situation was
one of perfectly functioning competitive markets. Our discussion in the
last two chapters demonstrated that this assumption is not always valid.
However, neither can a government program be assumed to be the best
alternative for correcting the situation. Probably the only safe way is to
evaluate each proposal on its own merits.

Efficiency of the Marheting Machinery

Many of these programs result in a change in the operation of the
marketing processes. The government loan programs encourage farmers
to store much of a crop that normally would have moved forward for
holding at terminal markets. The availability of the loan means that an
entirely new factor must be considered in the farmer's decision as to
 Governmental Price and Marketing Programs 137

building additional farm storage. Previously he had to balance the proba-

bility of seasonal gains against costs. Now he must consider how much
he will lose if he does not have the storage which would permit him to
participate in the loan programs.
The use of a price ceiling and ration program often disturbs the
normal marketing channel. An example of this was the meat situation
when effective ceilings were in force. Large packers normally processed
and moved a major portion of the supply. However, because of their size
and prominence they had to follow price regulations very closely. Many
small concerns, however, found it much easier to violate the regulations
without penalty. Under such black market conditions, the marketing
channel definitely was changed. Large packers found themselves outbid
in the livestock markets by other interests who were selling at more ad-
vantageous prices. Large packers found themselves without a lawful source
of meat. Some of the retail food chains acquired their own packing houses
during this period in order to assure themselves of regular supplies.
This example of market channel disruption could be multiplied many
times.
All programs need not necessarily adversely affect marketing agencies
and the consuming public. Too often programs which attempt to regulate
agricultural production or to support farm prices have been assumed to
raise automatically the price of food at the consumer level. This need
not be so.
vVe have seen that the farmer over the years has received less than half
of the consumer's food dollar. The remainder has gone to pay the various
costs of processing and marketing the finished product. ':Ve have also seen
that a basic cause for much of this marketing cost is due to the nature
of both agricultural production and the product itself. High risk costs,
high spoilage losses, and high storage and financing costs are due to some
extent to the widely fluctuating nature of agricultural production. Support
programs which may tend to limit price fluctuations for the producer will
also reduce them for processors and handlers. Violent production fluctua-
tions of such products as fruits and vegetables may be reduced. Such de-
velopments could result in less risk from fluctuating prices as wen as from
excessive spoilage which might occur in a feast-and-famine situation.
Market movement and storage operations might be undertaken in a more
orderly manner. Some of the speculative operations might be reduced.
In such instances as these, marketing charges might be reduced.
Many of the programs have stimulated more research and an improve-
n~;'::1t in the informational data available to an industry. After all, if a
marketing order is attempting to capitalize on different demand curves,
138 MARKETING OF AGRICULTURAL PRODUCTS

one must have the necessary-data to analyze the situation and estimate the
curves.
Again, little generalization can be made as to the effects of these
various programs on marketing. Cost reducing as well as cost increasing
effects are possible. Again the effects must be analyzed commodity by
commodity, program by program.

SELECTED REFERENCES
Black, J.D., and :tvI. E. Kiefer, Future Food and Agricultural Policy (New
York, ~IcGfa\v-Hill, 1948).
Gray, R. \V., V. L. Sorenson, and \Y. \V. Cochrane, Price Supports and the
Potato Industry, Minnesota Station Bulletin "p+ 1954-
HaIerow, H. G., Agricultural Policy of the United States (New York, Prentice-
Hall,1953)'
Hedlund, F. F., "The Impact of Marketing Agreements Upon the Marketing of
Fruits and Vegetables," Journal of Farm Economics, November Proceedings,
1951.
Hotchkiss, G. B., Milestones of Marketing (New York, Macmillan, 1938),
Chap. 15.
Jesness, O. B., ed., Readings on Agricultural Policy (Philadelphia, Blakiston,
1949) .
Larson, A. L., Agricultural Marketing (New York, Prentice-Hall, 1951),
Chap. 19.
Naden, K. D., "Price Policy of the Challenge Cream and Butter Association"
(2 parts), Journal of Il'1arketing, April, 1948, and January, 19-1-9.
Nichols, \V. H., Imperfect Competition \Vithin Agricultural Industries (Ames,
Iowa State College Press, 19.f1).
Oxenfeldt, H. R., Industrial Pricing and Marketing Practices (New York,
Prentice-Hall, 1951).
Price Policy Award Papers, Journal of Farm Economics, November, 1945.
Saloutos, T., and J. D. Hicks, Agricultural Discontent in the Middle \Vest,
19°0-1939 (Madison, University of \Yisconsin Press, 1951).
Shepherd, C. S., Agricultural Price and Income Policy, Vd ed. (Ames, Iowa
State College Press, 1951).
Stocking, C. VI., and M. \Vatkins, Monopoly and Free Enterprise (New York,
Twentieth Century Fl'nd, 1951).
Study of },lonopoly Power, Committee on the Judiciary, House of Representa-
tives, 81st Congress, 1949.
\Vaite, \V. C., and H. C. Trelogan, Agricultural Market Prices, 2nd ed. (New
York, \Viley, 1951).
CHAPTER TEN

Standardization and Grading

Standards are yardsticks of measurementi In agricultural marketing~__

tYE~s __9f_standards are of major concem"':'the standards for, weights' and
measures anCl-fh-ose'1or- quality. Grading refers to the sorting of products
into the variou~~ categories (referred to as grades) which are established by
the standards for quality. For example, standards have been established
for the various qualities of grain. In grading grain, it is sorted into the
various grades which have been set up.
In a complex marketing machinery, the possibilities of waste, con-
fusion., and dOWIlright chicanery are great. Keeping such practices to a
minimum is one Qi._ the purposes oLano a_9l'!_quate-and workable ,system_ of
standan:1s ~d grades. As one author phrased it, standardization fllmishes
the ethical basls-for-'
making,~!0_IlSaction. \Vithout such a system, the
rule "caveat emptor" ("let the buyer beware") must prevail along with
all of its confusion and unfairness. l

'-' I Iv1 P 0 R TAN CEO F S TAN DAR D I Z A T ION

\Veights, Measures, and Containers
The standardization of weights and measures has been so well accepted
by the civi]ized countries of the world tllat it seldom receives any attention.
However, without such standards, modern marketing would be next to
impossible. \Vhether the___English or the metric syster::r!_is ,us~_cL _t~_~~its
of length, area, \:olume, and weight are rigidly standardized. Conversion
tables for movement from one system to another are also uniformly
accepted. \Vere this not so, one could picture the trade confusion which
would exist 'ifthe weight of the pound ()r_length _o_Lthe yard varied from
phcetOpl~c_e or-time to__!_irne, -- . ,. -, --
1 Edward A. Duddy and David A. Revzan, Marketing, An Institutional Approach 0

(Nrol\' York, l\1cGraw-Hill, 1947), p. 59. .-

1)9
 MARKETING OF AGRICULTURAL PRODUCTS

~tainers for n~I1Y itGms in the wholesale trade are also standardized
with the -aid or-federal ~~~d state legislation. Howcver, there is little con-
tainer standardization at the retail level, with the result that consumers
arc often confused and misled. Federal law requires that quantities must
be plainly marked 011 food packages entering intcrstate commcrce. How-
ever, packages are often designed to deceive the purchaser. Examples of
this can bc found in any grocery store by comparing the size of the package
with its weight or volume. Many bottles are made to appe'!_~J<l_!:g~Lby the
tlse of extra thick or false b;ttoms or by the design of the sides. Many
packages are intentionally designed to be larger than necessary for its
contents.
,/"
Quality
It is in the area of quality that some of the greatest standardization
problems of agriculture arise. \Vhat should be the criteria for various
grades of quality? How many grades should there be? How uniformly
interpreted and widely accepted are the standards for grading from one
area to another or from one grader to another? 'Vhat terminology should
be used? Should the standards be compulsory or permissive?
All of these are questions which arc important to agriculture and
agricultural marketing agencies. In many instances, they are questions
which are currently answered unsatisfactorily. But the fact remains that
workable answers are necessary if the marketing machinery is to function
smoothly and efficiently. It is this area of quality standardization and
grading which will be discussed in the remainder of this chapter.

Early History of Standards 2

Our grading standards have evolved hand in hand with the commer-
cialization of agriculture. Some have been developed by trade groups and
then have been fomlalized by federal and state agencies. Others have come
about through the results of research directed toward the establishment
of standards. Practically all have been changed with the passing years as
weak points became evident. Changes are still being made.
In the early days, each grain market had its own grades and grading
methods. Different early standards for No. 2 corn required that the corn
"be dry," "reasonably dry," "have not more than 16 percent moisture,"
or "hm'e not more than 15.) percent moisture." Study of the terminology
used in grading grain in 1906 disclosed 338 names or grade titles being
used. There were 133 designations for wheat alone.
2 r-.luch of this material is adapted from an article by C. \V. Kitchen, "Standardiza-
tion and Inspection of Faml Products," The 1940 Yearbook of Agriculture, pp. 667-683'
 Standardi:wtion and Grading 141

The early cotton trade was also plagued by grade confusion. The term
"middling" apparently was adopted from its use in England. Such terms as
"good," "fair," and "ordinary" were in general use about 1th5. In 1847,
efforts were made to adopt a standard classification system, but this failed
within a few years.
Livestock once were sold on the basis of the girth of the belly. In the
literature of the 18:;0's, hogs were sometimes classified as "fat disti1Iery-
fed" hogs and "fat corn-fed" hogs. In most of the early market reports, the
point of origin was indicated as one method of classifying the animals. Such
terms as "prime," "choice," and "good" were not uniformly used either
within an individual market or between two different markets. 3
The lack of accepted fruit and vegetable standards resulted in especial1y
chaotic trade conditions. These very perishable products were shipped long
distances, and there was no intel1igible basis for price comparison and the
settlement of damage claims. Some growers attempted to secure recogni-
tion by placing their names on a11 shipments. In this way, they hoped to
establish a reputation which would give them market premiums. 4
Such situations resulted in many unfair practices and abuses. Not only
did producers suffer, but the middlemen of the trade also were often de-
frauded. In most instances, pressure developed for reform of the grading
system from within the trade itself. Trade groups and organizations at-
tempted to systematize nomenclature and grades. Generally, however, real
permanent progress was not made until the federal government stepped in
to coordinate the efforts to improve the grading system. In 1907, Congress
appropriated funds to study federal standardization. The passage of the
Cotton Futures Act in 1914 and the Grain Standards Act of 1916 initiated
a series of laws which have gradually broadened the area of federal respon-
sibility in promulgating uniform standards.

Advantag?~_gf Standardization
The use of uniform standards for setting up the different grades of
quality by the trade has many advantages to offer. These may be enumerated
as fol1ows:
1. It results in more meaningful price quotations. The consumer is as-
sumed to direct production through the pricing mechanism. This is not
possible if prices do not have specific meanings throughout the market-
3 A mc"e complete discussion of the progress of livestock grading can be found in

:\. A. Do\':dl and Knutc Bjorka, Livestock 1\larketing (New York, l\lcGraw-Hill, 1941),
eh. XIV.
4 See Raymond L. Spangler, Standardi;:ation and Inspection of Fresh Fruits and

\' egetablcs, USDA, Production Marketing Administration, .Misc. Publication 604, 1946,
for a more complete discussion of these early problems.
 l\fARKETING OF AGRICULTURAL PRODUCTS

ing channel. ByJ!.g_yjl!g widely accepted grades, price. q1}_o~a.tiqns for a

given grade of a commodity on one market can be compared t.9_similar
qnotations on othcr markets. If the producer is acquainted with the
quality standards, he can know the relative worth of his product.
2. It._IIlakes possible the sale of goods by sample or by description. If the
standards are widely understood and uniformly applied, products can be
bought and sold sight unseen. Description has uniform meaning. !vlost
grain is sold upon the basis of a small sample which represents a carload.
Fruit which is sold at terminal auctions is usually sold on the basis of
inspection of one box or crate out of the larger standardized lot. Neither
of these sample sales would be possible if the buyer had no confidence
in the grading system. ~
3. It,enables the pooling or intermingling of products for fur~her shipment.
\Vithout a grading system, the identity of Farmer Brown's wheat would
have to be maintained throughout the marketing channel if the ultimate
value \vere to be accurately reflected. \Vith a workable grading system,
his wheat can be graded and its value established immediately by refer-
ring to price quotations for the particular grade. Then it can be pooled
with wheat of many other farmers for shipment to the central market
and millers.
4. I!Jacilitate§ financing of the marketing of products. Loans are easier to
obtain if the product is graded, since it is possible tosecure a more
accurate estimate of the value of the._collateral ofi~!:ed. Financing
agencies will often advance a higher proportion of the collateral value of
graded products for this same reason.
5. It may reduce relative transportation costs. The settlement of railroad
and warehouse claims for damage is facilitated, since the value of the
commodity can be more nearly determined. It may reduce the risk from
spoilage, since the poorer quality products can be sorted out and utilized
more quickly or nearer home. It may also result in a relatively cheaper
transportation bill if only the higher valued product is shipped forward
while the lower valt:ed products are sold nearer home.
6. It may increase the demand for certain products. It is possible that coo-
s~mers will not buy as much of products which are uneven in quality
or which have been misrepresented to them. Gra~i_~g ~hould result in
a greater uniformity and less misrepresentation of a product.
D E T E R !,I I NAT ION 0 F S TAN DAR D S
Objective of Ideal Standards
The principal objective of an ideal standard should be to aid the con-
sumer i~ telling the producer what he considers desirable in- a product for
 Standardi:::ation and Grading 143
the particular use to be made of it. I~al standards set up a chain of infor-
mation between the consumer and the producer.
Gradingof agricultural products is a method of differentiation of the
products_too meet the various desires of the consumers. \Ve have learned
thatc~~sumers arc characterized by a large range of incomes and prefer-
ences. Some desire and can pay for tJiehighest quality. Others must be
satisfied with a somewhat lower quality at a lower price. A gr_ading system
attempts to differentiate the product in such a way that the various con-
su~~~s~_<1rejapped for all that they will pay. Or from the consumers' point
of VICW, a grading system attempts to aid the consumer in obtaining the
particular product he desires. The best grading system will be such that it
will mQve the greatest total amount into consumption and secure the great-
est total price for that amount. 5 T~~_ purpose of grading is not to assure
the ma-rketin-g of only top quality products. Those who conceive a grading
syst~m as a vehicle for the elimination of lower quality products are ignoring
the wide range of consumer preferences and uses which exist.
The major problem in developing grading standards then becomes one
of d_~.termining-differences in p~C2d~r;t~ _w_hich are_economi9_ally _significant
and then_developing methods for measuring these differences in the prod-
ucts. Only differences which users are willing to pay for are pertinent to the
establishIIl_enLofgrades. \Vhims and desires not backed by the willingness
t~- E~r-_~re not justifications for grade differentiation. Neither are the
opinions of a few "experts" of what should be desired workable foundations
for grades.

Criteria for Good Standards

The development of a system of perfect and ideal standards is highly
improbable. Each agricultural product presents different problems. Realiz-
ing that it is very improbable that any standard wiII meet them all, th.!:! fol-
lowing may be used as criteria upon which to judge the adequacy of
standards. G
1. Standards should be built on characteristics which the users consider
important as indicated by their willingness to pay different prices, and
these characteristics should be easily recognizable.
2. Standards should b~.?uiI~()!l those factors which can be accurately and
ultiformly measured and interpreted. If the major part of the standard
5 L. j. Norton, "Differentiation in 1\larketing Farm Products," Journal of Fann

Economic:;, Part 1, August, 1939, pp. 587-594.

"Discussion of this area and many other articles pertinent to the subject of stand-
8rds and grading can be found in the report of the 1951 Marketing Research \Vorkshop,
Market Demand and Product Quality, USDA, Agricultural Research Administration,
processed.
 MARKETING OF AGRICULTURAL PRODUCTS

consists of subjective measurements, uniform application by different

graders or at different points will be very difficult.
3. Standards should use those factors and terminology which\vill make
the grade meaningf~ito-...?§._ I1?any u~ers of the product as possible. The
ideal situation would be that in -which the ~ame grade terminology is
U~~(L at all levels_ ~f _t_lIe IlJ_arketing channel f~om the consumer to the
producer. T~ <_?fcou~~~_i~ complicated by the fact that many produ_cts
have several different uses. "
4. Standards should be such that each grade classification includes enough
of the average production so as to be a meaningful category on the
market. T1_l()ugh grading standards should be consumer oriented, they
cannot ignore the real facts of production. Consideration must be given
to the quality of the product which is produced. It is of little purp?se
to have a standard for the top quality set up in such a fashion that very
little of the actual production can meet the standards.

Probably the best practical test of the adequacy of standards is their

aC'2e.I'tan~e and, use, by the various marketing agencies. If the grading
-;tanda~d is wid~ly used, it is probable that the standards are fairly adequate
and economically meaningful. However, if large segments of the trade do
not use the standards, then it usually may be assumed that some of the
criteria are not adequately met.

PROBLEMS OF
AGRICULTURAL STANDARDIZATION
Much of the grading system for agricultural production needs critical
examination. In a recent report of the Agricultural Research Administra-
tion, which is in charge of administering federal marketing research funds,
it was reported that about 12 percent of the nearly 6 million dollars spent
in marketing research was used for consumer preference and grades and
stan da rds stu dies. 7

~a,~k of Relationship Between Price and Quality

It has become increasingly evident that for many commodities there
is little or no relationship between priccs paid by consumers and the grade
of the product. This, of course, means that the principal objective of
grading standards is not being fulfilled.
A study of the relationship between the labeled grade of tomatoes and
their actual grade revealed that, regardless of price, "f~ncy" tomatoes could
7 Report of Activities Under the Research and Marketing Act, USDA, Agricultural
Re,earch Administration, 1951.
 Standardization and Grading 145

not be obtained with any degree of certainty. Of the tomatoes labeled

"fancy," only 20 percent met the grade (Table 1). A study of potatoes sold
in New York City concluded that there appeared to be no significant rela-
tionship between prices which consumers paid for potatoes and the propor-
tion of grade defects. There was little evidence that cQg§.!:lme~s _\y_ere dis-
criminating in thei! choi~eof potatoes insofar as grade was concerned.s
A stlldy of tIle relationship between prices paid to creameries for butter and
tl~-;;-g~ade of butter ~old found a significant relationship of higher prices to
th_t:_Ng~rquality product. However, the differential was so small that the
question was raised whether the differential was adequate for creameries to
try to produce the higher quality butter.9

TAB LEI. Reliability of Labels in Describing the Contents of

Canned Tomatoes

ACTUAL OFFICIAL GRADE

LABEL STATED AVERAGE STANDARD

GRADE PRICE FANCY EXTRA STANDARD AND LOWER

CENTS PERCENT

Fancy 1::·5 20 61 19
Extra standard 9·9 6 63 31
Standard 8,4 4° 59
SOURCE: F. D. Gaylord and K. 1. Fawcett, A Study of Grade, Quality and Price of
Canned Tomatoes Sold at Retail in Indiana, Indiana Bulletin 495, 1944.

Determining Consumer Preferences

Findings like the above mean that the foundations of some standards
an~ ~~~lty indeed. Many standards have been developed by food technol-
ogists. In some instances, this has resulted in standards which are built
upon the ~'!~~~tCIist_~~_ whicb._ these scieI1tis~s:_d_eem d~ab1e:-1{u_t_:\vhat
are significant_c_()~~mer preferences? This question is a difficult one to
answer in meaningfuTterms. For example, the following list of important
quality c!laracteristics was developed for fruits and vegetables. lO
1. Eating quality (flavor, texture, viscosity, aroma).
2. Cooking quality (texture, consistency, color, aroma).
3· Nutritive quality (vitamins, minerals, caloric values, protein).
s Russcll L. Childress, Grade Qualities of Potatoes in Retail Stores, New York City,
1948, New York Bulletin 707, 1950.
9 A. G. Mathis and Donald E. Hirsch, Butter Pricing by Iowa Creameries, USDA,
Farm Credit Administration, Circular C-136, 1950.
10 Report of 1951 Marketing Research "'orkshop, op. cit.; Report of \Vork Group
IV, processed. .
 MARKETING OF AGRICULTURAL PRODUCTS

4. Eye appeal (color, shape, defects, cleanliness).

5. Freedom from harmful or undesirable substances.
6. Amount of waste and ease of preparation (decay, bruises, mechanical
injury, varietal characteristics, cleanliness).
7. Keeping quality (maturity, ripeness, disease, decay, bruises, and varietal
characteristics) .
8. Size.
9. Uniformity.
10. Suitability for a particular use.

All of these are important characteristics of fruits and vegetables. But

for which will the consumer pay a premium? \Vhich can be uniformly
and accurately measured?

Measuring Grade Factors

In measuring the various grade factors, the techniques used may be
sensory, physical, chemical, and microbiological. The latter three" tech-
niq~~s are ~sually objedi;e in natu~e and can be uniformly carried otrt by
!r~in'e_C1~gr~9_~rs. SeI1~ory't~sts;ho\vever, are a different matter. These depend
upon the grader's senses of sight, taste, smell, and touch. Standards of many
commodities are built largely on these subjective sensory tests. Dairy
product standards lean heavily on the sense of taste. TIle standards for
meat and many fruits and vegetables have color as one of the important
characteristics. In these situations, the standardization of the sensory abil-
ities of the individual grader is, in fact, the most important factor in obtain-
ing uniform application.
Generally speaking, the more mechanical and objective the methods
for grading, the more widely accepted are the standards by the trade. One
of the contributions of the other sciences in recent years has been the re-
placement of some of the sensory tests with chemical tests and mechanical
devices. Photoelectric colorimeters, refiectometers, and other devices have
been developed to replace the old color chart comparison method ..]'~Tl­
derometers are now used in measuring texture and consistency of peas and
lima beans and a few other vegetables. The succulometer is a device used
for measuring the juice content of sweet corn. The measurement of tastes
and odors has presented researchers with difficult problems; however, some
chemical tests are being developed which may aid the graders.u

11 For more detail 011 these developments, see the Report of the 1951 r-,[arketing

Research \Vorkshop, op. cit., and also the following __alti(:les in.l\Jarkcting _i\ctiyitie~,
USDA, Production and 11arkcting Administration: "Better Than the Human Touch,"
July, 1950; "Simple Refractometer Developed," July, 1950; "Technical Research to Back
Tobacco Standards," 1\la1', 1949; and "Good Butter Tastes Good," r-,'1arch, 1949.
 Standardization and Grading 147

DeterminingJhg_I,.i1Pits of Grades
How many grades should there be? This is an extremely important
question since it can influence the total amount received from the total
production. \Vithin limits of the consumer's willingness to pay premiums
for certain qualities, the amount which wiII fall in each grade can be
changed. However, agricultural products do not fall into classifications
with definite "breaks" between them. Instead, the quality of agricultural
products varies throughout a wide range. It has been suggested that most
pro~d_lJ..cJsJ~~_a_ qu_ality_distribution very similar to the normal frequency
distri~u~io_~_surve.l~ This can be illustrated by the hypothetical situation
shown in Figure 1.
_ •• , _ ' _r~' •

Amount of Production

lowest Quality Average Quality

f
/~
Highest Quality
FIGURE 1. Quality distribution of the total production of a
hypothetical product.

One of the criteria for good grades is that there be enough of the
llorm_aJFiod~~tion falling in each grade to make it a meaningful market
category. How many grades should there be and where should the
boundaries of the grades occur in the commodity illustrated in Figure I?
TJ1_ere are-some products of very low and some of very high quality. r-Iost,
however,
~-- ....---
fall --_somewhere between these two extremes.
'~., ".

It also is evident from this illustration that the grade boundaries will
be ~'~_on_e_( rather than clear-cut lines. The more the grade factors are meas-
12 H. E. Erdman, "Problems in Establishing Grades for Fann Products," Journal of
Farm Economics, Febr\lary, 1950, p. 15.
 MARKETING OF AGRICULTURAL PRODUCTS

uredsubjectively, the wider will be the zone of indecision. This has led to a
system of tolerances in standards. F:_orexample, grades of fruits and, yege-
tables usual1y provide for 5 to 10 percent of off-grade specimens.
There are situations in which the grade designations appear too re-
strictive. Eggs appear to be an example. A study showed that housewives,
when faced with a choice between "A" and "B" quality eggs, actual1y
chose about as many "B" eggs as the better egg "A." '''hen faced with the
choice between "A" and "e" quality eggs, however, most chose the "A." 13
Have the grade boundaries been incorrectly chosen in this case?
The quality of the production of a commodity also changes from year
to year: The curve in Figure 1 might shift either to the right or to the left.
One year might find a larger amount of higher quality products and a
smal1er amount of lower quality products. Or the situation might be re-
versed. Such conditions make it extremely difficult to maintain consistent
standards. Ag~in, this is particularly true when grade factors depend upon
5.l1bjective measurement. For example, if the apple crop is very poor in
quality, very few apples would meet the top grade requirements if the
standards were rigidly adhered to. Under these circumstances, the pressure
is strong to "reach a little farther down" for the top grade apples.
This tendency to "up-grade" or "down-grade" means that the cQmposi-
tion of particular grades will vary from year to year. Under such circum-
stances, the consumer is faced with a product of a given grade that will not
be the same product even though the grade is the same one time as com-
pared with another. It has been suggested that preference studies which
conclude that consumers are not discriminating as to grades do not neces-
sarily mean that the standards are incorrectly measuring consumer quality
preferences. On the contrary, they may indicate that consumers have found
the stated grades an unreliable measure of actual product quality and there-
fore ignore them.
One thing seems clear. Agricultural products, cannot hope for the
precise standardization that is possible with -~~ny industri~l_ prgdllcts.
Nature presents agriculture with a product which varies too widely in
quality to secure this kind of standardization.

_--
QualitlPeterio!:ation
__ -
-.

Much of the production of agriculture is perishable. The fact that a

c<?_rnmodity was of a given quality at one point in the marketing chamieI
13 R. L. Kohls and N. Oppenheimer, Quality Recognition and Purchasing Habits
of Egg Consumers, Indiana Bulletin 59::, 1953; also R. L. Baker and A. S. Goldman,
"Habits, Preferences and Demands of Des ~loines Egg Consumers," Poultr), Science,
l\,lay, 1951, and E. l\'1. 1vloore, Purchasing Practices and Qualit)' Recognition for Eggs,
New York Bulletin 835, 195::.
 Standardization and Grading 149
does not mean that it will be of the same quality when it reaches con-
sumers. Of 1,934 lots of potatoes marked as U.S. No. 1 which were in-
spected in New York City retail stores, 80 percent did not meet the official
grade specifications.14 Either these potatoes had been incorrectly graded
or they had deteriorated since the time of grading. Another illustration of
quality deterioration is shown in Table 2, which shows the loss in egg
quality in the marketing channels.

\ TAB L E 2. Change in Number of A-Quality Eggs Between Coun-

tr), Buying Stations and Car-lot Assemblers' Plants, 1948
A'QUALITY EGGS A-QUALITY EGGS DECREASE IN
AT COUNTRY AT CAR·LOT A-QUALITY
SEASON BUYING STATION ASSE~1BLER'S PLANT EGGS

PERCENT PERCENT EGGS PER 100

Spring 7'2·'2 6'2,3 9·9
Summer 68'7 58,9 9. 8
Fall 80.0 74. 8 5·'2
SOURCE: North Central Regional Publication 15. Changes in Egg Quality During
Marketing, Michigan Bulletin 361, 1949, p. 2'2.

The problem of quality loss during marketing brings ,up. th~ ql,!~stio_Jl
of where ion the mar~eting channel should grading be done. If grades are
to fulfill their objective of telling producers what consumers consider de-
sirable, grading first must be done when the farmer sells his commodities.
Only then will he know what the quality and actual worth of his product
was. However, if quality deteriorates during the marketing process, this
grade will not remain accurate. ~h~r.efore, grading must be done as often
as needed t!Jr_oughout the marketing process to assure accurate grade when
it reaches the finaruser.

\
Sometimes there is confusion between the requirements for sanitation
and e~ibility and those for. ~.a!i_ty. For example, meat entering into inter-
state commerce must be federally inspected to make sure it is fit for human
consumption. The packing plants themselves must also meet certain
sanitary requirements. But such inspection has nothing to do with th_~
grading of meat for quality.
On the ot:her' hand, sanitary requirements are sometimes written into
the gradir.g standards. ~'lilk quality standards are a case in point. Though
the graue standards consider bacteria count, they also may ,prescribe the
ron~itj,o'~s_l1E9.er_\vhich cows mllst be hOllsed and milked, the ~ilk co~led,
14 Childress, op. cit., p. 75.
 MARKETING OF AGRICULTURAL PRODUCTS

and so forth. Regardless of bacteria count, milk cannot meet the grade re-
quirements unless it has been produced and handled under the designated
conditions. Such practices confuse the issue. Often, instead of facilitating
marketing processes, such standards turn into practical trade barriers and
techniques to control production.

FARM SELLING ON A GRADED BASIS

Only if the farn1er sclls on the basis of grades will the fullest benefits
of the grading system as a method of consumer-producer communication be
realized. Yet it is true that a great many-perhaps a majority-of products
are sold by farmers on an ungraded or partially graded basis. .I
I
The wider the practice of selling on a graded basis, the lessjs_ ~h~p_os­ !
sibiliti for fraud and deceit in the selling of goods by farmers. However, it
is probably also true that not all farmers stand to_ gaj!!"f~~~ sell~ng on a
graded basis. T,he farmers which produce the higher quality pro._~_l!cts_~ould
gaIn ;iE'the 'expense--~f those producing the lower quality products.
, ' Prggucing high quality products usually is not costless. Usually more
careful, and often more expensive, handling is required. In_S.Q_~f
_a.g~cuJ!_ll!al production, !he ,~EE~~UYQ~!Q_P_~9_b3_b.lL~:)litweigll_~I~e__~xtra
returns. I~IIiese-situations, farm selling on a graded -basiS-has little attrac-
tion. An example of this is egg production of gI:!_~II_ p_o.!lI~ry ftocks. Such
flocks produce a large proportion of total egg supply. However, to the indi-
vidual farmer such production may be a sideline enterprise which receives
little attention. In a study of small farm flock owners, it was found that one
out of four producers did not know whether a graded market was available.
\Vhen asked whether they would make the necessary changes to mgrket
quality eggs, most of them indicated that they would not,15
Generally, the larger specialized producers to whom the product is
financially important are more receptive to the idea of graded selling. Also,
usually those producers who are farthest from market are more interested
in such a program. In that way, the best can go forward and the poorer
quality products be sold nearer home. This enhances the competitive posi-
tion in the distant markets. It also reduces the relative transportationcQ_sts,
since it generally costs the same -~~o;;~i: to ship high quality,'l;igh-valu~d
products as it does the lower quality, lower-valued products.
T}:tere is evidence that a program of graded selling raises the quality
of the goods sold. This usually comes about as the producer realizes the
things which he can do which will produce a crop of higher quality. Many
of these things represent only changes in present practices and not adoption
15 H. A. Johnson, L. S. Robertson, and J. \V. Sicer, Small Poultry Flocks in Central
Indiana, Indiana Bulletin 5V, 1948.
 Standardization and Grading 151

of new or additional ones. For example, quality deterioration of eggs can

be reduced if eggs arc held in basements' or cool rooms instead of on back
porches or in hot kitchens. Picking fruit and vegetallles at the proper degree
of ripeness may reduce spoilage. Such practices as these might become more
widespread if what constituted higher quality and higher valued products
were known.
Q!l!1li_ty programs should not be built on the premise that only the
highest quality is desirable or marketable. As we have seen, there is a wide
variety of consumers and users for each commodity. Many of these can pay
only for something less than the best. The farmers' objective is to maximize
incomes, not quality alone. .

PLACE OF GOVERNMENT
IN STANDARDIZATION
One of the prerequisites for an adequate grading system is a uniformity
of the standards and terminology to be applied throughout the market area
in question. In the United States this area for most commodities is the en-
tire country. Standards which are used in one state but not in others cause
confusion. In many cases, such differences may act as effective trade barriers
between states or regions.
As has been pointed out, real improvement in correcting this confusion
did not come until the federal government entered the picture. The
enabling legislation which was passed during the first two decades of this
century permitted the United States Department of Agriculture to enter
actively into the field of unifying standards of quality.
Federal standards for farm products fall into three classifications-
mandatory, permissive, and tentative. Mandatory standards are those whose
use is compulsory under certain conditions. Permissive standards are those
which are officially recommended but whose use is not compulsory. Tenta-
tive standards are those which are offered for use but are still subject to
further study before becoming permissive or mandatory. It is mandatory
that grains and cotton which move into interstate commerce and also those
which are traded on the futures exchanges be graded according to federal
standards. Apples and pears sold in the export trade, tobacco, and naval
stores also have mandatory standards. A list of the tentative and permissive
standards as of early 1952 listed some 136 standards for fresh fruits and
vegetables, some 110 for canned, dried, and frozen fruits and vegetables,
and some 59 for dairy and poultry products, livestock, meats, and miscel-
laneous other commoditiesY3
16 Check List of USDA Standards for Farm Products, USDA, Production and
lvlarketing Administration, 1952.
 MARKETING OF AGRICULTURAL PRODUCTS

Many states have adopted federal standards and have often made
them mandatory under certain circumstances. In some instances, states
have promulgated their own standards which differ from the federal stand-
ards and from other state standards. Such circumstances cause confusion
and often add to marketing costs through encouraging delays, waste, and
regrading. Many examples of these grade differences may be cited. Table 3
summarizes the differences in standards as set up for eggs.

TAB L E 3. Summary of Egg Grading Programs in Various States,

1949

SITUATION NUMBER OF STATES

Grades and/or standards, compulsory 23

Grades and/or standards, voluntary 17
No grades or no legislation 8
States using part or all of USDA standards 34
Grade designations are worded same as USDA standards of 1946 25
States having own standards 5
States not specifying standards 9
SOURCE: R. F. Pond and A. W. OUe, Variation in State Standards and Grades for
Eggs, USDA Mimeograph, 1950.

Standards for milk are also an example of the variation which can
exist when various governmental units promulgate individual standards.
Cities as well as states are active in establishing milk standards. The ordi-
nances of eighty-four cities of 100,000 or more in population were studied
in 1949. It was found that of these eighty-four cities, twenty-three followed
the standards suggested by the states in which they were located, twenty
had prepared their own local regulations, and forty-one followed the basic
pattern of the United States Public Health Service Ordinance. Table 4
illustrates the range of bacterial count which was permitted in the best
grade of milk.
These two examples illustrate one of the important functions of the
federal government in s~andardization. Both in the case of eggs and milk,
the standards established by federal agencies act as a model for the stand-
ards which are established by other governmental units. In this way, the
tendency is toward uniformity even though wide differences continue to
exist.
Changes in federal standards, or the development of new ones, come
about slowly. Generally, the initial suggestions for changes come from the
trade or from research findings. Conferences are then held with industry
groups to obtain suggestions. Out of the research and suggestions grow
tentative grades which are tried out. Finally, after it appears that the stand-
 Standardization and Grading 153
ards meet as many of the criteria for good standards as possible with current
knowledge and are usable by the trade, they are issued as the federal
standard. This process may extend over a period of several years.

TAB L E 4. Bacterial Standards for the Best Grade of Raw and

Pasteurized Milk, 84 Cities, 1949

RAW r.HLJ:.: PASTEURIZED MILK

BACTERIAL COUNT PERCENT OF BACTERIAL COUNT PERCENT OF

PER ML. OF ~nLK CITIES PER lIIL. OF ~I1LK CITIES

10,000 or less 11.9 1,000 or less 15·5

20,000-3 0 ,000 7. 1 15,000-3 0 ,000 66·7
35,000-5°,000 17·9 35,000-50 ,000 11.9
Over -0,000 2·4 Over 50,000 1.2
:\0 ra~v milk permitted No standard 4·7
or no standard 60·7 100.0
100.0

SOURCE: Sanitary Milk and lee Cream Legislation in the United States, National
Research Council of the National Academy of Sciences, Bulletin 121, 1950.

Even some of our more established standards have to be changed with

the passing of time in order to keep up with changing conditions. The
nomenclature and some of the standards for various livestock grades were
changed during the latter part of the decade of 1940. An official of one of
the large milling concerns recently stated that grade standards for grains
need to be carefully re·evaluated in relation to their use or intrinsic value.
He suggested that research in this area would undoubtedly reveal that at
least in some instances existing grade standards have very little relationship
to their use value. 17 The changing of standards, however, is often a difficult
and time-consuming process. Many persons have a vested interest in main-
taining the existing standard. Still others think always of the existing
standard as being right because it exists .

.- THE CON SUM ERA N D G R A DIN G

Generally speaking, consumers' goods are not sold on the basis of
uniform standards and grade terminology. One of the problems in the com-
plex society of today is that the_~(m~umer knows relatively little about the
quality of the goods among which choice has to be made. In many in-
st~nces, thc consumer is forced to rely upon the brand and the manufac-
turer's reputation of quality.
17 From the remarks of C. C. Farrington, Vice President, Archer·Daniels·Midland
Grain Company, before the National Marketing Research \Vorkshop, 1949·
 I'll ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

Ip. purchasing foods, the -consumer is faced with a confusing range of

brands and quality terminology. The terms designating top quality viry
widely. Such terms as "extra fancy," "prime," "choice," "AAA," "AA," or
just plain "A" n:ay all be used to designate top quality. "Good" Il!<lLbe
the terminology of the lowest quality available. In canned goods, com-
panies use different brand names to designate the different qualities. There
is little to guide the shopper who is not familiar with the brands themselves.
In one city, it was found that only two out of five housewives knew the
term which designated top quality eggs. 18 In a marketing system wh_i~"h_is
theoretically based largely upon consumer direction, the average consumer
is faced with the problem of how to make her wants known.
I~formative labeling and simple "A-B-C" designations have been
offered as ways of aiding the consumer in making rational selections. In the
"informative label," the product is described in terms which will help the
consumer in making the proper choice for the use she has in mind. For
example, informative labeling on fruits and vegetables would describe the
product as "wholes," "halves," "puree," and so on. It would also give other
details concerning its proper cooking uses and the number of servings pos-
sible.
Th~_"A-B-C" labels have the benefit of simplicity. ~ut they wilLl2e
useful only if the attributes of each grade are known by the purchaser. The
opponents of this proposal point out that "C" quality products maybe
the best product for some uses. But the average consumer will not know
this and will discriminate against the lower grades as products not useful
for consumption. For example, both "A" and "B" eggs are adequate for
table use. The "C" grade eggs may actually be better for some cooking uses,
such as when whipped egg whites are wanted. All are nutritious and clean
products. But it is maintained that the terms "B" and "C" discriminate
against their use because of the consumer's association of these terms with
unusable products.
Improvement in the area of consumer grading will be slow. There is
widespread acknowledgment that the average consumer needs help. There
is not much agreement as to how this help should be given. Large concerns
who have built up preferences for their brands are very reluctant to sanction
a uniform labeling system. Much of the modem manufacturing emphasis
upon brands and advertising is premised upon the fact that the consumer
is faced with a bewildering selection of goods and can be influenced into
simple brand dependence. This does not necessarily mean that inferior
products can dominate the market. Even brand shopping cannot prevent
consumers from turning away from unsatisfactory products. But it does
18 Kohls and Oppenheimer, op. cit.
 Standardization and Grading 155
mean that new products and new concerns may have difficulty in securing
consumer acceptance even if their product is of good quality.

THE WHOLESALE TRADE

AND GRADING
It is in the wholesale trade that uniform standards for grading find
widest acceptance. Here the purchase by sample or by grade description is
relatively common. Among wholesalers and processors, it is widely acknowl-
edged that without some standard language, confusion and fraud would
reign to the detriment of all.
In the development of standards, much dependence is placed upon the
help and cooperation of the wholesale trade. I,n some instances, the grade
has be~_n developed with only the wholesale trade in mind. This may help
explain why grades in use often are not meaningful either to farmers or to
consumers ..

SELECTED REFERENCES
Coles, J. V., and H. E. Erdman, "Some Aspects of the Arguments Against
Grade Labeling," Journal of l'vlarketing, January, 1945.
Juran, J. M., Quality-Control Handbook (New York, i'vleGraw-Hill, 1951).
Shepherd, G. S., Marketing Farm Products (Ames, Iowa State College Press,
1946), Chap. 14.
CHAPTER ELEVEN

Collection and Use of

Market 111fonnation

A smooth, efficiently operating marketing system depends to no small

extent upon accurate, adequate, and timely information. Everyone who
buys and se11s goods or is otherwise connected with marketing is, to some
extent, either consciously or unconsciously col1ecting and evaluating in-
formation pertinent to his particular marketing activity. In addition, many
agencies specialize in the function of col1ection, interpretation, and dis-
semination of all kinds of marketing data. It is to these problems of in-
formation col1ection and use that we now turn our attention.

THE ROLE OF MARKET INFORMATION

Buying and sel1ing is the heart of marketing. The establishment of
prices at which products will change hands is the end product of the buying
and sel1ing functions as goods move through the marketing channe1. In
an economy such as ours, much of the direction of the production and
marketing activities is leit to these prices.
The central position of the place of competition in the pricing process
has already been discussed. It will be remembered that the concept of per-
fect competition assumes several conditions. One of these assumed condi-
tions is that the various individuals and agencies in the economy have
perfect information, and that the buyers and sel1ers are equally wel1 in-
formed. \Ve concluded that, though perfect competition is probably non-
existent, competition is still an effective force. Such effective competition
depends to no small extent upon buyers and sellers who base their actions
upon pertinent knowledge.
 Collection and Use of Market Information 157
Marketing consists of the activities involved in the getting of the right
products to the right place at the right time. The questions of what, when,
and where are continually begging for answers. Adequate and accurate in-
formation about the supply-and-demand conditions of the market is neces-
sary if the products are to be moved into consumption with the minimum
of waste, confusion, and cost.
Besides the decisions concerning the marketing of the product already
on hand, long-run future plans must be made. Here again information con-
cerning future market potentials is necessary if wise production plans are to
be made. Not only are farmers in need of this type of market information,
but also processors and other agencies of the marketing system are con-
tinually faced with decisions as to the proper outlet, the proper package,
and other pertinent questions. At least part of so-called surplus problems
and the failure of businesses can be attributed to too little information too
late or incorrect evaluation of available information. Good decisions are
informed decisions. This function of the marketing process can be char-
acterized as that which helps the gears of the marketing machinery mesh
with a minimum of lost motion and friction.
SECURING ADEQUATE
MARKET INFORMATION
Area to Be Covered
In a country such as ours where hundreds of different agricultural prod-
ucts are produced and which must be handled by many people and dis-
tributed over large areas, the question of what kind of information is needed
is a complex one. Information on current market prices is necessary. So is
information concerning quantities now available in storage, en route, and
in prospect. Demand facts need to be collected. Information is needed at
all levels in the marketing channel from the point of first sale from the
farm, through the various points in the wholesale and processing stages, to
the retail level when the goods are sold to the consumer.
Each kind of information presents problems in collection. Generally,
a more detailed informational coverage is available for the wholesale level
than for either the farm or retail level. IvIore complete information is also
available for those products which utilize organized central markets than
for those moving through more decentralized and unorganized channels.

Price Jnformation
Accurate and meaningful price information is very difficult to obtain.
Price has meaning only in reference to the product itself. The great dif-
ferences in quality and trade practices complicate the picture. The ac-
 MARKETING OF AGRICULTURAL PRODUCTS

curacy and meaningfulness o{ price information depend to a large extent

upon uniformly accepted and applied quality standards.
For example, let us look at cattle prices. The United States' average
monthly price which farmers receive for cattle is reported. Just what does
this price refer to? Certainly it is for something different at various seasons
of the year. During the fall months, a larger portion of the cattle would be
of lower quality coming off pastures and ranges. During the late spring and
early summer a larger portion of cattle would be those higher of quality
coming out of feed lots. The reported price of "choice" cattle means
something more. vVithin the limits of the variation in the application of
grading standards, it refers to a rather specific quality of cattle. The re-
ported price of "choice, 900-1100 pound cattle at Chicago" is still more
specific and meaningfu1. Such a quotation now has meaning to the farmer
trying to estimate the value of cattle in his feed lot. It has meaning to the
dealer trying to follow the prices on several markets. This same type of
example could be developed for almost any commodity. Only when the
market information on prices, receipts, or consumption is specific can it be
widely used.
Let us look at still another complicating factor in price reporting. In
many instances the publicly quoted figure is not the actual price at which
commodities are being bought and sold. Premiums or discounts may be
used as a device to raise or lower prices without changing the quoted price
of sale. The pricing of butter at Iowa creameries is a good example of this
practice (Table 1). To one studying butter prices, the quoted prices would
not have shown the true butter price picture at Iowa creameries. The ac-
curate price information would have to take into account the premiums
and discounts being used. Even the grade of butter was not closely related
to the premium and discount system. Such a system of premiums and dis-
counts along with other trade differences would make it very difficult for
one creamery to compare its prices with another.
The use of various bases for weights and pricing points is stiH another
example of the inaccuracy of the quoted price as an indicator of the actual
price at which commodities change hands. An example of such a situation
is in the marketing of broilers. The average margin during 1950 between
the farm prices received in one Indiana county and Chicago quoted prices
was 2.5 cents. The margin between the same farm prices and Detroit was
3.9 cents. The county was about equidistant between Chicago and Detroit.
However, the buyers in Chicago usually paid on the basis of market weight
plus 5 percent while the buyers in Detroit paid on the basis of market
weight. In other words, country buyers selling to Detroit had to assume all
the shrink loss in transit while those selling to Chicago did not, since they
 Collection and Use of iVIarket Information 159

received a 5 percent weight bonus at Chicago. In this case, quoted prices

for the Chicago market and for the Detroit market were not directly com-
parable as in reality they did not represent the same product. 1

TABLE 1 . Price Premiums or Discounts Based on the 92 Score

Quotation, 70 Iowa Creameries, September 1, 1948

SIZE OF PRElIIIUl\1 SCORE OF BUTTER SOLD

OR DISCOUNT 92 AND TOTAL
(CENTS PER POUND) 89-9 0 90-9 1 9 1-9 2 HIGHER CREAlI1ERIES

Discount * 2 0 0 3
Premium:
~ I 0 3
Yz 2 0
9 I 12
% 0 0 2 0 2
1 0 1 5 1 7
I~ 0 0 0 1 1
lYz 0 0
9 10
Varying with grade 0 4 8
No premium or discount II °6 6
4
24
Total 16 9 28 17 70
* These three creameries sold butter Lo.b. factory; all others paid shipping costs to
market.
SOURCE: A. G. tvlathis and D. E. Hirsch, Butter Pricing by Iowa Creamerics, Farm
Credit Administration, USDA Circular C-136, 1950, p. 20.

The difficulty of reporting prices on a comparable basis is probably best

illustrated at the retail level. Some stores operate on a cash-and-carry basis.
Others offer credit or delivery services, or both. The simple comparison of
prices between these different types of stores is not enough. In some in-
stances the price represents only the product itself while in other instances
it represents the product plus a bundle of marketing services. All of these
examples represent the difficulty of collecting price information. And,
probably more important, they illustrate the necessity for judgment and
care in using such information.

Information Dissemination
If information is to be useful it must be timely. 'Vhat is considered
timeliness will vary with the different types of markets and different ways
in which information is used. Information which is to be used on the ex-
changes of the country is needed almost every minute during the trading
day. The li\'estock markets need information for each day's activities. Coun-
try markets for fruits and vegetables need rapid and detailed information
1 R. 1. Kohls and T. C. \Valz, Broiler Trucker-Buycrs in Indiana, Indiana Bulletin

=80, 195:::.
160 MARKETING OF AGRICULTURAL PRODUCTS

during the production season~ but very little during the remainder of the
year. Reports on the retail trade may be issued weekly or even less often
and still be quite useful, since the retail price structure is slow to change.
Much useful information is not tied to the day-to-day workings of the
market and short-run price determination. Total production figures, reports
of products in storage, utilization patterns, and so on are useful longer-run
marketing information. The usefulness of much of the marketing data de-
pends not so much upon speed in dissemination as upon accuracy and
completeness. Probably as many important decisions hinge upon the
analysis of historical data as upon the receipt of immediate short-run in-
formation.
COLLECTION AND
DISSEMINATION AGENCIES
Private Agencies
l'iluch information is collected either formally or informally by busi-
nesses for their own use. Large food processors maintain large staffs to
collect and evaluate information usable to the company in the production
and marketing of its products. Much of this information, however, is not
available for others to use. In a sense, large companies obtain still stronger
bargaining positions because of their superior information facilities.
To offset this situation, trade organizations of different industries
compile market information for general use by their trade. Organizations
like the American Meat Institute, the National Grocery Manufacturers of
America, and the various trade organs of the wholesale and retail trade all
continually compile pertinent information. Much of this data is available
to those who wish to use it.
Some newspapers operate primarily as market information agencies.
General newspapers and radios also retain the services of farm editors,
financial editors, and others whose job it is to keep their public informed.
To this must be added the growing group of private research agencies which
perform specialized jobs for a fee. They may evaluate the market potential
for a new product, study how an old product may secure an expanding
market, or do any of a wide variety of informational tasks upon request.
Though much of the remainder of this chapter will discuss the activities of
governmental agencies, the importance of the private information services
must not be minimized.

Public Agencies
In the field of agricultural information, public agencies playa major
role in the collection of information. To a considerable extent, this job has
 Collection and Use of Market Information 161

been done by federal governmental agencies, though often in cooperation

with various state agencies. There is much to be said in favor of the public
collection and dissemination of pertinent marketing information. As we
have pointed out, the principal need is to provide accurate, unbiased in-
formation to all interested parties of the market place on an equal basis.
Only in this manner can the bargaining power of both buyers and sellers,
from the the standpoint of market information, be equalized. Private con-
cerns spend their own resources in collecting information to enhance their
individual competitive position. One should not expect them to freely offer
their competitors the same service. The justification of the use of federal
funds for agricultural market news and statistics is much the same as that
for research. The numerous small units of the agricultural plant are not in
a position to undertake these services for themselves. And without these
services, they and their representatives may be at serious disadvantage in
the market place.
IVIost of the informational services of particular interest to agriculture
are centered in the Departments of Agriculture, Labor, and Commerce.
TIle Departments of Labor and Commerce collect and disseminate much
of the information which is important in appraising the economic condi-
tion of the economy as a whole. Insomuch as the wen-being of agriculture
depends upon the well-being of the whole economy this information is
widely used in appraising the agricultural situation.
The Department of Labor releases most of the information through
its Bureau of Labor Statistics (BLS). Statistics on employment and wages
and various general prices are collected by this bureau. The indexes of retail
and consumer's prices, wholesale prices, and daily primary market prices are
some of the more important price series obtainable from this source.
The Department of Commerce releases most of its economic informa-
tion pertinent to agriculture and agricultural industries through its Bureau
of Foreign and Domestic Commerce. This bureau is responsible for the
collection of national income and production data. It issues indexes of in-
dustrial production, business sales and inventories, construction activities,
and personal incomes. All of these data are pertinent in evaluating the gen-
eral demand picture. The best single source of these data collected by both
the Departments of Labor and Commerce is the monthly publication,
Survey of Current Business, which is published by the Department of Com-
merce.
Another important bureau in the Department of Commerce is the
Bureau of the Census. The general census and the Census of Manufactures
and Trade, which are taken every ten years, and the Census of Agriculture,
rihich is taken every five years, are all published by this agency. These
 MARKETING OF AGRICULTURAL PRODUCTS

ccnsuses furnish the basic data and bench marks for much of the statistical
work done in the United States.
The Department of Agriculture is thc sourcc of the vast majority of
market and economic information pertinent to agricultural producers and
the food industry in general. I'vIuch of this information work is centered in
the Agricultural :Marketing Service (AMS), one of the major subdivisions
of the department.!!
The purpose of the Federal Market News Service operating within the
Agricultural l\Iarketing Service is to collect and distribute information on
prices, supply, and demand conditions which exist at the various marketing
points throughout the country.3 The service was established in 1913 by an
appropriation to aid in information collection. The first market report
issued was that covering the movement and prices of strawberries at Ham-
mond, Louisiana, in 1915. From this, the service has developed into its
current six branches for cotton, dairy and poultry, fruit and vegetables,
grain, livestock, and tobacco. In many instances the federal agencies have
entered into cooperative agreements with the individual states in order to
expand the coverage of the service.
l\1arket news reporters stationed at the various important markets and
production areas of the country collect much of the data for the market
news reports. These men are specialists in their individual fields. The
market information must be collected from the various individuals and
agencies actively marketing the product. The information which agencies
give might be incorrect or biased. The news reporter must be thoroughly
acquainted with the market and the product so as to appraise the accuracy
of the information obtained. For example, a livestock news reporter must
be able to grade livestock and be thoroughly acquainted with the method
of the livestock trad~. The same is true for the news reporter for each of the
other commodities.
The various offices are tied together by leased wire and telephone
services as shown in Figure 1. \Vith this communication system, informa-
tion can be exchanged almost instantaneously with all other points in the
country. Messages placed on the wire at anyone point reach all other points
on the circuit and, when desired, can be relayed to offices on other circuits.
Speed is of major importance in making such market information
2 Prior to the reorganization of the department in November, 1953, the market news
work was centered in the Production and fvlarketing Administration (Pl\'lA) and the
estimating work in the Bureau of Agricultural Economics (BAE). Most of the activities
of these two organizations were collected in the AMS, and the PMA and BAE as such
were abolished.
3 Much of the following concerning the operation of the Market News Service has
been taken from Agricultural Estimating and Reporting Services, USDA Misc. Publica·
tion 703.
 Collection and Use of Market Information 163
useful to the trade. Agencies or individuals can subscribe to the Com-
mercial News Dispatch Service of the \Vestem Union Telegraph Company
which obtains information directly from the Market News Service. Radio
is widely used in distributing the market reports. Nearly 1,100 radio stations
throughout the country regularly broadcast market news information. The
information is also made available to the press services of the country. Most
of the daily newspapers carry market news either completely or in part as
collected by the federal and state agencies.
Daily, weekly, and monthly mimeograph reports and summaries are
available free of charge from the markets covered by the service. Such re-
ports arrive by mail and are usually too late to be of use in evaluating imme-
diate market conditions, but they are useful in evaluating the trends which
are developing. The following illustrates the type and extent of the infor-
mation available from the various offices of the Market News Service:

Cotton:
1. Prices on lint cotton, cotton linters, and cottonseed.
2. Daily price quotations on ten principal markets.
3. Quality data during the ginning season.
Dairy and Poultry:
1. Prices, receipts, dealer's stocks, cold storage holdings, and retail move-
ments are reported for butter, cheese, fluid milk, cream, dried milk and
products, condensed and evaporated milk, shell, frozen, and dried eggs,
live and dressed poultry.
Fruits and Vegetables:
1. Prices and supply movements for the large city markets.
2. Shipping area data on prices, volume of loadings, quality, and market
trends.
3. Cold storage holdings in principal centers.
Grain:
1. Daily grain prices and supply movements (both cash and futures) for the
principal markets.
2. Prices, market movements, and production data of feedstuffs.
3. Country shipping point prices of hay, beans, hops, and some others.
Livestock:
1. Prices and supply movements on the principal livestock markets.
2. vVholesale meat prices and information on large consuming centers.
3. Feder livestock prices and supplies.
4. Cold storage holdings.
Tobacco:
1. Prices and supply movements on important auction markets.
2. Piices, supplies, and relatcd data for the growing area.
 MARKET NEWS OFFICES AND

, eCS!~. IiIASS .l • 0 to P1TTSS'..,IR(iIof.

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SEASONAL OFfiCES

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FIG U REI. The market news system of the

TELETYPE SYSTEM 1953
PRODUCTION AND MARKETING ADMINISTRATION

SYU80i..S INDICATE COMMOOITY

MARKET ,.;EW$ SERVICE

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• (lA\"-' eo PQ\,)\,.TRl'
.a. FRUITS a Ve:CETASl(S
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A PYA AREA OFFICE

5 surE ACENCY COCP[R.aTES
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u$(D fCR IIlARI(ET N[Io'IS

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United States Department of Agriculture. (Courtesy USDA.)

166 MARKETING OF AGRICULTURAL PRODUCTS

The Agricultural Estimates Division of the AMS is primarily respon-

sible for securing much of the basic statistical information pertinent to agri-
culture. In addition to the federal personnel there are forty-one state offices
aiding in this work. Most of the information is collected from cooperating
reporters throughout the country. These reporters are farmers and business-
men who complete and return questionnaires from which professional
statisticians develop the estimates. These cooperating reporters receive
no pay except the satisfaction of knowing they are doing very valuable
work.
The procedures followed in securing, preparing, and releasing data are
fairly standard throughout all of the state offices. The questionnaire which
has been designed to secure the needed information is sent out from the
'/arious states to their list of cooperating reporters. \Vhen these are re-
turned to the state offices, they are checked, edited, and tabulated by
counties and by groups of counties known as crop reporting districts. The
state statistician may even do some spot checking in the field to verify the
information. The final forms are then sent by special delive,y to the Crop
Reporting Board in vVashington, D. C. Here the opening, tabulation, and
releasing of the compiled data are done with the greatest of care to prevent
information leaks in advance. The following description of the final stages
of this procedure will illustrate the great care used:
On the morning of the release of a report, the chairman of the board, the
secretary of the board (who has the key for one lock), one other board member,
and a representative of the Secretary of Agriculture (who has the key for the
other lock), go to the locked room accompanied by an armed guard. There they
unlock the mail box and take the state reports to another room. The night
before the venetian blinds on all windows within this corridor have heen
lowered, closed, and sealed. No one may open or even adjust these blinds while
the board is in session. All telephones in the wing have been disconnected, the
door at the other end of the corridor is locked, and a guard is on duty outside.
These are called the lock-up quarters.
\Vhen forecasts or estimates have been adopted for all states for a given
crop they are handed to i-he computing unit. The tables and stencils are pre-
pared. :Mimeograph machines are brought into the quarters the night before so
that the report can be processed inside the locked corridor.
After approval by the Secretary of Agriculture, two or three minutes before
the release time the chairman and secretary of the board leave the lock-up
quarters and proceed under guard to the release room, looking neither to right
or left and speaking to no one nor acknowledging any greeting, according to
regulations. In thc release room telephone and telegraph instruments are already
connected and the operators are assembled in a prescribed space out of reach of
the instruments.
The chairman places one report face down beside each telephone and tele-
graph instrument. At the precise time, a representative of the Secretary of Agri-
 Collection and Use of Market Information 167
culture says "go" and the various reporters rush to their instruments and begin
sending out the reports.
Also at this time the information is sent to the various state offices for their
release. 4

This elaborate procedure is testimony to the usefulness of the various

data. Estimates of the size of crops and other important information are
immediately used in the buying and selling of products. An early informa-
tion leak might be used by an individual for his personal advantage_ To
illustrate, suppose the last estimate of the wheat crop had been for a crop
of 900 million bushels. The new estimate to be released, however, will
reduce the production to 825 million bushels. Such a predicted reduction
in the crop would no doubt at least temporarily strengthen prices. Someone
with advance knowledge could have purchased wheat and profited by the
short-run fluctuation.
The information available covers a wide range of products. The presen't
program for statistics and reports prepared by the Agricultural Estimates
Branch and available free upon request include the following:

Livestock:
1. January 1 numbers, value per head, and total value, by states, of livestock
on farms and ranches; published every February.
2. January 1 cattle, sheep, and lambs on feed; published in January. Reports
on development of feeding situation are issued in October, November,
and December.
3. Sow farrowings and pigs saved in the spring and fall season along with
sow breeding intentions; released in June and December.
4- Report on the early lamb crop issued in March and on total lamb crop in
July; lamb crop development reports are also released in April and May.
5. Estimates of wool and mohair production; issued in IVIarch.
6. Condition of western range feeder cattle and sheep; reported monthly.
7. Shipments of stocker and feeder cattle and sheep into eight leading feed-
ing states; reported monthly. Shipments of lambs from western feed lots;
reported weekly from January through May.
8. Meat animal farm production, disposition, and cash receipt estimates by
states; issued every April.
9. L;vestock slaughter and meat production estimates; published monthly.
Dairy:
L Number of milk cows on farms; released January 1 and monthly.
2.Milk production per cow; released monthly.
3. AnTIual production of milk and butterfat on farms.
4. Annual farm disposition of and income from milk.
5. Rations fed to milk cows; published monthly.

• Op. cit., pp. 12-14.

168 MARKETING OF AGRICULTURAL PRODUCTS

6. Production estimates of butter, American cheese, ice crcam, cvaporatcd,

condensed, and dry milk, dry casein and milk sugar; released monthly,
some weekly.
7. Manufacturcrs' prices, stocks and sales of condensed and dry milk prod-
ucts; prices paid by dairy plants for milk for manufacturing purposes; dis-
tributors' buying prices for milk used for fluid consumption; retail sales
prices for fluid milk; published monthly.
Poultry:
1. Number and value of chickens and turkeys on farms January 1.
2. Layers on farms, rate of lay, egg production, young chickens, and poten-
tial layers; reported monthly.
3. Chicks hatched, eggs in incubators, and orders booked by hatcheries for
future delivery; published monthly.
4. Farmer's intentions to buy chicks and the estimate of number of chickens
raised; released in February and July respectively.
5. Grower's intentions to buy turkeys and estimate of number of turkeys
raised; released in January and August respectively.
6. Chick placements in commercial broiler areas; released weekly.
7. Production of liquid, frozen, and dried eggs and canned poultry; released
monthly.
8. Annual farm production and disposition of chickens and cash receipts
from chickens and eggs; released in April.
Crops (grains, cotton, tobacco, fruits and vegetables, and others) :
1. Intended acreage, planted acreage, and harvested acreage reports are issued
for most crops. For most spring sown crops, intentions are released in
March; acreage planted in July and acreage harvested in December. (Pub-
lication of cotton intentions and prospects before July is prohibited by
law.)
2. Crop condition and estimates of yields and production of many crops;
published throughout the growing season. Final production data arc re-
leased at the end of the season.
3. Disposition (used for seed, fed, sold, available for sale) and value reports
for principal crops; issued in May.
4. Estimates of stocks and their position (on farms and in off-farm storage)
of many crops; released quarterly.
5. Sales of grains and oilseeds; reported monthly.
In addition to the collection of the wide range of basic statistical
information, the Agricultural Marketing Service also interprets the current
and future meaning of the data. Such interpretations are widely known
as outlook reports. In addition to the federal outlook work, the extension
services of many states also prepare outlook publications which are aimed
to sen'ice their farmers and market people. As our economy has grown
more and more complex, looking into the economic future has become
more and more important.
Many publications issued by the Agricultural Marketing Service inter-
 Collection and Use of Market Information l~

pret and appraise current market information and make predictions con-
cerning future trends. These publications often report research findings
of special interest. Some of the more important of these reports, in most
instances available free, are as follows:
The Agricultural Situation. A popular type of monthly publication which con-
tains brief reviews of current economic developmcnts affecting farmers. Short
articles also report new findings and conditions of special interest.
The Demand and Price Situation. This monthly publication reports the more
technical details, analyzing the demand and price prospccts for agriculture.
Thcre are brief outlook reviews for each of the major commodity groups.
This is probably thc best publication for those who wish to keep abreast of
the general trends of the markets. The Agricultural Outlook Digest is a single
page summary of the general and specific commodity situations. It also is
issued monthly.
The Marketing and Transportation Situation. This monthly publication con-
tains statistical tables showing price spreads between the farmer and the
consumer. It also includes summary reports of some of the latest develop-
ments in the field of agricultural marketing. The publication, Marketing
Activities, also is issued monthly. This also reports results of marketing re-
search and current developments in the field of standardization, grading, and
price support activities.
Commodity Situation Reports (the cotton, dairy, fats and oils, feed, fruit, live-
stock and meat, poultry and egg, tobacco, vegetable, wheat, wool, world sugar,
national food, and farm cost situations). Some of these are issued monthly;
others periodically. Each appraises the current market situation and future
prospects for the respective commodity. Articles of special interest in the par-
ticular commodity groups are also carried. In all of the Situation reports, one
issue in the fall, usually October, is devoted to the analysis of the outlook for
the next year.
The above illustrates the scope and type of information available. In
spite of the availability of such information, many producers and marketing
agencies are notoriously uninformed. Ignorance is not a passive situation.
Information is a strong competitive weapon. To assemble and properly
evaluate pertinent information is one of the most difficult jobs facing
marketing personne1. In this work even the most astute make costly mis-
takes. However, to remain voluntarily uninformed when so much informa-
tion is available is the most costly mistake of all.

INFORI'vIATION NEEDS AND PROBLEMS

I\Iany of the needs and problems which are involved in keeping a
complex marketing organization informed have already been touched upon.
These now can be brought together in four major areas, namely (1) exten-
sion of coverage, (2) keeping abreast of changing conditions, (3) method-
clogy of collection, and (4) dissemination problems.
 MARKETING OF AGRICULTURAL PRODUCTS

Extension of Coverage
More specific information is needed. ,\Vith the wide range of qualities
that are involved, price, supply, and demand information will have its
maximum use only if it is related to specific grades and conditions. Since
many agricultural products have several uses, information needs to be
specific as to use. For example, price quotations for the fruit which is to
be used fresh cannot be interchanged with those quotations for the fruit
which is to be used for processing. Feeder livestock conditions need to
be reported separately from slaughter livestock market conditions. Informa-
tion needs to be more detailed and specific as to the level of the marketing
channel being reported, such as f.o.b. prices at the country elevators,
prices in the terminal market, and retail prices.
There is a need for additional regional or local data. Much of the
information is collected on a state or national basis. Political subdivisions,
however, do not necessarily correspond with the areas which are economi-
cally homogeneous. For example, local and regional data of the broiler
chick placement statistics are gathered and reported for our major broiler
areas. Some of these areas, such as the Del-Mar-Va peninsula, northern
Georgia, and northwestern Arkansas, represent highly specialized regions
for which state-wide data would not be adequate.
There is a need to fill the large gaps in which no information is now
available. One of these blank areas is that of the retail trade. Information
which would permit consumers to compare prices and products more
rationally should enhance competition at this level of the marketing
system. There are many commodities about which very little information
is available. Such commodities are often considered "minor" when viewed
from the national viewpoint. However, to the specialized producers, in-
formation for such products is of major importance. Naval stores and black-
strap molasses are examples of this type of product. Gum turpentine and
rosin are distilled from crude pine gum which is produced by over 8,000
farmers. Nearly three-fourths of the total production is in Georgia. As an
industry it has an annual gross value of many millions of dollars. To the
Georgia producers it is a product of major importance. Yet there is nothing
available from the federal services in the way of market information.5

Keeping Abreast of Changing Conditions

In a dynamic economy, the methods and channels of marketing are
continually changing. Such a situation means that news and information
5 Program for Development of the Market News Sef1!ice, Production and r-.larketing
Administration, USDA Ivlimeograph, 1950.
 Collection and Use of Market Information 171

services which once were adequate may not meet the requirements of a new
situation.
One of the important causes of information problems is the decentrali-
zation of the marketing processes which has taken place for many products.
The large central wholesale markets which once handled the bulk of the
products now may be largely by-passed. The principal level of initial trans-
actions is now in the production area, and the transactions at large whole-
sale terminals may no longer be a representative picture. The growth of
direct marketing of livestock means that other coverage than that of the
terminal market must be devised if the information is to be representative
of the livestock being marketed. The informational services for butter were
set up to cover the large central exchanges which originally handled the
great majority of the butter transactions. However, during 1949 it was
estimated that the butter sold on the Chicago Exchange represented only
I } percent of all the butter received in Chicago and less than two-tenths of
1 percent of all the butter produced in the United States. 6 Examples of

similar situations could be drawn from many other commodities.

Changes in the transportation pattern also require changes in the
informational organization. At one time rail movement data adequately
represented the supply movements of agricultural products. This is no
longer true. In many of our livestock markets, the vast majority of the
supplies are received by truck. It has been estimated that nearly two-fifths
of our fresh fruits and vegetables is shipped to market by truck. Some time
in the future, the volume of airline freight may need to be considered in
estimating market movement.
There have been marked changes in the amount and type of processing
of agricultural products during the past several years. The processing in-
dustry for fruits and vegetables was at one time a minor outlet. Now
this industry is a major outlet. Too, only in the past few years have the
products utilized in the frozen food industry reached sizable proportions.
Informational services must be continually revised to reflect changing con-
ditions such as these.

Methodology of Collectio1l
Above we have pointed up the need for more i~formational services.
However, there is also a need for more accurate coverage. Questions of
accuracy arise with regularity. Some are sure the estimates for the pig crop,
the corn crop, or the cotton crop are too high or too low. Many times the
estimates prove to be correct, but in a few cases they have been decidedly
6 Hugh L. Cook, "Central Market Quotations and Country Buying," Journal of

Farm Economics, November, 1950, Part :.

 !-.r ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

wrong. Such mistakes bring -a deluge of protests-sometimes even from

Congress itself. Such interest is testimony for the importance of accurate
information.
However, the financial resources, both private and public, which can
be devoted to this marketing function are limited. This focuses attention
on increasing the coverage and usability of the market and economic in-
formation and decreasing the costs. New methods of securing adequate
information are continually being sought. Complete coverage of all trans-
a~tions is impossible. The problem is one of adequate sampling so that
the information reported will be representative.
In the area of methodology also falls the problem of how to deal with
the growing importance of non price competition. \Ve have seen that the
quoted prices may be merely the basis for determination of premiums and
discounts. Credit conditions, transportation costs, various types of allow-
ances-all these may be determining factors which are not reflected in
quoted prices. Determining what the trade practices are and how they can
be handled presents a continuing problem to students of the techniques
of information gathering. The mere spending of large sums of money to
collect information is not the whole answer. The real challenge is to devise
new methods so that more information of greater accuracy can be obtained
with less expense.

Dissemination of Information
As pointed out in the discussion of usable information, timeliness
is of great importance. \Vith the development of modem communications,
the demand for speed has increased. The mail and press were aided by
the telephone and telegraph. To these methods were added radio and more
recently television. \Vith each new method of communication, the empha-
sis on speed has increased. Also, the area over which the information is
used has broadened.
Much of the information of a more basic character does not require
such speedy dissemination. In this area, the mails remain the most im-
portant method of dissemination. Even here, however, there is a need for
more uniform terminology in describing marketing conditions as the area
of use grows larger. l'vlarket reporters no longer can use their own peculiar
teminology in explaining marketing conditions. The preparation of press
and radio releases in language which cannot be misunderstood is important.
In this important field, many of our informational agencies need much
more experience.
An educational program for the users of the information is also needed.
Onl~' in this way will data be used for the purpose for which they were
 Collection and Use of Market Information 173
intended and nothing more. The use of price ranges instead of single
specific prices is an example of the misunderstanding and misuse of infor-
mation. In many markets, because of the number and variation of the
transactions, the reporting of a specific meaningful price is not possible.
Only a price range represents the true picture. However, some of the users
of the information desire a single quotation and criticize the use of price
ranges. This demonstrates misunderstanding of the mechanics of the
marketing and price making process. All considered, the securing of ade-
quate dissemination and wise use of information present problems no less
difficult than those involved in collection.

SELECTED REFERENCES
Agricultural Economic and Statistical Publications, USDA, Bureau of Agricul-
tural Economics, 1952.
Clark, F. K, and L. D. H. \Veld, Marketing Agricultural Products (New York,
lvlacmillan, 1932), Chap. 15.
Shepherd, G. S., Marketing Farm Products (Ames, Iowa State College Press,
1946), Chap. 6.
Taylor, A. C., and Ann D. Taylor, The Story of Agricultural Economics (Ames,
Iowa State College Press, 1952), Chaps. 12, 13, and 17.
Thomsen, F. L., Agricultural Marketing (New Yark, McGraw-Hili, 195 1 ),
Chap. 14.
CHAPTER TWELVE

Cfransportation

Products must be moved from where they are produced into the areas
where they will be consumed. As we have seen from our study of the
relationship of production and consumption areas of agricu1tural products,
this is no simple task. Adequate and efficient transportation is a cornerstone
of our modern marketing system. The wide variety of food available in
our grocery stores at all times of the year would not be possible without
modern transportation. How this moving job is done and some of its major
problems are discussed in the pages that follow.

WHO DOES THE JOB?

Transportation charges over the years have accounted for about 12
percent of the total marketing costs for food products. In 1949, it was
estimated that the total transportation bill of the nation was 13.9 billion
dollars. Agricultural products accounted for nearly one-fourth of this total

TAB LEI. Estimated Costs of Transportation, 1949

TYPE OF AGRICULTURE AND NONAGRICULTURAL

CARRIER RELATl:D PRODUCTS PRODUCTS TOTAL

BILLIOX DOLLARS BILLION DOLLARS BILLION DOLLARS

Railroads 1.9 5·7 7. 6

Motor truck 1.7 3. 8 5·;
Other '" t .8 .8
Total 3. 6 10·3 13·9

'" \Vater carriers, air carriers.

t Less than .05 billion dollars.
SOURCE: Donald E. Church, Effect of Increases in Freight Rates on Agricultural
Products, USDA Circular 847. 1950.
 Transportation 175
expenditure (Table 1). The relative importance of rail and truck trans-
portation for agricultural commodities can also be seen from these data.
Truck transportation accounted for slightly less than half of the tota1.
\Vater transport, though important for some commodities, was relatively
unimportant in relation to truck and rail movements. Air transportation of
agricultural products is still in the experimental stage.
The major change in transportation during the last few decades has
been the increasing use of the motor truck. In 1929, the truck transporta-
tion biB accounted for about 24 percent of the total transportation charges
for farm products. By 1949, the trucking bill had risen to where it accounted
for nearly half of the total.

Trucking to Initial Markets

Trucks have made the greatest inroads in the transportation of prod-
ucts from farms to initial markets. This segment of the transportation
picture is now almost completely dominated by the truck. Nearly 90 percent
of the total tonnage was moved from farms to the initial market in trucks
(Table 2).
TAB L E 2. Percentage of Total Tonnage Trucked from Farms to
Initial Market Compared with That Moving off Farms
to Railroad or Dock for Further Shipment to Initial
Market, United States, 1948

DIRECT TR'UCK JOINT HAUL WITH

COMMODITY HAUL RAIL OR WATER

PERCENT PERCENT

Grains 91 9
Fruits 83 17
Vegetables 82 18
Livestock 88 12
Milk 97 3
Cotton 96 4
Poultry and eggs 96 4
Tobacco 99 1
i\Iiscellaneous crops 85 15
All commodities 89 11

SOURCE: l\Iargaret R. Purcell; Statistical Findings of Survey of Transportation from

Farms to Initial Markets, Bureau of Agricultural Economics, USDA Mimeograph, 1949.

Farm,-!"s owned nearly half of the trucks engaged in this hauling

operation. The other trucks were either carriers hired by the farmer or
owned by the buyer. This picture varied somewhat depending upon the
commodities under consideration (Table 3).
 7'>1 ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

TAB L E 3. Percentage of Total Tonnage of Agricultural Com-

modities Moved from Farms to Initial Markets in
Farm-Owned, Hired, and Buyer's Equipment, United
States, 1948

FARM'OWNED EQUIP:,!ENT HIRED EQUIPMENT OW:-'ED

COM"'lODITY EQUIPMENT DY FARMER DY DUYER

PERCENT PERCENT PERCENT

Grains 54 34 12
Fruits 40 20 40
Vegetables 59 20 21
Livestock 21 61 18
Milk 30 41 29
Cotton 7° 28 2
Poultry and eggs 27 13 60
Tobacco 44 52 4
Miscellaneous crops 46 24 30
All commodities 45 33 2:?

SOURCE: l\1argaret R. Purcell, Statistical Findings of Survey of Transportation from

Farms to Initiall\Iarkets, Bureau of Agricultural Economics. USDA t\Iimeograph, 1949.

The growing importance of the farmer himself in this first stage of

transportation has been one of the contributing factors in the decentraliza-
tion of markets. A farmer owning his own truck is usually interested in
hauling his own products to market. But he is not interested in spending
much of his time to do the job. This has led to the growing popularity of
the local markets "near home."

Trucking to Terminal Markets

Not only do trucks dominate the initial movement of products from
farms to the nearby points of sale, but they have become increasingly
important in moving products to the large wholesale markets of the
country. Over three-fourths of the large terminal market receipts of live and
dressed poultry, eggs, hogs, milk, cattle, and calves arrived by truck. How-
ever, less than one-half of the grapefruit, lettuce, potatoes, oranges, cheese,
sheep, and lambs arrived at major markets by truck (Figure 1).
Limmer 1 has advanced four factors which he believes explain why
trucks are more important for some commodities than others:
1. Shippers of commodities whose supply area is farther from the market
prefer rail transportation over truck. This is particularly true if re-
frigeration is required. The shorter the haul involved, the greater is the
use of the motor truck.
1 Ezekiel Limmer, Transportation of Selected Agricultural Commodities to Leading

A'1arkets by Rail and Motor Truck, 1939-50, Bureau of '\gricultural Economics, USDA
Mimeograph, 1951.
 PERCENT OF FOOD RECEIPTS
BY RAIL AND TRUCK
Major Markets, Selected Commodities, 1950
COMMODITY PERCENT OF TOTAL RECEIPTS
o 25 50 75 100

LI V E PO U L TRY ......... I - - - - - - , - - - - - : - - - - _ - - - . J I
5 HELL EGG 5 ...•.•..... I--_ _--,-_ _ _-:--_ _ _ _ _~

HOG 5 ........•......•...... 1--_ _---:-_ _ _-:-_ _ _..uCLLL'LLL,,~

MIL J< ••••••••••••••••••••••• 1------,-_ _ _-:--_ _ ___rL;~<:"LL<::a

CA LV E S ...........•..•.•.. 1--_ _--:-_ _ _-:--_ _ _..J:::L.:::.ca.~

DR E SSE 0 PO U LTn Y .. I--_ ___,...._ _ _,..--_ _~:.ca.~~

CATT L E .................... 1--_ _-....._ _ _...,.-_ _ _ _t:C.C£:aL.t.~~

CREAM .................... I--_ _.....,....~

APPLES ................... I----.../,

TO M ATO E 5 .............. 1--_ _--:-_ _____,:--....rc.<aL.t.~~caG~

BUTTE R ................... I--_ _-,-_ _---;,..--~~~

,.,....,,..,.,..,.,..,...,..j
SHE E P (, LAM B S ...... I-----,---~CL==
GRAPEFRUIT ............ I--_ ___,..._ _~~

LETTU C E ................. i--_ _ _ _---J~~

POTATO E 5 ............... I--_ _-,-_-=~~~~=~~~~

ORA N G E 5 ............... I--_ _ _--.....!.I~=.LLL.I.~CLL£.CLLL"LLL.I.=~

C H E ESE .................. 1--_ _ ___r:,=CLLL~=CLL£.CLLL"LLL.I.=~

FIG U REI. The importance of truck transportation in mov-

ing agricultural commodities to terminal markets.
(Courtesy USDA.)

1 77
 MARKETING OF AGRICULTURAL PRODUCTS

2. Commodities which hav~ a high value per pound or are bulky have
comparatively high rail rates while those which have low value or are
less bulky have relatively low rail rates.
3. Some commodities are more susceptible to damage in transit. Shipment
by rail freight is frequently considered to be more damaging than ship-
ment by truck because of more jolting and handling.
4- Shippers which need speedy or more "door-to-door" service prefer the
truck over the rail shipment.

There is evidence that the increased use of trucks at the expense of

the railroad is continuing. About two-thirds of all Florida oranges which
were unloaded at nine big city markets across the country were carried by
railroads in 1949. However, during the period 1948 to 1949, a 27 percent
loss in rail traffic could be traced to diversion to truck hauling.!! It was
estimated that railroads lost 17 percent of their butter volume during the
same year because of the diversion to truck hauling. If the railroads had
not lost any of their volume to trucks since 1941, they would have hauled
46 percent more butter in 1949.3
In most instances, trucks are competing most heavily with the rail-
roads for the short-haul business from the nearer supply areas. In a study of
the vVashington, D.C., potato supply, it was found that the average length
of haul into the city was 860 miles. Of the total truck receipts, 88 percent
of them were from supply areas less than 700 miles distant. One-third of
all the rail shipments came from over 1,000 miles. 4 The railroad apparently
still holds considerable advantage for long hauls. However, the develop-
ment of the nation-wide trucking companies with terminals and established
routes are rapidly extending the satisfactory range of the truck. The truck-
ing industry is also making progress in the field of refrigeration. Successful
cross-continent runs with commodities under refrigeration have been made.
However, the use of refrigerator trucks is still largely limited to relatively
short runs.

Rail Transportation
Even though the inroads of the truck have been severe, the railroad is
still a very important agency for moving agricultural products. Agricultural

2 Donald E. Church, "Diversion of Florida Orange Traffic from Rail to Truck,"

Marketing and Transportation Situation, USDA, June, 1950.
3 Donald E. Church, "Diversion of Butter Traffic from Rail to Truck," Marketing
and Transportation Situation, USDA, July, 1950.
4 Donald E. Church, "Recent Trends in Transportation of Potatoes to 'Vashington,
D. C.," Marketing and Transportation Situation, USDA, February, 19 ;0; also Donald E.
Church and J. R. Snitzler, Trucks Haul Increased Share of Fruit and Vegetable Traffic,
Bureau of Agricultural Economics, USDA i\Iimeograph, 1953.
 Transportation 179
business is also a very important segment of the total business of the rail-
roads. Of the total rail transportation bill, 25 percent was from agricultural
and related products (see Table 1). Agricultural shippers originate about
one-third of the total box-carloads. Grains, cotton, and mill products
account for about 20 percent; sugar, packaged foods, and other similar
products for about 10 percent; and other miscellaneous agricultural prod-
ucts for about 3 percent of the total box-carloads. Nearly 95 percent of
an refrigerator carloads is made up of agricultural products. Fruits and
vegetables account for about one-half; meat, poultry, and dairy products
for about one-fourth; and various manufactured agricultural products for
the remainder of these refrigerator carloads.
Railroads are still preferred for large-volume, long-distance hauling.
Railroads also appear to have an advantage in cases where accurate advance
notice of arrival time is desired. Though the volume moved by truck is
large, the large mass-movement tasks, such as those which develop during
wheat harvest, could not be accomplished without the aid of the railroad
system.

\Vater Transportation
\\Then compared to the volume hauled by truck and rail, the volume
of agricultural commodities carried on the inland and coastal watenvays
of the country is small. However, where speed is not important and the
commodity has great bulk and weight, water transportation is often the
cheapest method of transportation. For example, in early 1953 the rail
freight rate for hauling wheat, corn, and oats from Minneapolis to New
Orleans was $10.30 per ton. The barge rate for the same trip was $4.50
per ton.
The Great Lakes and Mississippi River system are the most important
arteries of waler commerce in the United States. \Vith the development
of Diesel towboats, the barge traffic on the rvIississippi system jumped
from 5.5 billion ton-miles in 1931 to 36 billion ton-miles in 1951. Grain is
the principal agricultural product which is transported by water. One out
of every five barges hauls grain. Some of the larger barge tows will now move
200,000 bushels of grain. In 1951, 46 percent of the corn and 30 percent
of the wheat exported from New Orleans arrived by barge. 5
Air Transportation
Agricultural air freight is still in its infancy. The quantities of agricul-
tural commodities which are moved by air freight are very small indeed. Cut
5 Stanley Phillips. "Grain Traffic of the ;\lississippi River and Its Tributaries,"
::- ;,'rketing and Transportation Situation, USDA, April, 1953; also, the \Vall Street
/oumai, ;\lay :!.7, 1952.
180 MARKETING OF AGRICULTURAL PRODUCTS

flowers and nursery products are the biggest single agricultural users of air
freight. Some fruits have been moved in limited quantities on an experi-
mental basis. In a few instances, some of the very early season produce is
rushed to market by air in order to secure premium prices.
The future of air transportation cannot be evaluated on the basis of
current freight rates alone. Substantial economies may be forthcoming
in other ways. Lighter containers may be used. Some packing and other
marketing costs may be largely eliminated. For example, the usual methods
of handling off-season tomatoes is to pick them green and ripen them after
they reach the consumption centers. If tomatoes were picked when vine-
ripened and shipped by air overnight to the markets, the ripening costs of
2 to 3 cents per pound might be eliminated. The air shipment of lettuce
from California might substantial1y reduce the icing costs. Under normal
rail shipment, icing costs are about 50 cents per crate; this cost could be
largely eliminated with air shipment.6
In addition to these possible savings in current marketing costs, there
is the unknown factor of the effect upon demand. Many believe that if con-
sumers were supplied with tree-ripened fruit they would buy more at the
same or higher prices. Perhaps it is in this area of increased consumer
acceptance that the real net gain from air transportation may develop.
The potential for air transportation of selected high value, perishable,
and seasonal products appears considerable. However, the impact upon
marketing methods and costs will be great. Changes probably will have to
be made in harvesting, processing, packaging, and the assembly of the
commodity.
FREIGHT RATES
The level of and changes in freight rates have always been a matter'
of concern to agricultural producers. 'Vith the inelastic nature of agri-
cultural supply, at least in the short run, changes in the freight rate struc-
ture are absorbed by agricultural producers through lower farm prices.
Also, changes in rates which are unequal for various sections of the country
may change the competitive advantage of producers in one section com-
pared with those in another section. It was the rural agitation of the Grange
movement of the 1870'S which is credited with laying the groundwork for
the creation of the Interstate Commerce Commission in 1887-
The Freight Rate Structure
The railroad freight rate structure of the United States is a very
complex, and often irrational, thing. In general there are two basic types
6 R. \V. Hoecker, et al., Air Transport of Agricultural Perishables, USDA Misc.
Publication 585, 1946.
 Transportation 181

of rates, the class rates and the commodity rates. Class rates are those
which are estab1ished for a 1imited number of broad categories into which
thousands of different products can be placed. This eliminates the necessity
of establishing individual rates for each different product. Commodity
rates are those which are established specifically for an individual com-
modity considering the needs and problems of shippers. Such rates are
established for large·volume, low-valued items such as coal, ore, and grain.
j\,Iost agricultural products move under commodity rates. Over four-fifths
of the total carloads of all products is moved under commodity rates.
In establishing the class rates, the country is divided into five rate
territories each with different rates. These regional differences in rates have
resulted in continual controversy. It is claimed that rate differentials have
encouraged industrial development in the northeastern region of the
United States, and discouraged such development in the southern and
western regions. This situation results in the long hauls to move raw
products eastward for manufacture.
Just how much the differential freight rate structure has retarded the
industrial development of some sections of the country is a matter of
debate, but there is general agreement that regional rate differences cannot
be entirely justified on the basis of cost difference. 7 Many contend that
changes in the freight rate structure would encourage industrial develop-
ment in the areas near the raw materials. Since most manufacturing and
precessing generally result in less bulky and higher-valued products than
the original raw material, this could mean substantial savings in the trans-
portation costs.
Commodity rates are generally lower than class rates. These rates vary
somewhat in line with the "cost of service." Some of the factors considered
here are the length of haul, weight that can be shipped in a car, and the
risk of loss and damage. The great variation in distance and bulk among
commodities can be seen from studying Table 4- The effect of the length
of haul can be seen in the cost per hundredweight. Sugar beets which
are shipped for only a very short distance cost much less per hundred-
weight than apples or lettuce which travel long distances. However, the
bulk weight of commodities also affects the cost as can be seen from
variations in the revenue per ton-mile.
There are also rate differences depending upon whether the shipment
is in carlot (c.1.) or less than carlot (l.c.l.) amounts. The rate is generally
lower on the carlots than the less than carlot shipment. This preferential

7 Ralph L. Dewey, "Interterritorial Freight Rate Differences in Relation to the

i'"gionalization of Industry," Journal of Farm Economics, :t\lay, 1945; Frank L. Baron,
"Length of Haul and Farm Commodity Prices," Journal of Farm Economics, May, 1941.
 MARKETING OF AGRICULTURAL PRODUCTS

rate for carlots was one of the-reasons for the development of early coopera-
tivc livestock shipping associations. As the railroad was the only method
of moving livestock to major markets, the association assembled small lots
from individual farmers so they could ship into the terminal markets at
carlot rates.

TAB L E 4. Average Length of Haul, Revenue, and Load of

Selected Agricultural Commodities, 1948

REVENUE

PER SHORT-LINE PER HUNDRED· LENGTH OF HAUL, LOAD PER

COMMODITY TON-MILE" WEIGHT SHORT-LINE * CAR

CENTS CENTS MILES TONS

Flour, wheat .81 27 662 37

Soybean oil cake .9 8 24 485 38
Cereal food preparations 1.16 37 635 24
Sugar beets 1.22 5 84 39
Barley and rye 1.3° 28 435 49
Apples 1.41 137 1,95° 20
Oats 1.42 27 384 4°
Sorghum grain 1.43 32 454 52
\Vheat 1.4 6 27 36 5 53
Corn 1.5° 25 329 51
Oranges and grapefruit 1.55 12 3 1,5 29 23
Lettuce 1. 64 184 2,247 12
Potatoes 1. 6 5 68 82 3 21
Hay 1.99 45 44 8 15
Cotton in bales 2.01 56 55 6 21
Sovbeans 2.48 19 15 2 5°
T~bacco, unmanufactured 3·°3 61 4°° I;

* Short-line mile is the shortest practicable railroad distance between origin and
destination; actual haul usually is somewhat longer.
SOURCE: Donald E. Church, Effect of Increases in Freight Rates in Agricultural
Products, USDA Circular 847, 1950.

Rates are also differentiated depending on whether they are local or

through rates. Because of the terminal expense involved, longer hauls
usually are moved at a lower rate per mile. The through rate is less than
the sum of several local rates covering the same distance.
There also are several special services available to rail shippers. Two
such services of especial importance to agriculture are the transit privilege
and the diversion and reconsignment privilege. The transit privilege permits
a shipper to stop a shipment en route to permit some processing or opera-
tion to be performed and then reshipping on to the original destination,
still at the original through rate. This privilege is widely used by the grain
 Transportation 183
trade. Wheat en route from a western point to the East can be stopped
for cleaning, grading, and milling. The flour can then continue onward at
the original through rate from the initiating point to its eastern destination.
The diversion and reconsignment privilege allows a shipper to change
the destination of his product either while en route or after arrival at the
originally desired destination. Within limits, reconsignment and diversion
can take place and the through rates apply to the new destination. This
service is especia1ly valuable to the shippers of fresh fruits and vegetables.
Often produce is sold after it is en route so that the exact destination
cannot be known at the time it is shipped. Often, too, the original market
for which the shipment was intended becomes glutted and prices break
so that it would be more profitable to reship to another market. The use
of diversion and reconsignment aids better allocation of supplies of
perishables and reduces the spoilage and waste which accompany market
gluts.
A word should be said concerning motor truck freight rates. Most
trucks operating for hire can be classified either as common or contract
carriers. Common carriers serve the general public at a published schedule
of charges. Such carriers are usually large concerns with terminals and
fleets of trucks. Contract carriers are available for hire at rates established
by arrangement between the individual trucker and the shipper. The rates
of interstate common carriers fall under much the same regulatory ma-
chinery as railroads. Contract carrier rates, however, escape much of this
regulation. Contract carriers are probably of greatest importance to agri-
culture. Because of the differences in regulations, rates vary widely, as also
do the services provided. Few generalizations can be made concerning
truck rates. It probably is true, however, that much of the competitive
advantage of trucks over railroads arises not so much from rate differences
as from flexibility and convenience.

Making of Rail Freight Rates 8

In 1887, the Interstate Commerce Commission was established to
police the competitive practices of the railroads. Since 1910, this Commis-
sion has also passed on proposed changes in the rate level. The present
rate structure is the result of these various decisions of the Commission
as well as a great number of changes instituted voluntarily by the carriers.
Voluntary reductions have sometimes been made by the railroads in order
8 Mu('h of the information in this section is taken from the very excellent publica·
tion by Ezekiel Limmer, Chief Factors Underlying General Changes in Rail Freight
Rates, with Special Reference to Farm Products, 1910-51, USDA, Bureau of Economics,
:\i<iv, 1951. ~1r. Limmer discusses the history of each rate change siI1ce 1910 aI1d the
cmlution of the rate·making philosophy.
 MARKETING OF AGRICULTURAL PRODUCTS

to meet specific competitive situations. However, basic levels of rates have

been established by the decisions of the Commission.
From 1910 to 1951, twenty-nine decisions have been rendered by the
Commission. The large majority have been on the petitions of carriers for
higher rates. Only three of the decisions involved petitions for rate de-
creases-all of which were initiated by shippers (Table 5).

TAB L E 5. Rc.:ilroad Freigl1t Rate Level Decisions Rendered by

the Interstate Commerce Commission, 1910-51

TOTAL PROPOSED PROPOSED

PETITIONS INCREASES REDUCTIONS

Total number of decisions :9 :6 3

Favorable to proposed change 21 19 ;z.
Unfavorable to proposed change 8 7

It is the job of the Commission to see that tIle rates are "reasonable
and just." \\That are the standards for such rates? Some measuring sticks
for answering this question have been laid down by legislative action and
are continually being revised by court decisions. The Commission was
directed originally by Congress to provide for an adequate railroad net-
work. The first basis for making decisions was that rates should give a
fair return upon the property value of the railroads. In a resolution passed
by the Congress in 1925, the Commission was further directed to consider
"the conditions which at any time prevail in our several industries . . . ."
In the 1930's, the emphasis shifted from a fair return upon property value
to a return which would enable the carriers to attract additional capital
from investors. The Commission was then given the additional directive
to give consideration to the effect which the rates would have. on the
movement of traffic.
The Commission, then, is faced with the dilemma of establishing
rates which will yield un adequate return (as measured against some
standard) on the one hand, but which will consider the economic "ability
to pay" of the shipper on the other. This is the heart of the modem rail
rate problem. Diversion to trucks is cutting into rail volume. Operating
costs of railroads may rise, or remain stable, when other prices are falling.
To provide revenue which will maintain an adequate rail system may
require rate increases at the very time when shippers need a downward
revision in rates. The Commission has answered this situation on various
occasions in the past by exempting some commodities from rate increases
and by giving special treatment to others.
 Transportation 185

Freight Charges and Agricultural Prices

The general antagonism between farmers and the transportation
agencies can be at least partially explained by the historic relationship be-
twecn freight rates and agricultural prices. The outstanding characteristic of
frcight rates has been their relative stability and their tendency to change
in only one direction--up. A study of Figure 2 will show two pertinent

o
1910 1920 1930 1940 1950
YEAR BECfNHING JULY' 1.1911·'''; CALEHDA.R YEJ.R. 19"'$.Sl

FIG U R E 2.. Railroad freight rates and prices received by farmers,

1913 to 1953, showing the relative stability of freight
rates compared with farm prices. (Courtesy USDA.)

generalizations. First, rates remain relatively stable during the first stages
of a rise in agricultural prices, but they finally increase sharply. This increase
may occur even after the rise in farm prices is over and has turned down-
\vard. Secondly, once the rate increase is accomplished, the new level tends
to become permanent even though other prices decline sharply.
111ese relationships mean that during rising prices, freight rates de-
cline relative to farm prices. But during falling prices, the rates rise relative
to farm prices. The data on wheat prices and freight rates presented in
Table 6 illustrates this. The selected years given show the major changes
,,·hich have occurred in prices for wheat. In the immediate postwar years
 MARKETlNG OF AGRICULTURAL PRODUCTS

of 1919 and 1946, wheat prices had risen from prewar levels, but the freight
rate had increased only slightly. During those years, it required only 4.4
and 6.9 bushels to pay the freight on 100 bushels. However, in 1921 and
1932, prices broke sharply. In 19:n, freight rates actually increased and in
1932 they remained unchanged. The results were that it required 11 bushels
in 1921 and 24 bushels in 1932 to pay freight on 100 bushels of wheat.
This frcight-price relationship becomes particularly critical for those
shippers located long distances from markets. The inflexibility of the
rates often explains why a sharp market price decline for perishables, for
example, will result in California growers either destroying or leaving crops
unharvested. After freight and harvesting costs are met, the result may be
an actual net dollars loss to the grmver. He logically attempts to minimize
his losses by not incurring these expenses by not harvesting either part or
all of his crop.

TAB L E 6. \Vheat Prices and Freight Rates from Brewster,

Kansas, to Kansas City, Selected Y cars

FREIGHT RATES PER WHEAT REQUIRED

AYERAGE PRICE BUSHEL FRO~I TO PAY FREIGHT
SELECTED PER BUSHEL, BREWSTER, KANSAS, CHARGES O:S
YEARS KA:SSAS CITY TO KANSAS CITY 100 BUSHELS

CENTS CE:STS BUSHELS

19 15 119 8,7 7-3

19 1 9 242 10.6 H
19 21 1:0 13·: 11.0
19 2 5 16 3 1:!·3 7·5
1932 51 12·3 24. 1
193 6 121 12.6 10·4
19·P 126 1304 10.6
194 6 ::09 14·4 6·9
195 0 ::28 20.2 8.8

SOURCE: i\dapted from data in Chief Factors Undcrl;.-ing General Changes in Rail
Freigizt Hates by Ezekiel Limmer, Bureau of Agricultural Economics, USDA 1'.limeo·
graph, 1951.

REDUCTION OF
TRANSPORTATION COSTS
Rates and Methods of Transportation
There appears to be little justification for basing hopes of reducing
transportation costs on lowcr truck and rail freight rates. Past history offers
little encouragemcnt that ra tcs can be reduced substantially. Rather, the
future'probably holds increased rates. Also, competition between the trucks
and railroad carriers cannot be cQunted upon to accomplish any major re-
 Transportation 187
duction in costs. Though the diversion of business from railroad to truck
will probably continue, there will always be a place for both types of carriers.
The principal advantage of trucks lies in their speed, versatilil:jr, and con-
venience in short hauls and to small shippers. The advantage of rail carriers
is their ability to carry huge volumes over long distances with dependability
and regularity.
'Vith the increased development of the larger truck and nation-wide
trucking companies, the trucking industry will probably be subjected to
more and more regulations similar to those covering railroads. There is
a growing tendency for greater state taxation on trucking. \Vith ever-
grovving highway maintenance problems, states are insisting that trucks
pay a larger share of the road costs. Both trucks and railroads will probably
improve the efficiency of their operations with the passing of time. These
improvements cannot be depended upon to do more than hold down the
pressure for higher rates. It also seems likely that the rate advantages now
held by some segments of the truck industry will gradually disappear.
Unit costs of operation of the transportation agencies also are rela-
tively fixed. This means that in good or poor times for the economy as a
whole, there is only a very sluggish change in operating expenses. Because
of this, there is little hope for increased flexibility of rates. This means
that in periods of low prices, transportation rates will continue to be rela-
tively high. In times of prosperity, they will be relatively lower. Some sort
of public subsidization is probably the only way in which any considerable
flexibility could be obtained in rates.

TAB L E 7. l'vlaximum Gross \Veight and Length Limits Permitted

by States, 1950, Semi-trailer Combinations
----------------------------------------------~-.~--------
MAXIMUM WEIGHT NUMBER OF MAXI?-lUM LENGTH NUl\lBER OF
LIMITS STATES PERMITTED STATES

Up to 45,000 pounds 7 Under 46 feet 19

45,000 pounds 29 46 to 55 feet 13
Orer 45,000 pounds 12 55 feet and over 16
Total 48 Total 48
SOURCE: l\!argaret R. Purcell, Interstate Barriers to Truck Transportation, Bureau of
Agricultural Economics, USDA l\!imeograph, 1950.

Part of the cost of truck transportation arises from the barriers which
individU<i1 states have erected in the form of varying regulations on \veight
and dimensions (Table 7). Such regulations make it impossible for trucks
to pass freely from state to state. Loads often must be changed or rerouted
if the truck passes over state borders. There is a movement among states
188 MARKETING OF AGRICULTURAL PRODUCTS

to work out these differences and establish more uniform regulations.

Greater uniformity in these regulations should increase both the speed and
efficiency of truck movements.
About the only hope for rate reduction is to maintain a critical sur-
veillance of the requests for rate increases and to secure special approaches
to agricultural problems whenever possible. This does not mean, however,
that the transportation bill cannot be reduced.

Other Approaches to Cost Reduction

There are other means of reducing the real cost of transportation
which appear to offer greater promise than a reduction in rates. These are
various improvements and changes in the utilization of transportation by
shippers of agricultural products. The pressure for more efficient use of
an overburdened transportation system during 'VorId Viar II uncovered
many ways in which the real cost of transportation could be cut. Some of
the ways which may reduce transportation costs are as follows:
( 1) Obtain 1TUlximum use of the transportation facility in terms of
load hauled and mileage traveled. This would include the elimination of
excessive duplication of some transportation facilities and the better
arrangement of routes so as to assemble a full load more efficiently. The
pick-up of two or more commodities might be combined to secure a larger
load with less travel. Careful planning in many instances might eliminate
an empty return trip which often occurs when commodities are hauled to
market. 9
The local assembly of products from farm to initial market offers one
area in which more effective use of transportation equipment could be
obtained. This has been illustrated by several studies of milk assembly. In
one Indiana study it was found that the milk assembly routes for one city
ranged upward from sixty-two miles in daily trave1. The milk load per
mile ranged from thirty pounds to sixty-seven pounds.1O A Kentucky study
of milk routes found that several drivers were making side trips over roads
covered by other trucks of from three to fourteen miles in order to pick
up milk of a single producer.n It has been found that considerable savings
in transportation costs might also be made by the combination of some
routes during the fall and winter months. During the winter, when milk
production is at its seasonal low, many routes carry much less than capacity

9 D. O. Hammerberg, "\Vartime Problems of Conservation of Transportation,"

Journal of Farm Economics, February, 1943.

10 E. H. Matzen, A Survey of Countr), Milk Collection Routes in the Fort \Va)'ne
Area of Indiana, Indiana Bulletin ;20, 19-f7.
11 C. D. Phillips, Collection of Milk and Cream from Farms in Kentucky, Kentucky

Bu1letin 479,1945.
 Transportation 189
loads. The average daily load in February for some routes studied was less
than half of practical capacity. One study summarizes the savings possible
through combinations as follows:
For example, two haulers collecting milk in adjacent country areas 40 miles
or more from the city could save about 80 miles daily. At variable costs of 6,54
cents per mile, savings would be $5.23 or about $2.60 per hauler per day. On
many routes such temporary consolidations would be possible from 60 to 120
days each year. 1 !!

Farm assembly of products is not the only area where poorly planned
and underutilized transportation facilities exist. The pressures to conserve
tires and gasoline during World 'Var II exposed many other areas in the
marketing system where the same type of savings could be made. Every-
other-day delivery of bottled milk to consumers was substituted for daily
delivery. Better planning found return loads of fertilizer and other needed
supplies for the trucks which transported livestock to central markets. Often
many of these trucks previously had made the return trip empty.
(2) Reduce the spoilage, damage, and breakage during transportation.
This is an area which offers considerable opportunity to reduce real trans-
portation costs. Many of the remedies to reduce spoilage and breakage are
remarkably simple. Three factors account for much of the wide variation
in damage claims presented to railroads. These are differences in the value
of the carload because of the density and bulk of the product, types and
suitability of the containers, and the degree and efficiency of the loading
and bracing methods used in preparing the car for shipment,13
Nearly three-fourths of the total damage claims for fruits and vege-
tables occurs because of unsuitable and faulty containers and poor loading
practices (Table 8). These are factors subject to control and improvement.
For example, it was found that cantaloupe crates loaded on end had only
about one-third the breakage as when the crates were loaded on their sides
and lengthwise of the car. Also, a new method of bracing the crates in the
car was found to be superior to the one commonly used.14 The tying of a
single wire around lettuce crates was found to reduce crates damaged in
shipment from 11.5 percent to 6.2 percent,15 Experimentation is now going
12 N. T. Pritchard and \V. H. Cope, l\filk Assembly in the Fort \Vaync Milkshed,

Indiana Bulletin 559, 195 1 , p. 23.

13 P. L. Breakiron, "Reduction of Loss and Damage in Rail Transportation of Fresh
Fruits :llld Vegetables by Improved Loading Methods," Marketing and Transportation
Situation, uSDA, July, 1946.
14 J. C. \\Tinter and B. 1\1. Masters, Comparisons of Transit Damage Loading Time
and Materials Costs under Various Methods of Loading Cantaloupe, Productiori and
l>vIarketing Administration, USDA Mimeograph, 1952.
15 R. \V. Hoecker, "\Vire Ties Cut Lettuce Losses," Marketing Activities, USDA,
Pebruary, 1950.
 MARKETING OF AGRICULTURAL PRODUCTS

on with new containers and new packing methods for many commodities.
::\Iany of the methods and containers used have not changed from the early
days of railroad transportation. Imagination coupled with a lack of rever-
ence for the status quo can produce cost-saving results.

TAB L E 8. Claim Payment Distribution !vlade by Railroads, 1944

FRESH FRESH FRUITS

CAUSE VEGETABLES (EXCLUDING CITRUS)

PERCENT PERCENT

Unallocated damage" 73. 8 7°·5

Temperature failure 8.0 15·3
Delay 7·5 5·4
Train accidents 2.2 3.0
Improper handling in yards 1.7 2.8
All other causes 6.8 3. 0

* Includes breakage of containers, loss and damage due to excessive rough handling
in transit, faulty or improper methods of packaging, loading, and bracing.

(3) Change the product itself. In this area probably are some of the
greatest potentialities for attacking the transportation cost problem. High
damage claims, to a substantial extent, hinge around the nature of the
product itself. The product should not be accepted as a given, unchange-
able fact. It, too, can be changed.
High perishability is one of the basic reasons for expensive transporta-
tion. But poor quality products are more perishable than top quality
products. An expanded program of farm selling on grades might result in
products being more c10sely graded before shipment. Only those products
best able to stand up during movement then would move long distances.
Those which might deteriorate more quickly would be sold in the nearby
markets.
Bulky, low-valued shipments can also be changed. The shipment of
frozen, concentrated orange juice in place of the whole fruit is an example
of one type of possible change. The production-area slaughter of livestock
and the shipment of carcasses rather than the live animals is another
example of product change which can be made. In general, production-
area processing win result in a less bulky, higher-value-and oftentimes less
perishable-product for shipment to consumption areas.
(4) Reduce barriers to interstate shipment. As has been pointed out,
the various states have different truck weight limits, licensing regulations,
and so forth. Such differences often cause costly rerouting or reloading.
A "truckload" in one state may be an illegal "overload" in another. One
 Transportation 191

has only to notice the weigh stations that exist at the state borders to
realize that there are barriers to movement. An eliminaion of these barriers
through increased uniformity of regulations could reduce transportation
costs.

The Transportation Bill Will Remain High

Though a fresh and imaginative approach can probably lower costs,
the total transportation bill will remain high. The inherent nature of
agricultural production and products makes for an expensive transportation
situation. The great distances between production and consumption areas
will still exist in a large country. The job of assembling the production
from scattered small production units will remain an expensive operation.
~lany commodities will still be perishable, resulting in high spoilage and
extensive use of refrigeration. The seasonal nature of agricultural produc-
tion will continue to create peak transportation demands at some seasons.
Costs of the transportation agency will not suddenly become flexible so
that rates can respond quickly to price level changes.
\Ve cannot finish a review of transportation without mentioning the
place of society as a whole. The actual transportation costs were probably
well above the $14 billion shown in Table 1. This is because of the vary-
ing amount of public subsidy which have gone-and are going-into the
nation's transportation system. We have already noted the complaint that
trucks are not paying their own way, since society subsidizes them in the
form of the highway system and the like. The railroads in their early days
also had major subsidies in the form of land grants. Air transport has
received both direct and indirect public help in such form as publicly
built airfields. 'Vater transportation, of course, receives large amounts of
public aid in the form of river-bed and canal work, locks, dams, and so on.
~Iany students of transportation maintain that what may be the cheapest
way of transportation for an individual shipper may not be the lowest cost
method for society as a whole because of the varying subsidy picture.
SELECTED REFERENCES
Dean, Joel, "Market Competition Under Uniform F.O.B. Pricing" in Theory
in Marketing, cd. Cox and Alderson (Chicago, Richard D. Invin, 1950),
Chap. 15.
Stcwart, P. \V., and J. F. Dewhurst, Does Distribution Cost Too l\luch? (New
Yo;l:. Twcntieth Century Fund, 1939), Chap. 8.
Vail, R. S., E. T. Grether, and R. Cox, Marketing in the American Economy
(New York, Ronald Press, 1952), Chaps. 24 and 25·
\\·illiamson. H. F., The Growth of the American Economy (New York, Pren-
tice-Han, 19-4-1-), Chaps. 9 and 23·
CHAPTER THIRTEEN

Storage

The function of storage is that of having the product available at the

desired time. It is the function which matches the pattern of production
to the pattern of consumption from the standpoint of time. Storage over
a period of several years is not a normal situation for agricultural com-
modities. As pointed out in our study of price making forces, normally we
eat what we produce. Carry-overs from one production season to another
under freely operating market situations are usually only enough to assure
continuity of processing and distributive operations. The public's idea of
huge storage holdings of agricultural products has stemmed to some degree
from the operation of the price support programs of the government.

STORAGE OPERATIONS
There are two general types of normal storage operations. One is that
which equalizes seasonal production to the pattern of demand. The other
is the storage at all times within trade channels which is necessary to keep
the marketing system operating without interruption. The first type of
storage operation is undertaken by elevators, warehouses, and other places
of mass accumulation. The latter type of storage operation is largely the
operating inventories of the various manufacturers, wholesalers, retailers,
and to a small extent consumers of the nation.

Seasonal Production and Storage

Much of the output of agriculture is harvested during relatively short
periods of the year. The grains, cotton, tobacco, fruits, and vegetables are
all highly seasonal in nature. Even the production of livestock, eggs, and
dairy products, though continuous throughout the year, has wide variations
between the high and low periods of production. The desire for these
19 2
 Storage 193
products by consumers, however, is often quite constant throughout the
year.
To the extent that products are not perishable, they can be placed in
storage at harvest and then released little by little as the year progresses.
In this way storage stocks tend to equalize the amounts available for
consumption throughout the year. This counterbalancing relationship is
illustrated by the production and storage patterns of the commodities
shown in Figure 1. As production increases seasonally, products move into

Production Cold Production Cold Production Cold

1000 Storage Million Storage Million Storage
lbs. 1000 Ibs. lbs. Miflionlbs. Cases Million Cases
2000 ALL MEAT 1000 BUTTER 24 SHELL EGGS

1600

1400

Dec.
FIG U R E 1. Relations of monthly storage holdings to the sea-
son~l pattern of production, 1946-1950 average.

storage. In this way, the amount available for current consumption is re-
duced. Then, as production declines, stocks move out of storage and into
consumption. During this latter period amounts available for consumption
are maintained at levels above current production. For example, total meat
production starts increasing about September and reaches its peak levels
during December and January. Starting about October, cold storage
holdings increase and continue to grow until about March. From March
on through the summer, when meat production is low, meat moves out of
storage and into consumption.
In the case of storable crops which are harvested during a very short
time of the year, the entire production must be stored and doled out for
consumption throughout the remainder of the year. Table 1 shows the
amount and place of storage of two crops as we move through the year.
Corn is harvested during October and November, therefore January 1
storage holdings are the largest of the year. Then they work down to the
c:any-over levels of October. Wheat storage is highest during the quarter
 MARKETING OF AGRICULTURAL PRODUCTS

following the June-July harvest. It then works downward to its carry-over

levels of July 1. As the marketing year progresses, stocks gradually move
off the farms and into terminal market and processor storage.

TAB LEI. Amount and Place of Com and \Vheat Storage by

Quarters, Average 1946-50

INTERIOR GOVERN-
QUARTER MILLS, MENT
AND ON TERMINAL ELEVATORS, MERCHANT OWNED TOTAL
COMMODITY FARM MARKETS WAREHOUSES MILLS STOCKS * STORAGE

MILLION BUSHELS

Corn:
January 1 2,042 31 ;1 50 2,174
April 1 1,287 29 47 48 1,411
July 1 766 17 37 47 86 7
October 1 366 13 34 64 447
\Vheat:
January 1 373 137 15 6 106 7 77 8
April 1 206 88 102 71 5 472
July 1 62 73 51 32 4 222
October 1 53 1 20 4 24 8 13 0 5 1,118

PERCENT OF TOTAL STORAGE

Com:
January 1 93. 0 1.4 2·4 2·3 100.0
April 1 91.3 2.0 3·3 H 100.0
July 1 88,3 2.0 4·3 5·4 100.0
October 1 75. 2 2·9 7·5 14·4 100.0
\Vheat:
January 1 47. 8 17.6 20.1 13.6 0·9 100.0
April 1 43·7 18,7 21.7 14·9 1.0 100.0
July 1 27. 8 33. 2 22·9 14·4 1.7 100.0
October 1 47·5 18.2 22.2 11.6 0·5 100.0

* This is not too representative, for the government is in and out of the market
picture as the price support program is brought into play some years more than others.
SOURCE: USDA statistics.

Where Commodities Are Stored

Because of the great number of places where goods can be stored, an
accurate inventory of storage capacity is almost impossible. One writer
has estimated that we have about 100 cubic feet of storage space for each
person living in this county, excluding open-air storage. 1 In his inventory
of the storage capacity, he divides the capacity into two categories-that
which we commonly think of as storage and that which is less commonly
1 F. A. Harper, "How Much Food Can \Ve Store in the United States," Farm Eco·
nomics (Dept. of Agricultural Economics, Cornell University), April, 1944, pp. 3577-
35 8 1.
 Storage 195
thought of as storage (Table 2). The most important single storage
facilities are for the on-farm storage of grain. This does not include open-
air storage. The use of open-air storage is often temporarily quite great,
especially during the harvest season.

TAB L E 2. Estimated Storage Space That Could Be Used

for Food
PERCENT OF PERCENT OF
KIND TOTAL 'KIND TOTAL

STORAGE COMMONLY STORAGE LESS co:r-rMONLY

THOUGHT OF THOUGHT OF

Cold storage-mainly for per- Perishable refrigerator space in

ishablcs (meat, fruits, vege- stores, etc. 5. 1
tables, etc.) 5·7 Ivlainly for semiperishables in
Mainly for semiperishables 0·7 farm cellars, homes, stores, etc. 5·9
j'\[ainly for nonperishables: I.,fainly for nonperishables:
Grain, off·farm 10.0 Grain, on·farm 55·9
General warehouses Stores, homes, etc. 14·4
-..:.l
Total of commonly thought of Total of less commonly thought
types of storage 18.8 of types 81.3

Commodities, of course, change hands and place of storage during

the season. Grain may be retained for a time in farm storage. It then may
be moved to an elevator, and finally to millers and processors. Reference
to the percentage portion of Table 1 will illustrate the relative importance
of various places of storage. Farm storage is of prime importance for corn
which will most likely be fed to livestock on the farm. Terminal and milling
facilities are of importance in handling the wheat crop-a food grain.
A very considerable proportion of total storage takes place within the
channels of trade in the form of inventories. Retail and wholesale store
shelves as well as stock rooms of processing plants are important.
In terms of daily consumption, there is a very small amount of storage
space available for perishable items. It is estimated there are less than five
cubic feet of refrigerator warehouse space per person in this country. About
two-thirds of this is cooler space and only one-third is freezer space. To
this must be added the freezer lockers which developed rapidly during the
latter part of the 1940'S. There were only 1,269 frozen food locker plants
operating in the United States in 1938. By 1948 this number had increased
to about ~O,900.2 After World 'Var II, ownership of home freezers grew
rapidly. Frozen food capacity in the retail stores has also increased rapidly.
2 North Central Regional Bulletin 21, Frozen Food Lockers and Home Freezers,
Wisconsin Bulletin 490, 1950. From this study carne many other bulletins issued by
irdh'idual states.
 MARKETING OF AGRICULTURAL PRODUCTS

A11 of these must be considered as part of the cold storage capacity of

the country.

Public \Varehouse Supen'ision

The United States Warehouse Act gives the Secretary of Agriculture
authority to supervise warehouses operating under its provisions. Agitation
for some type of public supervision of commodity storage arose when
farmers were unable to secure adequate loan:; on the crops which they
wished to store. Such a situation often forced the farmer to se11 his crop
immediately upon harvest in order to secure needed money.
Whether a warehouse wishes to operate under the provisions of the
Act is optional. However, if it desires to so operate, then the operator and
his business must meet certain requirements. The warehouse must pass
inspection for its condition and facilities and the operator furnish bond
and a guarantee of his financial responsibility.
A11 commodities which are stored in a supervised warehouse are in-
spected for quantity, condition, quality, and insurance coverage. The owner
is then given a warehouse receipt showing the exact nature of the commodity
in storage. Since the commodity has been verified by a third party, these
receipts are usua11y accepted by banks as co11ateral for loans ranging up
to 70 to 90 per cent of the receipt value. In this way the person who does
not wish to se11 his product immediately has a source of reasonable credit
through which he can secure needed cash. Here, then, is another illustra-
tion of the close interrelationship of various marketing functions. The
public warehouse system is a very important factor in financing the mar-
keting processes. The negotiable nature of the warehouse receipts also
greatly facilitates the transfer of title while reducing the amount of
physical handling.
About 1,100 warehouses operate under federal supervision-others
may operate under supervision of the various states. However, the licensed
warehouse capacity in the United States varies greatly for different com-
modities. Such storage is available for about 75 percent of the cotton crop,
about 8 percent of the grain crop, and for a still sma11er proportion of the
tobacco and wool crops. Nearly a11 commodities stored under the Act are
those which utilize dry, nonrefrigerated storage.3

COSTS OF STORAGE
It is extremely difficult to isolate realistica11y the cost of the storage
function from the costs of the functions of financing and risking. With the
3 H. S. Yohe, "Storage Under License," Marketing Activities, USDA, December,
194 8 .
 Storage 197
hoMing of goods, one either foregoes possible money income or borrows
money against the goods. Also, with the holding of goods one incurs various
kinds of risk. In determining the total costs of holding commodities, five
possible categories of costs must be considered as follows:

1. The costs necessary to provide and maintain the physical facilities for
storage. These costs would include such items as repairs, depreciation,
and insurance against loss.
2. The interest on the financial investment in the product while it is in
storage. Whether money is actually borrowed or not, this is a cost
which should be assessed at the rate of interest which would have to
be paid if money were borrowed during the storage period.
3. The cost of quality deterioration and shrinkage during storage. Most
commodities either deteriorate in quality or shrink in volume-or
both-while in storage. In a few cases, some commodities, such as corn,
may increase in quality while shrinking in volume. In such cases, storage
may result in a net gain instead of a net loss for this particular factor.
4. The loss which may result from poor consumer acceptance of the stored
as against the "fresh" product. Packing companies maintain that frozen
meat will be accepted by consumers only at a price discount, even
though quality as measured by the grading system has not deteriorated.
There is consumer resistance to storage eggs compared to fresh eggs,
though the quality as measured by the grading system may be the same.
This is not a problem in all commodities. Nor do such consumer pref-
erence patterns remain unchanged. For example, there is evidence that
the widespread acceptance of food lockers and home freezers is over-
coming the resistance to frozen meats.
5. The risk that general business conditions might deteriorate and the
general level of prices decline. Under these circumstances, the product
might have to be sold at less than its into-storage value. The possibility
of a favorable movement in prices, on the other hand, is a major factor
in encouraging speculative storage.

WHO SHOULD STORE?

Like the other functions of the marketing system, storage must be
done, but there is no dictation as to who should do it. Obviously, the
storage which occurs within the trade channels in form of inventories is
done by various businessmen of the system. But the storage throughout
the season may be done by several agencies-the farmer, the commercial
~iorage operator, the food processor, the speculator, and others.
Costs of storage are not necessarily the same in all positions in the
 MARKETING OF AGRICULTURAL PRODUCTS

marketing channel. Though tne theoretically perfect seasonal price fluctua-

tion covers the cost of storage, it does not necessarily cover the operations
of highest cost. Even though storage must be done, it is not equally profit-
able for all individuals at all levels of the marketing channel to store_
\Vhether or not the farmer should store his own products is a debated
point. No generalized rule can be made, but the case of each commodity
must be decided on its cost-return conditions. In some circumstances, it
may pay the farmer to build his own facilities and carry out his own storage.
In others, it may be best to rent commercial storage. Or in still other cir-
cumstances, he may best sell at harvest and let some other agency of the
marketing system undertake the storage operation. Neither can the profit-
ability of farm storage be generalized for all years. The outlook for general
business conditions may make it very desirable for storage one year and
not for another.

REDUCING STORAGE COSTS

In a specialized economy, the function of storage will always be a
complex and expensive one. It is even more so when the production and
consumption patterns are as different as for agricultural products. Like
transportation, storage will remain a costly function in agriculture mar-
keting. But this is no reason to write off the storage function as something
which cannot be improved. \Ve have already considered the various factors
which must be considered in determining total storage costs. It is to these
we can look for ways to lo\ver the real costs of storage. Some of the more
fruitful possibilities may be listed as follows: 4
1. Reduction of the amount of deterioration during the storage. Great
advances have been made in discovering the best storage conditions for
individual products. It is now recognized that different commodities
have different temperature and humidity requirements for optimum
maintenance of quality. rvlany examples could be noted. Temperatures
of 30° to 32° F. are usually recommended for apple storage, but it has
been found that Grimes Golden apples hold up best at 34° to 36°. For
most fresh products the recommended relative humidity is 80 to 90 per-
cent, but 70 percent is better for onions and nuts. Temperature and
humidity conditions are now known to be important even for storage
of canned goods to control deterioration and rusting.
Chemistry is making increasing contributions to quality control.
One example is the potato sprout inhibitor. Potatoes sprayed with this
4 r-..fany of the following examples have been taken from the very excellent report,

Technology in Food Marketing, USDA, Agricultural Monograph No. 14, 1952, espe-
cially ch. 4.
 Storage 199
chemical when placed in storage will not sprout readily. Another ex-
ample is the use of "modified atmosphere" wherein proportions of
various gases are controlled in gas·tight rooms to retard deterioration.
Practices followed in preparing products for storage have an im-
portant effect on their storability. The deterioration rate of many prod-
ucts can be reduced if the temperature is reduced as soon after harvest
as possible. The discovery that cuts and bruises received during harvest-
ing reduce storage life has led to redesigning of machinery to reduce
sharp edges and dropping distances. The proper farm use of insecticides
and fungicides has reduced storage rotting which follows insect injury.
The degree of ripeness at harvest has also been related to length of
storage life. In grains, this has led to experimentation on various
methods of quick drying immediately after harvest. It is not too great
a dream to imagine that the combines of tomorrow will both harvest
and flash dry the grain in one operation.
2. Reduction of the costs of the physical facilities used for storage. The
most fruitful possibility here seems to be that of increasing the labor
efficiency in handling through reorganization and additional mechani-
zation. Often a by-product of such work is an increase in effective
storage capacity of a given area.
The concept that storage is not static but is instead an integral part
of the movement of goods has directed increasing attention toward
handling problems of all types. Much of the work and expense of ware-
housing occurs during the unloading and loading operations. Attention
to this idea of movement has led to the construction of one·story ware-
hOllses with ample loading facilities in contrast to the old multiple-story
buildings. The use of pallet storage along with the fork-lift truck, con-
veyor systems, automatic dumping devices, and other mechanical de-
vices is giving some storage operations a long-needed face lifting. One
multiple-story warehouse originally handled a maximum of five trucks a
day and 40,000 cases a month with a work force of fourteen. After rede-
signing and installing new eqUipment it could handle ten trucks a day
and 50,000 cases a month with a work force of seven. 5 The same dra-
matic changes were accomplished when the design and methods of
many grain elevators were changed.
Developments in ventilation and insulation are making both cold
and general nonrefrigerated storage possible in the same space. New
advances in the science of refrigeration are both reducing the cost and
increasing the dependability of refrigerated storage. Study is undenvay
on the problem of odor contamination of one product by another. If
5 Technology in Food Marketing, op. cit., p. 60.
200 MARKETING OF AGRICULTURAL PRODUCTS

odor controls can be worked out, commodities which now must be kept
separated in different facilities may be stored together. This would
greatly increase the flexibility of storage space.
3. Reduction of consumer resistance to storage products. Change here will
come slowly and with difficulty. In many instances resistance rests upon
prejudice instead of fact. In other cases, poor consumer acceptance has
carried over from a past period when storage did result in a poorer
quality product. \Vith the increasing use of frozen food lockers and
home freezers, many consumers are demonstrating to themselves that
refrigeration and storage need not harm the product. The real problem
in this area may be the resistance to change of many marketing and
processing agencies and not of consumers themselves.
+ Changing the product or the pattern of production. Many of the real
improvements in the storage problem can be classified here. Since part
of the storage problem rests upon the production pattern, some of the
cost reduction practices must be initiated on the farm or in the
factory.
In some commodities, such as eggs and hogs, production has grad-
ually shifted to a more uniform year-round pattern. Such changes reduce
the amount of storage needed. (For example, see the discussion on egg
production changes in Chapter 17.) In other cases, product develop-
ments have changed the nature of storage operation. The rapid devel-
opment of the frozen orange juice concentrate has shifted the emphasis
from that of maintaining fresh fruit to that of properly maintaining the
frozen product. If the experimentation with powdered orange juice
produces a practical market product, the storage considerations will
again be different. The trend toward more processed, table-ready meats
has changed some of the meat storage requirements. The development
of frozen and dried eggs in addition to shell eggs has increased the flex-
ibility of egg storage operations. Some varieties of crops have been found
to be better for storage than others.
5. Reduction of the sp.::culation in the storage operation resulting from
changes in the general level of prices. Perhaps this should not be listed
here since its implications are much broader than that of reducing
storage costs. This is part of the larger price policy question. Speculative
implications are important in orderly storage. The amount and timing
of this year's into-storage movement of many products often are affected
by last year's profit experiences. The level of farm prices during these
into-storage periods of the year may be particularly sensitive to the level
of demand for storage. Therefore, this year's price experiences may carry
over into next year. Though over the years storage must be done, this
 Storage 201

does not prevent high risk and speculation from affecting a particular
year's storage volume and its cost.

STORAGE AND SEASONAL

PRICE VARIATIONS
We have already discussed the relationship of the patterns of seasonal
price variation to the basic seasonal patterns of production and the relative
storability of tJifferent commodities (Chapter 8). The periods of high and
low prices during the year are inversely related to the periods of high and
low production. The amount of seasonal price rise from the seasonal low to
the high period is theoretically just enough to cover the costs of carrying
the desired amount of the commodity until the time when it is needed.
Basic seasonal price patterns can be affected, therefore, by changes in
storage costs. Any changes which will reduce the costs of holding a com-
modity will tend to reduce the amount of seasonal price variation. This
helps explain why a relatively new crop often has a greater amount of sea-
sonal variation which declines as the years pass. In a new situation, storage
facilities may be inadequate. Deterioration may be great. The trade chan-
nels may not be well organized. The costs of storage are therefore quite
high. Then, as the situation improves, storage costs may decline. The sea-
sonal price pattern then tends to become less pronounced. Such develop-
ments and their effects on the amount of seasonal price variation are, of
course, not limited to new commodities. The price pattern of any com-
modity may be changed by changes in the storage situation.
CHAPTER FOURTEEN

Risk and the Futures Exchanges

Our study of storage has demonstra ted how difficult it is to isolate one
of the marketing functions from others. The cost of holding goods, it wiII
be recalled, really incorporates the costs of the storage function as well as
costs related to the financing and risking functions. Now, we shall further
consider the risk-bearing function in marketing along with a brief survey
of an important specialized marketing institution, the futures exchange.

TYPES OF MARKET RISK

Risk is inherent with the ownership of goods. And as with the other
functions of marketing, risks must be borne by someone; they cannot be
eliminated. Various kinds of risk may be classified as follows: 1
1. Product destruction from natural hazards such as fire, wind and so on.
2. Product deterioration in value due to (a) quality deterioration;
(b) price change largely because of change in consumer preference or
acceptance, change in the supply situation, or change in general busi-
ness conditions.

Product Destruction
Those engaged in marketing must face the possibility that fire or other
forces may suddenly damage or destroy the products they have on hand.
A marketing firm, especially if it is a large one, may build up its own fund
1 There is still another kind of risk inherent in the buying and selling of goods
which perhaps should be mentioned here. There is always the risk that the buyer of
goods may not be financially responsible. To overcome this risk many of our regulatory
measures require registration and bonding of marketing personnel. There are special in·
surance companies which will guarantee a man's financial responsibility for a stated
amount. Your author also acknowledges that many prefer to separate price uncertainty
into a classification separate from risk. However, it is believed that it is more realistic to
trea t them together in the discussion of this area in marketing.
202
 Risk and the Futures Exchanges 20 3

to cover such a possibility. However, as in the case of many individuals,

fim1S may transfer this risk to an insurance company for a fee.
Insurance companies are specialized risk-bearers which spread the risk
over a wide area and groups of people or businesses. Ivlost marketing firms
find buying insurance more economical than attempting to provide for
their own protection. In the marketing of agricultural products, insurance
companies of varying types are of considerable importance. These range
from those insuring products in transit from farm to market to those insur·
ing the inventory of the retail store.

Product Deterioration in Value

Every marketer runs the risk of deterioration of a product while he
owns it. Aside from using the best technical equipment and knowledge
available, there can be little transference of this risk. A rapid change in
temperature, a breakdown in equipment, and the like are all possibilities
which cannot be ignored. This is one of the factors which increases the
marketing costs of perishables.
Risk from changes in consumers' preference or acceptance is greatest
in the style goods lines. For example, women's dresses which may be high
priced one year will bring much less the next, as they are "out of style."
Of course, most food products are not faced with such rapid preference·
shifts. Food preferences usually change much more slowly over a longer
period of time. However, price changes which occur because of large annual
shifts in production and in the general price situation are common for
agricultural products. A handler who purchased large amounts of eggs for
storage in the spring at what he considered "safe prices" may find himself
facing a highly unfavorable fall egg market because of an unforeseen
deterioration in general business conditions. A well-timed frost may greatly
increase the value of current apple storage holdings by sharply reducing
the crop. A series of rains may make or break the wheat crop.
It is in the area of price change that agricultural marketing agencies
probably face their greatest risk. ?vIany devices are used to shift this risk
from one person or firm to another. Products are often sold "in advance";
that is, the price is fixed in the present to deliver at a specified future date.
Elevators sell grain f.o.b. at their elevator, and once the grain is loaded
in cars on the railroad siding, their responsibility ceases. Vegetable canners
often sell their packs immediately to other middlemen who specialize in
taking ik~ price risks on inventories. !vlost of these are devices for shifting
risk from one agency to another within the same marketing channel. The
principal method by which price risk may be shifted to those outside the
marketing channel proper is that of hedging in a futures market.
 MARKETING OF AGRICULTURAL PRODUCTS

THE FUTURES MARKET

A major reason for the existence of futures markets is to provide a
means for the shifting of the risk of price change. Fundamentally, futures
exchanges provide the mechanics wherein trading can be done swiftly and
economically in standardized promises to deliver or receive products at a
specified time in the future. This organized market is complemen-
tary to the buying and selling of actual products on the cash, or spot,
market.

Exchanges and Their Organization

Throughout the country, organizations, generally known as exchanges
or boards of trades, have organized to carry on futures trading in a wide
variety of commodities. The members of these organizations buy and sell
futures contracts under set rules which they have devised. Boards of trade
or exchanges neither buy nor sell for their own account. They merely fur-
nish the facilities for aiding the trading operations of their members. They
obtain their income largely from assessments against their members and
from charges made for various services performed, such as weighing and
grading. In many instances, officials of the exchanges serve without pay.
Futures markets are usually organized and operated in conjunction with
cash markets so that the exchanges in reality preside over the operation of
both markets.
Table 1 shows the commodities which are traded in futures markets
under government supervision. Chicago is the most important futures grain
market in the country. Other important grain futures trading centers are
located in rvIinneapolis and Kansas City. New York is the leading futures
cotton and futures wool market. (Boston is the Jeading cash wool market.)
Both Chicago and New York are centers for butter and egg trading. The
commodities in Table 1 do not make up a complete list of those with estab-
lished futures markets. At some time or other, futures trading has been
done in many other commodities such as coffee, cocoa beans, rubber, and
silk. Trading in these other commodities, however, does not fall under
federal supervision.

The Futures Contract

The actual "commodity" which is bought or sold on a futures market
is a contract. This contract is a promise to deliver or accept delivery of a
specific grade of commodity at a specified time and place. No actual com-
modity ever changes hands until the contract comes Hdue." For example,
trading in l'vIay wheat is the buying and selling of contractual agreements
 Risk and the Futures Exchanges 20 5
TABLE 1. Commodities Traded in Futures Markets under
Federal Supervision, 1952

LOCATION OF
VOLUME OF LEADING OTHER TRADING
COMMODITY UNIT TRADING MARKET MARKETS

\Vheat 1,000 bushels 4,34 1,69 0 Chicago Kansas City, i'vlilwaukce

Seattle, Minneapolis
Corn 1,000 bushels 2,639,639 Chicago Kansas City, Milwaukee
Oats 1,000 bushels 2,239,20 5 Chicago Minneapolis, ~mwaukee
Rve I ,000 bushels 4 26 ,5 87 Chicago Minneapolis, Milwaukee
S~ybeans 1,000 bushels 2,953>1 80 Chicago
Flaxseed 1,000 bushels 40 ,9 26 Minneapolis
Grain sorghum Million pounds 8,634 Kansas City Chicago
Rice 1,000 pounds 320 New York
Cotton 1,000 bales 94,887 New York Chicago, New Orleans
Butter Carlot 8,369 Chicago New York
Eggs Carlot 90,006 Chicago New York
Potatoes Carlot 18,181 New York Chicago
Cottonsced oil 1 ,000 pounds 7,9 89,7 20 New York New Orleans
Soybean oil 1,000 pounds 2,795,7 60 Chicago Nc\v York
Lard 1,000 pounds 1,223,880 Chicago
Bran Tons 28 5,39 0 Kansas City
Shorts Tons 161,280 Kansas City
Cottonseed meal Tons 584,9 00 Memphis
Soybean meal Tons 1,972,500 Memphis Chicago

SOURCE: Report of the Administrator of the Commodity Exchange Authority,

USDA, 1952.

to deliver or receive wheat in May; actual wheat wiII be involved only if

the contract is allowed to mature in May.
Table 1 also gives the volume of trading which has occurred within
a recent year. Over 4 billion bushels of wheat were bought and sold on the
futures market compared to an actual crop of about 1.3 billion bushels.
Nearly 3 billion bushels of soybeans were traded on the futures market com-
pared to an actual crop of about 300 million bushels. Nearly 95 miIIion
bales of cotton were traded on the futures against an actual crop of about
15 million bales.
The natural question which arises is how one can trade more than
there is. Again one must remember that trading on the futures markets is
in terms of contracts, and such contracts involve actual commodities only
when they are allowed to mature. In practice only an extremely small per-
centage of the contracts are permitted to come due. The usual situation is
for a buyer of futures contracts to offset such a commitment with a sale
of a similar contract before the contract matures. Under such circumstances
'he individual is covered as far as the exchange is concerned. The sale off-
sets the purchase and no actual commodity will be delivered. Until the
:2.06 MARKETING OF AGRICULTURAL PRODUCTS

individual has covered he has an open contract-that is, he must either

delivcr or accept the commodity when the contract matures.:?
As in any other business transaction, for every purchaser of a futures
contract there must be a seller. By the nature of the contract, there cannot
be more futures purchased than sold or vice versa. It then would be theoret-
ically possible for all contracts to be canceled out by offsetting contracts
before the due date of the contract. If this happened there would be no
actual grain delivered to fulfill the futures contract.

Relationship Between Cash and Futures Prices

Fundamental1y, cash and futures prices differ owing to location, time
and quality factors, and random variations. The futures contract calls for
delivery of a specified grade of commodity at a specified place or area and
at a specified time. It follows, then, that cash grain prices throughout the
country will not be identical with futures quotations. Since every futures
contract when it matures calls for the actual commodity, the cash price for
the specified grade at the specified place will be almost the same as the
futures price at maturity.
]'vluch of the difference between cash and futures quotations on a given
market during the period prior to maturity will be due to the time factor.
Theoretically at any given time during the life of the futures contract, the
futures price will be above the cash price by the amount of the cost of hold-
ing the commodity. The longer the period before the contract matures, the
greater will be the futures price premium over the current cash quotation.
For example, in February the price of May futures wheat theoretically
should be above the February cash wheat price by the cost of holding
wheat from February until May. As May approached, this difference would
narrow until it would nearly disappear when the futures contract matured
during the latter part of 1\-1ay.
Because of this bridge of delivery which may always be crossed between
the two markets, factors which affect price movements on one market also
affect the price moveme"ts on the other. Theoretically, ignoring the dif-
ferences of time, space, and quality, cash and futures markets should move
2 Much of the confusion surrounding futures trading arises from the special termi-
nology which has been developed. The use of many of these terms has "spilled over" into
other markets. An example of this is the widespread use of the words "bullish" and
"bearish" to describe market conditions. A bull is one who operates on the assumption
of higher prices-a bullish market, therefore, is a strong and rising one_ .-\ bear is one
who believes prices will be lower-a bearish market is a weak and falling one. For an
excellent glossary of terms, see Grain Market Reports by L. 'V. Schruben, Kansas
Bulletin 353, 19:;2. Also the brokerage firm, l\Ierrill, Lynch, Pierce, Fenner and Beane,
70 Pine St., New York 5, offers free upon request several excellent pamphlets on various
trading aspects. The various exchanges also usually have useful descriptive literature avail-
able upon request.
 Risk and the Futures Exchanges 20 7

up and down together. The difference between cash and futures markets is
called "basis." Both markets may move up and down reRecting a change in
the actual or anticipated demand-and-supply situations while the basis
remains unchanged. Actually, the two markets do not move up and down
together pcrfectly. The futures market is appraising the situation as it might

Cents per Bushel Cents per Bushel

~------------~

+10 +10
oI---=l-~~~!oo.-l 0~~~~~~~4

-10 ~~~~~~~~.
Jul. Nov.Jan. May Jul. Nov.Jan. May
Million Bushels Million Bushels
~--------------~
160
120
80
40
o1...Ii:i~:.:J..J-LJ-.l,..u:!tU
Jul. Nov. Jan. May
1950-1951
FIGURE 1. Relationship between the mid-month price of
the !vIay futures contract and the monthly
average of NO.3 yellow corn, volume of futures
trading, and open contracts for the trading
years 1950-1951 and 1951-1952, Chicago
Board of Trade.

develop-the cash market as it is developing. Differences in judgment may

cause minor or severe short-run random variations to develop between the
cash and futures market. In some instances, an inverse market in which
the futures price is below the cash price may develop.
Figure 1 shows the quotations and trading volume of the 1 95 1 and
1 95 2 i\Jay futures contract for corn on the Chicago Board of Trade along
with the average cash price of corn at Chicago throughout the trading
period of eaeh contract. 'The relationships here are only approximate, since
only the mid-month futures quotations are plotted against the monthly
208 MARKETING OF AGRICULTURAL PRODUCTS

average for the cash prices. BlJt we can check and see if the generalizations
we have been discussing seem to apply. First, the futures and cash did move
up and down together. In the 1951 contract period, the trend of both was
upward; in the 1952 contract period, a downward trend developed after
December. By October, the futures contracts had come closely in line with
the cash market. Prior to this time the volume of trading in the May con-
tracts was so limited that a representative market price was not really estab-
lished. From October until the following May, the futures prices were
generally above the' cash prices. By mid-?\Jay the gap between the two
quotations had closed, for the May contracts were soon to mature into
actual grain.
The volume of trading reached its peak in January of both years when
about 160 million bushels of May futures were traded. About this time
open contracts also reached their peak of about 40 million bushels. From
this time on, open interests covered themselves by offsetting their mar-
ket positions. By mid-May less than 5 million bushels remained as open
interests. If these had remained opened for a few days more, grain would
have moved, in fulfillment of the contracts. This would have represented
about 0.3 percent of some 726 million bushels of 1951 May wheat and
about 0.6 percent of some 850 million bushels of 1952 May wheat which
was traded during the life of the contracts.

Hedging
V\T e pointed out earlier that the fundamental justification for the
deve10pment of the futures markets is that it provides a means of transfer-
ring price risks. This risk transference is accomplished through a process
called hedging. 3 In order to understand how hedging works we must keep
in mind two things:
( 1) The successful operation of hedging rests upon the assumption
that futures and cash commodity prices move up and down together-that
is, the basis remains unchanged.
(2) The mechanic~ of hedging is that of making simultaneous but
opposite transactions on the futures and cash markets. That is, if cash wheat
is purchased, future wheat is immediately sold and vice versa.
Let us look at a hypothetical i1lustration of a terminal elevator op'
erator who purchased 100,000 bushels of wheat. He intended to store the
grain and sell it later making money from his handling charges. He was
3 The author is aware of the objections that are raised to the use of this type of
hedging as typical; however, he still believes that it furnishes the most effective road for
elementary understanding of the process, See Holbrook 'V orking, "Futures Trading and
Hedging," American Economic RevielV, June, 1953, pp. 314-343.
 Risk and the Futures Exchanges 209

particularly interested in protecting himself from a fall in wheat prices

which might quickly erase alI of his potential margin. He decided to hedge.
The hedging procedure was as follows:
CASH MARKET FUTURES MARKET

(On day of cash Bought 100,000 bushels Sold 100,00;) bushel contract
purchase) @ $2.00 @ $2.10

(On day of cash Sold 100,000 bushels @ Bought 100,000 bushel con-
sale) $1.95 tracts @ $2.05
A loss of 5 cents a bushel A gain of 5 cents a bushel on
on the cash transactions the futures transactions
\Vhen cash grain was purchased, futures were sold. When cash grain was
sold, futures were purchased. The cash market declined, as he feared it
might, and he lost 5 cents a bushel when he finaIly sold his grain. However,
the futures market also feIl, and there was a net gain of 5 cents a bushel on
his futures transactions. This was a perfect hedge, since the loss on one
market was exactly offset by the gain on the other. The elevator operator
shifted his price decline risk into the futures market.
Let us foIlow through stilI another example-this time the case of a
cotton merchant. This merchant purchased cotton from interior points.
He was unable to make the immediate sale he desired, so he decided to
hold the cotton in his warehouse. Later on he made his sale to a spinner.
Since the merchant was afraid of a price decline he hedged as follows:
CASH MARKET FUTURES MARKET

(On day of cash Bought 1,000 bales @ 28.50 Sold bale contracts @
1,000
purchase) cents per pound cents per pound
30.50

(On day of cash Sold 1,000 bales @ 31.00 Bought 1,000 bale contracts
sale) cents per pound @ 32.5° cents per pound
A gain of 2.5 cents a pound. A loss of 2 cents a pound on
on the cash transactions the futures transactions

This hedge was handled like the previous one of the elevator operator.
However, in this instance the market rose and he gained 2.5 cents a pound
from an increase in the cash cotton price. However, the futures market
also rose, and he lost 2 cents a pound on these transactions. This hedging
operation illustrates a very important point. A successful hedge not only
protects the hedger against a price loss, but also prevents him from sharing
in a price iSain. Hedging is the process of shifting the risk from prices which
change III either direction. This example also illustrates a hedge which is
not perfect and as such is much more representative of the actual market.
In this case, the cash and futures markets did not move up and down
210 MARKETING OF AGRICULTURAL PRODUCTS

together in the same amounts. The basis changed. Only 2 cents of the 2.5
cents was "shifted" into the futures market.
The student should now be able to think of many situations in which
it would be desirable to shift price risk through hedging. The mechanics
of simultaneous offsetting transactions should now be clear. Also, it should
be apparent that the amount of price risk which is actually shifted depends
upon how perfectly the cash and futures markets move up and down
together.

The Place of the Speculator

vVhen one recalls that the volume of trading in the futures is several
times that of the volume of trading on the cash market, it is evident that
all futures transactions are not made by hedgers. The volume of hedging
wiII vary with the time of the year relative to the harvesting and handling
of the crop. The volume of grain futures due to hedging transactions often
runs below 10 percent of the total trading. The vast majority of the futures
trading is done by speculators of one type or another. In all probability,
. referring again to the hedging example, the grain and cotton merchants
bought and sold their futures contracts to speculators on the market.
Vlho are speculators? The best answer to that seems to be, "All kinds
of people." Doctors, lawyers, businessmen, farmers, clerical and manual
workers-all will be found speculating in futures markets. In addition to
these people, there are professional speculators who make their living buy-
ing and selling on the futures market. All hope to make money. They are
the people who are willing and happy to take the risk of price change for
the hoped-for reward of gain. The speculators are the risk underwriters for
the hedging process.
Many people believe that the speculator is an evil force in the market.
\Vhile they may agree that benefits are derived from hedging, they wish to
abolish the speculator. However, successful hedging is not possible without
a large, active, speculative group. There must be someone willing to assume
the risk, since risk-bearing as a marketing function cannot be eliminated.

Commodities Adaptable for Futures Trading

If the organization of coexistent cash and futures markets results in
a more efficient marketing organization, why not expand such markets to
other commodities? Throughout the history of these markets, commodities
have been added or dropped from the trading lists. For example, a recent
addition to futures trading has been grain sorghums. Back in the 1930's,
several unsuccessful attempts were made to establish trading in frozen eggs.
\Ve have had futures trading in cocoa beans, but not in tea; rubber, but
 Risk and the Futures Exchanges 211

not in petroleum, lumber, or stee1. For successful trading, commodities

must, in general, meet the following conditions: 4
1. The commodity must be homogeneous and capable of adequate stand-
ardization. Commodities which, like steel, are tailored to individual
uses, each with a different composition, cannot be used in establishing
a standard contract. Goods which are highly dependent Oil style or
brand preference for their value cannot be adequately standardized.
Any commodity which is to be successfully traded must have a grading
system which can be uniformly applied under careful supervision.
2. The commodity must be storable over some length of time. The reason
here is obvious. The idea of futures delivery implies that one has the
choice of selling now or of holding for later sale. The improvement of
refrigeration has meant that many commodities are now storable which
at one time were considered too perishable for trading.
3- Both supply and demand must be broad and uncertain and the move-
ment of the goods to market unrestricted. The production of the com-
modity must be widespread enough so that an adequate volume wiII be
available at all times. On the other side, the outlets for the commodity
must be many and varied so that there is always a substantial group
ready to buy. Restricted sources of supply or demand increase the pos-
sibility of monopolistic control with the consequent manipulation of
available supplies and prices. The commodity must be free to move in
response to price and not entwined with controls either by private
enterprise or government. The future movements of price must be
uncertain. Uncertainty is the life-blood of speculation. This is why
programs of state trading on the international scene or domestic price
control programs are not compatible with an active, freely functioning,
futures market.
By noting the above three major conditions, one can usually ascertain
why many products do not have futures market organizations. There arc
also some for which exchanges probably could be successfully established.
Such exchanges are not established automatically or by law. If a commodity
has the basic characteristics for a successful market, trade pressures develop
for trying it out. Since no one is compelled to use such a market, its success
depends upon whether potential users find the new futures market of value.

THE FUTURES r-.lARKET CONTROVERSY

The operation on futures exchanges permits the shifting cf risk from
price change from those handling and processing commodities to someone
4 These have been adapted largely from those in Commodity Exchangcs and Futurcs

Trading, Julius B. Bact and Olin C. Saxon (New York, Harper & Brothers, 1949), ch. 6.
 MARKETING OF AGRICULTURAL PRODUCTS

action was not sufficicntly -vigorous to offset the effect on prices. 7 Such
cffects were to be cxpected if the difference in size of traders was such as
to create an imperfectly competitive or oligopolistic situation. In the early
days of the exchanges, manipulations by large traders in attempting
squeezes and corners did violently affect prices. It was public reaction to
these situations which brought on the federal regulation of the exchanges.
Effects on lvlarketing Costs
The most obvious place where futures exchanges might affect market-
ing costs would be through the shifting of risk by hedging. If speculators
are willing to assume this risk at lower costs than the marketing agencies
handling and processing commodities, the costs wi11 be reduced both to the
users of the specific products and to society as a whole. It is very probable
that speculators are in reality advancing low cost money for this price risk
insurance.
Perfect hedges are probably the exception rather than the rule. How-
ever, cash and futures prices apparently do move close enough together so
that there is less risk involved from attempting a hedge which is not perfect
than not hedging at an. A study of the period, 1931 to 1941, found that the
proportion of the risks from price changes that could have been offset by
hedging in the futures averaged 64 percent for wheat, 44 percent for com,
and 49 percent for oats. 8 Though changes in basis were substantial, they
were not so great as changes in the cash prices themselves.
Pcrhaps the best answer to the charge that hedging cannot successfully
be done is that it is widely practiced by the trade. True, many studies
show that local elevators do not hedge. They shift their price risk to other
grain merchants and terminal elevators through the technique of advance
sales. However, terminal elevator operators, cash merchants, and processors
do hedge fairly consistently. One must conclude that they consider such
operations beneficial or they would not continue them.
Other benefits may accrue to the marketing machinery from the opera-
tion of the futures exchanges. Generany speaking, financing costs are
reduced as merchants may secure a higher percentage loan on their col-
lateral if it is hedged. Futures markets also encourage a highly efficient
information system. :Market price quotations get rapid and wide dissemina-
tion. Supply-and-demand factors receive continual analysis. The machinery
is set up for a uniform system of weighing. grading, inspection, and the
settling of trade disputes. In fact, these by-products making for rapid, effi-

7 c. \\'right Hoffman, Grain Prices and the Futures Market, USDA Technical

Bulletin -;-47, 194 1, p. 39·

8 Howell, op. cit., p. 39.
 Risk and the Futures Exchanges 21 5
cient trading may be fully as valuable as the hedging facilities them-
selves.

Government Supervision of Exchanges

Criticism of the futures market led to initial supervisory legislation in
1922. This was further amended in 1936 as the Commodity Exchange Act.
The Commodity Exchange Authority (CEA) was established to carry out
the provisions of the law. Certain commodities faU under the supervision
of the Act along with the markets at which they are traded. (See Table 1.)
Generally, certain undesirable practices which had developed are pro-
hibited. Commission merchants and brokers are required to register. Their
books are subject to audit. Regulations to protect their customers are set up.
In addition to general supervision of the market operations, the CEA
keeps a close supervision of daily trading so that illegal "corners" or
"squeezes" may be prevented. The amount of trading which may be done
by anyone speculator is limited. Operations of large traders must be
reported daily. The CEA has investigatory powers and may bring alleged
violators to trial. For example, in 1952, the CEA investigated a charge of
lard price manipulation, an attempted corner on eggs, and a complaint
against a brokerage firm for illegal practices. Much of the regulation is left
to the exchange organizations themselves. The Commodity Exchange
Authority might be characterized as the public's policeman that encourages
the exchanges to keep their own houses in order. 9

SELECTED REFERENCES
Chicago Board of Trade, Annual Symposium Proceedings, 1948 and years fol-
lowing.
Christensen, C. D., "The Use of Commodity Exchanges by the Iowa Grain In-
dustry," Journal of Farm Economics, May, 1952·
Duddy, E. A., and D. A. Revzan, Marketing, 2nd ed. (New York, McGraw-Hill,
1953)'
Federal Trade Commission, The Grain Trade ("Washington, D. C., Govern-
ment Printing Office, 1920 and 1926), Vols. 5 and 7·
Hoffman, G. W., Future Trading Upon Organized Commodity Markets (Phila-
delphia, University of Pennsylvania Press, 1932).
1lalott, Dean \V., Grain and Its Marketing (Chicago, Grain Exchange Insti-
tute, 1947).
Vaile, R. S., "Cash and Future Prices of Corn," Journal of !vIarketing, July,
1944·
u r 0: a summary of the CEA operations see USDA Leaflet 330, Commodity Ex-
change Act and Commodity Exchange Authority.
Part III

COMMODITY AND
'-

INSTITUTIONAL
PROBLEMS

o
 Livestock Marketing 237
The fad that much livestock in this country travels long distances
before it is slaughtered complicates the handling of the shrink allowances
under the proposed setup. In Indiana, for example, nearly three-fifths of the
hogs sold at markets within the state were shipped alive for slaughter in
other areas-principally in the eastern states. These hogs shrank nearly 8
percent of their purchased weight before slaughtering. 1D Situations of this
nature would be difficult to handle.

The Development of More Adequate Standards 20

Probably the contribution of the study of this problem will come about
from the development of more objective and realistic grading standards for
live animals. Through the pressure of the Packers and Stockyards Admin-
istration, many agencies have moved from a weight schedule selling basis
to a merit basis. This, at least, attempts to focus the bargaining on the
quality merits of the particular lot under consideration.
It has been established that weight, dressing percentage, and fat-back
thickness account for a large percentage of the variation in hog carcass
value. There is reason to believe that livestock salesmen and buyers trained
to give attention to these factors instead of the more conventional standards
can improve their live estimate of carcass value. New federal standards for
grading live animals have attempted to reflect these factors. An improve-
ment in the ability to judge accurately the live animals would, of course,
accomplish many of the advantages of carcass grade selling without incur-
ring the disadvantage of a change in selling methods.
The development of more widely accepted and objective federal meat
grades presents a more complex problem. Though federal inspection is man-
datory for a large portion of our meat supply, the use of federal meat grades
is optionaL A relatively small percentage of meat is federally graded. Most
packers have evolved their own grading system which they use in preference
to federal grades. Some of the major packers recognize over thirty different
grades of beef. Only federal law or increased demands from consumers and
retailers will secure the widespread acceptance of unifornl federal grading.
There is evidence that chain retail outlets are insisting more and more on
their meat supplies being federally graded.
19 J. R. 'Viley, R. '\Tilson, and G. B. 'Vood, The Eastern Market faT Indiana Hogs,

Indiana Bulletin 569, 1951.

20 For a discussion of the relative merit of several different ways of selling hogs see
G. Engelman, A. Dowell, and R. Olsen, Relatiw Accuracy of Pricing Butcher Hogs 01!
Foot and by Carcass 'Veight and Grade, 11innesota Bulletin 208, 1953.
212 1\1 ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

else. Still, someone must bear this risk. Other commodities which do not
have futures markets are efficiently marketed. There are alternative ways
of organizing the risking function. Other countries, as they have moved to
various kinds of public economic control, have shut down these markets.
Today, with very limited exceptions, the United States is the only country
which permits thcir operation.
Future markets in this country arc periodically subjected to heavy
criticism. Their critics have ranged from the uninformed man on the street
to the President of the United States, who cannot be excused for being
uninformed. In order to appraise this highly controversial market institu-
tion, let us examine the arguments.

Arguments For and Against Futures Trading

At one extreme, critics point to the greater volume of futures trading
than the actual commodity to be traded and cry, "Fraud!" Others maintain
that such markets are no more than a technique for organized gambling
by speculators. At the opposite extreme are those who have blind faith in
futures mechanism as the "last outpost of a free economy." Such arguments
show the need for a better public understanding, but they do not raise
any serious issue.
Arguments advanced by those more informed, however, have more
substance. In general they centered around the effect of the exchanges on
prices and marketing costs. Opponents charge that futures trading exag-
gerates price changes; that speculators manipulate the markets, and as a
result the cash market is adversely affected. Defenders maintain that the
futures mechanism gives stability to prices and furnishes a sensitive, realistic
price base for the cash market. Critics point out that the relationship be-
tween the futures and cash markets is so imperfect that successful hedging
is impracticable. To this the reply comes that it is hedging which
reduces the cost of marketing by reducing the margins of commodity
handlers.
Answers to these issues cannot be dogmatically given, for, after all, if
the absolute truth were known there would not be much ground for con-
troversy. However, we can point to the conclusions which have been made
by researchers as indicating informed judgment on these issues.

Effects on Prices
There can be no doubt that the practice of basing cash prices upon
futures is \videspread throughout the grain trade. It does not necessarily
follow, however, that futures prices therefore determine cash prices. They
would not be used for establishing cash prices if they were not in funda-
 Risk and the Futures Exchanges 21 3

mental agreement with the opinion of the buyers and sellers of grain as
to the value of the commodity. The same body of underlying conditions
affects both cash and futures, since the two markets are closely connected.
To state categorically which of the two prices is causal would be like asking
the tail to wag without the dog.
This is not to say that the operation of futures exchanges has no effect
on prices. One of the real contributions of exchanges is the establishment
of a sensitive price registration machinery. All kinds of news and statistics
are focused on the trading floor. Here the information is interpreted by
literally thousands of people through their trading actions. There can be no
doubt that commodities with futures trading have continuous markets.
There are always those who are willing to buy or sell at some price. Con-
tinuous markets, however, are also present for other commodities which
do not have futures.
The net effect of futures trading on prices probably cannot be eval-
uated statistically. Some observers like to compare price habits of com-
modities traded on futures exchanges to those of commodities which are
not. This is not a valid comparison, however, since the commodity with
the futures organization often has better grading services, more uniform
trading procedure, and more economic information available. Such im-
proved trade conditions may be a result of futures trading but they cloud
the effect on prices. Perhaps the best conclusion concerning price effects
was advanced by Howell after his study of grain futures. He states:

The data along with other available information indicate that futures trading
usually tends to lessen the seasonal fluctuations of prices of grain and to reduce
the extent of price changes from one season to another. But futures markets, by
facilitating trading, no doubt increase the frequency of changes over relatively
short periods.5
There is also some indication that very large speculators may have an
influence on price movements. One study found that the great majority of
small amateur speculators lost money in their speculative activities. This
study concluded that if the sample was representative of small speculators
there must have been other groups-large speculators, scalpers, spreaders,
or hedgers-that made very large profits.6 The actions of these very large
speculators were directly correlated with price movements. That is, when
they sold, prices fell, and when they brought, prices rose. Of course, other
traders illust have taken the opposite side of these contracts, but their
5 ~. D. Howell, Analysis of Hedging and Other Operations in Grain Futures, USDA

Technical Bulletin 971, 1948, p. 65.

6 Blair Stewart, An Analysis of Speculative Trading in Grain Futures, USDA Tech-

nical Bulletin 1001, 1949, p. 131.

CHAPTER SIXTEEN

Dairy Marketing

MILK PRODUCTION AND USE

Utilization
The output of the dairy herd, milk, is usually sold as either whole milk or
as cream. These may either be consumed as fluid milk or in the form of
the several different manufactured products such as butter, cheese, con·
densed and evaporated milk, dried milk products, and ice cream.

TAB LEI. Utilization of the Milk Supply, 1926-30 and 1946-50

PERCENT OF TOTAL SUPPLY

MAJOR USES 19 2 6-3 0 1946-5 0

Fluid milk and cream 42 48

Butter 43 27
Cheese 5 9
Evaporated and condensed milk 4 6
Ice cream 3 6
Other uses .. 3 4
Total 100 100

.. Includes dried milk (whole, skim, and cream), malted milk, dry ice cream mix,
and other minor uses.
SOURCE: USDA, Bureau of Agricultural Economics.

The manner in which the total milk output is utilized is shown in

Table 1. Nearly one-half of the total output is now consumed as fluid milk
and cream. Butter production utilizes slightly over one-fourth of the output.
Other uses account for the other one-fourth of the total supply. A com-
parison of the utilization pattern during 1926-1930 with that of 1946-1950
wi11 show the large shifts which have taken place. The proportion going into
23 8
 Dairy Marketing 239
fluid milk has increased some. The amount used in cheeses, ice cream, and
evaporated milk has increased sharply. The relative amount used in butter
production, however, has declined sharply.
Table 2 shows changes in the per capita consumption of these various
products. Even with increasing population, consumption per person of the
various dairy products with the exception of butter has increased. The
declining consumption of butter has been somewhat offset by increased
margarine consumption. The consumption of margarine has increased from
2.5 pounds per person during 1926-1930 to 5.3 during 1946-195°.

TAB L E 2. Consumption of Selected Dairy Products, 1926-30

and 1946-50

POU!>.'1lS PER CAPITA

PRODUCTS

Fluid milk and cream 395

Butter 10
Cheese
Evaporated and condensed milk
Ice cream *

* Net milk used.

SOURCE: USDA, Bureau of Agricultural Economics.

Milk which is used in various ways has different values. The highest
prices can be paid for milk which is used for fluid consumption. Next in
this scale of value is fluid cream and ice cream, Following this is the value
of milk for use by condenseries. The lowest valued uses for milk are in the
manufacture of cheese, dried milk, and butter-of these, dried milk and
butter are probably at the botton. This hierarchy of use-values means that
the demand for fluid milk will be satisfied first from the available supplies.
Usually all other uses for milk will be satisfied before milk is diverted into
butter and dried milk production. Butter manufacturing, other things being
equal, stands nearly last in the line of users of milk. It is within this frame-
work of different values that a good deal of the decline in butter manufac-
ture and consumption can be explained. The increasing demand for the
other dairy products, which has come about through population growth,
rIsing standards of living and an increased consciousness of the value of
milk .,s food, has meant that an ever-increasing proportion of the total milk
supply is needed to fulfill these demands. Less has been left for butter
manufacture, and into this gap have stepped the spreads manufactured
largely from vegetable oils.
 }'IARKETING OF AGRICULTURAL PRODUCTS

The Production of Milk

Milk which is to be consumed in its fluid form is a relatively perishable
and bulky product. The distance which it can be shipped is limited. :Lvlan-
ufactured dairy products, on the other hand, are relatively less perishable
and of various degrees of bulkiness. This means that they can be produced
at points farther away from the consuming centers. The geography of milk
production has often been described as a series of concentric circles sur-
rounding the consumption center. Fluid milk and ice cream will be pro-
duced within the nearest circle, condensed milk in the next, cheese in the
next, and butter in the areas most distant from the consuming center. This
pattern in the actual world, of course, is not as clear-cut as this. However,
milk for fluid consumption is usually produced within rather limited areas,
called milk sheds, surrounding our large cities. 'Wisconsin is a leading
cheese producing state; :t\Iinnesota, located somewhat farther from the con-
suming centers, is a leading butter producing state.

TAB L E 3. Regional Distribution of AiIilk and Production and

Methods of Sales, 1924 and 1949

WHOLE MILK SOLD CREAM SOLD BY

MILK PRODUCED BY FAR'l.IERS TO FARMERS TO
REGION ON FARMS PLANTS & DEALERS PLANTS & DEALERS

19 2 4 1949 19 2 4 1949 19 24 1949

% OF TOTAL % OF TOTAL % OF TOTAL
North Atlantic 18 17 38 23 4 1
East North Central 28 30 40 39 29 15
\Vest North Central 25 22 5 12 46 64
South Atlantic 6 7 4 5 1 2
South Central 12 13 3 8 6 11
West 11 11 10 13 14 7
United States 100 100 100 100 100 100

SOURCE: Changes in the Dairy Industry, Bureau of Agricultural Economics statement

submitted to public hearings before Senate Subcommittee on Agriculture and Forestry,
81st Congress, :md Session; data taken from Tables 31, 32, and 34.

Over half of the total milk production of the country comes from the
North Central region. The North Atlantic region is also a large producer.
The other regions of the country, while still relatively small in production,
are increasing their relative output (Table 3).1 This table also illustrates
1 The picture of the growing dairy industry of the South is well presented in the
Southern Cooperative Series, Bulletin No. 19, Trends in the Production and Disposition
of Milk and the Importance of Dairying in the South, 1924-50, 1951.
 Dairy Marketing 241
the geographic utilization differences. The bulk of the milk of the heavily
populated eastern areas is sold as whole milk to cities for fluid consumption.
Nearly two-thirds of the cream sold comes from the farmers in the west-
ern part of the North Central region, which is a heavy butter producing
area. During the twenty-five year period presented here, the total produc-
tion of milk has increased by one-third, the cream sales have decreased by
almost one-third, while the whole milk sales have increased tremendously.
As the output of the dairy herds and the utilization of this output for
fluid consumption has increased, there has been a marked trend toward
specialization of the dairy farms. There are now actually fewer dairy herds
than there were twenty years ago. The number of large commercial herds
has increased, while the number of the smaller "side-line" herds has de-
creased. In 1929, slightly over half of the total milk production came.from
herds of nine cows or less and only about 18 percent came from herds of
twenty cows or more. In 1944, about 38 percent of the total production
came from these smaller herds while nearly 30 percent came from the larger
herds (Table 4). In 1925, 26 percent of the total milk production was used
on the farm and only 29 percent was sold as fluid milk. In 1949, 17 percent
was used on the farm and 61 percent was sold in fluid form.

TAB L E 4. Changes in the Herd Production Pattern of Milk,

19 2 9 and 1944

SIZE OF
MILKING HERD
(NUMBER OF COWS) NUMBER OF HERDS MILK PRODUCTION

19 24 1944 19 24 1944
% OF TOTAL % OF TOTAL
1 to 2 49 52 13 11
3 to 9 38 32 39 28
10 to 19 10 12 30 31
20 to 29 2 3 9 14
30 or more 9 16

Total 100 100 100 100

SOURCE: Data from Census of Agriculture.

Production efficiency has also increased. From an average of 4>494

pound: of milk per cow during 1926-1930, production had increased to an
average of 5,092 pounds during 1946-195°' These trends to fewer, more
productive, but larger herds along with increased emphasis on the sale of
whole milk illustrates an industry in transition. This means increasing con-
 MARKETING OF AGRICULTURAL PRODUCTS

cern with dairy marketing problems as the producers are becoming more
and more specialized.!!

COUNTRY ASSE:tvIBLY OF MILK

AND CREAJ\I
Regardless of whether farmers sell their output as fluid milk or cream,
the problems involved in country collection are similar. Milk is usuallv
assembled by trucks operating over set routes which pick up the milk fro~
the farm and deliver it to the milk plant. In some instances where the pro·
duction area for a given market is extremely large, the milk may be first col-
lected and delivered to country milk plants. Here it is cooled and then put
in large tank trucks for the final move to the city. Generally, the farmer is
charged a flat rate per hundredweight for hauling regardless of distance or
amount hauled.
The organization and efficiencies of these routes vary widely. In some
instances trucks must travel long distances to pick up relatively small vol-
umes of milk. One study found that routes averaged eighty-three miles and
served forty-three producers. The average pickup was ninety-two pounds-
or approximately ten gallons of milk. One road was covered by four trucks
-anyone of which could have handled all the milk. Special lengthy side
trips were often made to pick up the milk of one producer.3
Seasonal production patterns also contribute to the inefficiency of milk
assembly. In some areas, the spring peak load is two-thirds above the fall-
winter load. Usually this results in trucks hauling loads well under capacity
during long periods of the year. Considerable savings could be made in
many instances through the combination of routes in periods of low pro-
duction and the addition of supplemental routes during periods of high
production.
The costs of handling the milk of each producer on a route are not the
same. The load hauled per patron and the length of travel are both factors
influencing cost. It costs almost as much to pick up one can of milk as it
does ten. One student of this problem suggested that a flat charge per
month plus a hundredweight charge would be more equitable. He pointed
out that a charge of $2.00 per month per patron and a 3o-cent per hundred-
weight charge would be more equitable than the 35-4o-cent flat charge then
2 This and a wealth of other data on the changing dairy industry can be found in
the hearing before a subcommittee of the Senate Committee on Agriculture and For·
estry, 81st Congress, ;md Session, entitled Changes in the Dairy Industry, United States,
19:0-50, a statement prepared by the Bureau of Agricultural Economics, USDA, and
available as a reprint from Utilization of Farm Crops, Part 4, Appendix A.
3 E. H. I\latzen, A Survey of Country Milk Collection Routes in the Fort \Vaync
Area of Indiana, Indiana Bulletin 520, 1947, and C. D. Phillips, Collection of llfilk and
Cream from Farms in Kentucky, Kentucky Bulletin 479, 1945·
 Dairy J\Iarketing 243
in existence. This scheme would have raised the effective hauling charge
of the small shipper and lowered that of the large shipper, thus being much
more in line with the actual costs of milk pickup.4
It would appear that much improvement could be made in the assem-
bly of milk from farms to plants. Small routes could be consolidated. Route
arrangements could be changed to avoid duplication and to help offset the
seasonal variation in the loads hauled. A method of more equitable charges
could be evolved.
However, as is so often the case, an entirely new approach to the prob-
lem may solve manY,of the difficulties. A new method of milk assembly is
now being tried. In this method, the milk is delivered directly from the
milking machine into large, sterile, cooled tanks. Large tank trucks then
periodically pump the milk directly from these farm tanks and deliver it
to the plant. This eliminates the laborious loading and unloading of indi-
vidual milk cans at the farm and also emptying them at the plant. It also
has been pos~ible by this method to let a larger supply of milk accumulate
at the farms and eliminate the daily pickup of small amounts. The end
product of such a development may be not only a reduced cost of milk
assembly but also a higher quality product.
FLU I D :1\1 ILK
Nature of the Product and Its Market
A knowledge of fluid milk and its market characteristics is an aid in
understanding many of the marketing problems which have developed.
One of these characteristics is that milk is usually considered a necessary
food. Not only is it necessary, but it is of such nature that under careless
handling it is a carrier of disease and can become a real threat to health.
The public interest in its milk supply is great. Most municipalities have
evolved more or less elaborate regulations which affect the production, han-
dling, and distribution of its milk. Such intense public interest and the
resultant regulations set fluid milk apart from many other agricultural
products.
A second characteristic concerns the nature of the supply and distribu-
tion of fluid milk. Milk is a perishable and bulky product. Even though
modem transportation permits the transportation of milk for long distances.
the large bulk of the supply for a city must come from the surrounding area.
1 'herefore, producers in a given milkshed could have near-monopoly control
over the milk supply if they were to organize together to control its pro-
duction.
4 N. T. Pritchard and \V. H. Cope, Milk Assembly in the Fort \\layne Milkshed,

I!:diam Bulletin 559, 1951.

 MARKETING OF AGRICULTURAL PRODUCTS

The pasteurizing and bottling of milk are operations which require

large investments in machinery, but little hand labor. With fixed costs
making up such a large share of the total cost, the economies of scale
in these operations are considerable.5 Under these circumstances, a few
companies do a large share of the business in a given milk market. For
example, out of the seventeen pasteurizing plants operating in Minneapolis,
in 1950, nearly 75 percent of the total sales were made by the five largest

Percent of Percent of
Monthly Monthly
Average Average
~------------------_,
130 p.~ Producer 130
/ ~,Deliveries
120 I', 120
110
I
I '\~
110
100 J=--P--........_~'~ 100
90 90
80 80
70~~~~~~~~~~ 70~~~~~._~~~~
Jan. Apr. Aug. Dec. Jan. Apr. Aug. Dec.
BOSTON, MASS. EVANSVILLE, IND.

FIG U REI. Seasonal pattern of producer milk deliveries and fluid

milk sales in two markets.

plants. 6 In 1949, of the forty-one fluid milk distributors in Portland, Oregon,

the six largest handled more than one-half of the total supply.7 Of the
eighteen distributors in Indianapolis, Indiana, in 1949, nearly 72 percent
of the sales were made by the six largest firms.s Such situations as these
can be duplicated in almost any market of size. Therefore, the situation is
one of monopolistic possibilities of supply on the one hand and oligopolistic
possibilities of distribution on the other. The rules of the competitive game
will not apply fully to such a situation.
A third distinguishing characteristic is that of a variable seasonal pat-
tern of supply and a stable seasonal pattern of fluid demand. Figure 1 shows
the supply and fluid milk utilization picture of two widely separated mar-
5 Charles B. Howe, Marketing Margins and Costs for Dairy Products, USDA Tech·
nical Bulletin 936, 1946.
6 Alexander Swantz, Economic Effects of Federal Regulation of the lVlinneapolis·
St. Paul Fluid !dilk !vfarket, USDA Marketing Research Report 11, 1952.
7 G. E. Korzan, A. B. Davis, and D. D. MacPherson, Costs of Distributing Milk in
the Portland Market, Oregon Bulletin ,10, 1952.
8 K T. Pritchard, The Indianapolis Milk Market, Indiana Bulletin 554, 1950.
 Dairy Marketing 245
kets. In both of these markets, fluid milk sales varied little from month
to month. On the other hand, the supply of milk varied widely from its low
in the winter months to its peak in the early summer months. This situation
means that if a city is to have enough milk for consumption during the win-
ter, it must establish a supply which will give it a largc surplus in the sum-
mer months. In the winter months, then, a high portion of the supply will
be used for the relatively high-priced use of fluid consumption. However,
during the summer, a much smaller portion will go for this purpose while
the remainder must be used for condensed milk, cheese, butter, and the like
-outlets which will pay lower prices. The producer usually finds it more
costly to meet the requirements of producing milk for fluid consumption.
Yet much of this same milk will go into the lower paying uses during part
of the year. This situation focuses attention on the problem of pricing milk
so that producers will maintain an adequate year-round supply for the
milk market.
Under the conditions of perfect competition which have been outlined
in Chapter 6, the price paid for milk would be uniform regardless of
whether its intended use was for fluid milk or the lower valued milk prod·
ucts. One seller would always offer his milk to the highest bidder and one
purchaser would always buy milk from the lowest priced supplier if neither
buyer nor seller had any control over the price. That perfect competition
is far from being the actual case in milk marketing should now be obvious.
The monopolistic element is a major factor in milk price determination.
As we pointed out in Chapter 9 in our discussion of price discrimi-
nation where market orders exist, the gain to be derived from such discrimi-
nation depends on two factors. First, prices must be administratively estab-
lished rather than dependent upon impersonal determination, and secondly,
it must be possible to segment the over-all market into a number of sub-
markets for which a price can be established. Both of these factors can be
present in milk price determination.
Basically, it will be recalled, price is controlled by influencing either the
quantity offered on a market or by influencing the demand for the product.
An industry in which the monopoly element is as important as it is in the
milk industry is one in which the quantity of each subproduct is adjusted
to give greater net returns than would otherwise be the case. The rule fol-
lowed is to adjust the quantity so that the addition to net revenue will be
the same in each submarket.
For fluid milk for human consumption the demand is highly inelastic
at current price ranges. As a consequence, additional milk would depress
prices so much that net returns would not increase. The processor, there-
fore, diverts milk into manufactured products which will bring a lower
 MARKETING OF AGRICULTURAL PRODUCTS

price but whose demand is- more elastic. In these outlets net revenue will
not fall as additional quantities are offered.
This division of the total supply among many uses would take place in
this fashion even if milk were purchased at a uniform price. The pricing
procedures outlined below merely represent an attempt of producers to
share in the returns that processors might receive from such price-discrim-
inatory procedures.

Pricing and I\Jarket Regulation

In most of the larger markets, producers have formed cooperative bar-
gaining and marketing associations in an attempt to offset the market
power of the few large distributors. Some markets may have only one
cooperative milk producers' association; others may have two or more.
Though they may differ in detail, all-on the surface at least-perform the
same general service. The principal purpose of these associations is to act
as the farmer's bargaining agent in establishing milk prices. In addition,
many associations own laboratory facilities with which they can perform
bu tterfat tests and thereby check this all-important factor against the
tests run by the distributor-buyers. Some associations also make a practice
of checking the weights which were taken by the buyers. Some operate
pickup routes, and others own processing facilities for handling the surplus
milk. These operations are largely financed through deductions from the
milk checks of members.
Dealers, too, in many markets have banded together in associations.
Such organizations are largely for the purpose of presenting a united front
to the producer cooperatives in bargaining over the price of milk.
The third major party in most milk markets is the municipal and state
authorities. These authorities regulate the conditions which must be met in
producing milk for human consumption. These regulations vary widely
from market to market. Either by intent or accident, such regulations often
act more as an effective method of controlling the supply of milk than as
an objective standard for judging the fitness of the supply. (See again Table
4, Chapter 10, as an illustration of the variability which exists in quality
standards. )
Sometimes these three agencies working in harmony achieved a peace-
ful and well-run market. At other times, however, marketing conditions
were turbulent indeed. The game of power against po\ver sometimes
resulted in producers' strikes in which milk was poured down sewers and
violence flamed. Distributors were accused of collusion in order to force
prices down and to achieve a more complete control of the market. As an
answer to a rather unsatisfactory situation, the federal milk marketing
 Dairy l'vlarketing 247
orders and agreements were born in the mid-1930's. (For the background
of these provisions see again Chapter 9 on government pricc and marketing
programs.)
The stated purpose of the marketing order is to stabilize prices and to
assure an ample and continuing supply of milk. In markets under federal
regulation, a milk market administrator acts as the referee and policeman
of the market. Formulas are established for pricing milk to replace much
of the bargaining between producers and distributors.
Since 1936, more and more markets have asked for and received the
supervision of federal marketing orders. It was estimated in 1953 that the
pricing of over one-half of the fluid milk and cream consumption was
affected directly by the forty-nine urban markets then operating with fed-
eral orders.!l
The procedure for obtaining a marketing order for a given city may
be outlined as follows:

1. A petition is made to the Secretary of Agriculture to initiate the pro-

ceedings for establishing the order. This step is usually taken by the
cooperative association representing the producers in the area.
2. Investigation is undertaken by the Secretary to determine whether
further action should be taken.
3· A public hearing is called, at which time the proposed order is presented.
All interested parties may present their opinions at this hearing.
4· Based on the facts and opinions presented at the hearing, an order is
issued. Time is then allowed for objections to be filed. Changes may
be made in the order after reviewing such objections.
5· The order is issued and becomes effective after a referendum in which
two-thirds of the producers vote in favor of the proposed order.

Basically, steps 3, 4, and 5 are followed in making any change in an order.

At the hearing all groups can be heard. Expert witnesses may be called.
Consumers' groups may appear, as well as representatives of producers and
dealers. Anytime 50 percent of the involved producers so desire, the order
may be terminated. The dealers, even though they may not approve of the
provisions of the marketing order, have no choice but to follow its provi-
sions once the producers have given their consent.
Though the provisions of the typical milk marketing order cover a
wide v8.riety of factors, the most important provisions are those which are
concerned with the pricing of milk. The paying price to producers usually
is based all the so-called blend price. In obtaining the blend price, the milk
9 "Role of Government in Pricing Fluid i\Iilk in the United States," Dairy Situ-
ation, USDA, April, 195+
 MARKETING OF AGRICULTURAL PRODUCTS

is divided into two or more-classes according to its utilization. Class I is

the usual designation given to the milk which is used for fluid distribution.
Other classes are established to identify the milk which is utilized in the
various other manufactured milk products. Each of these classes has a dif-
ferent price which attempts to reflect the value of the milk in line with the
products obtained. The proportion of the total supply which goes into the
various classes is valued at its particular class price and the blend price is
the result.
For example, suppose that 70 percent of the total milk supply for a
given period is used as Class I (for fluid consumption) and is priced at
$5.00 a hundredweight. The remaining 30 percent is used for manufactur-
ing purposes (in this case designated as Class II) and is priced at $4-00 a
hundredweight. The blend price will be calculated as follows:
70 percent X $5. 00 = $3·50
30 percent X $4.00 = 1.20
100 percent (blend price) = $+70

This price of S+70 will be the basic price for milk of a given butterfat
content to be used in paying producers. Some producers will receive slightly
more and some less depending upon whether their butterfat test is above
or below the standard requirement. This price reflects the way in which the
total supply is used in the market, and no individual producer will gain or
lose because his particular milk is utilized differently. The justification of
the same basic price to all producers rests upon the fact that individual
producers have little control over the use made of their own milk.
The real problem in the above example, however, is that of deter-
mining the prices of the various classes of milk. \Vhy should the price of
Class I milk be $ 5.00 (in the above example) and of Class II milk be $4'00?
Almost all federally supervised markets have adopted formulas by which
these prices are determined. Such a formula, once determined, is used
automatically until it is changed. The large majority of formulas in use
are based upon the prices of butter, cheese, powdered milk, and condensed
milk. Ususally two or more alternative formulas are provided for establish-
ing the price of milk used for manufacturing. The formula which results
in the highest price is used. In this way, the city meets the highest available
manufacturing competition for its milk supply. To this price for the man-
ufacturing uses, fixed premiums are added to obtain the price of Class I
milk. In the above example, the highest price calculated from the various
formulas in use is $4.00. This becomes the price paid for milk used in man-
ufacturing. To this, a $1.00 premium is added to obtain the price of the
milk used for fluid consumption.
 Dairy Marketing 249
From this brief explanation, it will be seen that two things might
have caused the blend price of $+70 to be different. The prices of butter,
cheese, condensed milk, or other formula factors might have caused a
change in the price of the basic milk class. In addition, if the way in which
the supply was utiiized had been different, the blend price would have been
different.lO
One of the objectives of pricing in a given market is to encourage a
more uniform seasonal pattern of milk production. A widely used technique
for this purpose is to vary the premium given for Class I milk. A greater
premium is offered in the winter months than during the heavy production
months of the summer. Assuming that the above illustration represents the
calculation for December, the premium added to the base price in June
may be only 50 cents. In this way, two forces work for a higher blend price
in the winter months than in the summer months. The premium for Class I
milk will be higher. Also, the proportion of the total supply used as
Class I milk will be higher in the winter than in the summer months (see
Figure 1). Such a seasonal factor in prices is used to encourage a more
even, year-round production.
Many markets have not found this method adequate to cope with
the problem of excess milk in the summer months. These have evolved still
other systems of giving incentives for winter production. One such system
is the base-surplus plan. Under one form of this plan, each producer has a
quota for his milk production. If the producer fails to deliver his quota
during the winter months, or delivers more than his quota during the sum-
mer months, he is penalized. Such a system coupled with the seasonal fluc-
tuations in the blend price obtained from the premium and utilization
changes offers a still stronger incentive for a more uniform productionP
Hearings are usually in progress at some market in the United States
at any particular time. These hearings may consider any of the provisions
of the marketing order, but usually they center around pricing problems.
Most markets have not solved the problem of the large variations in sea-
sonal production. Part of this problem is that of securing as much fluid
(Class I) consumption as possible. Most studies have found that the de-

10 The pricing details of the different markets vary. The method used in calculating

the prices of a particular market can be found in the market orders which may be ob-
tained from the market administrator. Many studies have been made by the Production
and ~r"rketing Administration of the USDA of the operation of the orders of different
cities. A general study giving the broad picture of the operation and problems of formula
pricing i3 Formula Pricing of Milk faT Fluid Use by E. S. Harris and I. R. Hedges,
USDA, Farm Credit Administration, 1948.
11 Effectiveness of this and other schemes has also been studied in several markets.

111ese reports are also available from the USDA, Production and l'\'larketing Adminis-
tration.
 ~I ARK E T r N G 0 FAG R r C U L T U R ALP ROD U C T S

mand for fluid milk is inelastic. 1!'! However, it seems possible that many
markets have reduced the returns from Class I sales through unwise pricing
practices. The flexibility of the wholesale pricing mechanism is the principal
concern of milk market regulation, since usually the retail resale prices are
not controlled by the marketing orders.13
The search for the proper pricing formula has led to some departures
from dependence upon the prices of manufactured products in establishing
the base price. The Boston formula illustrates an alternative approach
toward establishing prices. Formulas which follow the Boston pattern
attempt to include several measures of both the supply-and-demand situa-
tion and have divorced themselves from direct connection with butter,
cheese, and other milk product prices. In this type of formula, the United
States general wholesale price index, wholesale food price index, and index
of department store sales may be included as measures of the level of
demand. Data which measure the cost of milk production are included as
indications of supply conditions.
\Vhether such formulas are preferable must be answered by the future.
It is also increasingly evident that the butterfat content of milk is not
necessarily a true indicator of its value. The future will no doubt see
increased efforts to price milk on a nonfat basis. It seems probable that
dependence upon the prices of manufactured products as the sole factors
in fluid milk formula pricing will decline. \Vith increasing amounts of milk
being used for fluid distribution, basing its price upon the value of man-
ufactured products and butterfat content may be just a bit like asking the
tail to wag the dog.

Fluid Milk Distribution

There are two principal avenues for getting milk from the distributing
plant to the ultimate consumer. One is direct delivery to the consumer's
doorstep. The other is wholesale routes which deliver milk to retail grocery
stores where it is then sold to the consumer.
Almost every study of the cost of marketing fluid milk has concluded
that nearly one-half to two-thirds of the total cost occurs between the time
the pasteurized and bottled milk is available at the door of the milk plant
until it is delivered into the hands of consumers. It has been found that it
costs the same amount, for all practical purposes, to deliver one quart to

12 \Vhat Makes the Market for Dairy Products? North Central Regional Publica·
tion la, \Visconsin Bulletin 477, 1948.
13 A few states and cities have extended their regulatory measures to the supervision
of dealers' margins and retail sales prices. For an explanation of one such set of regula·
tions see f\!aynard C. Conner, The Milk r>.Iarket Control Law in Virginia, Virginia
Bulletin 444, 195 1.
 Dairy Marketing 251

the consumer as it does to deliver six. It also prohably costs more to deliver
directly to the consumer than it docs to deliver the milk in wholesale quan-
tities to the retailer.H
The frequency of delivery and the arrangements of routes also have
a direct bearing on the costs of distribution. Prior to \Vorld "\Var II, daily
delivery was the common practice. This practice, of course, reduced the
amount of milk delivered each day per customer. \Vith the modem home
refrigeration and the improved control of milk quality, milk can be satis-
factorily kept by the housewife for several 9ayS. As one of the measures to
conserve scarce rubber supplies during the war, milk delivery was reduced
from each day to every other day. This practice has remained in widespread
use even though governmental restrictions were lifted. Overlapping and
inefficient organization of routes of the several companies serving a city
are very similar to that of the routes assembling milk from the country
producer. Some routes are long and have small volumes. Overlapping is
frequent. Students of the problem have stressed the necessity of increasing
the density of deliveries in relation to the length of the route as a method
of reducing the unit costs of milk delivery.

TAB L E 5. Differences between Retail Prices of Milk Delivered to

Homes and Sold in Stores, 89 Cities, United States,
1949
AVERAGE A!\!OUNT DE-
NUMBER OF MARKETS LIVERED PRICES WERE
POPULATION - - - - - - - - - - - - - - - - ABOVE STORE PRICES
OF WITH NO STORE WITH STORE WHERE DIFFERENTIAL
MARKET CITY DIFFERENTIAL DIFFERENTIAL EXISTED

CENTS PER QUARTS

0- 99.999 3 ·4
100,000-2 99>999 14 ·9
300,000 and over 22 1.2
All markets 39 1.0

SOURCE: Louis F. Herman and l\Iordecai Bail], Farm to Retail l\fargins for Fluid
Milk, USDA, Bureau of Agricultural Economics, processed, 19$1.

It may be concluded that it is less costly to deliver milk in larger

quantities and less frequently. And probably it is also less costly to dis-
tribl:te milk through the retail stores if the consumer convenience consid-

.14 For an excellent analysis of these costs, see An Analysis of the Spread Between
Farm and Consumer Milk Prices in New York City Under Present Practices, Part 1 of
the Annual Report of the New York State Temporary Commission of Agriculture, 1949.
 MARKETING OF AGRICULTURAL PRODUCTS

erations are ignored. It would follow, then, if costs are to be reduced, that
consumers should be encouraged either to take their milk less often and
in larger amounts or to pick it up at their grocery stores. However, many
cities have uniform prices regardless of how much or where the milk is
purchased. Some have small discounts for retail and quantity purchases.
Some have a completely illogical pricing system from the standpoint of cost.
One study found that some store prices were actually 5 to 8 cents a quart
higher than home deliveries. I5 Table 5 shows the situation which existed
in eighty-nine markets in 1949. These data indicate that there is very little
price incentive to encourage store purchases.

Part of this "cost irrationality" in milk pricing can be explained by

the nature of the competition in the sale of milk. Regardless of the com-
pany from which milk is purchased, the quality is standardized in order to
meet the health requirements of the municipality. The dominance of a few
firms with heavy capital investments makes price competition highly un-
desirable from the viewpoint of the individual firms. Such a situation fur-
nishes the ideal atmosphere for nonprice service competition. l\;Iost milk
companies consider their salesman and the services he renders their most
active competitive factor. Under these conditions, from the company's
viewpoint, it may be desirable to encourage the home delivery of milk since
there are no such service factors present in the refrigerator case at the
grocery store. In this environment, poor and duplicative ronte arrange-
ments grow as different companies search for more customers. In addition,
pressure to maintain frequent deliveries in order to keep in contact with
the customer is substantial. Many companies have chosen to operate with
minimum price differentials with the result that the consumer who buys
large quantities at the grocery store usually subsidizes the consumer who
has her milk delivered often and in small amounts. In spite of these com-
petitive handicaps, there is a marked trend in many markets toward
increased store sales. The growing popularity of the paper container has
helped in that it is no longer necessary to return bottles. There also is
evidence of an increasing use of half-gallon containers.
The development of paper containers has also made it possible for
large city companies to expand their sales into small surrounding towns.
Originally many towns and small cities were served by small dairies which
had a substantial degree of local monopoly power. Recent years have seen
a great many of snch dairies fail, as larger dairies with their paper-contained
15 William J. J. Smith, "l\Iilk Price Differentials in the Southeast," Journal of Faml
Economics, [\lIgllst, 1946.
 Dairy Marketing 253
milk, have invaded these markets. Here is an excellent example of the
dynamic nature of the market structure. The innovation of paper con-
tainers has, no doubt, encouraged the further growth of already giant
concerns. On the other hand, many small communities which before had
only one source of milk may find two or three of these outside giants
competing for their favor. It is not easy to judge whether such development
has increased or decreased the competitive nature of the total milk
picture.

MILK USED FOR

MANUFACTURED PRODUCTS
Manufactured dairy products, in general, differ from fluid milk in that
they are less bulky and less perishable. This gives them greater flexibility in
transportation and storage. It also gives rise to the application of large-scale
industrial production techniques to their manufacture and of extensive
branding and merchandising programs to their marketing.

Marlwting Structure
Figure 2 shows the marketing channels which are used for butter,
cheese, and condensed milk. The principal channels used in marketing
butter is from the creamery to the wholesaler to the retailer. Cheese moves
from the local factories to country assemblers and processors, then to large
wholesalers to the retail store. Evaporated milk moves from the factories
to wholesalers, which may either be independent or factory-owned, and
then to the various retail outlets.
Though these channels appear rather simple, they are the result of a
significant change in the marketing structure which has occurred during the
last twenty-five years. At the time of \Vorld \Var I, the marketing of butter
was dominated by the independent wholesaler and jobber. Nearly half of
the cheese also was moved to terminal market cheese wholesalers, then to
wholesale grocers, and finally to retailers. The large meat packers were
major distributors handling about 30 percent of the butter and about 48
percen t of the cheese.
During the 1920'S and 1930's, there was a rapid growth of the chain
store system, large cooperative marketing organizations, and large diversi-
fied dairy products companies. These developments encouraged more direct
lTI«rkF:ting channels. Independent wholesalers and jobbers were by-passed
more and more. Both chains and packers secured their supplies directly
from plants in the production area. The cooperative marketing associations
and the large dairy product corporations owned country plant facilities and
 MARKETING CHANNELS FOR BUTTER, UNITED STATES,1939.

.,Ull-OWIlIO U(A.(IT·O.IltO
.WClLfSA1.[ 'l.UU
11 ,
U:U.llSTOIU

·'$TJ)O{ArtD
ALL FlGUltrS ElPRl5StD AS
lUCENT OF roTAL VOLUlif
RETAil•.
CRUMERY·OWII[O $1'0111:1:1
'''SmunOIl4L
.,
WHOLESAlERS
WHOl[SA1,.[ PUNTS USERS
to
70

"

MARKETING CHANNELS FOR AMERICAN CHEESE, UNITED STATES,1939*

U.R~E "ILK-PRO CutTS

CH([SE
f'AtrolllES
ASSEIUUU
."
WKO\"UAL£RS
n_o ...
WHOLESALERS 'ACTon-O_NII)
UT.l.H. STORt,

~ ~ ~
10.
'"
~ ~

-!STlMATED
AU FlGUUS U"UlSiD AS
PERCiN' 01 TOTAL roU/WI !t[TAIL
STORES
,lIoensoRS ... ,,~ FACTORY-OWNED WHO\,.[$.L£ IS_'
lXOUSTR,..,!,. USERS
AI.'
$ALE$ BIUNI:H£S
111 ...
~RO'US

FIG U R E 2, Marketing channels for butter and cheese (above)

and for evaporated milk (on facing page). (Courtesy
USDA.)
 \
Dairy Marketing 255
MARKETING CHANNELS FOR EVAPORATED MILK. UNITED STATES. 1939*

.... "'ur .. cfUA[If'$ C"AI,,-SrOR[ CiUl1i

\
IrHOLUALE IlIU,P'IC:t'.[S WAFO'IOUSE$ $TO~[)

'" J!.2 l3.2

.JJ. -1} {J.

Uleal "[C[lY''''
STATIONS
2U

l} i} l}
-1ST/MATED
ALL FIGURES IXFR£SSED AS IM~Ef[filCENf INDuSTRIAL I"OEP["~[1fT
f'£IIClIiT 01 TOTAL VOLUME WHOLESALERS USERS R.ETA.lERS
la.' 5.' "0

established their o\vn contacts with the large retailers.16 In the late 1930's,
it was estimated that the three leading firms of each industry did 21 percent
of the butter business, 63 percent of the cheese business, and 44 percent of
the condensed milk business. Chain stores also were major owners of pro-
duction facilities.
Though the marketing structure of the manufactured dairy products
has tended to become more direct and concentrated in the hands of fcwer
agencies, many production plants are still relatively small. Nearly two-fifths
of the butter and over one-half of the cheese were produced in plants
employing less than twenty men in 1947. Both evaporated milk and ice
cream factories tended to be much larger. Plants tended to specialize in one
product. Seven out of ten plants in 1944 produced only one product. About
50 percent of the butter plants, about 85 percent of the cheese plants, 72
percent of the ice cream plants, and 63 percent of the evaporated milk
plants were single product plants. For all practical purposes, the ability of
plants to shift from the manufacture of one product to that of another
was not great.1 7
16 A detailed account of this change in the marketing channels is found in two

lmIIctins by \ViIliam II. Nicholls, Post-\Var Developments in the Marketing of Butter

ane.: Pn"t-\Var Devclo/Jnwnts in the :Marketing of Cheese, Iowa Bulletins 250 and 261,
193Q·
17 J. 1\1. Cowden and H. C. Trelogan, Flexibility of Operation in Dairy !l1anufac-
turing Plants, USDA Circular 799, 1948. See also H. L. Cook, P. L. Kelley, E. F. Koller,
and A. H. i\1iller, Buiter Pricing and !vlarkcting at Country Points in the N ortll Central
Region, f-.linnesota Bulletin 203, 1952,
 MARKETING OF AGRICULTURAL PRODUCTS

Product Development
Substantial changes in manufacturing methods and product quality
have occurred. The butter and cheese made by the many small plants
originally varied markedly in quality. One of the earliest programs of the
Land O'Lakes Cooperative Association was to place emphasis on the stand-
ardization of the quality of its butter. In 1924, the Association was instru-
mental in setting up federal-state graders at its various concentration points.
\Vith grading done near production points, premiums for quality could
be paid to those who deserved them. Along with the quality improvement
came the establishment of the brand name, "Land O'Lakes," and a mer-
chandising program to promote the quality product. Is
The developmcnt of processed cheese and the shift from bulk cheese
to packaged loaves similarly made possible a cheese product more uniform
in quality. Here also the merchandising possibilities of branded products
were recognized. Evaporated milk also is a highly branded product.

Pricing Problems
The tendency of the manufactured dairy products to move more
directly from the factory to retail outlets has meant that much by-passes
the central wholesale markets. The growth of large-scale firms which dis-
tribute these products also has increased the possibility of price manipula-
tion. Many of the marketing problems of these products center around the
pricing process.
In thc early years of the butter industry, a large proportion of the
total supply passed through the large central wholesale markets such as
New York and Chicago. Here the organized exchanges for both cash and
futures trading developed. Though these products are by-passing these
market centers in increasing volume, prices still are based largely upon the
quotations of these centers. A study of the pricing of butter at Iowa
creameries found that these creameries sold almost exclusively subject to
prices quoted on the Chicago and New York exchanges. Though these
terminal prices furnished the basis of the quotation, almost every creamery
made an individual agreement with its buyers. Of the seventy creameries
studied, all but twenty-four received either a premium or a discount from
the central quotation. 19 (For details see Table 1, Chapter 11.)
A study of pricing practices of butter plants in the mid-west concluded
that commercial prices reported on the commonly used central markets
18 For an interesting account of the growth of this cooperative, see K. D. Ruble,
Men to Remember (Chicago, Donnelly and Sons), 1947.
19 A. C. l'vlathis and D. E. Hirsch, Butter Pricing by Iowa Creameries, USDA, Farm
Credit Administration Circular C·136, 1950.
 Dairy Marketing 257
underquoted the actual market in the sense that premiums were added to
them in obtaining the gross prices paid at country points. The varying
premiums resulted in the actual prices received at creameries varying in
such an irrational manner that it was impossible for the average creamery
manager to tell wh'lt his grade of butter should bring at his plant location.
The study further concluded that creameries would have profited from
being more aggressive in their bargaining relationships with those to whom
they sold their butter. Some buyers of butter often paid significantly dif-
ferent prices to plants in the same locality.20
A similar situation exists in the marketing and pricing of cheese. Bulk
cheese prices are largely established on the two Plymouth, \Visconsin,
exchanges. The price for cheese paid to \Visconsin factories is almost univer-
sal1y based on the prices at the Plymouth exchanges. Both the Chicago and
New York wholesale cheese markets fol1ow the prices of these exchanges
closely. However, here again an extensive system of premiums over the
exchange quotation is used. Such premiums are usual1y secret arrangements
between the buyer and the factory. As in the case of butter, one factory does
not know what the other is actually receiving. 21
There is evidence that prices can be influenced by the larger operators.
It has been suggested that the purchases and sales on the cheese exchange
by large traders tend to maintain price stability. In the period studied, six
members of the exchange made over 80 percent of the purchases and nearly
two-thirds of the sales for the period. 22 A study of the operation of the
Challenge Cream and Butter Association noted that the Association had
achieved a strong position in regard to butter prices. It is credited with
stabilizing California prices, with the result that there are less day-to-day
fluctuations in California butter quotations compared to those in the
East. 23
These are all indications of a departure from the idea of a nearly per-
fect competitive situation which is often associated with wholesale markets
of farm products. \Vholesale market prices do not represent the price at
which the bulk of butter and cheese is actually traded. Butter and cheese
producers often sell their products in relative ignorance of what is the going
price. A few large firms appear to have the power to affect prices by their
operations. This situation takes on added significance when it is recal1ed
that many fluid milk markets use the quoted prices of these dairy products
as a basis for their pricing formulas.
20 Cook, Kelley, Koller, and Miller, op. cit.
21 Arthur H. Miller, Pricing American Cheese at \Visconsin Factories, \Visconsin
Bulletin 163, 1949. 22 r-.lilIer, op. cit.
23 Paul E. Quintus, Operating Methods of Challwge Cream and Butter Association,

T]SDA, Farm Credit Administration Circular C-119, May, 1940.

CHAPTER SEVENTEEN

Poultry and Egg Marketing

The principal products of the poultry industry are eggs and meat. The most
important product as measured in terms of dollar value is eggs (Table 1).
Farm chicken meat is largely a by-product of the production of eggs. These
two products-eggs and farm chickens-account for about three-fourths of
the total value of poultry products. Seventy-eight percent of an United
States farms had some chickens in 1950. Broilers and turkeys are important
products on fewer, more specialized farms. Because of their different nature,
both from production and marketing viewpoints, the marketing of eggs and
poultry meat will be discussed separately.

TABLE 1 . Average Output of the Poultry Industry, 1947-51

AVERAGE VALUE CONTRIBUTION TO:

TOTAL TOTAL
FARM GROSS SALES GROSS
PRODUCT SALES CONSUMPTION TOTAL VALUE VALUE

MILLION DOLLARS PERCEXT PERCENT

Eggs 1,84 2 •8 245·7 2,088·5 59 59

Farm chickens 49 8 .1 149·4 647·5 16 18
Commercial broilers 474. 1 * 474. 1 15 13
Turkevs 270.6 4·4 275.0 9 8
Other' poultry 41.8 13·9 55·7 2
Total 3, 12 7,4 4 1304 3,54°. 8 100 100

* Home consumption not separated, but probably would be very small.

SOURCE: Computed from USDA, B.A.E. Statistics.
 Poultry and Egg Marketing 259

EGG 1\1 ARK E TIN G

The Product and Its Production
Eggs are a relatively perishable commodity. However, under proper
handling, quality deterioration can be controlled to the extent that storage
for a considerable period of time is practicable. Storage can also be provided
for dried and frozen eggs. However, the large proportion of the total supply
is moved into consumption in the form of shell eggs.
The production of eggs is widely scattered. Though four out of every
five farms in the United States produce some eggs, only less than 5 percent
of the farms of the country can be elassified as specialized poultry farms.
Yet this highly specialized group accounts for nearly half of the total value
of poultry products sold. In 1945, nearly three-fourths of all the farms
reporting chickens had flocks of less than 100. These farms produced
slightly more than one-fourth of the total egg supply. Only 2 percent of
the farms reported flocks of over 400. This very small group accounted,
however, for another fourth of the egg production. This dual nature of egg
production-widely scattered, small, side-line enterprises on the one hand,
and highly specialized enterprises on the other-must be continually
kept in mind if the problems of egg marketing are to be fully under-
stood. I
Marked changes have been taking place in egg production. Total
pro::1uction has increased sharply (Figure 1). During 1945-1949, egg pro-
duction was nearly 50 percent above that of 1935-1939. A considerable
amount of this production increase was the result of increased productivity
of the hen. During this period, the rate of lay increased about 35 percent
while the number of layers increased only about 10 percent. This means
that even though hen numbers may decline, egg production may continue
to increase.
There has also been a tendency toward less seasonal variation in pro-
duction. The period of peak egg production comes during the months of
February through June. The period of low production occurs during Octo-
ber through December. During 1925-1929, 69 percent of the yearly produc-
tion of eggs came during the highest six months of the year, with 31 percent
during the lowest six months. During 1945-1949, these percentages were
60 and 40 respectively. Such developments have reduced the amount of
eggs moving into storage during the peak production season. The storage
stocks of eggs on August 1 (usually the month of peak storage holdings)
averaged 11 percent of the total production of the preceding six months
1 R. P. Christensen and R. L. l'vIighell, Competitive Position of Chicken and Egg
Production in the United States, USDA Technical Bulletin 1018, 1950.
260 MARKETING OF AGRICULTURAL PRODUCTS

POTENTIAL LAVERS AND EGG

PRODUCTION ON FARMS
% OF 1935-39

150

1251---

75~~~~~~~~~~~~~~-=~~~~
1935 1940 1945 1950 1955

FIG U REI. Number of layers and egg production showing the

results of the increased rate of lay. (Courtesy USDA.)

during 1945-1949 compared with 15 percent of the preceding six months'

production during 1925-1929.2 '\lith less seasonal fiuctation of production,
there is less seasonal variation in prices than in earlier years.

jVIarlwting Channels
The widespread, small-unit nature of egg production has fostered a
large variety of agencies engaged in the buying and collection of eggs in
the country for shipment to other markets. A study of Table 2 will show
differences in outlets which can be attributed to the different production
patterns as well as the geographic locations. In the nonspecialized North
Central and Southern areas, the local grocer store is a principal egg buying
agency. In the more specialized Northeastern area, this outlet is not so
widely used. Here the cooperative association and the buyer from larger
outside outlets are more important. There is also reason to believe that
some outlets are more important during the heavy production season of
the spring than in the light production season of the fall. This is indicated
by difference in the April and August outlets used in the North Central
region (Table 2).
2 Christensen and ~lighell, op. cit.
 Poultry and Egg Marketing 261

These various country buyers in turn sell to a large variety of outlets.

During the period of low production, many of the eggs may be retailed in
the cities of the local area. In the heavy production season, more eggs are
shipped to wholesale receivers located at the large consumption centers ..
There many will be stored for consumption during the season of low
production.

TAB L E 2. Producer Sales of Eggs by Type of Market Outlet

NORTH CENTRAL NORTHEAST NINE
REGION, 1948 " REGION SOUTHERN
TYPE OF OUTLET APRIL AUGUST 1948 t STATES, 1947 ~

PERCENT OF TOTAL

Local dealer 29·7 35·5 10.6 8.0

Trucker or outside buyer 13. 1 16·3 28.6 11.0
Cooperative association 9. 1 9·7 17·7 3.0
Retail store 26.2 24.2 13·4 4 8.0
Hatchery 12.6 2.0 7. 2 5.0
Hotel, restaurant, bakery 1.2 3-3
Consumer 6,4 9.6 18,9 21.0
Otllers 2.0 1.5 0·3 4. 0
All outlets 100.0 100.0 100.0 100.0

* \V. N. Starkey, O. C. Hester, and L. F. Hermann, Sales of Eggs by Farmers in

til!! North Central Region, USDA Agricultural Information Bulletin 46, 1951.
to. C. Hester, Egg Marketing Channels and Methods Used by Northeastern Pro-
ducers, USDA Agricultural Information Bulletin 69, 1951-
~ Marketing Eggs at the Producer Level in Nine Southern States, Southern Co·
operative Series Bulletin 17, 1951.

The proportion of the total marketing charge taken by the local

assembly agencies is greater for eggs than for many other agricultural prod-
ucts. (See Table 4, Chapter 5.) To a considerable extent, this can be
explained by the nature of the production. Eggs must be collected from
a great number of small producers scattered throughout the country. For
example, the average weekly sale of eggs by producers in the North Central
states during April was about thirty-six dozen; in August, this figure had
dropped to about twenty-three dozen. 3 In the southern states, where the
flocks tended to be still smaller, weekly sales were less than this and the
seasonal variations still more pronounced.4
Under such conditions, the volume handled by many of the agencies
3 W. N. Starkey, O. C. Hester, and L. F. Hermann, Sales of Eggs by Farmers in the
North Central Region, USDA Agricultural Information Bulletin 46, 1951.
\ Marketing Eggs at the Producer Level in Nine Southern States, Southern Co-
operative Series Bulletin 17, 1951.
262 :t\I ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

assembling eggs is no doubt considerably below that necessary for the lowest
cost operations. This helps explain why many buying stations also buv
cream, wool, and other products. This small volume characteristic of sal;s
also helps explain why many retailers are side-line egg buyers. The benefits
of larger-scale operation can be realized more fully in the more specialized
areas of production. There appears to be less business stability in egg han-
dlers than in many other businesses, and the rate of business mortality is
high. The large nnmber d handlers operating in areas which cannot furnish
the volume for efficicnt operation may be a principal cause for this. 5
rvIany egg buyers have establish cd truck routes to pick up eggs from
producers. The proportion of eggs picked up at the farm ranges from 24
percent in the southern states to over 40 percent in the northeastern
states. The remainder of the eggs are delivered by farmers to the buyers.
In many instances, the pickup route must serve a wide territory in order
to secure adequate volume. Forty-five percent of the egg routes studied in
Indiana were over 100 miles in length. In Ohio, the average length of the
routes studied was 152 miles. The least efficicnt Ohio routeS were 163 miles
long and assembled about one-third of a case for each mile traveled; the
most efficient were 89 miles long and assembled about two cases for each
mile traveled. G Here again the importance of volume for low cost operation
is illustrated.

Problems of Quality
Problems in the maintenance of quality in eggs start on the farm.
It is generally agreed that the hen lays eggs which in the majority of cases
are high quality as measured by current grading systems. However, it was
found that only about two-thirds of the eggs which were delivered to the
country buying stdtions were of top quality.' Between the time of laying
and the time the farmer sold them to the first buyer, one egg in every
three had dropped below Grade A quality.
Eggs continue to deteriorate as they move on through the marketing
channel. Between the country buyer and the carlot assembler which may
be the next step in the marketing channel, an average of thirteen eggs per
hundred dropped in quality one grade. s 'Vhat is the quality of eggs which
finally reaches the retail stores? This varies widely. Some stores make

5 \V. P. r-.lortenson and T. F. Graf, Marketing Eggs ill the Lake States, \Visconsin
Bulletin 168, 1950.
6 T. C. Rothbauer, G. B. 'Vooel, and J. H. }.iartin, Poultry and Egg Truck Routes
in Indiana, Indiana Bulletin 571,1952, and R. E. eray, The Efficiency and Cost of Col·
lecting Eggs from Farms in Ohio, Ohio Bulletin 721 , 195:?-.
7 Changes in Egg Quality During Marketing, ~\lichigan Special Bulletin 361, 1949.
8 Ibid.
 Poultry and Egg Marketing 263
particular efforts to handle high quality eggs; others through poor handling
offer relatively low quality eggs for sale. There is also evidence that egg
quality varies considerably from city to city.9
Part of this quality deterioration is inherent in the marketing of a
perishable product. Egg driers and breakers utilize much of the lower
quality products. However, part of the deterioration in quality is prevent-
able through improved handling methods. Better handling practices by the
farmer may reduce the initial quality loss. One study found that if seyen
different farm practices in handling the farm flock and eggs were followed,
<jO percent of the eggs marketed were of "A" quality. If none of these
practices was followed, only 55 percent were of "A" quality.10 Speed,
refrigeration, and care in handling will help reduce quality deterioration
at both the wholesale and retail levels.
'Vhat are some of the causes of this continuing neglect in the handling
of eggs? One is that a great many producers do not find it profitable to
strive for product quality. In the North Central region, nearly 60 percent
of the eggs are sold by farmers on the ungraded basis. In the Southern
region, 90 percent of the eggs are sold ungraded. In the highly specialized
New England area, however, it is indicated that only about 5 percent are
sold ungraded. l l
On the other end of the marketing channel, a large proportion of eggs
which consumers buy are not designated by grade. The ability of the house-
wife to judge accurately the difference between Grade "A" and Grade "B"
eggs is very limited. The term "fresh eggs" appears to have more impact
on consumer acceptance than the grade label. In one city, less than half
of the consumers contacted knew that the term "Grade A" signified top
quality. In addition to this, many studies have shown the lack of relation-
ship between the price which the consumer pays and the quality of egg
received. Consumers apparently cannot rely on price as an indicator of
quality.l!!
The egg grading system as now constituted is extensively used only by
the wholesale handlers within the marketing channel. The question is
9 See, for example: N. Nybroten, j\Jarketing Eggs in Retail Stores of the Northeast,

1949 and Retailing Eggs in \Vest Virginia Stores, \Vest Virginia Bulletins 353 and 354,
Junc, 1952; D. M. Spillcr and G. B. \Vood, Egg Quality in the Indianapolis Market,
Indiana EC 5+ 1951; S. K. Seaver and R. A. King, Marketing Eggs Through \\'lzolesale
Ch<innels and Marketing Eggs Through Retail Stores, Connecticut Bulletins ::69, 1951,
and 768, i950; and R. L. Kohls and N. Oppenheimer, Quality Recognition and Pur·
chasing li"bits of Egg Consumers, Indiana Bulletin 59::, 1953.
1C Poultr;,' Farm Practices and Egg Quality, USDA Marketing Research Report ::::.

]] Starkey, Hester. and Hermann, op. cit.; Southern Cooperative Series Bulletin,
op. cit.; and \\T. Earle, Business Operations of Northeastern \Vholesale Egg Buyers, New
York Bulletin 868,1950.
12 Kohls and Oppenheimer, op. cit.
 MARKETING OF AGRICULTURAL PRODUCTS

largely unanswered as to- what is the quality desired by the consumer and
what price she will pay for it. The grading system is not adequately serving
its purpose of guiding production through price. It is not surprising that
producers and handlers are not vigorously pressing to handle eggs in a way
that will assure high quality.

POULTRY MARKETING
During the five-y~ar period, 1946-1950, the per capita consumption
of red meat averaged about 148 pounds. During this same period the per
capita consumption of chicken averaged about twenty-five pounds and that
of turkey slightly more than four pounds. Poultry meat has been largely a
by-product of egg production in the form of old hens, roosters, young
fryers, and roasters. In recent years, an increasing proportion of the total
supply, however, has been corning from the commercial broiler industry.
In 1940, only 14 percent of the total chicken meat came from broilers; by
1950, broilers accounted for 40 percent of the total chicken supply (Fig-
ure 2).

SUPPLY OF POULTRY ~AEAT

PER PERSON
LBS.*

>I< fOR CIVILIANS

FIG U R E 2. The composition of the poultry meat supply

showing the growing importance of commer-
cially grown broilers as a source of poultry meat.
(Courtesy USDA.)
 Poultry and Egg Marketing 265
The principal marketing channels of chickens consist of poultry
buying stations which buy from farmers in the production areas. Shippers
buy in small lots from these country buyers and sell to live chicken whole-
salers, processors, and wholesalers of dressed chickens. These wholesalers
sell to the retail store. 13 Poultry may be sold to consumers either alive or
dressed. In recent years, the amount of chickens sold alive to consumers
has sharply declined. Live receipts in New York City, the nation's largest
live poultry market, declined from 60 percent of the total receipts in 1920
to 25 percent in 1950. Dressed poultry may be sold either "New York
dressed" (killed and picked only) or "oven ready" (picked and completely
eviscerated). The trend has been toward the "oven ready" dressed chicken
and away from the New York dressed birds. Frozen poultry has also
become of considerable importance, increasing from less than 1 percent
of total production in the late 1930's to over 6 percent in 1950.
In the marketing of poultry, as in that of eggs, the necessity of assem-
bling the birds from widespread small producers is one of the principal
factors contributing to high marketing costs. Country buying points are
often too small for efficient operation. Country buying on the basis of
quality is not widely practiced. It was estimated that in 1950 less than
10 percent of the farm chickens and about 28 percent of the turkeys were
graded under federal and state grading programs. Such situations make the
collection and dissemination of meaningful price and market information
difficult.
Poultry slaughtering facilities were originally concentrated in the
wholesale markets of the large urban centers. In recent years, more and
more facilities are being built in the production areas. Provided production
area plants can obtain a volume for an efficient scale of operation, the
potential savings in transportation and other marketing costs are great.
However, such a decentralization raises the same problems in pricing as
those discussed for butter. Terminal market quotations are used widely to
price poultry even though the may no longer be based on an adequate
volume of trading.
It has been felt by much of the industry that the poor quality of
products in retail stores has been a limiting factor to the consumer accept-
ance of poultry. \\lith better quality control in dressing plants and the
inGeascd acceptance of fully dressed fresh or frozen chicken, consumers
\ViII be offered a more attractive product. Many of the large chain retailers
have taken the lead in improvement of quality either by operating their
own processing facilities or by the establishment of rigorous standards of
'" E. P. \Vinter, Marketing IVlargins and Costs for Poultry and Eggs, USDA Tech·
nical Bu!letin 969, 1948.
266 MARKETING OF AGRICULTURAL PRODUCTS

quality which their suppliers must meet. In the late 1930's, less than
3 percent of poultry sales were slaughtered under federal inspection. By
1950, this had riscn to about 12 percent.

The Commercial Broiler Industry

The commercial broiler industry offers an example of the marketing
problems which occur as a new industry develops. Commercial broilers (in
reality a misnomer, sin::e most "broilers" are marketed at fryer weights
of three pounds or more) were not produced in any quantity until the
middle 1930'S. At that time, commercial broilers were really a side-line
enterprise, with the producer raising only one or two broods a year. From
1934 to 1950, broiler production increased on the average about 14 percent
each year (Figure 3). The industry in its growth became a highly special-
ized year-round operation heavily concentrated in a few areas.

Million Broilers

FIG U R E 3' Trend in United States broiler production.

(Source: USDA, B.A.E.)

The leading broiler areas of the country are the Del-Mar-Va peninsula
and northwest Georgia. Other important areas of concentration are in the
Virginia Shenandoah Valley, northwest Arkansas, North Carolina, Texas,
California, Ivfaine, Indiana, Mississippi, Missouri, and Connecticut. These
various areas account for nearly 75 percent of the nation's total broiler
output. These widely scattered areas have various histories of development.
No one set of criteria can be used to explain the location pattern. Some
are close to eastern markets, but in areas of high feed and labor costs.
Others are far from market, but close to sources of surplus feed. Some have
 Poultry and Egg Marketing 267
developed in areas of excess cheap labor. In some areas, alternative farming
opportunities are limited; in others, such opportunities are many and varied.
Though the location pattern is not easily explained, there appear to
be at least two major explanations for the rapid growth of the industry.
One of these lies in the pattern of expansion of egg production. As pre-
viously pointed out, the increased egg production was secured from only
a moderately larger laying flock, but with a marked increase in the rate of
lay (Figure 1). This meant that relative to the growing population there
was a smaller supply of poultry meat available as a by-product of egg pro-
duction. Into this gap stepped the broiler industry (see again Figure 2).
The other reason for growth lies in the rapid technological improvements
which permitted a continually lower cost of broiler production. Part of
this improvement was in the development of improved strains of chickens
for meat production. Another development was in the field of feed nutrition
which led to greater meat production per pound of feed. Improved brood-
ing and feeding equipment both reduced the labor required and the mor-
tality rates.
In the early years of the industry, most of the birds were shipped alive
from the production area to processing plants located in the central markets.
In some areas, this is still true. However, production area processing has
been increasing. It is estimated that 90 percent of the Del-Mar-Va produc-
tion, 75 to 85 percent of the Shenandoah Valley production, about 66 per-
cent of the Georgia production, and about 50 percent of the Arkansas
production are now processed in the production area. 14 In the Del-1hr-Va
area, for example, birds are processed and moved by overnight trucks to
New York City in order to assure the consumer a high quality, fresh
product.
A high degree of vertical integration has also developed within the
production process and the marketing channel. In some areas, large feed
companies operate hatcheries and processing plants. These companies may
also extend credit to producers, supervise production operations, and finally
buy the finished product. In some situations, the feed-hatchery financier
assumes most of the risk in both the production and marketing. Under these
circumstances, producers may be little more than hired laborers receiving a
wage or guaranteed return per bird. The broiler industry offers one of the
few examples in agriculture of across-the-board control of production,
process!\:g, and marketing by a single agency.
This industry also furnishes an example of one of the more sensitive
agricultural industries from the standpoint of output regulation. Produc-
'" S. T. Rice, Interregional Competition in the Commercial Broiler Industry, Dela-
ware Bulletin 290, 1951.
 MARKETING OF AGRICULTURAL PRODUCTS

tion can be started and the product marketed within a twelve-week period.
The broiler operation is relatively independent of c1imate. These factors
plus the development of the commercial producer who is largely dependent
on the sale of broilers for his income have encouraged continuous year-
round production. However, it is a production which can be regulated
quickly to favorable or unfavorable market conditions. Because of this, the
violent seasonal price pattern of the 1930's has been replaced by a one
with little seasonal variation.

The Turkey Industry

The turkey industry, similar to the broiler industry, has been one of
recent rapid growth. The number of turkeys raised has tripled during the
decades of the thirties and forties (Figure 4). Production also has tended

Million Turkeys

o 1935 1940 1950

FIG U R E 4. Trend in United States turkey production.
(Source: USDA, B.A.E.)

to become more specialized. In 1929, four times as many farms reported

raising turkeys as in 1949. However, in 1949, there were more than two
and one-half times as many turkeys raised. This means, as was the case
with broilers, that the small side-line producer is being forced out and that
those remaining are producing larger and larger flocks. Production has also
tended to concentrate in certain areas. The western states of California,
Oregon, Washington, and Utah raise nearly one-third of the nation's
turkeys. Other leading areas are located in Minnesota, Iowa, Texas, and
Virginia.
Traditionally, turkey is the meat for the Thanksgiving and Christmas
holidays. In the middle 1930's, three-fourths of the turkeys raised were sold
 Poultry and Egg Marketing 269
during this holiday season. Only about 5 percent of the total production
was put into storage for consumption at other times of the year. '\lith the
rapid expansion of production, the industry made considerable effort to
encourage more consumption during the other months of the year. The
marketing season was extended, until during the latter part of the 1940's
about one-third of the birds was marketed in periods other than the holiday
season. The amount of meat which was put into storage increased to an
average of about 15 percent of total production.
With the household unit getting smaller, the problem of moving the
large turkey into consumption has become more difficult. Through pressure
for increased turkey consumption, attempts have been made to reach addi-
tional consumers by selling turkey quarters, halves, and pieces. Such efforts
have met with only limited success, though the potentialities seem great.
The housewife, who has been accustomed to handling the whole bird, must
be educated to the proper ways of preparing the partial turkey.15 The re-
sistance which the industry has met in changing consumption patterns
illustrates the many problems both in consumer preference and in the
functioning of the various agencies in the marketing process which are
encountered in changing long established practices and customs.
The introduction of the Beltsville small white turkey is another \vay
of attempting to secure a smaller bird to meet consumer needs. The pro-
duction of the turkey "fryer"-a turkey which is finished quickly at weights
comparable to a large hen-also is offering consumers a different turkey
product available on a year-round basis. Both of these developments
are accounting for an increasing portion of the total turkey produc-
tion.
The large surplus production areas are located far away from the
consumption areas of the East. This has fostered the development of
large cooperative associations which have sought to retain control of the
birds throughout the marketing channel. These cooperatives own process-
ing plants in the production area, operate storage facilities, and employ
sales representatives in the eastern markets. In the early days, most turkeys
were sold alive and shipped to the large cities for processing and storage.
There now is an increasing tendency for farmers themselves to hire the
processing done (or own their own facilities) in the production area and
hke the risk of storage themselves. Such marketing activities have become
feasible ,:.lI1ly with the increased specialization and volume of individual
producers.
15 L. E. Dawson and C. B. \Vood, Merchandising Turkey Quarters, Indiana Bulletin

537> 1949·
270 MARKETING OF AGRICULTURAL PRODUCTS

PROBLE~lS OF INTEGRATION
AND PRICING
The poultry industry furnishes an excellen t illustration of the problems
which arise in marketing products which arc produced in small amounts
scattered over broad areas. The products change hands many times in the
marketing channel. l\hny of the handlers operate on a scale which is too
small for the greatest efFciency.
The lack of widely accepted grade standards plus the smal1 scattered
agencies and diversified methods of buying makes for many faulty pricing
situations. Price quotations from central terminals have only limited mean-
ing. For example, broilers are purchased on certain markets on the basis
of country weights or market weights plus 5 percent. On other markets,
the broilers are purchased on the basis of the market weight. Price quo-
tations under these two situations cannot be directly compared. The market-
ing agencies on the former market are assuming much of the shrinkage
which occurs between the country and the city. Therefore, a quoted price
on that market equal to the price quoted on markets following the latter
practice is in fact a higher price. 16 In addition to the differences in trade
practices, the wholesale poultry markets in many of our cities operate in a
very disorganized fashion. Assembling meaningful quotations which accu-
rately represent the prevailing price level is a difficult task.
There is evidence that active competition for buying eggs and poultry
in the production area is limited. In one area, over three-fourths of the
lots of chickens were sold after obtaining only one bid from prospective
buyersP This is in rather sharp contrast to the way in which farmers often
"shop around" when selling their hogs, and is probably due to the gen-
erally small scale and relative unimportance of the poultry enterprise.
Large flock owners tend to receive more for their eggs than small flock
owners.1S There is evidence that the large-scale producer follows better
handling practices which result in higher quality eggs. He therefore should
receive higher prices. However, it is also probable that the large-scale pro-
ducer is more active in shopping around for the best outlet or buyer for
his product.
Such conditions as described above mean that when the poultry enter-
prise reaches large-scale specialization in certain areas, new and better
outlets are sought. Often these take the form of vertical integration in the
16 R. L. Kohls and T. C. \Va]z, Broiler Trucker-Buyers in Indiana, Indiana Bulletin
s-8Cl. 1952.
. :7 R. H. Anderson, Marketing of Chickens from Producer to First Handlcr, \Vash-
ington, Oregon and Utah, 1948-49, Utah Bulletin 354.
18 See footnote 3.
 Poultry ana Egg Marketing 271

marketing channel. This has been the development in tIle specialized turkey
areas through the growth of the marketing cooperatives. It has also been
true in commercial broiler areas usually under the direction of the financing
agency. Egg marketing cooperatives often attempt to obtain quality outlets
by dealing directly with wholesalers and retailers. The large chain stores in
search for assured supplies of standardized quality have reached backward
in the marketing channel and established direct buying and processing
facilities in the production areas. Such developments in simplifying the
marketing channels offer considerable opportunities for reducing marketing
costs.
Real progress in improving the marketing and pricing structure, how-
ever, can come only as fast as production tends to become more concen-
trated and specialized. Then will producers become more actively inter-
ested in improving their situation and force a more active competitive
situation. Also, the assembling and processing agencies then will be able
to capitalize on the economies which arise from specialization and large-
scale operations.
CHAPTER EIGHTEEN

Grain Marketing

THE PRODUCTS-THEIR PRODUCTION

AND USE
The principal grains of the United States are corn, wheat, oats, barley,
and rye. Soybeans are not a grain but an oilseed, but they are included
in this discussion of grain marketing problems. There are, of course, other
grains produced, many of which are of considerable regional importance.
The concentrated corn, oats, and soybean production area is in the
North Central region-the "corn belt." The principal wheat area lies to
the west of the corn belt occupying the tier of the great plains states from
Texas north to the Dakotas. The northern part of this group of states is
also the principal rye and barley growing area. Grain sorghums are grown
mostly in the southwestern states of Texas and Oklahoma.

Product Utilization
All of these gr~ins are the raw material for conversion into some other
product. Feed grains are converted into pork, beef, poultry, and dairy
products. Figure 1 illustrates the movement of corn into its various uses.
In recent years corn has made up about 60 percent of the total grain and
by-product feeds for livestock. It is this relationship which ties livestock
so closely to feed grain production. As indicated in Figure 1, such food
industries as the meat packing and dairy products industries are indirectly
but closely tied to the problem of feed production and marketing. Food
grains are usually first converted into flour which is the raw material of
the baking industry for bread and other bakery products. In recent years
a sizable portion of the wheat crop has been exported to foreign countries.
The principal products from soybeans are the oil and meal. In recent
years, about 50 to 60 percent of the value of soybeans has been derived
27 2
 MOVEMENT OF CORN
Co,n Haryell
Ooh. bortey, ~o';"'\Jft\
grg!n. wheat and rye
fed, byproduct fnch Imporh
1I

lowgha;. co""~",.d
by lIy.,tock

Dolt)" proc.uCl'

Wool, Mea', lard, Mille, blltttr. &• .,"00 .... rndu.,tlol prod'uc:t ... tc:~ j
01ch Md... .tc. ,".. n. ,te. Co,,, lMIor. bOn'llny, CO'I\ flake&. .tc·,
.re.
p"Wtr $ta,c~. lugor.sIrup. 01: Export
Fa.rm and Nonfarm Consumption
o
.G~AINS AND IYPlOOUCr FEEDS FED AS SUCH Ol IN COMMElCIAtlY.1REPAHD FEEDS
4THE ENTIRE lOX MEASURES THE TOTAL FEED FEDI THE SHADED AUAS THE AMOUNT Of COlN fED

FIG U REI. The utilization of the nation's com supply showing

the close relationship between livestock and feed
production. (Courtesy USDA.)
 MARKETING OF AGRICULTURAL PRODUCTS

from the meal and about 40 to 50 percent from the oil. In 1948, soybean
meal amounted to 21 percent of all by-product feed, surpassed in impor-
tance only by wheat mil1feeds. Soybean oil represented 22 percent of the
total supply of food fats in 1948, exceeded only by lard and butter.1 As a
major source of food fats and oils, soybeans are comparatively new. Figure 2
shows the rapid growth of soybean oil compared to other vegetable fats

t=ATS AND OILS USED IN FOOD

( E:ccep~ BuHer and Lard)
Bll. LBS.

1935 1940 1945 1950 1955

FIG U R E 2. The changing composition of supplies of fats and

oils. (Courtesy USDA.)

and oils. It is now the largest single source of vegetable fats and oils. Nearly
three-fourths of the soybean oil is used in margarine and shortening manu-
facture.
Table 1 shows the utilization of several grains. Nearly nine-tenths of
the corn and oats is used as livestock feed. Though these are the largest
crops from the standpoint of bushels produced, only a very small amount
actually moves into the commercial marketing channels, since most are
consumed on the farms where they are grown. In the case of wheat, how-
ever, a very large proportion of the total production is sold from the farms
to be further processed. The same is true of soybeans.
I Don Paarlbcrg, Prices of Soybeans and Soybean Products, Indiana Bulletin 538,
1949·
 «00 I I ~ I'l" o
o....

I I

o
....o

I I

00 00
I '" I I ... o
00 o
....
,..on
<: oo~
o
o o'"
" ....

~
o \0 V\f'("\~O-lr\('..
u r:..,..:~ ci +0."':
P'"O r-j r~.-tOO ('("\,0"-
\0 ...
01

~: C' I I
'"
u
'§
~~I I o
t::
o
u
W

" 00
I I

I I ~n ~
00
-r
 MARKETING OF AGRICULTlTRAL PRODUCTS

Grain used in commercial mixed-feed manufacture is not sorted

out in Table 1. This is a growing outlet for grains and their by-products.
Between 1939 and 1947 the number of feed-mixing plants doubled. In
1947, it was estimated that slightly over 22 million tons of commercially
prepared feed were sold. This was more than twice the amount sold in
1939. Such feed represented 18 percent of all the feed concentrates used
in 1947 compared to 10 percent in 1939. About half of the mixed feeds
produced in 1947 was poultry feed. Cattle feeds-particularly dairy-ac-
counted for another one-fourth of the output.2

Variable Production
The acreage planted to the various grains does not vary markedly from
year to year, but the production does. This is largely because of the weather
and its effect on yields. Production is also highly seasonal. ~\'Iost of the com
is harvested during October through November. The entire crops of wheat,
oats, and rye are harvested during the relatively short period of June through
September. The soybean crop is harvested during the eady fall months.
In contrast to the seasonal nature of production, there is a fairly con-
stant demand throughout the year either for animal or human food. Some-
where in the marketing channel, then, must be the facilities for the huge
amount of seasonal storage.
The unpredictable nature of production also means that some stocks
must be carried over from one year to another. This is necessary if there
is to be any stability of supplies of food and feed from year to year. If the
harvest is a bumper one, the season-end carry-over will be large. If the
harvest is small, the carry-over will be much reduced. Such carry-overs are
the safety factors which protect dependent industries from violent feast-
and-famine f1uctu3tions. Table 2 shows the source of our annual average
total available supply. For most of the grains the average carry-over has
been running from one-sixth to one-fifth of our total supplies.
The government loan programs to support prices, of course, have a
definite effect on the amount of carry-over. How much carry-over the coun-
try should assure itself is a matter of public debate. If part of the carry-
over is government-owned because of its price support operations, the com-
position of the carry-over becomes an important factor. The amount which
is in private hands is "free" to move in response to market price fluctu-
ations. The amount which is in government hands is "frozen" and can be
released only for commercial use when prices reach certain levels or under
certain circumstances prescribed by law.
2 \V. R. Askew and V. J. Brensike, The Mixed-Feeds Industry, USDA Marketing
Research Report 38, 1953.
 Grain Marketing 277
TAB L E '2. Composition of the Annual Available Supply of
Selected Grains in the United States, 1946-1950
Average

WHEAT RYE CORN OATS BARLEY SOYBEANS

PERCENT OF TOTAL

Production 84 70 87 84 78 98
Carry-over 16 17 13 15 19 ::
Imports " 13 3
Total supply 100 100 100 100 100 100

" Less than 0.5 percent.

SOURCE: USDA, Bureau of Agricultural Economics.

THE MARKETING CHANNELS

Unlike s~ch commodities as poultry, which has a large number of
agencies involved in the marketing channel, the channel followed by grain
in moving to market is relatively simple. First, we must again recall that a
great proportion of some grains is never sold from the farm as such. It is
fed and marketed through livestock. Of the grain which is sold by farmers,
80 to 90 percent is sold to country elevators. Country elevators in tum sell
about 75 percent of their purchases to terminal elevators. Terminal elevators
then sell their purchases largely to millers and to mixed-feed and other
types of manufacturers. Food grains then move from the millers to bakeries
and finally through various wholesale and retail channels to consumers.3
Figure 3 shows the marketing channel which is followed by the major food
grain, wheat. The soybean channel is even simpler, as the major movement
is from farmer to country elevator to processor. 4

Country Elevators
For most producers, the country elevator is the major buyer for their
grain. These elevators are scattered throughout the production area, usually
along railroads. The typical country elevator is estimated to have a storage
capacity of from 25,000 to 30,000 bushels, though many are much larger.
Depending upon the size of crop, they will handle from 100,000 to 300,000
bushels annually.5
Country elevators faU into three general c1asses according to their
ownership and organization. The independent elevators are under the
3 D. R. Stokes, Marketing ]\Jargins and Costs for Grains, Grain Products, and Dry
Edible Beans, USDA Technical Bulletin 934, 1947.
4 A. R. Sabin, Marketing Channel and Margin for Soybean and Soybean ProGucts,
USDl\, Bureau of Agricultural Economics, 1950.
5 D. \V. Mallott, "Grain and Its Marketing," Grain Exchange Institute, Inc., 1947.
 }\1 ;\ R K ~ T I KG 0 FAG RIC U L T U R ALP ROD U C T 5

WHEAT from FARM to CONSUMER

Figures cre in billions of pounds

1939 DATA

FIG U R E 3. The marketing channel of wheat as it moves from

the farm to the consumer. (Courtesy USDA.)

operational control of their individual owners. Cooperative or farmer-

owned elevators are owned and operated cooperatively by the farmers of
the area. These may either be organized singly or in state-wide groups.
The third type is the line elevator. This is a group of elevators o",med and
operated from a central headquarters as a chain. Such chains may be
O\vned either by grain companies or millers and processors who use them
to secure supplies directly for their manufacturing operations. The owner-
ship of elevators will vary from area to area. In some areas, cooperative
elevators predominate. In other areas, the line elevator is predominant.
I\hny studies have been made of the costs of elevator operations. Most
of them have found that roughly half of the total operating costs above
the purchase price of grain goes for wages and salaries. Other major expense
items are depreciation and repairs, power, and taxes.
Nearly all studies have found that operating costs per bushel handled
tend to decline with increasing volume. A study of I11inois elevators con-
cluded that unless at least 300,000 bushels of grain are handled annually,
other business lines must be added if the business is to be profitable. 6 A
6 L. J. Norton, Business Policies of Country Grain Elevators, Illinois Bulletin 477,
194 1.
 Grain Marketing 279

Kansas study found that even with considerable side-line business, eleva-
tors handling less than 250,000 bushels required a margin of 4-6 cents a
bushel to break cven, while those handling more than 250,000 required
3.6 cents (1945-1948).7 In this same study, 50 percent of the elevators
studied handled less than 250,000 bushels. An Indiana study found that
elevators with a sales volume under $125,000 had a net profit of 2.6 percent
of sales while those with a volume of over $375,000 had a net profit of 4.1
percent of sales. s
Increased volume for an elevator can be obtained in two principal
ways. One is to add other business lines to that of grain handling. The
other is to consolidate elevators so as to obtain a larger trade area. The
great majority of elevators have taken on various side-line enterprises to
boost their volume and offset the highly seasonal nature of their grain
operations. For many elevators the word "side-line" is not appropriate, as
the income frem the other enterprises may equal or surpass that received
from the handling of grain alone. The most common side-line is the feed
business. In addition, coal, seeds, implements, building materials, petro-
leum, and farm supplies are common sales departments. In some com-
munities the elevator is not only the outlet for grain, but also the principal
source of general farm supplies.
Increased volume can be obtained by the consolidation of existing
elevators. :tvluch of the present locational pattern was established back in
the era of horse-drawn transportation, poor roads, and poor communication.
The supply area of many elevators is sman. In Indiana, half of the total
business of the large majority of the elevators was obtained from a radius
of less than ten miles. 9 In Illinois the territory served varied from forty-
three to seventy-one square miles, and within this area there were from
three to six competitors.10 As is the case in other considerations, the number
of firms \vhich will provide an adequate volume for low cost operation
must be balanced against the industry structure which will assure effective
competition. The modern farmer, however, with his telephone, daily news-
paper, and radio, has a communication network which covers a larger area
than was available to his grandfather. \Vith his truck he can sen his grain
over a wider area. Some reasonable consolidation seems possible without
sacrificing an effectively competitive situation.
IvIost country elevator operators sell their grain to firms located at a
terminal market and ship it to the designated terminal elevators. Grain
7 E. B. Ballow, j\Jargins fwd Costs in Cooperative Grain Marketing in Kansas,
\ lSDA, Farm Credit Administration, Bulletin 66, 1951.
8 E. G. Byer, G. B. \Voad, and G. S. Abshier, A Financial and Business Analvsis of
l1,di;,na Grain Elevators, Indiana Bulletin 547, 1950. .
9 Ibid. 10 Norton, op. cit.
 MARKETING OF AGRICULTURAL PRODUCTS

may be consigned to commission merchants on the market for sale or it

may be sold on "to-arrive" or "on-track" bids. If the grain is consigned to
commission merchants, the elevator ships the grain to the terminal and
takes the price secured by the commission merchant much the same as
with the use of livestock commission men in the livestock yards. In selling
on a "to-arrive" basis, the price, along with shipment details, is agreed
upon in advance of delivery. '\Then sold "on-track, country point," the price
is agreed upon for grain in cars at the local elevator. The buyer of the grain
takes title to the grain at the country elevator, and arranges and pays for the
cost of transportation.

Cash Grain Commission Merchants

The representative of the country elevator operator in the terminal
market is the cash grain commission merchant. For a fixed charge, the
cash grain merchant will accept the responsibility of selling the grain. The
principal job of the commission merchant is to oversee the grading of the
grain and to seek out the interested buyers. Since these merchants on most
markets must all charge the same commission, they compete for grain
consignments on the basis of service which they can render to the elevator
operator. They specialize in the analysis of market information for their
clients. They also take charge of any arrangements which must be made
with the buyer of the grain.
The commission merchant also handles the grain sold "on-track" or
"to-arrive." In handling the "on-track" and "to-arrive" sales, the merchants
make a practice of sending out bids to the elevator operators at the close
of the market day. In many cases, this is in the form of postal card bids;
in others, private wire and telephone are used to contact the local elevator.
In soybean marketing, the interior carlot dealer is also an important
intermediary between the country elevator and the soybean processor. Un-
like the commission merchant, the carlot dealer takes title to the soybeans.
However, he does not take physical possession of the soybeans, but merely
directs their movement to the processor.

Terminal Elevators
Terminal elevators furnish the large storage reservoirs necessary in the
grain marketing channel. The capacity of these large elevators ranges from
3°0,000 bushels to more than 10,000,000 bushels.u Besides furnishing
storage, the operators of terminal elevators condition the grain for storage
and prepare it for future sale.
Operators of terminal elevators may be grain dealers or merchants
11 rvlallott, op. cit., p. 154.
 Grain Marketing 281

who buy grain for storage and later sell to millers and processors. Or the
operators may merely run the elevator and store and process the grain for
others for a fee. In still other cases, the large millers and processors may
own and operate their own terminal elevator facilities.
Terminal elevators are one of the principal groups which utilize the
futures markets for hedging. Very few country elevator operators hedge
their holdings. The country elevator operators often sell their grain almost
immediately upon purchase by utilizing "to-arrive" and "on-track" bids.
Under such circumstances, they quickly shift the price risk to their buyers.
On the other hand, terminal operators often hold grain for considerable
periods of time. These operators are small-margin, large-volume handlers,
and price fluctuations might easily turn profits into losses. Therefore,
hedging insurance is very desirable.

Processors and Millers

Since the uses to which grains are put are many, the buyers of grain
differ widely in their wants and desires. Flour millers desire wheat of a
specific gluten or protein content, depending upon whether they are pro-
ducing bread or cake flours. The grains desired for breakfast foods may
differ. Com processors and maltsters look for special characteristics.
Some processors maintain their own buyers on large terminal markets
and purchase their supplies from the cash grain commission merchants.
Others may retain the services of brokers who buy grain wherever it can
be obtained. Still others have built up their own large country buying
operations and operate line elevators in the grain belt itself. In this latter
situation they not only protect their supply position but also control the
handling and moving of grain throughout the marketing channel.

GRAIN GRADING
The use of federal standards is mandatory for the grading of any grain
which moves in interstate commerce. Because of the national nature of
the grain market, this means that the great bulk of commercial grain is
at some time in the marketing channel graded according to federal
standards.
TNhenever grain arrives in a large terminal market, a sample is drawn
and gradd. Grain grades range from the highest grade, Number 1, down
through Number 5 and sample grade. There is also a division into classes
and subclasses for each kind of grain. For example, Class I of wheat con-
sists of bard red spring wheat. This is further divided into the subclasses
of Dark Northern Spring, Northern Spring, and Red Spring. \Vithin each
class, the requirements for the various grades are set up.
::.82 MARKETING OF AGRICULTURAL PRODUCTS

Though the factors considered in grades differ somewhat from one

grain to another, generally the following arc used to determine the grade
of a given class of grain:
1. A minimum test "'eight per bushel which is uscd as an indication of the
plumpncss of the kernel.
., A maximum moisture contcnt.
3. A maximum amount of foreign matcrial and cracked kernels.
+ A maximum amount of damagcd kernels.
An example of the grade requirements for the three classes of corn (yellow,
white, and mixed) is shown in Table 3.

TAB L E 3. GracIe Requirements for Yellow, "\Vhite, and

Mixed Corn

M.\XnIU;\[ L1~[lTS OF

DAMAGED KERNELS

;\lINIMUM CRACKED CORN

TEST WEIGHT AND FOREIGN HEAT
GRADE PER BUSHEL J\IOISTURE MATERIAL TOT.\L DA~L\GE

PCU:-';OS PERCENT

Number 1 54 1.4.0 :: 3 0.1

Z 53 15·5 3 5 0.2
3 51 1/·5 -+ 7 0·5
4 43 20.0 5 10 1.0
5 44 :: 3.0 7 15 3.0
Sample grade: any grain which does not meet the requirements of the abo\"e five grades

SOURCE: Handbaa" of Official Grain Standards of the United States, USDA, 1947.

Failure to meet anyone of the above requirements will reduce the

grade. For example, if corn met all of the requirements for grade Number 1
but had 0.2 percent heat damage, it would go as Number .2 grain. This
variation possible within a given grade explains why different carloads of
the same grade of grain sell at slightly different prices at the same location
and instant of time. As mentioned earlier, the different processors have
different requirements for their needs. In the above example, one processor
who was not particular about the damage but watched moisture content
carefully might pay more for that particular carload than another carload of
Number 2 corn which had 15 percent moisture. Also, some processors may
be watching for certain factors, such as protein content in wheat, which
have not yet been incorporated into official grading standards.
Since the grade of grain is determined by a combination of different
 Grain Marketing 283
factors, each of which can vary within limits, handlers can mix or blend
grain in order to raise the grade. For example, suppose two loads of grain
wcre received. One was graded Number 2 because of its moisture content,
but it met all other requirements of Number 1 grain. The other load was
graded Number 3 because of excessive cracked kernels and foreign material
but in all other aspects it met the requirements for Number 2 grain.
Through the proper mixing or blendings of these two loads of Number 2
and Number 3 grain, it might be possible to secure two loads (or nearly
so) of grain which would grade Number 2. This would be possible because
one load was low in the grade factors in which the other load was high.
Country elevators sometimes blend grain, and terminal elevators usually do.

THE STORAGE OF GRAIN

One of the principal marketing problems of the grain producer is to
find the answer to the question of whether to sell at harvest time or to
store for sale at a later date. If it is decided to store the grain, the next
question is where it should be stored.
In answering the question of whether to store, the farmer must balance
the costs of storing the grain against the possible gains from a rise in price
later in the season. Two factors besides the normal seasonal price rise must
be considered. One of these is the possibility of taking advantage of the
government price support programs. The nonrecourse loan removes much
of the uncertainty about the relationship of the current to a possible future
price. If the market price of grain at harvest time is enough below the
available loan rate to offset storage costs, certainly there is very little to
lose and much to gain by storing under government loan. The other con-
sideration is the outlook for the general movement of prices during the
storage period. The average seasonal pattern of price variation can be
expected to materialize only if the general price level does not change
violently in one direction or another. If the general price level is expected
to move downward, sales at harvest may be much more attractive to the
producer than if the general level is expected to move upward.
Determining the cost of grain storage is merely the particularized
application of the generalized cost factors referred to in Chapter 13. There
are certain fixed costs which must be met whether grain is stored or not.
These inch.:de the depreciation, maintenance, insurance, taxes, and interest
on the capitai invested in the available storage facilities and equipment.
TIlen there are several variable costs which will occur only if grain is
stored. These will include the costs of shrinkage and loss from damage,
iwurance and taxes on the grain, any expense of treating or conditioning
the grain, and the cost of the labor and transportation expenses due to the
 MARKETING OF AGRICULTURAL PRODUCTS

storage operation. Against these costs of farm storage must be weighed the
cost of hiring the country elevator to store the grain.
Several studies have reached the general conclusion that it is usually
less costly to hire storage in commercial elevators than to store on the
farmP All studies, however, point out the exceptions which may exist to
the general rule. If farm storage capacity exists which would otherwise
remain unused, then this conclusion may have to be modified. If the grain
is to be used later on as feed, the assurance of having a safe supply might
outweigh the other cost considerations. Several of these studies have cal-
culated the dollar-and-cents cost of storage. However, these costs vary so
much under different conditions that any generalization about actual costs
has little validity.
Grain is a good illustration of the fact that storage may be done more
efficiently at some levels in the marketing channel than in others. Very
little grain is stored by country elevators for their own account. Once grain
is sold by farmers it is quickly moved forward in the channel and the
major storage operation occurs at the terminal elevator level. Here the low
cost possibilities of large-scale handling by experienced operators can best
be realized. However, it must be recognized that the price support program
has encouraged more storage in the production area and in the majority
of the cases on the farm of the producer.

COUNTRY GRAIN BUYING

Elevator operators must buy their grain from producers in such a
manner that when they sell it they have an adequate margin to cover their
costs and result in some net return. Margins taken by elevators vary widely.
Stokes arrived at a realized weighted average margin for wheat, oats, corn,
rye, and barley of about 4 cents per bushel in 1939.13 An analysis of Illinois
elevators for 1949-1950 found the medium gross margin to be 3.4 cents
for oats, 3.9 cents for com, 4.6 cents for wheat, and 6.3 cents for soybeans.
The variation among elevators was great, however. For example, a few
firms realized a gross margin of less than 2 cents and a few of more than
10 cents on com.
12 T. E. Hall, A. L. Larson, H. S. \Vhitney, and C. H. Meyer, Where and How
Much Cash Grain Storage for Oklahoma Farmers, USDA, Farm Credit Administration,
Bulletin 58; T. E. Hall, P. V. Hemphill, C. H. Meyer, and W. K. Davis, Where and
Mow Much Cash Grain for North Dakota Farmers, USDA, Farm Credit Administration,
Bulletin 61; T. E. Hall, J. \V. Hicks, \V. K. Davis, and N. Coats, \Vhere and How
Much Cash Grain Storage for Indiana Farmers, USDA, Farm Credit Administration,
Bulletin 68; A. M. Rollefson, D. B. Agnew, and C. H. Keirstead, Improving S.oybean
Marketing Through Farm Storage, USDA, Agricultural Information Bulletin 57; T. E.
Hall, Changing Grain Storage Costs, USDA, Farm Credit Administration, Circular
C- 151, 1953.
13 Stokes, op. cit.
 Grain Marketing 285
Prices realized by farmers for their grain is a combination of the
quoted price of the elevator plus the grade of grain delivered. Elevators
sell grain on the basis of official federal grades, but buy very little on that
basis from farmers. Instead, each elevator operator devises his own system
of dockage-usually based on weight and moisture. Some elevators have
been known to follow a system of high quoted prices plus a heavy dockage
program. Others have used underdocking and overgrading instead of
price as a competitive weapon. 14 (This, of course, is very similar to the
difference in sorting methods used by livestock buyers.)
Farmers, as in choosing their livestock outlet, must evaluate both
quoted prices and buying practices before selling their grain. Once an
outlet is chosen, the farmer cannot rest assured it will remain the most
advantageous. A study of the prices paid by sixty-four elevators in Indiana
for soybeans found that on October 3, 1951, the prices paid varied from
$2.47 to $2.67-a range of 20 cents. Two weeks later the same elevators
were paying prices ranging from $2.60 to $2.69-a range of only 9 cents.15
This meant that prices at some elevators had increased more than at others
during that two-week period. Grain marketing has often been used as an
example of efficiency and active competition. It is increasingly evident that
many of these claims have been founded more on fiction than fact.
I< R. J. Mutti, C. P. Schumaier, and L. F. Stice, Business Analysis of Illinois, 1949,
precessed.
15 D. E. Meyers, Factors Causing Soybean Price Variation Among Indiana Elevators,
unpublished thesis, Purdue University, 1953.
CHAPTER NINETEEN

Cotton Marketing 1

THE PRODUCT AND ITS USE

United States Production
Cotton continues as king of crops in the South after undergoing several
changes of fortune. Farmers in eight states receive more cash from the sale
of cotton than from any other farm enterprise. In addition, farmers in four
other states receive more cash from marketing cotton than from any other
crop planted in that state. 1-1ost of these states are located in the southern
portion of the United States extending from North Carolina to California.
The areas of heaviest production are the Mississippi Delta, the Black
Prairies and Great Plains of Texas, the valleys of North Alabama, and the
upper Piedmont areas of Georgia, North Carolina, and South Carolina
(Figure 1).
Prior to 1914, acreage and production increased steadily. In 1914 a total
of over 36 million acres was planted to COttOD. But with the coming of
the boll weevil, acreages and yields declined and adjustments to this menace
were necessary. From a low point of less than 30 million acres in 1921, the
acreage planted to cotton increased to reach the all·time peak of nearly
46 million acres planted in 1925. In the ensuing years acreages were reduced
as a result of continuing low prices and acreage allotment programs which
were in effect from 1934 to 1943 with the exception of 1937. The low
point in acreage planted to cotton was reached in 1945 when only about
17.5 minion acres were under cultivation.
The yield per harvested acre of cotton showed a slight upward trend
during the years 1866 to 1915 with most annual yields ranging between
160 and 200 pounds per acre. In the period of severe boll weevil infestation
that followed, yields were sharply lower. The former level was regained
1 This chapter and the onc: following, "Tobacco 1iarketing," have been contributed
by Dr. C. B. Cox, Associate Professor of Agricultural Economics, Purdue University,
formerly with Department of Agricultural Economics, Alabama Polytechnic Institute,
Auburn, Alabama.
 CottOIl Marheting 287

UNITED STATES TOTAL

26.599.263 I DOT- 10.000 ACRES
(CO'JN1'1' UNIT BAS-'S)

FIG U R E 1. Geographic location of COttOIl producticn in the

United States. (Courteo), U.S. Dept. Com.)

between 1931 and 1936. With the 270 pounds in 1937, a new era of yields
began starting a sharp upward trend that reached 311 pounds per acre in
1948. In recent years the smaller acreages in cotton have been accompanied
by higher fertilization and a larger proportion grown on better adapted
lands. \Vith these, production has remained relatively constant, fluctuating
with weather and control programs.
Most of the cotton is produced on relatively small farms. About a
fourth of the farms producing cotton in 1949 harvested five acres or less
(Table 1). Another 40 percent harvested between six and fourteen acres
and less than 10 percent of the farms producing cotton harvested fifty
acres or more. This meant that most of the farmers must sell in relatively

TAB L E 1. Percentage of Farms Growing Cotton Reporting

Various Acreages of Cotton Harvested in 1949

COTTON HARVESTED PERCENT

ACRES OF FARMS

5 or less
6-- 1 4
15-49
,0- 1 99
:00-499 1·3
500 and over ·3
SOURCE: United States Census, 1950.
288 MARKETING OF A.GRICULTURA.L PRODUCTS

small lots. About 40 percent of the farms growing cotton produced three
bales or less in 1949 (Table 2) . One-third produced between four and nine
bales and only 10 percent produced over twenty-five bales.

TAB L E 2. Percentage of Farms Growing Cotton Reporting

Various Numbers of Bales Produced in 1949
BALES PRODUCED PERCENT OF FARMS

3 or less 39
4-<) 33
10-2 4 18
25-49 5
50 and over 5
Computed from United States Census, 1950

Coiton Standards
Cotton is classed according to grade and staple length. Cotton classi-
fication is technical and most cotton farmers are unable to determine
accurately the official quality. Many local buyers are not trained buyers
and estimate the classification. The official standards for grades of American
upland cotton are given in Table 3.

TAB L E 3. Official Standards for Grade of American Upland

Cotton
EXTRA YELLOW
GRAY WHITE WHITE SPOTTED TINGED STAINED

No.1, or Middling Fair

No. z, or Strict Good l\Iiddling
Gl\IG GMEW NO.3, or Good Middling GMSp GMT GMYS
S;\IG SMEW NO.4, or Strict Middling SMSp SMT SMYS
l\IG MEW No. " or Middling MSp MT MYS
SLMEW No.6, or Strict Low Middling SLMSp SLMT
LMEW No. 7, or Low Middling LMSp LMSp
SGOEW No.8, or Strict Good Ordinary
GOEW No. 9, or Good Ordinary
(B) STAPLE LENGTH IN INCHES"

UPLAND SHORT STAPLE LONG STAPLE OR STAPLE COTTON

1
liz
IT.r
l:i1z
" Short staple cotton is cotton 1 h inches and shorter. Long staple cotton is cotton
111 inches and longer.
 Cotton Marketing 289
The Smith-Doxey Act and the Cotton Grade and Staple Statistics Act
were passed to provide cotton classification service to producers. This classi-
fication service is provided free to producers in certain communities. In
1949 about one-half of the crop was included in the program.
Consumption of All Fibers
Per capita consumption of all fiber in the United States has beeen more
than a third higher during and after the years of World War II than in the
prewar period (Figure 2). The shift was due primarily to a high level of

PER CAPITA CONSUMPTION OF

COTTON, RAYON, AND AlllFlBERS
POUNDS
501----+--

20

10

~'orHUS' IHClUPE WOOL. "AX. SIUI: loa All rEARS AHP • OTHER MAH·MADE'IIBfU loa IP40 TO "ATE

FIG U R E 2. The consumption of different fibers in the United

States. (Courtesy USDA.)

economic activity. Consumption of cotton has increased almost 20 percent

and rayon consumption has almost tripled. Consumption of other fibers
has ill crease slightly primarily because of a rise in the consumption of
noncellulose synthetics. The per capita consumption of cotton during the
five-year period of 1948-1952 was approximately 29 pounds. Cotton made
up approximately 70 percent of the fibers consumed. This percentage has
been declining since 1913 primarily because of the increased consumption
of other fibers rather than a decline in the actual consumption of cotton.
Rayon consumption per capita reached 1 pound per year in 1929 and had
290 MARKETING OF AGRICULTURAL PRODUCTS

increased to a little over 7 pounds during the five-year period of 1948-1952.

Rayon and acetate fibers now account for about 18 percent of the fibers
consumed in the United States. The consnmption of wool has fluctuated
during the period 1913-1952 from a low of 1.79 pounds per capita in 1934
to a high of ).14 pounds in 1946. Per capita consumption during the five-
year period 1948-1952 was less than 4 pounds and accounted for slightly
over 8 percent of the fibers consumed. The per capita consumption of silk
and flax has declined with the introduction of other synthetic fibers. Flax
and silk combined now account for about o. 3 percent of the fibers con-
sumed, while other synthetics account for about 4 percent of the fibers
consumed.
No area of the world even approaches the per capita level of fiber
consumption which prevails in the United States.::! Europe consumed about
38 percent as much cotton and other fibers per capita as the United States
in 1951. Africa consumed about 8 percent and Asia consumed about 9 per-
cent as much as the United States (Table 4). An increase in cotton con-
sumption of one-half pound per person in all foreign countries would
increase world consumption 2. 3 million bales. The total cotton consump-
tion outside the United States is now only about equal to consumption
in 1938 despite a population increase of about 300 million persons.

TAB L E -t. Per Capita Consumption of Fibers, Specified

Locations, 1938, 1949-51

LOCATION 1938 1949 195 0 195 1

POUNDS

Europe 13.7 14. 1 15·7 16.1

Asia 4.9 3·5 3·3 3·7
Africa 2.9 3-3 3-3 3·5
Others g.o 8,4 8.8 9.0
]\II foreign locations 7.1 6.2 6,4 6.8
United States 26.8 35·3 43-3 4 2 .3
World 8.2 7·9 8.6 9.0

Computed from reports of the F.A.O., USDA.

Utilization of Cotton 3
Most cotton moves to the mills in bales. At the mills the bales are
opened and the cotton is cleaned, carded, combed (for fine yams), and
2 For a detailed discussion of foreign consumption sec the statement by Frank
Lowenstein, Agricultural Economist, before the Senate Committee on Agriculture and
Forestry, April 24, 1953.
3 L. D. Howell, "]'vlarketing and ,vfanufacturing Services and Margins for Textiles,"
USDA Technical Bulletin 1062, 1952.
 Cotton Marketing 29 1
spun into yarn. On the average, about 4 percent of the gross weight of the
ba1e usually is discarded as tare (bagging and ties), about 7 percent usua11y
is removed as nonspinnable waste, and most of the remainder, which
amounts to about 89 percent, is made into yarn (Figure 3). According to
census reports for 1947, for example, about 75 percent of the yarn was
woven into cloth, 9 percent went to the knit-goods industry, 9 percent was
used in tire cords, and the remainder was used in making thread, carpets,
cordage, twine, and other products.

APPROXIMATE DISTRIBUTION OF A
TYPICAL BALE OF COTTON, 1947

I COTTON IN BAL E
500 POUNDS GROSS WEIGHT

TARE WASTE 35 PO\lNDS

20POUNOS (NONSPINNABLE)

OTHER TIRE CORD

KNIT GOODS SEWING THREAO YARN
YARNS
40 POUNDS 6 POUNDS
40 POUNDS
27 POUNDS

1129POUNOS!

CLOTHING HOUSEHOLD GOOOS INDUSTRIAL USES

FIG U R E 3. The distribution of a bale of cotton showing the

amounts of different products which are produced.
(Courtesy USDA.)
 MARKETING OF AGRICULTURAL PRODUCTS

Census reports indicate that in 1947, about 19 percent of the woven

cotton cloth was used in the u~finished form, about 10 percent was colored
yarn fabrics, and about 71 percent was finished from the gray. Finishing
gray goods includes bleaching, dyeing, and printing. Of the total linear
yardage finished in 1947, for example, about 52 percent was bleached and
white-finished, 25 percent was plain dyed and finished, and 23 percent was
printed and finished. In 1949 the corresponding proportions were 45, 31,
and 24 percent, respectively. Style and finish of a large part of the cotton
cloth are controlled by converters, but substantial proportions are con-
trolled by mills, with or without the collaboration of the manufactur-
ing user.
A large proportion of the finished cloth usually goes to cutters where
it is made into wearing apparel and household goods. Estimates based
on incomplete data indicate that of the total output of cotton manufac-
tured in the United States during recent years, about 37 percent went into
apparel, about 34 percent into industrial uses, and about 29 percent into
household textiles. Clothing and household textiles usually go directly
or indirectly through wholesalers, jobbers, or other agencies to retailers
and finally to ultimate consumers.

LOCATION OF MILLING
The average mill consumption of cotton during the period of 1948-
1952 was slightly over 9 million bales (Table 5). Mill consumption was
fairly stable during the period of 1920-1939, then increased sharply, reach-
ing a peak of over 11 million bales in 1941; afterward it remained relatively
constant from 1943 through 1952 at about 9 million bales.

TAB L E 5. Cotton Mill Consumption and Percentage of Total

Consumption by Geographic Areas for Selected
Periods

::-.nLL CONSU::-'IPTION
TOTAL
UNITED STATES COTTON
YEARS BEGINNING l\HLL GROWING NEW
AUGUST 1 CO:-lSU~IPTION STATES ENGLAND OTHERS

1,000 BALES PERCENT OF TOTAL

19 20- 2 4 5, 86 9 6-) 29 6
1930-34 5,4 6 5 81 16 3
194°-44 10,3°1 87 10 3
1948-52 9,162 91 7 2

SOURCE: The Cotton Situation, USDA, B.A.E., August, 1953.

 Cotton Marketing 293
Most of the cotton is manufactured into the cotton products within
the cotton growing states. Mills in the cotton growing states have tended
to account for an increasing proportion of domestic cotton consumption
for many years. In the 1952- 1953 marketing year, about 93 percent of
domestic cotton was milled in the cotton growing states compared with
65 percent in 1920-1924. At the same time, the proportion of cotton con-
sumed by mills in the New England states has declined steadily. In the
1952-1953 season it was 6 percent while in 1920-1924 it was 29 percent.

MARKETING CHANNELS
Channels Used
Taking cotton from farms and delivering it in the form of finished
clothing and household textiles to ultimate consumers requires the services
of many different types of middlemen, including handlers of raw cotton,
manufacturers, and distributors of cotton products (Figure 4). These
services begin when seed cotton is hauled from farms to gins. Gins perform
services such as conditioning and cleaning of seed cotton, separating the
lint from the seed, and packing and wrapping the lint into bales weighing
approximately 500 pounds.

Local Markets 4
Almost the entire cotton crop is produced on farms located within a
fcw miles of a market outlet for cotton. Some 2,500 of these producers'
or local markets form a vast network of primary markets which dot the
entire expanse of the cotton belt. Growers, with few exceptions, dispose
of their cotton at these local markets.
Few local markets have a formal market organization set up specifically
for cotton trading. Trading between producers and buyers usually is con-
ducted on an informal basis with the producer selling his own cotton
according to his desire to sell and his ability to bargain. A local market
customarily serves a small community or trading area. Sales by growers
averaged 6,784 bales per market in 1947, although individual markets varied
widely in the volume of cotton handled.
The small volumes available and the relatively short duration of the
active marketing period require most first-buyers either to engage in some
related cotton activity or to have some other type of year-round business.
During 1947, approximately 62 percent of sales by growers were made to
buyers whu reported other business activities. Ginning has been the major
activity associated with cotton buying.
" For more details on marketing practices, see R. C. Saxman, "Marketing of Cotton
in Producer's Local Markets," USDA, P.M.A., processed, 1949.
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 Cotton Marketing 295

Central Markets 5
A relatively small number of spot cotton market5 situated at strategic
locations throughout the cotton belt exercise a dominant role in the
marketing of American raw cotton. These major centers are called central
spot cotton markets and have large-scale facilities for storing and concen-
trating cotton. Trading in most of these markets is carried on according
to rules of the local cotton exchange. Each market has a fairly well-defined
trading territory.
Central markets such as Houston, New Orleans, and Galveston are
deep-water ports and form the gateway through which American cotton
moves to overseas markets. Others, including Memphis, Dallas, Greenwood,
Little Rock, Augusta, and Montgomery, are interior markets located stra-
tegically with respect to important areas of production and inland lines
of transportation to mil1s or ports.
For a number of years, :rvIemphis has been the leading central cash
cotton market. l\hrkets next in order of volume of sales are Dallas,
Houston, and New Orleans, respectively. These four largest markets usually
handle slightly more than one-half of total cotton production.
The three principal buying agencies in these markets are cotton
merchants, mill buyers, and cotton brokers. Cotton merchants acquire the
bulk of their stocks by purchases made in local markets, usually from gin-
ners and other local buyers. In a study of five central markets it was found
that merchants secured about 22 percent of their cotton from producers, 27
percent from ginners, 18 percent from other first buyers, slightly less than
7 percent from other merchants, 20 percent through brokers, and the re-
mainder from varied sources. lvIil1 buying agencies followed the same gen-
eral pattern as did merchants in buying chiefly at local markets. More than
three-fourths of the purchases were made at country markets.
Sales made by spot brokers were chiefly for producers or various types
of first buyers. About 37 percent of sales by brokers were made for pro-
ducers, approximately 52 percent for ginners and other local buyers, only
about 9 percent for merchants, and the remainder for cooperatives and
others.
Merchants normally attempt to avoid all possible risk of adverse price
movements. Merchants sell some purchases immediately, but almost all
unsold purchases are hedged by the sale of future contracts. l\'fill buying
agencies usually purchase for the account of certain mills or have estab-
lished outlets for immediate sale.
5Adapted from R. C. Soxman and A. L. Roberts, "i\I<lrketing Practices at Central
~?)t Cotton Markets," USDA, P.M,A., processed, 1948.
 MARKETING OF AGRICULTURAL PRODUCTS

MARKETING MARGINS6
The farmer receives a small portion of the consumer's dollar paid for
finished cotton products. Data relating to the retail value of forty-two
cotton articles of clothing and household furnishings and to farm values
of equivalent quantities of cotton indicate that from 19'27 to 1950 farm
producers received an average of 10.6 percent of the consumer's dollar. The
portion 'of the consumer's dollar represented by the farm value of the
cotton usually varied directly with the price of cotton. It ranged from about
5 percent in 193'2, when farm prices of cotton averaged about 6 cents a
pound, to 14 percent in 1950, when farm prices of cotton averaged about
40 cents a pound.
Gross marketing margins for cotton include the costs or charges made
for taking seed cotton to the gins, having it ginned and baled, delivering
the bales to mills at the desired time, manufacturing the cotton into cotton
goods, distributing the goods and selling to the ultimate consumer.
The fact that, on the average, almost 90 percent of each dollar paid by
consumers for finished cotton goods is accounted for by marketing margins
emphasizes the importance of these margins.

Margins Included in Farm Prices

Farm prices are those received by growers, usually in farmers' local
markets. They apply to cotton after it has been hauled to the gin, ginned,
and the lint cotton packed and wrapped in bales of about 500 pounds.
Costs of this hauling, ginning, and baling are paid by the producer and
are included in farm prices.
Cotton usually is hauled from farms to gins by farm producers,
although some is hauled by ginners and commercial truckers. The portion
of the crop that is hauled to gins by producers varies between 80 and 90
percent. Commercial truckers haul most of the balance, with ginners haul-
ing a small percentage.
Most of the seed cotton produced in the United States is ginned be-
fore it is sold by the farm producers. During recent years only about 2 or 3
percent of the crop in the United States was sold as seed cotton and a sub-
stantial proportion of this was made up of remnants harvested toward the
end of the harvesting season. But in other major cotton-producing coun-
tries, large proportions of the cotton are sold by farm producers before it
is ginned. 7
6 Howell, op. cit.
7 In Egypt and India, for example, most of the cotton produced is sold by growers
before it is ginned, and in Brazil a large proportion of the cotton is sold in the seed.
Apparently custom ginning is more highly developed or more generally practiced in the
United States than in any other major cotton-producing country. Information as to
 Cotton Marketing 297

Charges for ginning vary considerably from year to year with changes
in general business conditions, in prices of cotton, and in costs of bagging
and ties. They vary also from one state or region to another with differences
in kinds and amounts of services rendered. For the United States as a whole,
average charges for ginning a 5°o-pound bale of American Upland Cotton,
including charges for bagging and ties, ranged from 4.04 for the 1931 crop
when farm prices of cotton averaged 5.66 cents per pound to $11.19 for
the 1950 crop when farm prices averaged 40.07 cents a pound. The pro-

Where It Goes
THE CONSUMER'S COTTON DOLLAR,
BY OPERATIONS OR SERVICES
Paid for Apparel and Household Goods, Selected Years
$122
Rehiling

Wholesali ng
75¢
Manuf. apparel 60
household goods
Manuf., dying, 60 finish-
ing yarns 60 fabrics
25¢ Merchandising coHon
F=~-Ginning and baling
Farm produdion
O--~~--~~~~--~~------------~
1939 1947 1949 1950
BASED OH OFFICIAL AHD OTH~R OATA. AHD ,pARTLY ESTIMATED ..

FIG U R E 5. The breakdown of the consumer's cotton dollar

showing the proportion taken by various market-
ing operations and services. (Courtesy USDA.)

portion of the farm value of the cotton accounted for by ginning charges
ranged from 5 percent for the 1946 crop when farm prices averaged 32.64
cents a pound to 14 percent for the 1931 crop when farm prices averaged
5.66 cents a pound. For the 1950 crop, when farm prices averaged 40 cents
a pound, this proportion averaged 5.6 percent. The portion of the con-
sumer's dollar represented by ginning and baling has averaged less than
one cent (Figure 5).
cotton-selling practices in Egypt, India, and Brazil is based on observations by P. K.
"'':lrris, former marketing specialist, Bureau of Agricultural Economics, during his studies
at production and marketing of cotton in these countries.
 MARKETING OF AGRICULTURAL PRODUCTS

COttOIl Merchandisers' ;v[argirzs

i'vIerchandisers' margins are the differences behvcen farm prices of
cotton and costs of the raw cotton to mills. These margins include the
costs of taking the cotton from gins and delivering it to mills at the time,
in the quantities, and of the qualities desired. These services include receiv-
ing, sampling, weighing, classifying, compressing, storing, insuring, trans-
porting, financing, and risk-bearing, among others. These margins include
payment for services performed by both local and central markets. This
portion of the consumers' dollar spent for cotton products has varied from
2.1 percent in 1939 to 1.3 percent in 1950.

Manufacturing lvlargins
The manufacturing margins include the costs for spinning yam, weav-
ing cloth, and dyeing and finishing the fabrics; and for the manufacture
of apparel and household textiles.
Different kinds of agencies engage in some of the same kinds of serv-
ices. Consequently, the margins indicated for each type of sp.rvice do not
show specifically the charges made by each type of agency. Some textile
manufacturers, for example, although they engage primarily in spinning
and weaving, dye and finish some cloth, fabricate some of the cloth into
household and other goods, and sell the products to wholesalers or retailers.
The proportions of the consumer's dollar accounted for by average margins
for cotton manufacturers who are primarily engaged in spinning, weaving,
dyeing, and finishing cotton yarns and fabrics averaged 18,5 percent in
1950. Similar proportions for manufacturers of apparel and household
goods averaged slightly more than 29 percent in 1950.

\Vholesale and Retaill\Jargins

Manufacturers of apparel and household textiles sell large quantities
of their products directly to retailers. The costs of these selling services
accounted for the fact that margins for these manufacturers are some-
what greater than total margins for manufacturing apparel and household
goods. Regular wholesalers' margins, which amounted on the average to
4.9 percent of the retail price in 1939 and 1950 and to 4.8 percent in 1947
and 1949, were substantially less than the average margins for wholesaling
because a large part of the wholesaling was done by agencies not primarily
engaged in wholesaling. The proportion accounted for by retailing has
averaged about 32 cents. Retailing, therefore, was the most expensive single
operation or service. It will be recalled that this has been true for each
commodity we have studied.
 Cotton Marketing 299

Consumer's Cotton Dollar by Cost Items

Available information indicates that salaries and wages account for
more than half of the spread between retail prices of apparel and household
goods made of cotton and returns to growers for the cotton used (Figure
6). The proportions of the consumer's dollar accounted for by wages and
salaries ranged from 44 percent in 1947 to 48 percent in 1949. The propor-

Where It Goes
THE CONSU~AER'S COTTON DOLLAR,
BY COST ITEMS
Paid for Apparel and Household Goods, Selected Years
$1~~~~~'---~~'---~~'---~~
Profil:s if

754 All ot:hcro------l

~;s::}---= AdverHsing

44.0 48.0
254
7.S 11.3 11.2 13.3 - Farm producHon
O ~~~--~~~~~--~------------~
1939 1947 1949 1950
e.-SED ON' OFFICIAL AND OTHER: DATA, ANt) PARTLY ESTIMATED •
.. NET PROFITS OF Al.L AC!HCIES. EXCEPT FARM PRODUCERS. A.FTER: OEOUCTIOH OF FEDERAL INCOME A.HD EXCESS-
PROFIT TA.XES.
o INCLUDES DEDUCTIOHS FOR FEDERA.L ''''COME APID EXCESS-PR.OFIT TAXES.

FIG U R E 6. The breakdown of the consumer's cotton dollar

showing the proportion taken by various market-
ing cost items. (Courtesy USDA.)

tions for net profits for all agencies combined ranged from 5.7 percent in
2939 to 14 percent in 1947, and averaged 11 percent in 1950. The propor-
tions for advertising and for other items decreased markedly after 1939.
Salaries and wages for employees engaged in marketing cotton and cotton
products average more than four times as much, and net profits to market-
ing agencies average almost as much as returns to grO\vers for farm pro-
duction of the cotton.
Thest. data relating to the distribution of the consumer's donar paid
for apparel and household goods made of cotton may serve to indicate the
r~lative importance, from the viewpoint of costs, of increasing efficiency
 MARKETING OF AGRICULTURAL PRODUCTS

and of reducing costs for the different agencies and functions involved. Data
show that the margins for ginning and baling, combined \vith those for all
the merchandising services involved in taking cotton from gins and deliver-
ing it to mills, amount, on the average, to only about 5 percent of the
combined margins for manufacturing and finishing the cloth and for
fabricating it into wearing apparel and household goods. They amount to
only about 6 percent of the combined margins for wholesaling and retail-
ing these products. Thus a reduction of only 3 percent in the margins for
wholesale and retailing, or for manufacturing and finishing cloth and fabri-
cating it into apparel and household goods, would tend to reduce the spread
between retail prices to consumers and prices to growers for the cotton to a
greater degree than would a 50 percent reduction in the margins for ginning,
baling, and merchandising the raw cotton.
MARKETING COTTONSEEDs
Cottonseed usually ranks among the ten leading field crops in farm
value in the United States and has been third in rank in the cotton belt.
Since cottonseed is the less valuable member of the lint-seed crop, the
production of seed is often influenced primarily by factors determining
production of lint cotton. Cottonseed is processed into oil, cake or meal,
linters, and hulls, all of which are important in the national economy.
The physical movement of cottonseed from farm to mill is character-
ized by directness and simplicity. Growers bring seed cotton to gins where
the lint and seed are separated. The greater part of this seed, except that
retained for planting and other farm uses, is sold immediately to ginners
who usually sell promptly to processors.
As compared with many other agricultural products, cottonseed is very
bulky in relation to weight. Cottonseed weighs about thirty-two pounds per
bushe1. This bulkiness creates relatively high costs in storing and transport-
ing cottonseed and re3tricts its movement over long distances for processing.
Processors, therefore, customarily are located in close proximity to the
source of supply.
The quality of cottonseed often varies appreciably with location and
season of harvest. Since such variations in quality can be measured only by
highly technical chemical analyses, cottonseed normally is purchased by
ginners without regard to the quality of individual lots of seed but is sold
to the oil mills largely on the basis of quality.
Many methods are used to determine the weight of cottonseed being
sold. Only a small part of the trading between the ginner and grower is
8 For more details on the handling of cottonseed, see M. E. \Vhitten and J. H.
Stevenson, The Marketing of Cottonseed, USDA, P.M.A., processed, 1949.
 Cotton Marketing 301

settled on the basis of weight determined by the use of scales specifically

for weighing the cottonseed. Weights of the seed purchased by ginners are
arrived at principally by estimation, the particular formula being a matter
of local custom. Some gins use the method of calculating the seed cotton
load minus the gross weight of the bale. Others use the seed cotton load
weight minus the gross weight of the bale, minus a given number of pounds
or percentage of the seed cotton load weight for waste. A few estimate the
weight of the cottonseed by using a seed-lint ratio from the weight of
the bale.
Prices posted by ginners relate indirectly to prices offered by processors
because such prices apply to seed of whatever estimated quality currently is
being received at a specific gin. Ginners normally calculate prices by sub-
tracting a sufficient margin from existing mill prices to defray marketing
expenses and allow a profit and then make a further price adjustment to
compensate for any difference between the estimated quality of seed arriv-
ing at the gin and that of basis 100 grade seed. Mill prices for seed, however,
do not always reflect changes in prices of products and gin prices do not
always respond in a sensitive manner to fluctuations in mill prices. Since
seed generally is purchased on the basis of estimated weight, and almost
exclusively in terms of approximated qualities, there are many chances
for error. Also, many ginners apparently maintain charges for ginning serv-
ices at levels that place considerable emphasis on cottonseed purchases as
the major source of income.
FOREIGN PRODUCTION AND UNITED
STATES EXPORTS
United States cotton exports reached an all-time peak in 1926. There-
after the trend was reversed and continued downward through the 1930's
while production abroad rose sharply (Figure 7). Interruptions of trade in
the five years of 1940-1944 dropped exports to the lowest levels in almost
seventy years but discouraged production in most foreign countries as wen.
Recovery of exports in postwar years has been helped by United States
programs of foreign aid. Foreign production reached a peak of 20 million
bales in 1937-1938 and declined to 12 million bales in 1945-1946. Since
'World War II the increase in foreign production has been at an average
rate of more than a million bales a year. Foreign production has been stim-
ulated by attractive prices.
Western Europe continues to be the destination of the greater part
of the Ur:ited States cotton exports, though to a lesser exent than before
World \Var II. In Asia, the Republic of India, now the world's second larg-
est cotton manufacturer, has been a net importer since the partition of the
 1\1 ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

COTTON: U. S. EXPORTS AND FOREIGN PRODUCTION

MIL.
BALESLI

15

10

o '24 '28 '32 '36 '40

YEAR BEGINNING AUGUST
Ll500 POIJND BALES

FIG U R E 7. Relationship of United States cotton exports to

the volume of foreign cotton production. (Cour-
tesy USDA.)

subcontinent and is an important user of American cotton. Japan, however,

with the postwar restoration of its cotton mills and partial recovery of its
textile export trade, has regained its prewar position as the leading cotton
customer of the United States.

FIG U R E 8. I ntemational trade in cotton showing the relative

importance of trade with various countries. (Cour-
tesy USDA.)
 Cotton Marketing 303

Before \Vorld War II the total volume of the world's cotton export
trade approximated 13 million bales a year, of which the United States had
more than 40 percent (Figurc 8). Other principal exporters of American
type cotton were Brazil anel India. During \Vorlel \Var II the international
trade in cotton declincd drastically. Recovery following \Vorld \Var II was
slow until 1948-1949 when the European Recovery Program gave cotton
trade a new emphasis, bilt the volume in trading sti1l remains more than a
million bales under the prewar yearly average.

COT TON 1\1 ARK E TIN G PRO B L E 1-.1 S

Producer Knowledge of Grades
The majority of producers must depend on outside sources for quality
information. In 1947 the proportion of growers that knew neither grade nor
staple was about 45 percent (Table 6) _9 From 99 to 100 percent of growers

TAB L E 6. Proportion of Growers Knowing Grade and Staple of

Cotton Sold, 98 Selected Markets, Season 19.f7-48

GROWERS GROWERS
LOCATION K:'>OWING GROWERS GROWERS KNOWING
OF 1IARI:ETS BOTH GRADE K~OWING KNOWING NEITHER GRADE
(STATE) AND STAPLE GRADE ONLY STAPLE ONLY NOR STAPLE TOTAL

PERCr::'>T

Alabama 50 9 40 100
Arizona 1CO 100
Arkansas 66 34 100
California 99 1 100
Florida 58 100
Georgia 44 55 100
Louisiana 32 6 62 100
l'IIississippi 38 62 100
l\Iissouri 23 77 100
New l\Iexico 100 100
Xorth Carolina 27 72 100
Oklahoma 47 52 100
South Carolina 9 91 100
Tennessee 9 91 100
Texas 71 * * 2q 100
Virginia 2 98 100

All markets 54 * 45 100

* Less than 0.5 percent.

at the mar~ets in Arizona, California, and New j\Iexico had quality infor-
mation at the time of sale. Two-thirds of the growers in Arkansas and
9 Saxman, op. cit.
 MARKETING OF AGRICULTURAL PRODUCTS

about three-fourths of those in Texas knew the quality of cotton being sold.
In contrast, less than one-tenth of growers at markets in Florida, South
Carolina, Tennessee, and Virginia was informed as to the grade and staple
of their cotton.
Federal grading service is available to producers participating in im-
provement programs without any direct charge for the service. Growers
marketing 46 percent of the total volume had documents at the time of sale
such as reports from federal grading or licensed classers' certificates that
indicated grade and staple. Approximately 28 percent of all sales (about
three-fifths of the cotton so documented) were completed on the basis of
such impartial quality information without buyers examining a sample.

Producers Do Not Force Price Competition

A great many growers do not attempt to obtain price bids from a num-
ber of buyers prior to selling. Sales made by growers after interviewing only
one buyer accounted for 57 percent of sales in 1947.10 Sales were made on
the basis of bids from two buyers for only about one-fifth of the cotton
sold. The remaining one-fourth of the cotton was sold after interviewing
three or more buyers.
About one-half of the growers selected buyers who in their opinion
offered the best price. A surprisingly large percentage of growers, however,
indicated that custom, convenience, or confidence in the buyer determined
their choice. Nearly two-fifths of the growers reported being largely influ-
enced by this latter combination of factors.

Producers Sell in Small Lots

A majority of the growers must sell in small lots, since nearly 70 per-
cent produce less than ten bales per year. Very few of the producers wait
until all the crop is harvested to sell, but gin and sell as the crop is har-
vested to get money for harvesting expenses. In a study in 1947, sales of
cotton in one-bale lots represented about 17 percent of the total sales in
the United States.u About 37 percent of the production is sold in lots of
five bales or less. With these small sales, individual producers' ability to
bargain is restricted.

Excess Gin Capacity

Average costs per bale for ginning cotton are usually substantially less
for gins with annual volumes of ginnings of 500 or more bales than for
gins with smaller volumes. However, the number of bales ginned per gin
10 Soxman, op. cit.
11 Soxman, op. cit.
 Cotton Marketing 305

stand in the United States usually averages less than 300 bales. This indi-
cates that the cost of ginning might be reduced considerably by increasing
the volume of cotton per ginP This would require a reduction in number
of gin stands operated. Such a reduction might well be brought about by
discontinuing the use of old, badly worn, and obsolete equipment. In the
1947-1948 season, 75 percent of the cotton was hauled six miles or less to
gin, therefore the number of gins could be decreased considerably without
causing farmers to travel unusually long distances to gins. Bureau of Census
reports relating to the number and capacity of gins and to the number of
bales ginned during the 1945-1946 season indicate that if all gins had been
operated at capacity on the basis of a twelve-hour day, the 1945 crop could
have been ginned in about twenty days.

SELECTED REFERENCES
The Classification of Cotton, USDA, Miscellaneous Publication 310, 1938.
The Cotton Textile Industry, U. S. Bureau of Internal Revenue, Excess Profits
Council, 1948.
Cox, A. B., Cotton Markets and Cotton Merchandising, 2nd ed. (Austin, Texas,
Hemphill, 1949)'
Data Relating to Practices and Costs in the Primary Marketing of Cotton,
USDA, Production Marketing Administration, 1950.
Facts About Cotton, USDA Leaflet 167, 1952.
Home, M. K, Jr., "Cotton's Way Forward," Oxford Business Research, Uni-
versity of lVIississippi, 1949.
Little, H. \V., and R. A. Ballinger, Progress of Free Classing and Market News
Service for Members of Cotton Improvement Groups in Louisiana, Louisiana
Bulletin 362, 1943.
Merrill, G. R., American Cotton Handbook, 2nd ed. (New York, Textile Book
Publishers, 1949)'
Richards, F. A., The Marketing of Cotton and the Financing of Cotton Mer-
chants (New York, Chase National Bank, 1949)'
Roberts, A. L., and A. J. Fortenberry, Charges for Ginning Cotton, 1941-42 to
1946-47, USDA, Production Marketing Administration.
Whitten, M. E., and J. H. Stevenson, The Marketing of Cottonseed, USDA,
Production Marketing Administration, 1949.
Wright, J. \V., Cotton Quality as Related to Marketing, USDA, Production
Marketing Administration, 1946.
Wright, J. 'V., F. L. Gerdes, and C. A. Bennett, The Packaging of American
Cotton and iV1ethods of Improvement, USDA Circular 736, 1945.
12 Howell, op. cit.
CHAPTER TWENTY

cr bacco Marketing
0 1

THE PRODUCT AND ITS USE

United States Production
Owing to the localized, but concentrated, nature of production, tobacco is
the chief source of income in many areas. For example, in 1949, North
Carolina tobacco sales amounted to about one-third of the nation's total
tobacco sales and accounted for three-fourths of the total crop sales of the
state. Farms within given areas are almost wholly dependent upon tobacco
as a source of cash farm income. Twenty-one states produced tobacco in
195'0, but the three leading states-North Carolina, Kentucky, and Vir-
ginia-produced 70 percent of the total United States tonnage.
Because of the large amount of labor required, tobacco farms are
usually small. The average acreage per farm growing tobacco is about three
acres. Very few farms, indeed, grow more than twenty acres. As with other
commodities, this small-scale production means that the marketing system
must be designed to handle small quantities of various grades of tobacco.

Classification of Tobaccos
The tobacco industry in the United States is highly specialized. To-
bacco is not a single crop, but rather a group of crops each having distinctive
characteristics and uses. :Methods of curing vary materially, and except for
the cigar and miscellaneous types, they provide one basis for classification.
The cigar types are classified on the basis of use.
Tobacco is first classified on the basis of its distinct characteristics
caused by ,oaricties of soils, climate and methods of cultivation, harvesting
1 By Co B. Cox (see Chapter 19).
 Tobacco Marketing 307
and curing; this division is called a class.!! Each class is subdivided into
types. Tobacco which has the same characteristics and corresponding
qualities, colors, and lengths is treated as one type. Types are further sub-
divided into grades. The grade of tobacco is based upon three factors-
group, quality, and color. The group is determined by the shape of leaf,
body, percentage of injury, and other common characteristics. For example,
the normal groups for flue-cured tobacco are lugs, cutters, and leaf. The
second factor of a grade is quality which is based on a combination of
elements of smoothness, oil, maturity, body, width, porosity, color shade,
finish, and uniformity. The six degrees of quality for flue-cured tobacco
are choice, fine, good, fair, low, and common. The third factor of the grade
is color. The colors recognized in flue-cured tobacco arc lemon, orange, red,
clark red, and green.
Any combination of group, quality, and color can be made to form a
grade. As this method of expressing grades is too cumbersome for practical
purposes, symbols are used for each group, quality, and color. For example,
flue-cured tobacco, produced principal1y in the Piedmont section of Vir-
ginia and North Carolina, taken from the top portion of the plant (leaf),
and being of choice quality and lemon color, would be designated as
type 11 BIL.
The following are the six main classes of tobaccos which are divided
into twenty-nine recognized different types: 3
Class 1. Flue-cured, types 11, 12, 13, and 14
Class 2. Fire-cured, types 21, 22, 23, and 24
Class 3· Light air-cured, types 31 and 32, and
dark air-cured, types 35, 36, and 37
Class 4· Fillers, types 4 1, 4 2, 43, 44, and 45
Class 5· Binders, types 51, 52, 53, 54, 55, and 56
Class 6. \Vrappers, types 61, 62, and 65
Class 7· 1Iiscellaneous, types 71 and 72
The type numbers indicate not only the type but also the class. For ex-
ample, the first digit for all flue-cured types is 1.
Class 1, the flue-cured tobacco, accounts for more than half the total
production of American tobacco (Figure 1). It is light colored and aro-
matic, and is the largest component in domestic cigarettes. The great
majority of all our tobacco exports is from this class. Trends in the produc-
tion of flue· cured tobacco have been steadily upward, whereas the opposite
~ For a ;TIore complete discussion of grades, see Tobacco Inspection, l'vIar:wt News,
and Demonstraiion Sen-ices, USDA, Production and l\1arketing Administration, l\Jimeo-
graph, 1950.
3 :\dapted from J. F. l\larsh, J. A. Hicks, and C. E. Burkhead, Tobaccos of th_!;

l!)~itc~ States, USDA., Bureau of Agricultural EconOI;nics, CS-3 0 , 1918.

 MARKETING OF AGRICULTURAL PRODUCTS

has been true of some other classes. Nearly all flue-cured tobacco is now
"prime"-that is, the leaves are pulled individually as they reach maturity.
The leaves are then hung in barns in which heat through metal flues is
applied gradually. Temperatures of from 1500 to 1700 F. or higher are
reached during the drying proccss, which requires from three to five days.
Flue-cured tobacco is grown in southern Virginia, North Carolina, and the
coastal plain region of South Carolina, Georgia, and northern Florida.

TOBACCO: PRCDUCTION IN THE UNITED STATES. 1919·51

POUNDS,,-------.-------.-------r------.-------,-------~l--~
'MILLIONSI
- - Flue cured
1.200 .-.-. Burley
- - Fire cured and dark clir-cured

1,000

800

600

400

200

o 1925 1930 1950

FIG U REI. The trends in the production of different classes

of tobacco. (Courtesy USDA.)

The second class, fire-cured, is made up of heavy-bodied, dark, strong

tobacco. It is used for making snuff, roll, plug, strong cigars, and heavy
smoking tobacco. The tobacco is usually hung in the barns under natural
air conditions for a few days for yellowing before heat in the form of open
fires is applied. The heat is less intense than that used in curing the flue·
cured types, and may be applied in several installments. It sometimes takes
several weeks to cure a barn of fired types. The long-time trend in produc·
tion of fired tobacco has been steadily downward. Current production is
now less than half the average of twenty·five years ago. Fire-cured types are
produced in northwestern Tennessee, southwestern Kentucky, and central
Virginia.
The third class of tobacco, air-cured, is broken into two subclasses-
 Tobacco Marketing 309

light and dark. The difference in these is in the characteristics of the to-
bacco rather than the method of curing. The dark types are heavy-bodied,
coarse in texture, and to some extent comparable to the fired types. Over
the years, the dark air-cured types have averaged somewhat lower in price
than the fired types. Production of this tobacco has also declined through
the years. These dark types are grown in western Kentucky and to a less
extent in Tennessee, Indiana, and Virginia.
The light air-cured types are not interchangeable with or substitutable
for the dark air-cured because each has special characteristics. Type 31,
burley, is the most widely grown single type of tobacco in the United
:i States. It is grown in ten states and accounts for 25 percent of all the
i
tobacco grown in this country. It is flavorful but much milder than the
darker types, and is used with the flue-cured tobacco as the base for making
I blended cigarettes. Large quantities of burley are also used in pipe tobacco,
plugs, and twists. Type 32, or Southern Nlaryland, a mild and more neutral
tobacco with less oil, is generally thought to be about ideal with respect to
burning quality. Concentrated production areas of light air-cured types are
found in north central Kentucky and southern Maryland. Some is also
produced in Tennessee, North Carolina, Virginia, \Vest Virginia, Ohio,
Indiana, Missouri, and Kansas.
The cigar types are al1 air-cured but are classified on the basis of use.
The classifications do not imply exclusive uses, however. Some of the lower
grades in all three of the cigar classes go into scrap-chewing and other uses.
The three main classes of cigar tobacco now grown in the United States are
fillers, binders, and wrappers.
Fil1ers are grown in Pennsylvania and Ohio. They constitute the core
or body of cigars. These types are high-yielding, and the curing methods
are similar to those used for burley. The stalks are cut in the fields and
curing is done by the natural air unless the weather is so damp as to require
artificial heat.
The binder types are grown mostly in \Visconsin and in the Con-
necticut val1ey. SmaIl quantities are grown in Minnesota, New York, Penn-
sylvania, and along the Georgia-Florida line. They are used for binding
the fillers into the form of cigars.
\Vrappers are the most costly tobacco. Used for the outside cover of
cigars, the leaves must be elastic, relatively free of damage, uniform in color,
and of good burning qualities. In addition, the best wrappers are thin,
smooth, anti of fine texture. In order to obtain such qualities some protec-
tion is needed from the sun and weather. A permanent framework is erected
over which open mesh cloth is tacked enclosing large fields. Cultivation is
 MARKETING OF A.GRICULTURAL PRODUCTS

carried on under this cover. The leaves of wrapped tobacco are primed as
for flue-cured tobacco, and the curing and conditioning require much more
handling than most other classes. The wrapper types are grown in the Con-
necticut vaney and in Georgia and Florida.

Domestic Consumption
About 80 percent of all tobaccos used in this country in 1952 was Con-
sumed in the form of cigarettes. This is in sharp contrast to tobacco utiliza-

MIL.LBS.
TOBACCO
PRODUCTS
IN U. s.

800

400

o
1935 1940 1945 1950 1955
UNSTEMMfD PROCESSINC;~WEIGH7 EQUIVALENT

FIG U R E 2. Trends in the uses of tobacco in the United States.

(Courtesy USDA.)

tion in 1920 when twice as much was used for pipe tobacco and snuff as
for cigarettes. Cigar consumption accounted for 9 percent of total utiliza-
tion in 1952 compared to 26 percent in 1920. Tobacco and snuff accounted
for only 10 percent of total consumption in 1952 compared to 51 percent
in 1920 (Figure 2).
Owing to the time required for off-farm curing and processing, most to-
bacco is stored for as long as several years before it is used. Storage stocks
usually exceed annual production. In 1950, stocks were 52 percent greater
than production.
---
I
I

Tobacco Marketing 311

FARM MARKETING METHODS~

On-Farm Sales
Some tobacco is purchased by buyers who come to the farm itself. Such
on-farm sales are of considerable importance in the sale of cigar tobaccos.
Sales may be made during the growing season, but the bulk of sales are
made during or after the curing season. The price may be either for the
farmer's entire crop or quoted by different grades. On-farm sales of tobacco
other than cigar types are declining but are still of considerable importance
in some dark air-cured, fire-cured, and burley areas. Buyers may be local
speculators, dealers, and manufacturers who wish to buy certain crops be-
cause of their quality.
There are several disadvantages of on-farm sale which can be sum-
marized as follows:

1. The farmer has little knowledge of actual market conditions which

may be prevailing. The typical farmer has only a limited association
with buyers and sellers, and both of these groups may be reluctant to
disclose prices.5
-". Although there are savings to the farmer in marketing and transporta-
tion costs, these savings may be offset by a lower price resulting from
the greater expense incurred by buyers.
3. Price support loans are based on grades as determined by federal
graders. On-farm sales make such grading more difficult and thereby
reduce the possibility of participation in the loan program.
4. Unless prices are paid on the basis of quality, growers may tend to
neglect quality control, particularly if sales are made prior to harvesting
and curing.

Hogshead Selling
Hogshead marketing began in colonial days when packed hogsheads
were fitted with shafts for transportation to central markets. Sales were made
on the basis of official inspection. This form of marketing reached its peak
about the time of the Civil \Var but began to decline about 1889. :lvIarket-
ing by hogshead is almost nonexistent today. Baltimore is the only
remaining market which receives, inspects, and sells such deliveries.
" Fur hrther detail see C. E. Gage, American Tobacco Types, Uses arid Markets,
USDA Circular 249, 1942.
5 For more details see H. H. Bakken and \V. F. I'dueller, "Oligopsony in the \Vis·
ron sin Tobacco Industry," Land Economics, May, 1952.
 MARKETING OF AGRICULTURAL PRODUCTS

Loose Leaf Auctions

The loose leaf auction is now the principal method of sale for all
tobaccos except the cigar types. The sales warehouses are one-story build-
ings, usually well lighted with skylights, and sometimes have as much as
100,000 square feet or more of unobstructed floor space. Sales warehouses
are located in the major production areas so that most of the tobacco to be

TOBACCO
AUCTION MARKETS AND PRODUCING AREAS, 1952-53
(CIGAR lEAF PRODUCING AREAS NOT SHOw"l

u ... U!.~ •• ~",.'r~ ••• u.n., ..·"

..... !U ... oe. SI~~ ,." 00 '0'( .... u
.V" ... ,."U."
"""'0 •••",.01
'~""""",.'"
c'u .... "t, flO.
"""
.,.~ .. ..
u'!s ..... ,
I'
. . . . . II
'.0
'.,
no

;~~~~?::·~:ttt- :~~n:g: ;;:.;1

t. 'L~.· c~~, •. ..
H ..
UC""'U'II>'
on''', u,
,., ••• '. Q¥
,.,,,.,,,~

ON.'"
..
- - - -•••- -'U- -,00001(D --- - - -
00" '''"

K.t.NSA
coT!
- -- ,• • • ~1"".
-
n.t u,.
- -_.

~."LL ,v'If" .,,. .. , .......... ,U . . . . . . . . .

,,, UTI O' .~, ... ,~. rIO', 'u,,~ .... .... n
" ::!'.,"'O,.fI"u.:!~;! ._. ,." .... 0.1 HI o-r •• '-

FIG U R E 3. Location of tobacco auctions and buyers.

(Courtesy USDA.)
 Tobacco Marketing 313

sold is usually brought in by the farmers themselves (Figure 3). The to-
bacco is weighed and tagged and displayed on the floor in round piles with
the stem end out. Before the sale, the tobacco is graded by a federal grader.
Sales are conducted according to a prearranged schedule which per-
mits buyers to move among the several warehouses in a given market area.
Small markets with only two or three sales warehouses may have only one
group of buyers, while a larger market may have several sets of buyers which
work simultaneously. This also is shown in Figure 3. Buyers include repre-
sentatives of tobacco manufacturing and exporting companies and specu-
lators (pinhookers). The sale is conducted as the auctioneer moves about
the various piles of tobacco on display in the warehouse.
To the uninitiated observer, sales are a scene of utter confusion. He
can scarcely tell auctioneer from buyer from warehouseman, and finds it
almost impossible to determine who bought which pile of tobacco for what
price! The owner may "no sale" any basket and place it elsewhere in the
warehouse, remove it to another warehouse, or hold it for later sale. No
warehouse charges are paid if tobacco is removed from the warehouse
unsold.
The sales dates vary with production areas. The Georgia-Florida mar-
kets open first, usually in mid-July, and continue through most of August.
l'vlarkets in South Carolina open a week or so later and continue through
October. North Carolina markets follow and conduct sales through No-
vember. Burley and fire-cured markets operate from December to February
or :March. Southern Maryland markets begin sales in May and continue
through the summer months. Thus some type of tobacco is being sold
nearly every month in the year.

Cooperative Associations
At the present time, cooperative associations do not make up a separate
type of market organization, but function largely as farmers' representatives
in conjunction with the auction system. Tobacco cooperatives have a long
and turbulent history. By 1923, almost half of the nation's tobacco was
marketed through various cooperative associations. But the movement
declined, and by 1930 only about 2 percent of the production was marketed
by cooperative organizations. At the present time "Cooperative Stabiliza-
tion Corporations" perform the storage functions in connection with the
govern men t loan programs which are the mechanism of price supports.

MARKETING CHANNELS
As indicated in Figure 4, tobacco may be sold directly to the manufac-
turer, or to dealers or specu1ators who in turn sen to the manufacturers.
 MARKETING OF AGRICULTURAL PRODUCTS

In the case of indirect sales, redrying, stemming, and packing may occur
before the tobacco finally reaches the manufacturer.
Tobacco, as delivered to the market by farmers, is in a semiperishable
condition because of high moisture content. Except for certain cigar types,
aging and fermentation occur after leaving the farm. Sometimes a period

FIG U R E 4. Principal marketing channels for United

States tobacco.

of two or three years is necessary for the complete fermentation process

to take place. Prior to storage, tobacco is cleaned, reclassified, and redried
to obtain the moisture necessary for fermentation. The weight loss from
cleaning, redrying, aging, and stemming is such that the manufacturer's net
yield is about two-thirds of the farm sales weight.

TOBACCO MANUFACTURING
As has been pointed out, tobacco leaf is the raw product for many dif-
ferent kinds of products. Cigarettes are by far the most important of these
products in the United States. In 1947, there were 1,086 tobacco manufac-
turing establishments which employed a total of 111,782 persons. How-
ever, the manufacturing capacity is highly concentrated in the hands of a
very few firms. More than 90 percent of all cigarettes made in 1947 were
manufactured by four companies (Figure 5). Eight companies made over
80 percent of the snuff, chewing, and smoking tobacco. In cigars, the top
eight companies produced 57 percent of the total. The nature of tobacco
manufacturing is such that mass production and assembly line techniques
can be widely used.
Recent years have seen substantial changes in manufacturing tech-
nology which have still further increased the advantages of large-scale pro-
duction. In 1947, about 370 billion cigarettes were produced compared
 Tobacco Marketing 315
with 122 biI1ion in 19 2 9. However, the number of workers in the industry
only increased 21 percent during this period.
In the marketing of the finished product, large-scale operations are
also favored. To a substantial extent, the market for any given brand of
cigarette is nation-wide. The cigarette is a low-bulk-and-weight product

CONCENTRATION IN TOBACCO
MANUFACTURES
(Value of Produc:1:s Made in 1947)
MIL. DOL.
o 200 400 600 800 1,000 1,200
~g!Ak·~~·~~·.:::~·~··~"~~~~~~~~~~~U':S'·.'~t1
NEXT4 MFRS.
TOTAL .. ·· .... · ..
TOP 8 MFRS.···r-:--a'J-
NEXT 12 MFRS.
TOTAL ......... ..
TOP 8 MFRS.···
NEXT 12 MFRS.

DATA fROM II. S. DEPT. Of COMMERCf

FIG U R E 5. The concentration in tobacco manufactures in the

United States, 1947- (Courtesy USDA.)

compared to its value, and transportation charges, therefore, are not a lim-
iting factor in its distribution. The distribution system is built largely on
nonprice competition. As any listener to the radio or viewer of television
can testify, the various companies make a tremendous attempt to make the
public brand conscious.

MARKETING MARGINS
OF CIGARETTES
The farm value of tobacco in a package of cigarettes has fluctuated
from a low in 1931 of about a half cent to a high in 1950 of slightly over
H cents (Figure 6). The average during the prewar period of 1935-1 939
was about 1.4 cents. To a substantial degree, all of the analysis of the
farmer's share of the food dollar which was developed in Chapter 5 applies
to tobacco.
 MARKETING OF AGRICULTURAL PRODUCTS

The retail price of cigaretes has gradually increased from 12.7 cents per
pack in 1933 to about 22~5 cents in 1953. The retail price includes the
farmer's share, the manufacturer's and leaf dealer's margin, the distributor's
margin, and federal and state excise taxes.

CIGAR ETTES
Estimated Farm Value of Leaf Tobacco, Marketing Margins, and Taxes
¢ PER PACKAGE-
Re{:ail price

1930 1935 1940 1945 1950 1955

YEAR BECINNINC JULY 1. * RETAILERS AND WHOLESALERS.
o PA YMENT TO FARMERS FOR TOBACCO EQUIVALENT TO PACKACE OF CICARETrES.

FIG U R E 6. The breakdown of cigarette prices showing the

farmer's share and marketing charges. (Courtesy
USDA.)

Manufacturer's and Leaf Dealer's Margins

The margin of the manufacturer and leaf dealer is the difference
between the farm value of the tobacco and the average wholesale price of
cigarettes received by the manufacturers. It therefore includes all of the
costs of converting the leaf tobacco sold by farmers into the finished ciga-
rette. As such, it also covers the cost of any foreign imported tobacco which
may be used. The profits of the tobacco manufacturing firms are also
included.
Distributor's Margin
The distributor's margin represents the cost of wholesaling and retail-
ing cigarettes. It is the difference between the retail prices and the man-
ufacturer's wholesale prices excluding excise taxes.
 Tobacco Marketing 317

Federal and State Excise Taxes

Excise taxes are a major part of the marketing margins for cigarettes.
During 1935-1939, excise taxes accounted for 6,7 cents and the margins of
the manufacturer, the dealer, and the distributor for 5.7 cents of the 13.9
cents average price of a package of cigarettes. In 1951, excise taxes ac-
counted for 10 cents and manufacturer, dealer, and distributor margins for
7.9 cents of the 21.3 cent average price of cigarettes. In recent years, in-
creases in state and federal excise taxes, along with a wide variety of city
taxes, have accounted for much of the rise in retail prices of cigarettes.
TIle major role of taxes must not be omitted from any consideration
of marketing margins for cigarettes and other tobacco products. In 1950,
federal tobacco taxes amounted to almost as much as the combined federal
receipts from taxes on gasoline, oil, tires and tubes, automobiles, trucks,
buses, and motorcycles. State revenues from tobacco accounted for 3.5 per-
cent of the general state revenue.

ACREAGE AND PRICE CONTROL6

Tobacco has been defined as a basic crop for which price support is
compulsory (Chapter 9). In general, supports have been made effective
through storage in the nonrecourse loan program. During every year from
1933 to 1953, except 1939, federal price support actions have been a major
factor in tobacco prices. Along with this aid has developed a very elaborate
system of production control through a system of acreage allotments for
each individual tobacco producer. Each individual grower can plant only
his allotted acreage. He then may secure the support price through placing
his tobacco in storage and securing loan price.
The net effort of this program has been to regulate effectively who
grows tobacco. Since acreage allotments are granted on a historic basis, the
production pattern has tended to become frozen. Since the controls are
based upon acreage and not production, the program has tended to focus
attention on improved production practices. As a result, there has been an
upward trend in yield per acre as tobacco has been planted on better land
with better seeding, fertilization, and cultural practices. The program has
also focused greater attention on grading as the loan program is tied to
graded tobacco. Improved market information has also become available as
i!lcreased data have been compiled through the operation of the program.
In addi:ion, the farmer has been provided with the mechanism which
enables him to store his product for more advantageous prices.
6 For a detailed description of the operation of the control program, see Tobacco,
USDA, Production :t-.larketing Administration, p. 140, 1952.
 MARKETING OF A.GRICULTURA.L PRODUCTS

Many objections have been raised against the program. There is no

doubt that the individual- producer does not have the freedom to grow
tobacco where and when he chooses. The price support feature has resulted
in domestic prices which are often weU above the world prices for tobacco.
Since tobacco is a product which in the past has had a substantial export
market, this is an important consideration. Some of the foreign market has
probably been lost as production in other areas of the world has been
stimulated by high domestic prices. J\Iuch of the benefit from the higher
prices has probably been capitalized into high land prices. \Vith the acreage
allotment system, the most valuable aspect of a farm has often become,
not the fertility of its land, but rather the size of its tobacco base.
Regardless of the pros and cons concerning the control program, it is
highly popular with the growers. As with other production control pro-
grams, tobacco growers must approve of its operation by a majority vote
in a referendum or the program is discarded. \Vith one exception, 1939,
each time the program has been submitted to the growers, they have
appoved of its operations by huge majorities-sometimes by over 90 per-
cent. The history of the tobacco control programs leads to the conclusion
that some types of controls are probably a permanent part of tobacco mar-
keting. Those who decry the loss of the "free competitive market" are per-
haps bemoaning the loss of something which never really existed. The
market always has been one of multitudinous small sellers on the one hand
and a few very large buyers on the other. There is considerable evidence
that buyers have not always been actively competitive. 7

INTERNATIONAL TRADE
Of a total world production of p million tons (the USSR and China
excluded) in 1940, 560 thousand tons entered international trade. The
principal importing and exporting countries are given in Table 1. The
United Kingdom was the leading importer, and imported one-fourth of all
tobacco that entered international trade. The United States, the leading
exporter, exported nearly two-fifths of the total tobacco sold internationally.

United States Exports

The amount of tobacco exported by the United States declined
throughout the decade of the thirties. It was not until 1951 that export
volume approached the average export tonnage of 1924-1928. From 1923 to
1929, exports averaged only slightly less than 40 percent of the total pro-
duction. During the postwar years of 1948-195°, exports amounted to only
7 For a full description of price policies, see W. H. Nicholls, Price Policies in the
Cigarette Industry (Nashville, Vanderbilt University Press, 1951).
 Tobacco Marketing 319
about one-fourth of domestic production. s Much of this loss in export can
be explained by the growth of domestic outlets-particularly in the sharp

TAB LEI. Maior Tobacco Importing and Exporting

Countries, 1950

IMPORTERS EXPORTERS
AI\IQUNT AMOUNT
( 1,000 METRIC (1,000 I\!ETRIC
COUNTRY TONS) COUNTRY TONS)

United Kingdom United States

Germany Turkey
United States India
Netherlands Southern Rhodesia
Spain Brazil
Belgium-Luxembourg Greece
France Dominican Republic
Denmark Indonesia
Philippines Cuba
Egypt Canada 12

SOURCE: USDA statistics.

upward trend of consumption of cigarettes. The general breakdown in

world trade during the depression of the 1930's and the war that followed
also affected the tobacco trade. Just how much influence the tobacco sup-
port programs have had on the volume of exports is an open question. It
seems likely, however, that some areas in other countries which are now
producing tobacco might not be doing so if the price of American tobacco
had not been protected.

:MAJOR MARKETING PROBLEM AREAS

The tobacco marketing system provides a means whereby even the
smallest tobacco farmer can sell a semiperishable product quickly. Pay-
ment is prompt and assembly costs are low relative to some other farm
products. In most production areas, the grower has a choice of several sales
warehouses and in many cases he can choose between two or more markets.
The nature of the market makes it possible for farmers to deal directly with
representatives of manufacturers. Yet problems exist in marketing tobacco
under the present system. Some of these problems may be summarized
as follows:
1. Price5 vary on the same market for tobaccos of identical federal grades.
8 Production tonnage is on a farm sale weight basis and exports on a declared
'"eight basis. Exports on a farm sale weight would be 10 to 12 percent greater than on
the declared weight basis.
 MARKETING OF AGRICULTURAL PRODUCTS

Indeed, the same basket of tobacco sold on a given market may bring
different prices if the -bid is refused and the tobacco sold again in a
different location on the warehouse floor. An extreme case is that of a
farmer who sold the same basket of tobacco ten times at prices ranging
from 8 to 28 cents per pound.9 Variations in prices of identical tobacco
or of tobacco of the same federal grade may arise from the follow-
ing causes:
(a) Inability of buyers to accurately determine grade. This may arise
from crowded warehouse conditions and rapidity of sales which
prevent proper inspection of the tobacco by all buyers. Lighting
conditions (location of skylights and amount of sunlight) may
prevent accurate quality determination. Variations in price of the
same federal grades of tobacco could be due to the fact that federal
grades and buyer grades are determined by different criteria. And
some variation may arise from the inherently subjective nature of
grade determination.
(b) Tobacco is sold by many small producers and purchased by a
relatively sma11 number of large manufacturers. This fact has been
used to argue that the individual farmer has little or no bargaining
power and must accept the price offered by the buyer. The federal
government has investigated the tobacco manufacturing industry
to determine whether or not there existed violations of the Sherman
Anti-Trust Act. Several leading tobacco manufacturers were con-
victed in federal courts as possessing power to exclude competition.
(c) Tobacco is a semiperishable product which is difficult or imprac-
ticable to store on the farm for more than a few months. Thus, the
bargaining position of the farmer is further impaired since he can-
not withhold his product from the market in anticipation of higher
prices. However, the price support program of the federal govern-
ment has greatly increased the bargaining power of farmers.
2. It is claimed that tobacco marketing costs are excessive because many
warehouses operate at considerably less than their capacity.10 This con-
dition also results in a shorter marketing season which may be to the
disadvantage of the farmer in curing and preparing his crop for market.
The short market season is said to be particularly disadvantageous in
the Georgia belt. It must be remembered, however, that a certain
9 J. J. \\Tooten, Jr., The Plight of the Cigarette Industry of North Carolina (Chapel
Hill University of North Carolina Press, 1931)'
10 See P. D. Conycrse, "Tobacco Auctions Evaluated," Journal of Business, Uni-

versity of Chicago, July, 1943.

 Tobacco Marketing 321

amount of duplication of services and "inefficitnt use of facilities" is a

cost of maintaining effective competition between warehouses.
3. Lack of knowledge of grades by farmers poses a problem. Farmers may
find it difficult to determine what grade classifications are desired by
buyers. Buyers apparently wish to buy tobaccos of certain qualities for
their various blends. Thus, buyer standards and federal grades are
determined by different criteria which tend to confuse rather than assist
the producer's knowledge of grades. Also, some farmers are not inter-
ested in or are not aware of advantages secured from proper grading.
4. Small lots in which tobacco is handled make for excessive marketing
costs. Small producers with a few acres of tobacco may have only several
hundred pounds of tobacco of the same grade. Instead of selling in one
lot, it is sold in several smaller lots. Much labor is required to handle
these small lots.
SELECTED REFERENCES
Austin, R. C., "Governmcnt Programs in Tobacco," Journal of Farm Eco-
nomics, Novcmber Proceedings, 1950.
Barner, J. C., The Production of Tobacco, 2nd ed. (Philadelphia, Blakiston,
195 1 ).
Flue-Cured Tobacco--An Economic Survey, Research Department, Federal Re-
serve Bank of Richmond, Virginia, 1952.
Gottsegen, J. J., Tobacco, A Study of Consumption in the United States (New
York, Putnam, 1940).
:Howe1l, L. D., and \V. P. Young, Marketing and Manufacturing Margins for
Tobacco, USDA Tcchnical Bulletin 91 3, 1946.
Jackson, E. L., "Trends in the Consumption of Tobacco Products," United
States, 19°0-1950, Journal of Farm Economics, November Proceedings, 1950.
Parr, K., "Marketing Margins for Cigarettes," USDA, Bureau of Agricultural
Economics, Marketing and Transportation Situation, January, 1953.
Robert, J. C., The Story of Tobacco in America (Ncw York, Knopf, 1949).
Tennant, R. B., The American Cigarette Industry (New Haven, Yale University
Press, 1950).
CHAPTER TVJENTY-ONE

'The Place and Problems of

Agricultural Cooperatives

Agricultural history is full of examples of the continuing battle of the

farmer against the abuses, either real or imaginary, of the marketing
"middleman." The farmer has continually complained about having to "sell
cheap" as a producer and "buy high" as a consumer. Cooperative organi-
zation is one of the answers to these problems which has been proposed
by farmers.
:rVIutual action by farmers to help solve large tasks have long been a
part of agricultural life. Bam raisings, husking bees, and threshing rings
all required that many act together with a common purpose. Cooperative
enterprises of today are similar in nature but have been established as
formal business organizations.
:l\lost cooperatives in the United States are among farmers. They are
often called the "off-farm arm" of farmers. They have been organized to
provide a wide variety of services, to help sell the farmer's products, and to
help farmers purchase their needed goods. :Many cooperative leaders look
upon cooperation as a way by which the multitudinous, independent, small
farm units can effectively compete in a business world which is composed
of larger, more powerful units. It is the organization and operation of these
cooperatives as they have developed in our competitive business structure
that we shall examine in this chapter.

WHAT IS A COOPERATIVE?
Distinctive Characteristics of American Cooperatives
Almost an cooperative leaders of both past and present have had their
pet conception of what constituted a good definition of a cooperative.
322
 The Place and Problems of Agricultural Cooperatives 32 3
H. E. Babcock, an eastern cooperative leader, phrased it weB when he said
that cooperatives are a legal, practical means by which a group of self-
selected, selfish capitalists seek to improve their individual economic posi-
tion in a competitive society. Several aspects of this definition deserve
attention. First, a cooperative is a device which permits group action
for the economic gain of the individual members. Secondly, it is an active
part of our competitive business framework. And thirdly, the cooperative
is an institution whose characteristics are formalized in the laws of the land
as one of the legal forms of business organization.
TIle so-called Rochdale principles are generally conceded to be the
cornerstone of the modern cooperative structure. This list of practices
received its name from the group of weavers of Rochdale, England, who
are credited with founding one of the first successful cooperative businesses
with the opening of a store in 1844- These principles of cooperative opera-
tion as developed by the Rochdale pioneers are usually listed as follows:
(1) open membership, (2) democratic control, (3) dividends on the basis
of purchase, (4) limited returns on capital, (5) political and religious
neutrality, (6) cash trading, and (7) promotion of member education.
Much of the intent of these operating principles has been incorporated
into the body of law which sanctions American cooperation. The legal
definition of what constitutes a cooperative has gradually evolved through
the passage of laws by the different states. The passage of the Capper-
Volstead Act by Congress in 1922 helped codify this legal concept of agri-
cultural cooperation, though even today the details of laws vary among the
several states. l
It is from the Rochdale and post-Rochdale experience that the basic
concepts of modern cooperative business organization have been developed.
There are three fundamental concepts which help differentiate a cooperative
from other forms of business enterprises. These concepts must be incor-
porated in the organizational and operating pattern of an enterprise in
order for it to qualify as a cooperative.
The first of these distinctive concepts is that the ownership and control
of the enterprise must be by those who utilize its services.2 The control is
exercised by the owners as the patrons of the business rather than by the
O\vners as investors in the business. In no other form of business enterprise
is there a comparable patron-owner relationship. Such a relationship means

1 For a brief review of the continuous changes in the legal provisions, see R. L. Kohls

and R. Biais, "Trends in Legislation of Incorporation of Agricultural Cooperatives,"

Indiana Circular, 1951.
2 For further development of this very useful framework, see Harold Hedges,
"t-.latching Cooperative Principles with Present·Day Practices," American Cooperation
(American Institute of Cooperation, 'Vashington, D. C., 195 1 ), pp. 69-73.
 MARKETING OF AGRICULTURAL PRODUCTS

that the primary objective of the cooperative enterprise is to do the job

assigned to it at a minimum of cost and with maximum satisfaction for
its owner-patrons. In contrast, the primary objective of nonpatron firms is
to maximize returns over costs for the benefit of the owner-investors. In
order to assure the effectiveness of this concept, often some provision is
made in the by-laws of cooperatives to limit the amount of business which
can be done with nonmembers.
Another distinctive cooperative concept is that the business operations
shall be conducted so as to approach a cost basis and any returns above
cost shall be returned to patrons on an equitable basis. From this concept
arises the common practice of referring to cooperatives as nonprofit business
concerns. The patronage refund of cooperatives is the device used to return
to the owner-patrons the overcharges or underpayments which have resulted
in earnings above cost. In noncooperative businesses, earnings or profits
belong to the business for distribution or use as the business sees fit. In
cooperatives, such earnings are a liability which is owed to the patron-
owners.
The third distinctive cooperative concept is that the return on the
owner's invested capital shall be limited. The capital requirements of a
cooperative may be no different from that of any other type of business
organization engaged in similar activities. However, the relationship of
the investor to the business is quite different. In a cooperative the patron-
owner invests his money primarily so that the organization may provide
desired services for him. His decision to enter or remain as a part-owner
of the cooperative is made largely on the basis of his opportunity to benefit
as a patron-user. In noncooperative forms of business, investors offer their
money in expectation of a profitable return on their invested capital. The
need for capital may be as urgent for a cooperative, but the methods of
capital accumulation must acknowledge the fact that returns on the capital
are limited.
These distinctive differences give rise to several operational differences
between cooperative corporations and noncooperative corporations. These
may be summarized as in Table 1.
Kinds of Cooperative Business
Cooperative associations, like other business organizations, are estab-
lished to perform certain tasks. \Vhen classified according to the tasks per-
formed, cooperatives fall into four broad categories-marketing, purchasing,
service, and processing associations.
MAR K E TIN G COO PER A T I V E s lvIarketing cooperatives are those
through which farmers sell the products of their farms. These cooperatives
 The Place and Problems of Agricultural Cooperatives 32 5
TAB LEI. Similarities and Differences of Three Types of Business
Organizations

INDIVIDUAL OR NONCOOPERATIVE COOPERATIVE

CONDITION PA R TNERSHIP CORPORATION CORPORATIO:-!

Operated for profit Yes Yes Yes

motive?
How are earnings dis- To owners or To owners on basis Largely to patrons on
tributed? partners of shareholdings patronage basis
\Vho controls the Individuals or Board of Directors Board of Directors
firm, selects manager, partners elected by stock- elected by patron-
etc. holders owners
How is voting done? None or by Usually 1 vote for Usually 1 member, 1
agreement each share of stock vote
\Vhat is owners' lia- All property of Assets of corporation Assets of cooperatiYe
bility? owners
\Vith whom IS the Public Public Chiefly members but
business conducted? often others also

may collect members' products for sale, grade, package, and perform other
functions. Cooperative livestock commission organizations, producers' milk
associations, and cooperative elevators are examples of the cooperatives act-
ing as marketing cooperatives. The objective of such organizations is to
secure the greatest possible amount for the products of their farmer-owners.
Some associations act solely as commission agents. Some associations act as
bargaining agents and do not actually handle the products. Others will
actually buy the commodity from the farmer for resale.
Marketing cooperatives of various types handle approximately 20 per-
cent of all farm commodities sold. The proportion of commodities which
is marketed cooperatively varies from commodity to commodity, as can be
seen by studying Table 2. Some of the marketing cooperatives are large and

TAB L E 2. Percentage of Selected Products -Which \Vere

I'vIarketed Cooperatively, 1945-48

PERCENT PERCENT
PRODUCT OF TOTAL PRODUCT OF TOTAL

Citrus fruits 60 \Vhcat 35

r.!ilk 25 Poultry and eggs 10
Cotton 10 Cranberries 75
Liycstock 20 Citrus juices 30
Wool 35 Butter 35
Rice 25

SOURCE: Indiana Farm Bureau Co-op Bulletin, Co-ops, \"I'lhat They Are and How
They Work, p. 6. .
 MARKETING OF AGRICULTURAL PRODUCTS

powerful organizations. The role of some of these associations in carrying

out marketing orders and agreements has been discussed previously. IVlany
of the common branded products such as Sunkist oranges, Sun-Maid raisins,
Sun-Sweet prunes, Eatmor cranberries, and Diamond Brand walnuts are
products of cooperative associations.
PUR C HAS I N G COO PER A T I V E S Purchasing cooperatives are those
through which members buy the supplies they need. The farmer here
reaches back toward the raw material source for his supply. Purchasing
cooperatives often engage only in retailing and wholesaling. In other in-
stances, they manufacture the products they sen and acquire the sources
of raw materials. Ivlost states have large state-wide associations which are
examples of this type of cooperative. The objective of such organizations is
to effect savings for the farmer on the things he buys. The principal source
of such savings usually will come from lower prices or from higher quality
and better adapted supplies and equipment.
The sale of various farm supplies accounts for most of the business
volume of these cooperatives, although increasing amounts of items for
farm household use are being handled. Table 3 shows how the nearly
2 billion dollars of sales to farmers of these cooperatives in 1951-1952
were apportioned.

TAB L E 3. Importance of Various I terns Sold Through Local and

Large-Scale Purchasing Cooperatives, 1951-52

ITEM PERCENT OF SALES

Feed 42
Petroleum products 22
Fertilizer 10
Field seeds 5
Fann machinery 4
Building materials 2
~leats, groceries, etc.
Other

SOURCE: Fanner Cooperative Service General Report 2, Statistics of Farmer's Market·

ing Purchasing and Service Cooperatiws, 1951-52, p. 20.

S E R VIC E COO PER A T I V E S Service cooperatives are organized to

provide their members with improved services or with services they could
not otheIWise obtain. The service undertaken may include credit, insurance,
electric power, telephone, irrigation and drainage, hospitals, and mortuaries.
Membership may be of rural or urban people or a combination of the two.
The Production Credit Associations and the Rural Electric AssQciations
 The Place and Problems of Agricultural Cooperatives 32 7

are examples of this type of cooperative. The principal source of savings

from such association occurs largely because the peculiar needs of the
farmer members can be better served.
PRO C E S SIN G COO PER A T I V E S The processing cooperative is or-
ganized to engage in the packing or processing of the farmer's products.
Cheese and butter manufacturing, fruit packing, and vegetable canning
associations are examples of this type of cooperative. In a great many
instances the processing activities are part of the over-all activities of
marketing cooperatives. It is common, for example, for cooperative cheese
manufacturing associations to undertake also the marketing service of
wholesaling the finished product. This is another way in which farmers,
through the integration of processing and marketing made possible by
their cooperative associations, attempt to extend control over their products
as they move into consumption. The number and membership of these
kinds of associations are shown in Table 4.

Ii TAB L E 4. Number and Membership of Various Kinds of

iI i Farmer's Cooperatives
Ij
YEAR OR DATE ESTIMATED
TYPE OF DATA ASSOCIATIONS MEMBERSHIP

r.larketing (including processing) 195 1-5 2 6,582 4,228,556

Purchasing 195 1-5 2 3,3 28 3,°3 2 ,54 1
Service:
National farm loan associations Jan., 1953 1,164 312,000
Production credit associations Jan., 1953 499 477,000
Banks for cooperatives Jan., 1953 13 3,168,000
Rural credit unions June, 1953 108 24, 10 3
Farmers' mutual fire insurance
companies 195 2 1,800 3,500,000
Mutual telephone companies 1937 32 ,879 669,344
Rural electric cooperatives June, 1953 9 08 3,753,372.
l\!utual irrigation companies 195° 9,374 14 8,49 6
Dairy·herd improvement associations Jan., 1953 2,15 1 4°,993
Dairy-cattle artificial breeding
associations Jan., 1953 1,62 3 57 1 ,9 21
Others 195° 562 126,113

SOU:\CE: Farmer Cooperative Service, USDA, General Report 2.

Type of Cooperative Organization 3

Cooperatives can also be classified on the basis of membership affilia-
tion and control. From this viewpoint, cooperatives are usually grouped as
3 For a description of different cooperatives which are examples of these various
types of associations see the following publications of the USDA Farm Credit Adminis-
tratiow J. H. Heckman and G. H. Goldsborough, Cooperative Marketing of Apples in
 MARKETING OF AGRICULTURAL PRODUCTS

independent local associati9ns, federated associations, centralized associa-

tions, or a combination of the other types of organization.
IN D E P E:r-. DEW T L 0 CAL The simplest type of
ASS 0 C I A T ION S
cooperative is the independent local association in which people hold
direct membership and are able to participate in the affairs of the coopera-
tive. The relatively small area of coverage and number of people involved
mean that the opinion and action of each member can have influence.
Because of the size limitMion, however, such cooperatives are often limited
in what they can do. These local cooperatives often join to form larger
organizations to conduct mass marketing, purchasing, or manufacturing
operations.
FED ERA TED ASS 0 C I A T ION S The federated association is one
\vhich is composed of several local associations which operate together as
an integrated unit. Farmers are members of the local association, and the
local is a member of the over-all association. Usually the motive for band-
ing together is to secure greater business power and efficiency. In such an
association, the basic channel of control is from the local up to the over-all
organization. The local associations have a considerable degree of auton-
omy, and any powers which are not expressly granted to the central or-
. ganization are retained by the locals. Savings made from the operations of
the over-all association are allocated back to the member local associations.
The local then adds these to whatever savings have accrued from its own
operations, and this total amount is then distributed to the patron members.
CE N T RAL r ZED coo PER A T I V E ASS 0 C I A T ION S Centralized
cooperatives are those in which the patron is a direct member of the central
organization and exercises control through delegates sent from the different
areas to the regional's annual meeting. The central organization in turn
controls the local branch cooperatives which serve the members. This plan
has the advantages of centralized control which makes possible prompt and
uniform action by all the local outlets. But is lacks the direct membership
participation possible in federated cooperatives. The central association
itself is dominant and delegates certain powers to the locals. In such an
association the local units have a very limited amount of autonomy. Savings
are distributed directly from the central association to the members.
M I XED ASS 0 C I A T ION S Most large cooperative organizations today
are neither totally centralized nor totally federated but rather a mixture of

the United States, Bulletin 55, 1948; H. C. Hensley, Marketing Policies of the California
Prune and Apricot Growers Association, Circular C·l F, 1948; K. B. Gardner and
A. \v. :t\IcKay, The California Fruit Growers Exchange System, Circular C-135, 1950.
 The Place and Problems of Agricultural Cooperatives 32 9

the two. Often associations which were fundamentally federated in nature

undertake new operations which are organized on a centralized basis.
Through stronger bargaining power or other methods, the over-all associa-
tion may essentially gain control of the member local cooperatives. On the
other hand, cooperatives which were originally organized on a centralized
basis find it practicable to establish at the local level a committee of farmers
to suggest operating procedures for the local units. Theoretically, these
committees do not have any absolute authority, but often in practice they
control the policies of the local units.
lVIost states have state-wide organizations combining both the market-
ing and purchasing operations. These state associations often, in tum,
combine into regional and national associations. This may be done in
order either to operate manufacturing enterprises or to enhance bargaining
power with noncooperative manufacturing concerns. In some instances, the
regional or national associations may acquire raw materials for their manu-
facturing enterprises. Savings made from the operations of these regional
and national associations are apportioned among their member state asso-
ciations. The way in which the state associations handle these savings is
dependent upon their individual type of organization.

HISTORY AND PRESENT STATUS OF'

AMERICAN COOPERATION4
Edrly Development
Many, looking at cooperation in a broader social sense, like to say that
cooperation has existed since the first two men discovered that by working
together work could be accomplished more efficiently. This type of ap-
'proach contributes little to the understanding of the development of co-
operation as a method of doing business.
Cooperative enterprises have been undertaken in a disorganized fashion
in this country since the early colonial days, Throughout the nineteenth
century, organized cooperative businesses in most commodity lines were
attempted. Cooperation among farm groups as a method of presenting
their opinions to the public and the government developed largely in the
period of agricultural distress following the Civil \Var.

The Active Period-191D-1925

Slart;ng after the turn of the century more serious attention was given
to the urganization of all kinds of cooperative business. The movement

4 For a more complete history of cooperative development, sec H. H. B~kken and

M. A. Schaars, Economics of Cooperative Marketing (New York, McGraw-Hill, 1937)'
 MARKETING OF AGRICULTURAL PRODUCTS

gained momentum during \Vorld \Var I and reached its peak in the
postwar depression of the early 1920'S. The number of marketing and
purchasing cooperatives doubled in the ten-year period 1915-1924 (see
Figure 1).
Several factors favored the cxpansion of cooperation in this period.
First, rapidly falling prices in the immcdiate post-\Vorld-\Var-I period led
many cooperatives to be organized to stabilize or raise prices. Aaron
Sapiro, an early proponent of using cooperation to fix prices is credited

Number Membe~
(1000) (Millions)
~--------------------~

4
2
o~~_.~~~~~~~~

o 1915 '20 '25 '30 '35 '40 '45 'SO 1915 '20 '25 '30 '35 ~O ~5 '50
NUMBER OF ASSOCIATIONS MEMBERSHIP
*data unavailable

FIG U REI, The number and membership of marheting and pur-

chasing associations by 5-year periods, 1915-1950.
(Source: USDA, Farm Credit Administration.)

with explaining his position in an Indianapolis, Indiana, speech in 1924 as

follows: "We don't say that the purpose of cooperative marketing is to
introduce any economy in the physical handling of grain because we
believe that particular point is too trifling to bother with, \\Then we talk
cooperative marketing, we say that we are interested in raising the basic
level of the price of wheat."
Also, there were loud complaints that private supplicrs of necessary
farm supplies, such as fertilizer and feeds, were taking exorbitant margins,
Farmers further complained bitterly that the middlemen of the market
were not interested in improving either quality or service. There was just
enough truth in many of these complaints that Congress, through the
passage of the Capper-Volstead Act in 1922, gave official sanction to
cooperatives as a way of "self-help" and as a way of restoring and main-
 The Place and Problems of Agricultural Cooperatives 33 1
taining reasonable competition in the marketing and purchasing of agri-
cultural products and supplies. 5

The Consolidation Period-1 92 5-1940

In the flush of early enthusiasm it was inevitable that many coopera-
tives would be started which were unsound in their business structure.
Also, it was soon evident that cooperation could not be depended upon
to stabilize general price fluctuations and automatically cure the many ills
of the general economic situation. These things, plus the depression of the
1930 's, contributed to the short life of many cooperatives.
In order to gain economic strength, many smal1 independent coopera-
tives consolidated into the large federated associations. The numbers and
membership of all cooperatives tended downward throughout most of this
period. However, this decrease was largely due to the decline in numbers
of marketing cooperatives. Purchasing cooperatives continued to grow both
in numbers and membership (Figure 1).

The Period of Economic Growth-194O-?

The number of cooperative associations has nearly stabilized in recent
years. Marketing associations have declined slightly while purchasing asso-
ciations have increased slightly. However, membership in both kinds of
associations has greatly increased. The volume of business, even after
changes in the price level have been considered, has grown rapidly.
The growth in the volume handled by marketing cooperatives has
been due, in part, to the increase in agricultural production. The continued
growth in the purchasing associations probably can be partially attributed
to the changing nature of the farm business. More and more of the
farmer's production items must be purchased off the farm. In recent years
many of the larger associations have taken their place in the ranks of the
nation's largest businesses. For example, the nation's largest cooperative,
the Grange League Federation Exchange, which operates both supply and
marketing installations, did approximately 162 million dollars' worth of
business in 1952.6
In 1950, of the about 10,000 marketing and purchasing associations,
69 percent were classified as marketing associations and 31 percent as pur-
5 Many readable stories of the carly problems and efforts of cooperatives to solve
them are ~\'ailable in the histories of many cooperative associations. Illustrative of these
are: K. n. Ruble, l\.Jen to Remember (Chicago, Donnelley and Sons, 1947); O. 1\1. Kyle,
The Farm Bureau Through Three Decades (Baltimore, \Vaverly Press, 1948).
o l\L A. Abrahamsen and J. L. Scearce, Handbook on Maior Regional Farm Supply
Purchasing Cooperatives, Farm Credit Administration, USDA Misc. Report 172.
 :MARKETING OF AGRICULTURAL PRODUCTS

chasing associations. About four-fifths of the total dollar volume of business

was done by the marketing associations and about one-fifth by the pur-
chasing associations.
Cooperation has expanded into many new fields during the last twenty
years. The depression years of the 1930'S gave impetus to governmental
sponsorship of both credit and electrification cooperatives. The Production
Credit Associations, the National Farm Loan J\ssociations, and the Rural
Electric Associations were originally established during this period. In
recent years, the government has also extended aid to the formation of
rural telephone associations. Then, too, there has been an expansion in in·
surance cooperatives, irrigation cooperatives, and other miscellaneous asso-
ciations to perform special services for rural areas.

Cooperation by Regions and Commodities

The prerequisite for successful cooperative business ventures is large
production volume. Chiefly for this reason, the principal area of commercial
agriculture, the North Central states, is the region which accounts for
over haH of the cooperative business of the country (see Figure 2). Exten-

West North Central 127.4

East North Centra I 126.0
Pacinc 112.6
Middle Atlantic 19.7
West South Central 17.3
South Atlantic 16.0
Mountain 14.9
New England 0 3.2
East South Central
i=J 2.9, , I I I

o 5 10 15 20 25 30
Percent of Total Business
FIG U R E 2. Regional distribution of total business done by
marketing and purchasing associations, 1949-
1950. (Source: USDA, Farm Credit Adminis-
tration.)

sive cooperation is very difficult in low-producing, noncommercial agricul-

tural areas.
Similarly, successful commodity cooperation also rests to a consider-
able extent on the nature of production. Continuous, large volume produc-
 The Place and Problems of Agricultural Cooperatives 333
tion by specialized farm units favors large-scale cooperation much more
than scattered production by nonspecialized farm units. For example, it has
been found that the favorable attitude of members of dairy cooperatives
increased as the size of the dairy herd increased.7 The relative importance
of c~lOperative business done in various farm products is shown in Figure 3.

Dairy Products - 123.3

Grains (incl. rice ) 122.4
Livestock 114.8
Fruits. Vegetables 19.0
Cotton and Products 14.5
Poultry Products t=J3.3
Tobacco P1.3
Miscellaneous t=J3.9
Purchasing Assoc .J18.8
I

o 510 15 20 25 30
Percent of Total Business
FIG U R E 3. Distribution of total business done by market-
ing and purchasing associations by commodities,
1949-195°. (Source: USDA, Farm Credit Ad-
ministration.)

WHAT MAKES FOR A SUCCESSFUL

COOPERATIVE ASSOCIATION?
Criteria for Long-Run Success
In a broad sense, a cooperative, if it is to be more than a passing fancy,
must accomplish one, two, or all of the fonowing three things:

1. Increase the returns from sales of products of its members, and/or

:. Reduce the price or improve the quality of the purchases of its members,
and/or
3. Render new or improved service or give more equitable treatment to its
members.

All of the above add up to the improvement of the economic well-

being of the individual members. Many studies have shown that whatever
other bencfits there may be from cooperation, the economic one is of the
7 M. E. John, Factors Influencing Farmers' Attitude Toward a Cooperative Market-
;r g Organization, Pennsylvania Bulletin 457, 1943.
334 MARKETING OF AGRICULTURAL PRODUCTS

foremost importance. One -study asked the farmers what they considered
to be the main advantage of cooperatives. Sixty-three percent of the mem-
bers answered lower costs, high returns, and refunds. s
It is not enough to do a job as well as it was done by other agencies.
The cooperative must do it better. A good cooperative should be the pace-
setter for the industry with which it is associated. Only under these cir-
cumstances is the creation of an additional market agency justified.
There are things which even a successful cooperative cannot do for its
members. A clear understanding of these limitations is necessary for suc-
cessful operation. The cooperative should recognize that it cannot "set"
prices unless it has monopolistic control of the supply.9 This means that it
cannot "guarantee cost of production" to its members. Cooperative asso-
ciations cannot eliminate the marketing functions performed by other
middlemen. Neither can they successfully, for any period of time, coerce
their members against their will into trading with the association. Coopera-
tives are circumscribed by the same set of economic restrictions as any
other form of business organization. As has been emphasized before, their
success depends not upon their uniqueness, but rather upon their business
ability to operate profitably and satisfy their patron-owners.

Establishment of a Successful Cooperative

The fundamental premise guiding the establishment of a successful
cooperative association is that there be an economic need for such a new
venture. There must be the opportunity to do a buying or selling job
better than it is being done. This can take the form of more advantageous
prices or better-quality products and service. To establish whether there is
such a need which can be met by a cooperative must be determined by an
assembly and objective study of the existing facts. Far too many coopera-
tives have been wished into existence only to fail when it was discovered
there was no real additional service which they could perform.
After the need has been established, it must be ascertained whether
the factors necessary for a successful business operation are available.
These factors are fundamentally the same as for any other business under-
taking. They can be listed as embracing the following questions:
a Social Research Service of Michigan State College, Co-ops as the Farmer Sees
Them, Report given at 1947 annual meeting of Michigan Association of Farmers' Co-
operatives.
9 An extreme example of the attempt and failure of a cooperative to control price

monopolistically by controlling production was the Burley Tobacco Society in the early
1900'S. Physical force in the form of "Night Riders" was used to coerce growers into
reducing production. \Vithin a short time, however, the attraction of higher prices soon
caused the control scheme to fail. See E. F. Dummeier and R. B. Heflebower, Economics
with Application to Agriculture, :md ed. (New York, McGraw-Hill, 1940), pp. 264-:66.
 The Place and Problems of Agricultural Cooperatives 335
1. Can an adequate volume be secured and maintained? The economies
of large-scale operation are just as important to cooperatives as to
private corporations.
2. Can adequate and reasonable financing be secured? To build an efficient
plant takes capital-to build less than an efficient plant invites failure.
3. Is efficient management available and will the association pay its
price? In management, as in other things, high quality demands a high
price. Successful cooperatives need as high a level of managerial ability
as other businesses.
4. Is the membership prepared to meet competitive trouble? Especially
in the initial stages, competitive conditions usually get worse rather than
better. A new cooperative can usually expect that the rest of the business
community will unite against it during the early period of its existence.
The reasons why cooperatives fail point up the importance of these
factors. One study of failure problems listed difficulties in the field of man-
agement and membership relations as accounting for nearly two-fifths of
the failures. Insufficient business volume and financing troubles accounted
for another one-fifth of the failures! 10 In all likelihood, those cooperatives
which failed because of "membership difficulties" really were having mem-
bership troubles because the association was not operating profitably or
because the membership was not prepared to face the facts of business life.

PROBLEMS OF MODERN COOPERATION

Size and Growth
Paradoxically enough, the maturing of American cooperation in the
sense of its attaining considerable size and economic power has presented
some thorny problems. Many of the early cooperative principles seem to be
easier to apply to small units than to the large cooperative aggregates of
today.
Close control by the membership was one of the more important
premises of early cooperation. As cooperatives have grown into large cen-
tralized and federated associations engaging in multiple kinds of operations,
effective control by the members has become increasingly difficult. Students
of the modern corporation are concerned with the growing ability of cor-
porate management to perpetuate itself. In large cooperatives, the same
prob1em exists. The one-man, one-vote provision, which was originally
considered as the method of securing democratic control, is no longer a
guarantee of member-owner control. Size has resulted in the breakdown of
10 R. 'V. Miller and A. L. Jensen, "Failures of Farmers' Cooperatives," Harvard
I3usiness Review, Vol. XXV, NO.2, 1947, p. 213. This article also presents an interesting
approach to the factors of cooperative success.
 MARKETING OF AGRICULTURAL PRODUCTS

the memberships into districts or units which elect delegates who elect
board members. In many instances, the one-man, one-vote idea has been set
aside in favor of cumulative voting on the basis of business volume. Once
a director is selected, the tendency is for him to serve until he resigns or
dies. One study found a direct relationship between the age of the director
and the length of years of service in his post. Only 13 percent of the direc-
tors of 174 cooperatives were under forty years of age. Nearly 90 percent
of the directors and managers who were contacted admitted that they could
influence the election of new directors.ll
Growth in size and economic power also has made further expansion
of existing cooperatives easier. New ventures do not have to be scrutinized
as carefully to ascertain whether the cooperative effort is needed. Accumu-
lation of large financial reserves makes it possible for associations to carry
on unneeded ventures for long periods of time. This situation may not be
compatible with the goal of increased efficiency of the marketing machinery.
The question of how far the cooperative should expand its operations
needs close study. Eventually, the question of the relationship of farm and
consumer cooperatives must be faced. On the surface at least the aims of
these two kinds of cooperatives are quite different. The consumer coopera-
tive strives to obtain goods at lowest cost; the farmers' marketing coopera-
tive aims to sell its products for as much as possible.

Financing
As stated previously, cooperatives require the same amount of capital
as noncooperatives in performing similar functions. But with limitations
placed on voting rights, share transferability, and the returns paid on
invested capital, cooperatives cannot utilize the noncooperative method
of selling additional shares to the investing public in order to secure addi-
tional funds.
Vlhen cooperative enterprises were relatively simple, only limited
amounts of capital were needed. However, the desire of cooperatives to
expand has focused attention on the techniques of securing growth capita1.
In general, cooperatives have relied on members to provide much of the
financing needed, although other sources also have been used occa-
sionally.
Membership fees are the source of capital in some cooperatives. Non-
stock cooperatives of this kind are called membership cooperatives and do
not have stock outstanding. In addition to membership fees, some coopera-
11 o. R. Ray, Selection and Responsibilities of Indiana Coopcratire Directors, un-
published 1\I.S. thesis, Purdue Unh·crsity, 1953.
 The Place and Problems of Agricultural Cooperatives 337
tives also use other methods such as selling certificates of indebtedness as
a means of financing operations. Such certificates are a method of borrow-
II ing money from members and othersP
In the early years, earnings were returned to patrons in the form of
I'
cash refunds. l'vIany cooperatives have abandoned this in the process of
!
growth. Savings are now often returned in the form of stock refunds instead
of cash. This procedure permits the retention of earnings above cost within
the association itself to use as it sees fit.
The stock refund plan has the advantage of spreading the financial
burden. Under this plan each patron of the cooperative becomes a part
I:
owner upon receipt of his stock. Since the refund is based on the amount
of business done with a cooperative, ownership is divided in direct propor-
tion to the use each patron makes of the store or business. The methods
under which a member may withdraw his investment from a cooperative
will vary from one association to another. Generally, in case a member
ceases to be a farmer or moves out of the trade area, his investment is
returned. If a member dies, his investment is usually returned to the estate.
Usually the member also may sell his stock to any buyer subject to
approval of the cooperative directors or hold his stock until it is redeemed
by the cooperative. Some cooperatives have a fixed time for redeeming
stock; others do not. If the cooperative has a policy of redeeming its stock
after a fixed time, this is generally referred to as a revolving fund.
Though a continuous stock refund program is a relatively easy and
cheap method of capital accumulation from the standpoint of the man-
agement, there is reason to believe that membership relations start to
deteriorate under it. Such a policy also may encourage the management
to follow a vigorous competitive price policy so that greater savings can
be accumulated for further growth.
The sale of additional common or preferred stock provides capital for
some cooperatives. The market for this stock will be limited mainly to
cooperative members. Common stock has voting rights, usually one vote
per member, but no guaranteed dividend. Nonmembers may hold common
stock but they may not vote. Most cooperatives also sell preferred stock
and sometimes bonds. These carry a fixed dividend or interest rate and
will attract investors other than cooperative members. Preferred stock can
be cumulative or noncumulative but usually carries no voting rights.
In practice, cooperatives secure capital by a combination of these
methods. Part of the problem is that of adequate financing. Of great im-
12 For a more complete discussion of this and other techniques see Bakken and

Schaars, op. cit., pp. 393-429.

 MARKETING OF AGRICULTURAL PRODUCTS

portance, however, is a financing plan which wi11 not destroy the essential1y
cooperative nature of the enterprise.

Management
Three groups of people are involved in the management of a coopera-
tive-the members, the board of directors, and the hired manager. The
members exercise their control through their elected directors. The directors
have the responsibility of formulating general operating policies and of
obtaining a manager to carry out these policies and report the results to
the members. The manager is charged with the operating responsibility of
the cooperative enterprise. He puts into actual practice the policies bid
down by the board.
Problems in cooperative management are essential1y the same as in
other enterprises. Boards of directors cannot manage the details of a going
business effectively. The manager must be competent and have the con-
fidence of his board. On the other hand, boards cannot surrender their
duties and become puppets of the manager and yet fulfi11 their responsi-
bilities to the membership.

Membership Relations
The nature of cooperative business makes it imperative that good
relationships be maintained between the members and their association.
In many ways this is more important to cooperatives than stockholder rela-
tions are to noncooperative corporations. A stockholder's relationship to
the corporation is that of an investor, and when he is dissatisfied with the
returns he may dispose of his stock through sales to anyone else who will
buy it. i\{embers of a cooperative, however, are at the same time both
owner-investors and owner-users of the business itself. They cannot as
readily divorce themselves from the responsibility of the business by selling
their stockholdings.
Many of the problems of membership relations are fundamentally
by-products of the increased size and complexity of the associations. In
large associations, the feeling upon the part of members of "the co-op"
instead of "my co-op" becomes prevalent. In a great many instances only
a very small minority of the member-owners take an active interest in the
problems and management of their association.
A good member is an informed member. Farmers who support co-
operatives are those who know what cooperatives have done and what they
can and cannot do. 13 The really successful cooperatives rank this task of
13 J. K. Stem and A. F. Dam, Farmer's Support of Cooperatives, Pennsrlvania
Bulletin, 1948. .. .
 The Place and Problems of Agricultural Cooperatives 339
keeping an informed and participating membership high on their list of
problems. 14
Relations with the General Public
In the early years, with few exceptions, the general public was disposed
favorably toward cooperation. This attitude took concrete form in the
passage of legislation favorable to cooperatives by both the state and federal
governments. The Capper-Volstead Act, while not exempting cooperatives
from antitrust prosecution, for all practical purposes made prosecution
improbable. The federal government provided public funds for the Farm
Credit Administration to aid cooperation with research and other services.
It has actively participated in the formation of some cooperatives. In the
legislation which provided for marketing agreements and orders, we have
already seen that cooperatives received the permission to wield large de-
grees of monopoly power.
In most cases aid and public approval was extended to cooperatives
under the assumption that a strong cooperative business helped maintain
effective competition. Currently, the public appears to be in a state of in-
decision concerning cooperatives. Some of this has come about through
the agitation over the income tax exemption privileges granted cooperatives.
Under strict legal interpretation, cooperatives as a business entity do
not have income. They are, by definition, businesses which operate at cost.
The eamings above cost belong to the individual member-owners and not
to the association. Patronage refunds in the legal sense, as we have already
noted, are either an adjustment for original underpayment in the case of
marketing cooperatives or an adjustment for original overcharge in the
case of a purchasing or service cooperative. As long as these earnings were
returned to members in the form of cash patronage refunds there was little
complaint. However, as has been mentioned previously, cooperatives in-
creasingly tended to make refunds in the form of stock or ownership cer-
tificates and thereby retained these earnings in the association as growth
capital. Thus, many cooperatives have accumulated large reserves tax-free,
while their noncooperative competitors paid income taxes on their accumu-
lations. This has led to the charge of unfair discrimination. No doubt,
cooperatives must critically examine this whole area if they are to maintain
their high standing in the public eye. 15

14 For a,1 appraisal of the methods of member education see O. R. LeBeau and J. H.

Heckman, Patrons Appraise Cooperative Relations, USDA, Farm Credit Administration,

Circular C'140, 1951.
15 The ramifications of the tax exemption controversy are purposely not treated here
as being beyond the scope of a general cooperative survey. Rather voluminous writings
on the subject are available for those wishing to explore the question further.
 MARKETING OF AGRICULTURAL PRODUCTS

Some of the monopolistic practices of cooperatives have been hard to

justify from the viewpoint of the public good. One of the principal Con.
tributions of a good cooperative is as a pace-setter and competitive prod
to other businesses. Large cooperatives, however, like other businesses, often
concern themselves with maintaining the "status quo." Several examples
can be found of cooperatives fighting changes instead of spearheading an
attack on their behalf. Such situations also cannot long receive the public
blessing. Vigorous, well-run cooperatives have and can be a desirable
competitive force. They can effectively improve, and often have improved,
the services available to farmers. Such coopcrative undertakings will con-
tinue to be a valuable asset to marketing.

SELECTED REFERENCES
Erdman, A. E., "Trends in Cooperative Expansion, 1900-1950," Journal of
Farm Economics, November Proceedings, 1950.
Knapp, J. G., E. A. Stol,dyk.-Architect of Cooperation (\Vashington, D. C.,
American Institute of Cooperation, 1953)'
Packcl, 1., The Law of the Organization and Operation of Cooperatives, :md cd.
(Albany, New York, Bender, 1947).
Pcrregaux, E. A., "The Future of Farm Cooperatives in the United States,"
Journal of Farm Economics, February Proceedings, 1947.
Nourse, E. G., The Legal Status of Agricultural Cooperation (New York, Mac-
millan, 1929). .
Robotka, F., "A Theory of Cooperation," Journal of Farm Economics, Febru-
ary Proceedings, 1947.
CHAPTER TWENTY-TWO

Government and Agricultural

Marketing

1"lany readers, when they arrive at this chapter, will start humming the
tune, "Anything you can do, I can do better." For some it means that
anything done by government can be done better by private business. For
others it means that government can do most things better. The more
accurate appraisal lies somewhere between the two extremes. The l1istory
of our government participation in marketing has been similar to a
pendulum-sometimes swinging near one extreme, then reversing itself
and swinging to the other side. In most instances, though, the search for
the proper role of government has been motivated by the desire to main-
tain the type of competitive free enterprise system which will maximize
the social, economic, and moral desires of our people.
Throughout this book, reference has been made to this or that law
or agency. It is the purpose of this chapter to organize into some sort of
logical framework the principal relationships of government to the opera-
tion of the marketing machinery. :Most of the. references are to the positions
taken by the federal government. State and local government actions do
have important effects on marketing, but because of their wide variation
onl~' general mention can be made.
In studying this chapter, we should always keep in mind that this
is a highly controversial area. Laws are passed by legislative bodies, inter-
preted by the courts, and carried out and enforced by various administrative
agencies. \\-ith interpretation by the courts through a period of time, the
actual results of many laws may be far different from their original intent.
In order to understand the full effect of governmental actions, one should
).p
 MARKETING OF AGRICULTURAL PRODUCTS

study both the original statutes and the interpretations which have evolved
through the many court cases. Obviously such detail is beyond the scope
of this chapter.

AREAS OF REGULATION
The classification scheme which is used here is, of course, not the only
one possible. To develop a set of pigeon-holes which will perfectly catalog
governmental relationships to the marketing machinery is impossible.1
The classification offered here is a broad one. For many observers, govern-
ment relationships to agricultural marketing consist of that group of laws
dealing directly with agricultural products and those handling them. This
is too narrow a view. More and more people interested in agricultural
marketing will have to concern themselves with broader aspects if they
wish to come to grips with some of the more fundamental issues. The
classification which we will use for discussion is as follows:

1. Regulations to maintain and police competition or prevent monopoly.

2. Regulations to control or offset monopoly conditions.
3. Regulations to facilitate trade and provide services.
4. Regulations to protect the consumer.
5. Regulations to directly affect commodity prices.
6. Regulations to foster economic and social progress.

Regulations to Maintain and Police Competition or Prevent Monopoly

The fundamental economic proposition of the United States from its
beginning has been that the desired economic organization should be op-
erated primarily by individual, private, competitive enterprises. Out of this
organization would come the maximum economic good for all. Through-
out the first 100 years or so of our history it was basically assumed that
such business organization was normal and automatic if government would
just let things alone. However, with the price decline and economic troubles
which followed the Civil \Var, public pressure forced investigation into
charges of monopoly and collusion. A Congressional investigation into
charges of collusion among the large meat packers was in part responsible
for the Sherman Anti-Trust Act. This Act, which was passed in 1890,

1 Others have developed classification schemes which are possibly equally helpful.
See, for example: F. E. Clark and C. P. Clark, Principles of i\larketing, 3rd ed. (New
York, :t-.Iacmillan, 1947), chs. 25 and 26; E. A. Duddy and D. A. Revzan, Marketing,
1St cd. (New York, McGraw·Hill, 1947), ch. 28; F. L. Thomsen, Agricultural Market·
ing (New York, J\1cGraw·Hill, 1951), ch. n; R. S. Vaile, E. T. Grether, and R. Cox,
Marketing in the American Economy (New York, Ronald Press, 195 2 ), ch. 34.
 Government and Agricultural Marketing 343
became the cornerstone of federal antimonopoly policy. It stated that
"every contract, combination in the form of trust or otherwise, or con-
spiracy in restraint of trade or commerce among the several states, or with
foreign nations is hereby declared to be illegal."
It was not enough, however, simply to declare actions illegal. The
subsequent history of legislation in this area has been largely to determine
what are "undesirable" or "unfair" methods of competition. Both the
Clayton Act (1914) and the Federal Trade Commission Act (1914)
started to spell out how firms should and should not compete in order to
maintain competition. In 1936, the Robinson-Patman Act attempted to
establish rules against price discrimination. Equal treatment must be given
to all buyers unless the discounts can be shown to be derived from econ-
omies in manufacture, sale, or delivery. The intent of this latter law was
to prevent large concerns from using their market power to secure unfair
price advantage over their competitors.
Vlith the development of large-scale retailing, the cry arose to protect
the small retailer. IVIany states passed so-called "fair trade acts" which
permitted manufacturers to control the retail selling prices of their prod-
ucts. In this way the large retailer was not permitted to undersell the
smaller retailer if he wished to continue handling the manufacturer's
products. These state regulations were made legal in interstate commerce
b\' the Tydings-:l\1i11er Act (1937). This urge to protect the smaIl operator
aiso has resulted in the regulation of selling margins for many products.
:"lany states prohibit the selling of products below "cost" or cost plus a
stated margin.
The present status of such resale price maintenance laws is not certain.
In 1951, the court held that resale maintenance as then practiced was
illega1. Movement was quickly underway in Congress to repair the damage.
The ivlcGuire Act (1952) attempted to restore the legality of resale price
maintenance. It was a touch of irony that the r.IcGuire Act put the en-
forcement of price maintenance in the hands of the Federal Trade Com-
mission which has been a vigorous opponent of the practice.
i, \Vhen one studies the trends in interpretation of the regulations in
I: this area of maintaining and policing competition, it becomes obvious that
I, there is considerable confusion as to what is desired. !vlonopoly is illegal.
II
I, But a business does not run around with a sign on it saying, "I am a
I' ~Ionopoly"! Both the Robinson-Patman and the resale price maintenance
I acts have protected the "litt1e fe1low" as a way of maintaining competition.
i:i' The resale price maintenance laws seem to take the additional position
~]:1t numbers of business establishments are the key to desired competition .

'I
• I
i
!I·,
; ;
i
:, i
f j
3-H ~I ARK E TIN G 0 FAG RIC U L T U R ,\ L PRO Due T S

Developments in this regulatory area are of real importance to agricultural

marketing and can have an important effect on costs.~

Regulations to Control or Offset lvlonopoly C01lditions

In some areas of the economy, it has been admitted that vigorous
competition is not desirable. This is particularly true for public utilities,
such as light, power, and telephone, and in other industries such as public
transportation. The larg'C! fixed investments in these industries mean that
competitive duplication would be very costly. For these industries, the
attempt has been made to simulate the results of competition through
public regulation. It was toward this end that the Interstate Commerce
and Federal Communications Commissions were established. Such Com-
missions have been given regulatory powers-the most important of which
is the supervisory po\ver over rates charged. As pointed out in the chapter
on transportation, the objective is to be "fair" to both the customer and
the company. The legislation covering wage and labor relations would also
probably fall within this general category.
In still other areas of the economy, Congress has recognized that weak
and disorganized groups must do business with strong and concentrated
industries. Or, in some cases, small and disorganized businesses are at the
mercy of marketing forces, with wasteful or disruptive consequences to the
public. In these instances, Congress has attempted to create "power
balance" by granting organizing privileges which would otherwise be in
violation of antitrust laws. The \Vebb-Pomerene Act legalized monopolies
in the export trade. The Capper-Volstead Act recognized the legal right
of farmers to act together cooperatively. The Agricultural 1 Iarketing Agree-
ment Act (1937) provided that producers and handlers could band together
to promote orderly marketing of their products. Under the provisions of this
latter law have developed the federally supervised milk markets and the
various fruit and vegetable marketing orders which regulate the amounts
which are to be offered for sale. (Examples of these were discussed previ-
ously in Chapters 9 <:illd 16.)
The balance between preventing unfair competition and monopoly
and controlling or creating a counterbalancing monopoly is a delicate one
indeed. The problems of adequate and intelligent enforcement of regula-
tions in the former area are great. The danger in the latter area is that of
creating monopoly power \vhich may become more vicious than the situa-
tion is was intended to "balance."
2 For a good discussion of the economic implications of resale price maintenance

see Vaile, Grether, and Cox, op. cit., eh. :21.

 Government and Agricultural Marketing 345

Reouiations to Facilitate Trade and Provide Services

b

Falling within this general classification arc many of the laws and
regulations that have been mentioned in various other chapters. Laws to
facilitate trade have attempted to create uniformity and reduce possibilities
of fraud.
The Commodity Exchange Act provides the elimination of question-
able practices and supervision of those dealing on futures exchanges (1922,
amcnded 1936). The Packers and Stockyards Act (1921) sets up the
supervisory machincry to control marketing practices and charges on ter-
minallivestock markets. The United States \Varehouse Act (1916) pro-
vides for the licensing and supervision of warehouses and their operations.
The produce Agency Act (1927) attacks fraudulent practices of commis-
sion agents and brokers. The Perishable Agricultural Commodities Act
(193 0 ) proVIdes for the licensing of commission men, dealers, and brokers
handling fresh fruits and vegetables. All of these laws have attempted to
establish standards of practice and operation of markets and men operating
on these markets.
There have been many laws passed affecting the product and its
handling. Laws regulating weights and measures of containers have aimed
for uniformity in this important area. There have also been a series of acts
which established the authority of the United States Department of Agri-
culture to study and promulgate standards and grades for agricultural
commodities.
Legislation has established the market news service and the various
grading and inspection services. Another series of laws have sanctioned the
collection and dissemination of statistics of various commodities and the
agricultural census. 3
Ivluch federal legislation can affect only those commodities which
enter into interstate commerce. Therefore, in most of these fields states
have evolved counterpart legislation to cover trading within the several
states.

Regulations to Protect the Consumer

There has been some recognition that in a modem, complex society
the consumer cannot possibly be expected to have complete knowledge
about all his multitudinous purchases. Regulations in this area generally
strive to assure adequate and accurate information so that the consumer
3 A valuable reference list of laws is the Abridged List of Federal Laws Applicable
!:.' '\griculture, USDA, Office of Information, ~limeograph NO.2, 1950.
 2\1 ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

can make informcd dccisions and to protcct the consnmer from products
and practices which might harm him.
The principal regulations in this area were initiated by the Federal
Food and Drug Act (1906, expanded 1938) along with the related laws
of the states. Generally, the purpose of this law is to prevent shipments
of adulterated or misbranded foods, drugs, and cosmetics. The adminis.
trator of the Act also has the power to establish minimum quality and
fill of container for most packaged goods. The law provides for labeling
of contents. The use of food preservatives, artificial coloring, and so on are
under the administrator's jurisdiction.
The \Vheeler-Lea Act (1935) sets up a code of ethics for advertising.
It makes false and deceptive advertising an unfair method of competition
and thereby illegal. The ?\cleat Inspection Act (19°7) authorizes inspection
of animals, meats, and packing establishments to assure that products will
be fit for human food. Also, individual state and local governmental units
have set up required health standards for milk and milk processing and
for various slaughtering and food processing facilities.
To a great extent it is because of these various laws that the consumer
can depend upon the weight, volume, and content labels of the food he
buys. He can learn the fiber content of his clothes. He can have some
assurances that in this age of new chemicals, someone is watching out for
his health and well-being.
The dividing line between protector and dictator is a fine one. The
intent of these laws has been to protect the consumer from fraud and
danger which he reasonably could not detect for himself and to give him
knowledge npon which to make wise decisions. There is always the danger
that such regulations may be administered in such a way as to actually
make the choice for the consumers. Such interpretation may stifle change
and initiative if industry must serve the administrator instead of the con-
sumer. It should not be the role of these regulations to decide what is best.
That decision should always be left to the consumer himself. Regulations
should provide the basis for informed consumer action. Beyond this point
the consumer should go the road alone.

Regulations to Directly Affect Commodity Prices

\\Then governmental units assumed the obligation to control and
offset monopolistic conditions, the necessity to supervise prices of these
controlled industries followed. Railroad rates, public utility charges, live-
stock yardage, commission fees, and a great many other prices and fees
have been brought under the supervision of government. Originally, the
place of government was assumed to be largely one of supervision. How-
 Government and Agricultural Marlwting 347

ever, with the advent of two major wars and a drastic depression within
the short span of thirty years, actions have been taken to directly establish
prices of individual commodities. .
?vfuch of the agricultural price and income legislation already has
been discussed in Chapter 9. It should merely be reviewed here that with
the establishment of the Federal Farm Board in 1929, a long succession
of laws has firmly established the federal government as an active partici-
pant in determining farm prices. In addition to such direct farm price
regulations, provisions have been made to reduce the price of food to
certain groups of people. The Food Stamp Program and the passing of the
National School Lunch Act (1946) are illustrative of such developments.
Of equal importance has been the acceptance of the validity of the
place of government in controlling prices throughout the ,vhole economy.
Legislation established the Office of Price Administration (OPA) during
World \Var II and the Office of Price Stabilization (OPS) during the
Korean \Var. Under these agencies, prices of commodities and services at
all levels in the marketing system were controlled.
The impact of such regulations upon marketing is obvious. \Vith the
power to regulate margins and prices, the government in effect assumed
the power to regulate the operation of all phases of the marketing structure.
It was in a position to favor one type of market or product over another.
Using its powers, it effected such marketing changes as every-other-day
delivery of milk, the reduction of the kinds and types of packaging; the
expansion of federal meat grading, and so forth. Agricultural price regula-
tions also affected marketing channels used, places of storage, and other
details of the marketing process.

Regulations to Foster Economic and Social Progress

Each group which pressures for preferential legislation generally justi-
fies its actions as being necessary for economic and social progress. Usually
such laws fit better into one of our other categories. However, there have
been legislative developments which have addressed themselves specifically
to the general purpose of "holding the carrot in front of the horse," so
that our economy will have the push and urge to move forward.
Patent and copyright laws give the innovator a monopoly for a period
of time so that he may reap personal gain from his efforts. Such an incentive
system, which had a long history in English law, was recognized by our
Constitution and definitely set forth in the original patent act of 1790.4
4 For a more complete discussion of the patent problem, see George Stocking and

:,;;.'[on \Vatkins, Monopoly and Free Enterprise (New York, Twentieth Century Fund,
195 1), ell. Lt.
 MARKETING OF AGRICULTURAL PRODUCTS

The original intent was to give to the innovator the right of monopoly
exploitation for seventeen years, after which the innovation was to become
available to the public for general use. Such incentive for gain has no doubt
fostered development. But as with other regulations, abuse is possible.
l1uough legal manipulations, protection can be extended well beyond the
statutory seventeen years. There is record of one inventor successfully
maintaining his exclusive rights for fifty-three years. 5 There is also evidence
that patent and copyright privileges are being used today to prevent some-
one else from working in given fields and making discoveries which might
destroy the current business power of the involved firms. Such actions, of
course, do not encourage progress but retard it. \Vith increasing food
processing and more synthetic products, patent and copyright provisions
are of growing importance in the marketing of farm products. The chal-
lenge is how to furnish incentive for the continuing parade of new and
better things and methods without, at the same time, preventing the active
search for improvement by anyone in any area of endeavor.
Another very important group of laws is that providing for public
support of education and research. G In 1862, Congress established the
Department of Agriculture. The Ivlorrill Land-Grant College Act (1862)
provided the basis for our extensive system of government-supported higher
education. This was followed by the Hatch Act (1887), which provided
for the establishment of agricultural experiment stations in conjunction
with the land-grant colleges.
In 1914, the Smith-Lever Act broadened the educational system in
agriculture by establishing the agricultural extension system. Now, through
a widespread system of county agents and various types of trained special-
ists, the findings of the experiment stations are quickly brought to the
farmers' attention. This Act was followed in a few years by the Smith-
Hughes Act whicl1 provided federal support for teaching vocational agri-
culture in the public schools. In 1953 there were over 10,500 vocational
agricultural teachers and over 5,250 county agents at work in the United
States. Our agricultur;}l research-educational team today is the envy of the
world.
This educational and research structure has been augmented by a long
series of laws making monies available for research in specific areas. Early
work was aimed largely at farm production problems. However, the Re-
search and Marketing Act of 1946 laid the groundwork for a broad research
5 Stocking and Watkins. op. cit., p. 458.
6 An excellent report, "Organization of Agricultural Research in the United States,
Questions and Answers," was issued as a ~limeograph by the USD1\, Agricultural Re·
search Administration, July, 1950.
----
I

I
Government and Agricultural Marketing 349

attack on marketing problems. One very pertinent contribution of this

legislation has been to expand the horizons of agricultural marketing re-
search and extension beyond the point of first sale. TIle complete producer-
to-consumer area is now recognized as the field in which to work. Official
recognition now has been given to the fact that the actions of food proces-
sors, wholesalers, and retailers are the business of those who are concerned
with agricultural marketing. To a large degree, the improvements in market-
ing will depend upon research progress in this enlarged area of study.
Governmental agricultural research is carried on at about 400 field
locations including federal field stations and laboratories and cooperative
work at the individual state experiment stations. The states maintain about
32 5 research centers including experiment stations and substations. To-
gether the federal and state governments employ over 10,000 agricultural
research scientists. The general framework for financing agricultural re-
search consists of the states matching the federal appropriations. The fol-
lowing quotation from a report issued by the Federal Agricultural Research
Administration illustrates the point:

Federal appropriations for agricultural research during the fiscal year 1950
approximated $59 million of which $-1-7 million was allotted to USDA agencies
and $12 million was made a\-ailablc to state agricultural experiment stations as
federal grant funds. The states themselves provided more than $40 million
which averaged about $3' 50 for each $1.00 received from federal grants.

The Pr0blem of Perspective

After the above brief and incomplete survey, we can now return to
the initial questions of the where, the what, and the how much of regu-
lation. Careful, unbiased thought brings the conclusion that there is a
real place for government regulations and laws. Often it is not the intent
of regulations, but their enforcement and administration, which causes
trouble. The role of government is not passive or static: Nor does the fact
, Ii
that certain laws are on the books make them currently good or adequate
laws. A progressive economy is one of change. Legislation once considered
vital may no longer be useful. New developments may bring about the
need for new regulations even in fields where such actions were once
considered improper.
Value judgments change. The trend has been toward increasing the
area of governmental influence. One of the real problems in marketing is
the job of appraising the "proper" solution. 'Yorkers in agricultural
marketing must accept this task of appraisal in all the areas of possible
re~ulation and not just those which apply directly to agriculture.
 MARKETING OF AGRICULTURAL PRODUCTS

UNITED STATES DEPARTl\IENT

OF AGRICULTURE,
The United States Department of Agriculture has the assigned role
of a service agency for the agricultural industry. It administers many of the
laws discussed previously. It actually operates many service agencies. It
directs and coordinates research. No worker in the field of marketing can
adequately do his job and not be familiar with it at least in a general Way.
The USDA is a huge organization. Not all of its facilities or its em·
ployees are located in \Vashington, D. C. Some of its agencies are very
important to those interested or working in marketing; others are mOre
directly concerned with production and other phases of agriculture. \Ve
shall discuss briefly many of these various agencies and give the highlights
of what they do. No attempt will be made to show organizational lines
of authority or to give an indication of relative size.

Agencies of General I nieresi

There are several agencies of general interest to anyone interested in
agriculture. Important ones of this nature are the Office of Information,
the Office of Experiment Stations, and the Extension Service.
By addressing inquiries to the Office of Information, USDA, \Vash·
ington 25, D. C., one can either secure, or find out where to secure, any
information which the Department may have on a particular question.
This is the agency responsible for the integration and coordination of an
USDA activities. The purpose of the USDA is to be of service to agricul-
tural workers. A note sent to the Director of Information often saves hours
of fruitless searching.
The Office of Experiment Stations and the Extension Service are
almost self-explanatory. The former is largely an administrative agency
coordinating the ,vork of the experiment stations in each of the forty-eight
states, Alaska, Hawaii, and Puerto Rico. The Extension Service serves
much the same purpose for the extension education programs of the
Department and the states.

Agencies of Specific Marketing Interest

Though nearly all agencies are involved in marketing problems at one
time or another, the Agricultural Marketing Service (AMS) is of special
7 The following processed reports will give a much more complete picture of the
growth and work of the usn'\'; Some Landmarks in the History of the Department of
Agriculture, USDA Agricultural History Series No.2, 1951, and later issued in an
abridged form as USDA Document No.8, February, 1953; Origin, Structure, and Func-
tions of the U. S. Department of Agriculture, USDA Document No. I, February, 195 2 .
 Government and Agricultural Marketing 35 1
importance. 8 The AMS is the central source agency for a great deal of the
material of interest to students of marketing.
In order to cover its field, the AMS is divided into several divisions.
The Divisions of Marketing Research and Agricultural Economics carry on
research in all phases of marketing and all other economic, analytical, and
statistical work with the exception of farm management and land use. The
Agricultural Reporting Division supervises the crop reporting and market
news services of the Department. Other divisions of the Service are given
the responsibility to carry out many of the supervisory and action programs
of the Department. For example, the administration of marketing orders,
the Packers and Stockyards Act, the Commodity Exchange Act, and the
operations of the school lunch program are under the supervision of AMS.
The Division of Human Nutrition and Home Economics in the Agri-
cultural Research Service is one of specific marketing interest, since its area
of research interest, among other things, is that of human nutrition and
food consumption. Studies on nutritional standards, composition of various
foods, and family food consumption are made by this agency.
The Farm Cooperative Service is the source agency for information on
agricultural cooperatives. It carries on a research program covering all
aspects of agricultural cooperation. It also advises farm groups on the
practicability of setting up new cooperatives.
The Foreign Agricultural Service is responsible for the compiling and
interpretation of information relating to foreign agriculture and trade. It is
the principal source agency for information dealing with our foreign agri-
cultural relations.
The Commodity Stabilization Service is charged with the responsi-
bility for establishing and administering the acreage allotments and market-
ing quotas when these are necessary in the operation of our price support
programs. The loan and storage activities of the Commodity Credit Cor-
poration (CCC) are also carried on by this agency.

Agencies of Limited Marketing Interest

The activities of many agencies are of limited or side-line interest to
those concerned with marketing. Many of these are divisions of the Agri-
cultural Research Service (ARS). The Divisions of Crop Research and
Livestock Research continually are at work on new crop varieties, produc-
8 As of November, 1953, the Department of Agriculture was reorganized. Some of
the old ag~T)cies lost their identity and new ones were created. The Agricultural Market·
ing Service was one of the newly created agencies. It incorporated most of the activities
of the old Bureau of Agricultural Economics (BAE) and many of the activities of the
old Production Marketing Administration (PMA). This fact is mentioned since many
vlder studies of value continue to carry BAE and PMA designations.
 MARKETING OF AGRICULTURAL PRODUCTS

tion methods, improved methods of insect and disease control, and so on.
The Utilization Division is- active in experimentation which may lead to
!lew products and new uses for agricultural commodities. \Ve now should
realize that production cannot be realistically separated from marketing, so
all of these activities can have a real influence on marketing.
The Agricultural Research Service also has certain regulatory re-
sponsibilities. The Animal Quarantine Act, the twenty-eight-hour transpor-
tation law for livestock, the meat and poultry inspection work, and the
insect control and eradic1tion work all come nnder its supervision. l\llan1'
of these activities are of direct concern to marketing agencies.
SELECTED REFERENCES
Brown, 'V. F., "The Federal Trade Commission and False Advertising" (2
parts) , Journal of Marheting, July and October, 1947.
Edwards, C. D., "Trends in Enforcement of Antimonopoly Laws," Journal of
Marketing, April, 1950.
- - - , Maintaining Competition (New York, McCraw-Hill, 1949)'
Cans, J. £vI., and L. O. ,"\Tolcott, Public Administration and the United States
Department of Agriculture (Chicago, Public Administration Service, 1940).
Lee, 1\1. 'V., "The A-and-P Case," Journal of Marketing, October, 1949.
Steiner, C. A., Government's Role in Economic Life (New York, :tvlcCraw-Hill,
1953)·
CHAPTER TWENTY-THREE

Food Processing Industries

Since thc farmer sells raw materials which must often be processed further
into food products, a study of marketing must consider the part which
these food processors play in the over-all marketing processes. 1 TIle defini-
tion of marketing which we developed in Chapter 1 excluded the crea-
tion of form utility. The manufacturing processes of food processors are
concerned with the addition of value which comes from the changing of
form. \Vheat is milled into flour. Livestock is converted into meat. Fresh
\'cgctables are processed into the canned product. However, as we men-
tioned in the discussion of marketing institutions in Chapter 2, these
activities are only part of the activities of food processors. They also perform
to a variable extent some of the marketing functions. They are not a passive
element in the marketing channel. They buy and sell products. They may
have \'ertically integrated themselves until they act institutionally in
wholes;lling capacities. And because they are often the largest and best
informed business aggregate in the marketing channel, they play an im-
portant role in the all-important activities of pricing. \Ve have already
studied some of thesc processor activities in our commodity discussions.
The purpose of this chapter is to bring together these various industries
so that we can obtain a better picture of the over-all structure of food
processing.

THE INDUSTRY STRUCTURE

Fooel processing is a multi-billion dollar industry. In 1947, output
of 1:]1(; fooel industries as measured by the value added accounted for one-
I l\{ust d the statistical data used in this chapter were taken eithcr directly froIll
the UnitcJ State,; Census of :\Ianufacturing. 1947. or from Allan B. Paul's excellcnt
statistical sllIlllllarization of these data, The Economic Stmcture of the Food Processing
h~ustries and Changes ill the Food Processing Industries from 1939 to 191;. Illinois
r.hmeogr~ph~ FT5 and FT:7.

353
354 MARKETING OF AGRICULTURAL PRODUCTS

eighth of all manufacturing output in the country.:! About one-sixth of aU

manufacturing plants is engaged in processing food and related products.
These plants employ one-tenth of the workers engaged in manufacturing.
The data in Table 1 show the relative importance of the various food
industries. From the standpoint of the number of establishments and pro-
duction workers and the amount of value added, the industries making
grain products lead the list. The sweets industries depend heavily on im-
ported products such as sugar and cocoa and to a lesser extent on the
products of domestic agriculture. Other major industries are those associ-
ated with meat, fruits and vegetables, and dairy products. These industries
processing grain, meat, fruits and vegetables, and dairy products account
for two-thirds of the output of the food industry.

TAB LEI. The Food Processing Industry, 1947

NUMBER OF
NUMBER PRODUCTION VALUE ADDED
OF WORKERS BY
PLANTS (THOUSANDS) MANUFACTURE

MILLION PERCENT
DOLLARS OF TOTAL

Grains (milled products, malt,

liquor, baked products, cereals,
macaroni and spaghetti, rice
and com products)
Sweets (candy, soft drinks, cane
and beet sugar, chocolate, fla-
vorings, chewing gum) 8,159 157·3 16.2
jl,leats (packed meats, prepared
meats, dressed poultry) 3,974 no.8
Fruits and vegeta bJes (canned
products, quick-frozen foods,
vinegar, wines, pickles, dehy-
drated products)
Dairy products (ice cream, but-
ter, cheese, concentrated milk,
plastic cream) 7·3
Oil seeds (cottonseed and soybean
oil milk, shortening and cook-
ing oils, oleomargarine) 575
Miscellaneous products (sea
foods; leavening compounds;
liquid, frozen, and dried eggs;
other nonclassified processed
foods) 6.2
Total 100.0

2 Value added is a measure of manufacturing output. It is the value of sales minus

the cost of raw materials purchased. As such, it attempts to measure the value of the
conversion or processing done.
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355
 MARKETING OF AGRICULTURAL PRODUCTS

Location of Food Processing

Though food processing is done to some extent throughout the COun-
try, nearly two-thirds of the total output comes from the l\Iiddle Eastern
and Korth Central regions. Table 2 shows the location of various indus-
tries in terms of percentage of output by state groupings. The leading area
has been underscored.
Several factors influence the location of industry. Some of the marc:
important are (I) the bulkiness of the raw material compared with that
of the finished product, (2) the perishability of the raw material compared
with that of the finished product, and (3) the institutional considerations
such as freight differentials, labor supply, consumer peculiarities, and his·
torical development. Many of the location patterns can be explained by
these factors. For example, milling takes a very bulky raw product, grain,
and converts it into a more concentrated product, flour. Thus, half of the
industry is located in the \Vest North Central and the \Vest South Central
production rcgions near the source of the grain. The concentration in the
l\Iiddle Atlantic states can be explained largely by the freight rate structure.
On the other hand, the bread industry which utilizes a nonperishable
product, flour, to make a highly perishable product, bread, is concentrated
in the areas of heavy consumer population. The location of the meat pack·
ing industry follows the area of livestock production closely with the
exception of a sizable portion located in the l\Iiddle Atlantic states. The
special fresh meat requirements of the kosher trade, along with some other
historic factors, help explain much of this diversion from the production
area. The perishable nature of fruits and vegetables dictates that a major
part of the fruit and "egetable processing industry be located in the Pacific
states near the principal production areas.

Organization and Firm Size

lvIany people like to think of the food industry as the stronghold of
small, individual entrepreneurs. For example, your author has heard re-
sponsible persons in the meat packing industry talk about the smal1-scale,
competitive nature of the industry, for, "aftcr all, anyone can go out under
a tree and butcher a steer"! Such statements may not be false, but they
are mis1caeling. In general, there is not too much difference between
organization and size of the fooel processors and other types of industry.
Table,) compares the food industries \vith all manufacturing industries
as to types of organization and ownership. It is the similarities, not the
differences, which arc striking. About thrce-fifths of the total output of
both the food and other industries is from companies which operate more
 Food Processing Industries 357
than one plant. Nearly nine-tenths of the outpm comes from plants
organized as corporations. Though nearly half of the units are owned
individually or by partners, this group accounts for less than 10 percent
of the total food industry output.

TAB L E 3. Organization and Ownership of Industry, 1947

TYPE OF ORGANIZATION TYPE OF OWNERSlIIP OR CONTROL

INDUSTRY MULTI- SINGLE COR- INDI- PART-
CLASSIFICATION UNIT * UNIT PORATE VIDUAL NERSHlP OTHER t

PERCENT OF TOTAL

Food industry:
Number of establishments 24 76 49 27 20 4
Value added 61 39 89 4 5 2
All U. S. industry:
Number of establishments 15 85 49 29 21
Value added 59 41 92- 3 5
* Operation of more than one manufacturing unit from a central administrative
office.
t Includes cooperatives, receiverships and trustees, and public ownership_
; Less than 1 percent.

Food processors, similar to many other American industries, have

been undergoing considerable integration-both vertical and horizontal.
Table 4 gives an indication of the amount of concentration of ownership
in various food manufacturing fields. In studying the concentration of all
American industry, the Federal Trade Commission classified thirteen in-
dustries as having "extreme" concentration. The biscuit and cracker and
the meat packing industries were in this classification. Six major industries

TAB L E 4. Concentration in the Ownership of Food Processing

Facilities, 1947

PERCENT OF NET ASSETS OWNED BY

INDUSTRY LEADING THREE CORPORATIONS

Biscuits and crackers 67·7

Meat packing 64. 0
Dairy products 55. 8
Canning and preserving 32 .0
Grain mill products 30 .2-
Bread and pastries 25·4

SOURCE: Federal Trade Commission Report on Concentration of Productive

f~jlities.
 MARKETING OF AGRICULTURAL PRODUCTS

were considered as having "high" concentration. Dairy products fell in this

category. The grain mill and canning industries were put along with three
other industries into the group considered as having "moderate" concen.
tration.
There is a great variation in the size of the individual firms. Table 5
breaks various industries down into size groups as measured by number of
employees. The number of firms and amount of the output of each of
these size groups are shown. A great many firms in all of the various
industries could be cldssified as small businesses. However, this relatively
large group often contributes very little to the total output of the industry.
For example, our gentlemen who made reference to the small·scale nature
of the packing industry was right in one sense-nearly half of the meat
packing firms have under ten employees. What he did not add was that
this large group accounts for under 5 percent of the total output of meat
packers. Only 2 percent of the packing establishments have over 1,000
employees-but these 2 percent account for nearly half of the industry
output. Considering the total food industry, the 4 percent of the firms
employing 250 or more people produce 60 percent of the total output.
A close study of Table 5 will show a great difference in the size pattern
of production units of different food processors. Much of this variation
can be explained by one or all of three different factors: (1) supply prob·
lems including both the characteristics of the raw product and its produc-
tion, (2) finished product problems, and (3) the nature of the manufac- .
turing process itself, especially as to the degree and kind of mechanization
possible.
Cereal manufacturing, the biscuit and cracker industry, and meat
packing all have large portions of the output coming from very large
firms. These are industries which have utilized assembly-line, continuous-
operation principles. They do not have particular limiting problems on
either their supply of raw materials or distribution of their finished prod-
ucts. On the other hand, two-thirds of the butter output and over four-
fifths of the cheese output come from plants employing less than fifty
people. The assembly of the raw product, milk, as well as the small unit
nature of butter and cheese machinery, favors the small-scale plant. The
baking industry tends to favor the moderate-sized plant. At least part of
the size-limiting factor in this industry is the distribution of its product.
With the emphasis on bakery goods which are fresh daily, the marketing
area of a given plant is limited.
The size structure of the food industry has changed and will continue
to change. New technology is changing both the assembly and distribution
problems of plants. The areas in which it is economically feasible to secure

I
I
 Food Processing Industries
359
TABLE 5· Relative Importance of Different-Sized Firms in
Selected Food Processing Industries, 1947

NUMBER OF EMPLOYEES
1,000
INDUSTRY 1-9 10-49 50- 2 49 250-999 AND OVER

PERCENT OF TOTAL

All industry:
Number of firms 49 33 14
Value added 3
3 12 25 27
All food industries: 33
Number of firms 50 36 12 2
Value added 5 18 26
"
36 15
Grain:
Flour milling
Number of firms 58 25 15 2
Value added 3 15 60 22
Cereal manufacturing
Number of firms 42 25 19
Value added 9 5
Baking (selling to grocers)
" 3 11 42 44
Number of firms 44 34 20 2
Value added 3 17 58 22
Biscuits, crackers, pretzels '----v------'
Number of firms 30 29 24 17
Value added 3 18
Meat: 78
l\leat packing
Number of firms 44 35 I; 2
Value added 4
3 10 19 21
Poultry dressing 47
Number of firms 29 49 21 1
Value added 4 29 20
47
Dairy:
Butter
Number of firms 68 27 5
Value added 22 43 35
Natural cheese
Number of firms 82 16 2
Value added 44 39 17
Concentrated milk
Number of firms 27 46 27
Value added 4 28 68
Fruits and vegetables:
Canning and preserving
Number of firms 24 48 24
Value added 1 14
4 "
38 31 16

* Less than 0.5 percent.

or to distribute products are continually expanding or contracting. Meclla-

nization of the food industry is also increasing. Continuous processing tech-
niques, improved product quality control, and new machinery are all
 MARKETING OF AGRICULTURAL PRODUCTS

making larger production units possible. which in many instances in the

past were severely limited in size.
The historical devclopmcnt of our country has left its mark on the
various food industrics. As the country has expanded its agricultural pro-
duction into new geographic areas, many of the proccssing industries also
have had to move. This has resulted in unused, excess capacities and high
costs in the firms which were left operating in old areas.
The grain milling industry is a good example of an industry which has
undergone considerable movement. ;\vIilling first developed in the Atlantic
Coastal states. Here it was near both wheat supplies and the water power
to operate the mills. Then, as new wheat areas farther west were opened,
Cincinnati and aftenvard St. Louis became important milling centers.
\Vith the growth of wheat production in the Northwest during the first
years of the twentieth century, lvIinneapolis devcloped into the nation's
leading milling center. Then as the wheatlands of the Southwest were
opened, Kansas City rose in importance. Finally, a change in the freight
rate structure in 1920, plus the growing opportunity to mill Canadian
wheat, led to the growth of the Buffalo, New Yark, mills. As each of the
gradual changes took place, much mill capacity was left in the declining
area. Today, it is the usual situation for the milling industry to operate at
levels much below total capacity.
The East Coast packing industry to some degree is the vestigial
remains of the earlier years before the development of the livestock indus-
try in the mid-wcst. At first much livestock was shipped to the East alive
for slaughter. The end product, meat, was so perishable that processing
had to be done ncar the centers of consumption. However, with the de-
velopment of the refrigerator car, Chicago and other mid-western cities
became important packing centers. The pacbng industry in the past two
decades has again followed production into the western part of the com
belt. Today, there is excess and unused slaughter capacity in many of the
major terminals of the eastern corn belt, such as Chicago.
The fact that the country is now completely settled will not protect
industries against location change. New refrigeration, transportation, and
other technological developments will continue to change existing patterns.
For example, new developments in whole milk transportation are tearing
down the past barriers which restricted milk collection and distribution
to relatively limited areas. The dairy products manufacturing structure
which was built upon the limited areas of supply and demand no doubt
will also undergo change.
Another capacity problem of the food industries is seasonal in nature.
Table 6 indicates the amollnt of production seasonality associated with
 Food Processing Industries 361

rarious industry groups. Generally, industries like the canning industry,

which processes seasonally produced, perishable commodities, are highly
seasonal in their operations. Some industries, such as the confectionery
group, have a seasonal demand. On the other hand, those industries whose
supply of raw materials is either more constant or storable operate with
less seasonal variation. This is illustrated in the meat packing, flour milling,
and baking industries.

TAB L E 6. Seasonality of Operation in Selected Food

Industries, 1947

NU)'!nER OF E)'[PLOYEES
IXDUSTRY HIGH MOXTII LOW).IO:-;TH

PERCE~T OF 1:!-l\[ONTH AVERAGE

All industries IO::!

97
Food and related products: 115 91
Canning and preserving :!05 6:;
Poultry dressing 13 1 78
Confectionary products 1:;3 88
Natural cheese 114 86
Concentrated milk III 88
Creamery butter 10 7 93
:Meat packing 109 9°
Biscuits, crackers 108 94
Flour milling 10 3 97
Bread and bakery products 101 97

FOOD INDUSTRIES AND MARKETING

Buying Operations
All manufacturers are faced with supply problems. Any manufacturer
desires to assure himself of an adequate amount of the desired kind and
quality of raw material at the lowest possible price. He may depend either
upon other marketing agencies to do this purchasing for him or he may
undertake to set up his own procurement machinery. One of two consider-
ations may force the processor to become his own assembler. He may be
dissatisfied with the operation of the existing agencies which are supposed
to serve him. They may be "dragging their feet" in making improvements
or othcrwise operating inefficiently and at high cost from the manufac-
turcr', Yic\\point. Or the processor may wish control over the machinery for
his own V_;lllpetiti\·c safcty or to make his buying pO\ver a morc effecti\'e
price-affcding forcc.
Food processors utilize a wide variety of ways to procure their
materials from farmers. Generally, meat and poultry processors use the
 MARKETING OF AGRICULTURAL PRODUCTS

existing independent agencies to secure their supplies. rVfany packing

firms, of course, operate their own country buying points. However, the
large majority of assembly agencies for livestock and poultry operate largely
independently of slaughterers and packers. To a considerable extent, the
grain milling industries also depend upon the independent country elevator
operators and terminal market merchants for the procuring of grain from
the farmer. However, some millers have become owners of elevators in the
production areas. One corn products manufacturer who has developed a
special variety of corn wllich best satisfies his needs contracts directly with
farmers for its production.
Butter, cheese, and other milk product manufacturers, on the other
hand, are their own country buying and assembly agencies. They often
operate their own truck routes to pick up milk at the farms. Canners are
also direct country buying agencies as well as processors. They often con·
tract with the farmer for the products in advance of planting. In this way
both price and some indication of amount available for processing are
established in advance.

Selling Operations
As in procurement, a processor is faced with the necessity of choosing
between alternative methods of selling the finished product. He may either
utilize the existing independent wholesale channels or set up his own
sales organization to distribute his product directly to retailers.
It is probably true that food processors have been more interested in
securing direct control over the selling phase of their operations than the
buying phase. But here again, industries vary in the direction they have
taken.
The meat packing industry, for example, has largely become its own
wholesaler. It is h'lI1dling a perishable commodity which has wide fluctua-
tions in volume over a short period. In order to keep such a product mov-
ing effectively, packers consider it imperative that they have control of
the distributive channel through to the retailer. Independent meat whole-
salers handle a relatively small volume.
The milling industry offers a good illustration of the wayan industry
adapts itself to changing conditions. Originally flour millers shipped their
flour on consignment to commission men in the consuming areas. These
commission men sold and delivered the flour to retail stores who were
their principal customers. However, abuse by some unscrupulous commis-
sion men gave rise to flour brokers. The broker acted as the sales agent of
the miller, but the miller himself kept control of the transportation and
delivery arrangements. Then came the widespread movement away from
 Food Processing Industries 363
home baking and the rise of large commercial bakeries. Bakers, not retail
stores, became the principal flour consumers. This development of rela-
tively large volume customers caused the miller again to revamp his selling
methods. Now large millers, like the packers, set up their Own wholesaling
organization with direct salesmen and strategically located branch houses
to facilitate delivery.
Though the processing units for butter and cheese are small many
have grown into large organizations with their own wholesaling setdp . Th~
large-scale canners have also developed their own wholesaling organization
to sell directly to retailers. However, the small independent canner cannot
afford his own selling organization. He must depend upon independent
brokers and commission men to sell his products.

Agencies for Effecting Change

The food processing industry, then, is a highly diverse structure made
up of many different groups. It is similar to other American industries in
its form of business organization. It is also characterized by a relatively
small group of firms accounting for a large portion of the total output.
The differences of the various industry groups are reflections of the
struggle to adapt to product and technological pecu1iarities. It is no more
logical to expect the meat processing industry to be like the canning in-
dust!)' than to expect the soap industry to be like the drug industry. Some
food industries handle products with highly seasonal supplies or demands.
Some buy or sell nonperishable, others handle highly perishable, products.
Some are highly mechanized, others require large amounts of human labor
and supervision. These differences reflect themselves in where the industry
is located, how large the individual firms are, and the attitude which the
indust!), takes to other agencies in the marketing channel.
Processing industries are both buyers and sellers of products. As such,
they are part of the agricultural marketing picture. Often processors are
the most important single group influencing the operation of the whole
marketing structure. It is true that the food industries are most interested
in securing their incomes from the performance of their manufacturing
and converting operations. But successful operational margins require that
the raw material be purchased and the finished food sold in a way which
is advantageous to the processor.
Very few processors, indeed, assume a passive role in marketing. Pro-
ducers often are small and disorganized. The same is often true of retailers
and consumers. But the processing firms are usually not small and ve!)'
~ddom are disorganized. A review of the long list of trade associations
will show that nearly each food group has some form of organization.
 IvIARKETING OF AGRICULTURAL PRODUCTS

\ Vholcsalcrs, brokers, comniission men, and other agcncies many times

may be pcrsuaded to change thcir opcrations through appropriate pressures
exerted by thc proccssors. The active support of proc'essors is usually
necdcd to sccurc changes in trade practices, grades and standards, and th~
like. For example, in our discussion of livestock marketing, we saw the
problems involved in encouraging the production of meat type hogs. \Vhen
major packers take an active interest through their buying practices,
progress in this field will be much more rapid. Teclmological problems
and innovations in processing may often place the processors in the role
of advisors to farmers as to kind and variety of product most needed. New
and complex products may place the processors in the role of advisors to
other processors, wholesalers, and retailers as to how their products can
be used best. Dupont has to educate and advise others how to use its new
synthetic fibers to their best advantage. The processors of quick-frozen
foods were active in advising handlers as to the proper equipment needed
to assure that the product would be of good quality when finally purchased
by consumers. Processors themselves initiate much of the consumer ad-
vertising which is used by retailers.
The relative size and concentration of food processors also have led
to many accusations of monopolistic practices. :Many segments of our food
industry have been brought before the courts, and in some instances con-
victed, for unlawful and collusive practices throughout the years. Regard-
less of the legal aspects, there is little doubt that many of the elements
of imperfect competition which were discussed in Chapter 7 exist in
the food industries.
SELECTED REFERENCES
Adams, \V., The Structure of American Industry (New York, l\Iacmillan, 1950),
Chaps. 9 and 10.
Alderfer, E. B., and H. E. l\Iichl, Economics of American Industry (New York,
j\IcGraw-Hill, 19.P')' Chaps. 19-:::6.
Malott, D. \V., and B. r. l\Iartin, The Agricultural Industries (New York,
l\IcGraw-Hill, 1939).
\Villiamson, H. r., The Growth of the American Economy (New York, Pren·
tice-Hall, 1944), Chaps. 10 and 20.
 CHAPTER TWENTY-FOUR

Wholesaling and Retailing of Food

\Ve have discussed in the various commodity chapters the operations of

the various kinds of wholesalers and commission agents who buy and move
commodities from farmer producers into the hands of food processors and
other central market agencies. This group, including such agencies as
livestock buyers and commission men, local grain elevators, and poultry
and egg buyers, is active in the major marketing process of concentration.
In the previous chapter we discussed the role which food processors may
play in both the buying of farm commodities and the selling of their food
products. In this chapter we shall complete our description of the chain
of marketing events which occur in moving products from producers to
consumers by summarizing some of the more important characteristics and
changes which have taken place in the food wholesaling and retailing
structure. 1 The basic distribution structure serving the consumer end of
the line can be shown diagrammatically as on the following page.

FOOD WHOLESALING
The food wholesaler operates between the food processor and the
retailer. The up-to·date food retailer stocks relatively small amounts of
literally hundreds of widely different items. Retailers, who are primarily
interested in the problems which arise from servicing their customers,
could not possibly search out and deal with the producer and processor
sources of all his products. And on the other hand, processors could not
in mo~t circumstances profitably service the small unit needs of the retailer.
To assemble efficiently these various products in reasonable quantities
from the rebtively specialized processors and to sell them in small quantities
is the job of the food wholesaler. As we can see in the following diagram,
1 The source of the statistical data used in this chapter has been the United States

\:nsliS of Business: \\'holcsale and Retail Trade, 1948.

\' 6
'l :; .~
 MARKETING OF AGRICULTURAL PRODUCTS

the merchant wholesaler who actually buys and brings the needed products
together is a focal point in the distribution scene.
Too, as we mentioned in the last chapter, many processors perform
the functions of a wholesaler for themselves. Through sales offices and
branch warehouses, they can contact and service retailers directly. On the
other hand, many processors who do not have an adequate line or volume

STRUCTURE OF WHOLESALE-RETAIL FOOD DISTRIBUTION

Food industries (processed foods)

Non processed foods (form

not changed essentially since
leaving farm)

Food Brokers and Manufacturer Sales Branches

(G~:;:~;;'t~:~~;I;'~~:r11 Md 011""
function, limited function)
/ ~
Retailer Food Stores)' Restaurants, Institutions

~~
Consumers

of products may utilize food brokers and commission men to act as their
salesman. As in the case of the other brokers and commission men which
we have already studied, this group of middlemen does not take ownership
of the products. It merely searches out potential sales outlets for processors
and keeps the processor informed of trade conditions and needs for a fee.

Types of Wholesalers
Merchant wholesalers may be classified on the basis of the functions
they perform. The service or full-function wholesaler performs all of the
various marketing functions to some degree. He is an expert in the buying
of goods, and the retailer often looks to him for advice on what to stock
and how to merchandise individual items to the best advantage. He extends
a line of credit and delivers to his retailers. Since he must be able to
furnish retailers with small quantities at frequent intervals, he stores large
amounts of food in the form of inventory stocks.
In contrast, the limited-function wholesaler does not perform this
complete array of services. He may be a cash-and-carry merchant, extending
no credit or giving no delivery. He may set up order-size requirements for
 Wholesaling and Retailing of Food 367
his customers, thus requiring them to order larger amounts less frequently.
Many of the manufacturers' sales branches are in this classification of the
limited-function wholesalers.
In addition to this functional basis, wholesalers may be classified as
to the kind of goods which they handle. The general-line grocery whole-
saler will stock a wide variety of goods so that a retailer can secure all
of his needs from one wholesaler (with the usual exception of meat). The
1948 Census of Business estimated that the sales of the average general-
line merchant grocery wholesaler were as follows:

Type of Commodity Percent of Sales

Canned goods 35
Other groceries 31
Tobacco products 8
Soaps 5
Coffee 5
Fresh fruits, vegetables 4
Confectioneries 2
Other goods 10

In contrast to the general-line wholesaler is the specialty wholesaler.

He handles only one or a few closely related lines. For example, he may
specialize in fruits and vegetables, meat, flour, breakfast cereals, and so on.
A large portion of the food wholesale business is done by the general-line
wholesalers. The specialty wholesaler, however, has had a strong attraction
for food processors. The processor can expect a specialized wholesaler to
become an expert salesman for his particular product. He also may find
such a 'wholesaler more likely to cooperate closely in processor-originated
advertising and sales campaigns to push particular goods.

Structure and Operation

Table 1 shows the number and sales of the major types of wholesalers
directly serving the grocery retailer. Merchant wholesalers of various kinds
are the most important type of wholesaler selling to grocers. Generally
speaking, commission agents and brokers do relatively little business
directly with retailers. They operate more closely with other wholesalers.
Compared to processing industries, wholesaling is a small unit opera-
tion. Over half of the merchant grocery wholesalers in 1948 employed
between ten and fifty men (Table 2). This group also accounted for over
half of the total sales of this kind of wholesaler. \Vell over half of the
rne,chant wholesalers have an annual sales volume of under a million
clolhr~. Table 2 also illustrates the difference between the merchant whole-
 MARKETING OF AGRICULTURAL PRODUCTS

saler who operates a warehouse and handles goods, and the broker who i3
only a contact man doing no physical handling. Over 90 percent of the
brokers employ under ten people. In fact, one-fifth of the brokers operate
without any paid employees and another fifth have only onc other person
working for them.

TAB L E 1. Types of \Vholesale Fooel Agencies, United

States, 1948

5.\1.1'5 1'01( PERCENT OF

TYPE OF :'IU~!llER OF TliE YEAR SALES :-O!ADE TO
EST.\llLlSll~!E"T ESTABL!SlI~!ENTS (~!ILLlO" DOLLARS) RETA!LERS

~{crchant wholesalers:
Groceries. meat. confections 11,35';" 7"Z
Dairy and poultry products,
fresh fruits :ind n:gdables 6"Z
i\!anufacturers' sales
br:lIIches anel offices:
Groceries. 111ea t. confections 7.9 6 7
Dairy anel poultry products 955
Agents anel brokers:
Groceries. meat. confections 3,17 1 5.4 87 1.4
Dairy and poultry products.
fresh fruits and vegetables 1.15:; 1.77 8

T;\ B L E ~ Annual Sales and Number E11l/Jlo!,ed by \VllOlesale

Grocers, 1948

~IERCII.\NT .\GI:NTS
~!El\CIl.\:\T WIlOI.ES.\I.ER A:\n BROKERS
WIIOl.ES.\LERS E~!pI.On:LS :\0, NO.
SALES \'O!.!J~!E NO. OF A:\:\U,\L Hlln:n OF OF ,\N:\U.\L
PER FIl\~r nH~IS S,\LES PElt FII(~! Fllt:O-!S S.\ u:s FIR:o.!S S.\I.ES

PERCE:\T OF PERCE:\T OF TOT.\L

TOT.\L
0-") 14 : 70 34
Uncler 5;00.000 11 4-<) :)' 9 ::") 33
5 300.000 to S -l99.c)90 I j 1 O-H) :8 H) :; 15
:;00,000 to C)C){).c)9'i 3I ::)-.j() ::4 )-; 3* 1S •
1.000.000 to 1.l)l)9.l)99 :6 ~0-99 G Ii)
:.080.000 to +9l)9.999 13 :7 loo-and
).COO.008 and o\'\.:r _ -l. _ _ :L o\'<.:! 3 :.1

.\I1 firms 108 100 100 100 100 100

" Twenty employees anc! O\<.:r.

l\'carly two-third, of the mcrchant wllOlesalcrs operatc as independent,

single-firm units. :\5 is to be expcctcd. this is 110t tme of manufacturers'
sales branchcs. \\'hcll ~l manufacturer is large enough to establish his own
 ,,1holesaling and Retailing of Food 369
wholesale facilities. he will generally have more than one unit. Three-
fourths of all grocery manufacturers' sales branches are operated by com-
panies which havc twcnty-five or more branches scattered throughout the
country.
Thc Ccnsus of Business reports the operating expenses of the average
general-line grocery wholesaler to be 8.1 percent of his sales volume. A
manufacturer's sales branch carrying grocery stocks had operating expenses
of 8,3 pcreent of sales. One study showed that of wholesalers' total operat-
ing costs, general administrative expenses accounted for 34 percent, selling
expenses for ::!2 percent, delivery for 19 percent, and warehousing for
25 percent.:l

FOOD RETAILING
It will be recalled that retailing accounts for about 40 percent of the
total marketing charges for food (see Chapter 5). It is the most expensive
single stage in the marketing process. Retail food stores are the major
consumer outlets for agricultural products. The only other substantial
consumer outlets for food are restaurants and other large-scale eating
places. It has been cstimated that approximately 16 percent of the total
ci"ilian food supply is marketed through these various commercial eating
places. 3
The rctailing part of the marketing channel has long been ignored
by those interested in the problems of agricultural marketing. This has
been a serious omission. Not only is retailing the most expensive operation,
but the nation's grocers are also tIle farmers' sales representatives to the
final consumer. Efficient marketing of farm products depends to a con-
siderable degree on efficient, progressive, and well-informed retailing.

Prices Ultimately Determined at Retail Level

:l\!aI1Y pcople belic"e that prices are finally "set" at the terminal
markets. ~~11C1. to thesc priccs, processing, wholesaling, and retailing margins
arc mcreh' added to cstablish the prices for consumers. Though the
meehanic~ of pricing make this appear true, in the final analysis prices
arc nltimateh' dctermincd at the retail level. Here the demand of con-
snmers is matched against thc supply being offercd. All of the other prices
in the mar1:eting channel arc reflcctions of the ultimate price which moyes
prodl:ct~ ill io consumption.

o Snncy Ill' thc \\'holcsale Grocer's Association reported in \Veekl)' Digest of Food
Distribution'. 0fo\'cmber 3, 195I.
3 Lester C. Sartorius, Eating Places as Marketers of Food Products, USDA, Market-

ing Research Report ~o. 3, 195:·

 MARKETING OF AGRICULTURAL PRODUCTS

There are several reasons why prices appear to be finally determined

at earlier stages in the channel. First, there are time lags of various lengths
between the time that farm commodities are sold by farmers and the
delay involved for these commodities to be processed into food and offered
to consumers. This lag in time gives rise to such statements in the press
as, "Today's lower livestock prices will soon show up as lower meat prices
in the butcher shop." A statement closer to the truth would be that
"today's lower livestock prices reflect the lower prices which retailers will
find necessary to move the current offerings of meat into consumption."
In other words, most marketing agencies are continually m;Jtching current
supply against anticipated demand in the future. The question asked by
marketing middlemen is always, "How much can I afford to pay today
against what I might get tomorrow?" It is this aspect of anticipation which
gives the illusion of prices actually being set early in the marketing channel.
A considerable amount of wholesale price fluctuation can be attributed
to mistakes made by market people in their forward guesses. 4
Secondly, there are often many consumer products made from an
individual farm commodity. For example, from livestock comes not only
meat but also hides, lard, tallow, and many other by-products. The price
of the farm commodity is determined by the composite prices of all the
resultant products. The retail prices of all these products may not move
together.
Thirdly, retail prices fluctuate much less than wholesale prices. Part
of the reason for this stems from the belief of retailers that consumers
dislike fluctuating prices. Acting on this premise, retailers will take smaller
margins for a time, as wholesale prices move upward and hold the retail
price line. They may make a substantial jump in retail prices after the
margin squeeze has been occurring for some time. In times of falling prices,
the reverse situation tends to be true. To this must be added the mathe-
matical fact that a small change in retail prices means a larger change in
wholesale and farm prices because of the fixed marketing charges. (Refer
again to the illustratic n of this given in Chapter 5.)
Fourthly, we have already mentioned that processors and marketing
people do not passively accept consumer judgment and reaction. Com-
petition is not perfect, and individual firms can exert some influence over
prices by controlling their output. The extent to which this distortion of
consumer wishes is possible will depend upon the cxistence of the factors
explained in Chapter 7.
4 For an excellent discussion of this area, see \V. \Vaite and H. Trelogan, Agricul·
tural f..farket Prices, 2nd cd. (New York, \Vilcy, 1951), chs. 6 and 8.
 \Vlzolesaling and Retailing of Food 371

The Job of Retailing

The retailer is the principal partner of the food wholes<l.1er in the
marketing process of dispersion. Like many wholesalers, the retailer will
perform all of the marketing functions to some degree. He continues the
breakdown job of the wholesaler. For example, the fruit and vegetable
wholesaler may purchase several bushels of apples and seU only a bushel
or two to a retailer. The retailer in turn will sack them up and sell them
to consumers in five-pound lots. In satisfying the wants of his customers,
the store operator must stock a wide variety of goods. He must not only
have canned peaches, but also several brands of canned peaches. He con-
tinually sorts and discards to maintain a salable quality of perishables.
Through advertising, he furnishes information to his customers as to price,
quantity, and quality of goods that are available. Duddy and Revzan have
perhaps best summed up the job of retailing as follows:
Retailing is, perhaps, the most difficult part of the marketing process to
perform, and certainly is the most expensive. It employs more people and is
subject to more criticism than is any other segment of the marketing structure.
For vast numbers of consumers living in cities who lack direcl contact with the
primary sources of supply, the retail store is the only means of access to the
essentials of living. For producers of consumers' goods, the retail store is the
ultimate point of contact with the users of their products. Here in the retail
store the battle of the market is fought out to a final eonclusion. 5

Structure and Operation

There are about one-half million retail food stores of various types
in the country. These, plus nearly 350,000 eating and drinking places, sell
food directly to the nation's consumers. Table 3 shows the relative

TAB L E 3. Retail Food Outlets in the United States, 1948

PERCENT OF PERCENT OF
TYPE OF STORE NU~!BER TOTAL Nu~rBER TOTAL SALES

Groceries with meat "-::3,66:: 44 67

Groceries without meat 154,"-77 3° 13
~rcat and fish markets ::9,4 6 5 6 6
Fruits and yegetablcs 15,7 63 3
Bakery stores :'0,15: 4 :::
Candie " I1nb, confectioneries 3::,876 ::
Other sprciall J. stores ::8,::44 ~ 9
Total outlets 5°40439 100 100

5 Edward A. Duddy and Da\"id A. Re\"z3Il, Marketing, An Institutional Approach,

,- lj,d cd. (New York, .l\!cGraw·HiII, 1953), p. 150.
I

I
!~
i
 ::\1 ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

importance of the various· types of retail food stores. By far the most
important type of retail food outlet is the complete grocery store which
also handles meat. 111is type of store makes up nearly one-half of the total
store population and accounts for two-thirds of the total food sales.
Basically, food retailing is organized into relatively small, independent
units. O\'er 90 percent of the total number of food stores are operated as
independent, individual units owned by individual proprietors or partners.
This large group docs ne'lrly two-thirds of the total retail business.
Over half of the stores have no employed help in addition to the
owners (Table 4). Half of the food stores did under $30,000 annual
business in 1948. It takes no mental giant to conclude that the net re-
turns to the owners of this group of stores must be very small indeed.
These are the "?vla and Pa" stores-the retail counterpart of the subsistence
farmer. Though making up a large share of the store population, these
small stores do a relatively small share of the total food business. Stores
in this large group are very often high cost stores. Their volume is too
small to make practical the utilization of much of the cost-saving tech-
nology of modern food merchandising. However, this group often sells
service in addition to food. They are the convenient neighborhood stores,
extending credit, offering delivery, and often staying open nights and
Sundays. Therefore, one must usc considerable caution in directly com-
paring the price of goods sold through these stores with other types of
grocery stores.
At the other extreme is a very small group of stores having a very
large volume, employing many people, and selling over a third of the

T 1\ B L E 4. Sales Volume and Employee Distribution of Food

Stores, 19-/8

AX:-;UAL SALES YOLU~IE .\\'ERAGE NU~!BER E:\IPLOYED

STORE ANNUAL NU~!DER OF STORE .\:\NUAL

SALES YOLU~IE NU:'lnERS SALES E~lPLOYEES NU~IBERS SALES

PERCENT OF TOTAL PERCENT OF TOTAL

Less than $10,000 21 J\OIlC 54 16

$ 10,000 to S 19,999 16 4 15 10
20,000 to 29,999 13 5 2 10 9
30,000 to 49,999 18 10 3 6 8
50,000 to 99,999 18 19 4-5 6 10
100,000 to 299,999 10 24 6-7 3 7
300,000 to 499,999 2 10 8-19 -I 19
500,000 or more 2 27 :0 or more 2 21
All stores lCO 100 1\11 stores 100 100
 Wholesaling and Retailing of Food 373
total food volume. These are large specialized stores. They are quite cost-
conscious and anxious to find and put into praetice the latest mer-
chandising developments. Often these are cash-and-carry stores. They
depend largely on low cost operations, not service, to meet compe-
tition.

The modern food store is one which offers hundreds of different

products and brands. Some of these products move rapidly in large vol-
umes, others have a very slow turnover. Some are highly perishable, others
can be stored for long periods of time without appreciable spoilage. Some
products require large areas for proper display, while others can be
merchandised in relatively little space. From the buying and selling of this
wide selection of products, the retailer must secure enough margin out
of which he can pay his operating expenses and make a profit.
Items of high and low markups on cost vary widely within an indi-
vidual store and between stores in a particular area, as well as between
areas. One study found that corporate chains handled 24.5 percent of their
total sales at markups of 14 percent or less; 6,7 percent of total sales were
handled at markups of 25 percent or more.G In some intances, high markups
may be associated with high costs of handling. Generally, however, it may
be said that the markups are more closely related to what the traffic will
bear than to the cost of handling an individual item. Over the years,
habitual rule-of-thumb markup practices have developed. These have been
gradually accepted as "fair" and followed more or less blindly. There is
evidence that many retailers do not know what markup they are taking
on various products. A study of ten stores, for example, found that all ten
operators said they were taking a markup in their fresh produce depart-
ment of about 25 to 30 percent. In all but one store, however, it was found
that the actual markups were nearer 40 to 50 percent.7 There is growing
evidence that many food items are habitually at markups which do not
cover costs while other items carry extremely high markups. Some items
and departments are often used as leaders to attract customers into the
store. The store owner is primarily interested in a profitable return from
his total store operations. However, an efficiently operated, consumer-
directed marketing system requires long-run, cost-price, logical relationships
for different products. Otherwise the price system cannot adequately do
its jobs of directing production and consumption.
G "Chain Store Age," survey as reported in Profitable Methods for a Retail Store,

American Institute of Food Distribution, Inc., pamphlet, 1950. .,

7 R. L. Kohls and Russell l\1awby, Retail Produce Departments, Indiana CIrcular

38~, 195 2 •
374 MARKETING OF AGRICULTURAL PRODUCTS

CHANGES IN THE
WHOLESALE-RETAIL STRUCTURE
The Corporate Chain Store
One cannot study the pattern of food retailing without giving some
attention to the development of chain food stores. The origin of chain
retailing is usually traced back to the establishment of the Great Atlantic
and Pacific Tea Company in 1858. However, it was not until after vVorld
\Var I and during the decade of the 1920'S that real growth occurred.
By 1929, it was estimated that chain stores were doing about 38 percent
of the total business of combination grocery and meat stores. Also, about
this time food chains reached their peak in number of outlets.
Starting in the late thirties and continuing after \Vorld \Var II,
chain organizations consolidated their holdings into fewer, but larger,
stores. In 1948, the Census of Business reported that only 8 percent of the
total food stores were operated as multiple units; the remainder were
independent single units. In 1951, the trade magazine, Progressive Grocer,
estimated that 38 percent of the combination grocery and meat store
business was done by chains. Interestingly enough, this was the same
proportion as reported in 1929.
Originally the chain store organization collected several retail outlets
under one management in order to secure price advantage of large volume
buying from wholesalers and processors. At the retail level they adopted
the policy of cash-and-carry. They aimed for low cost, large volume
operations, and competed with low prices instead of with service.
As time moved on, however, chains have not been satisfied with
horizontal expansion into more retail outlets. They have moved to in-
tegrate vertically. They have become their own wholesalers, often buying
rlirectly from growers in the production areas. They have acquired various
processing facilities, so as to broaden their control over the marketing
channel. Large chains have acquired canning companies, cheese and
butter firms, bakeries, and other miscellaneous food processors. These
firms operate under the brand label and standards set by the chain. Chains
also take large portions of the output of independent processors who meet
the standard and use the brand label of the chain.

The Voluntary Chains 8

As has been so often the reaction of those who stand to lose from
change, the small retailers and service wholesalers attempted to fight the
8 See Duddy and Revzan, op. cit., ch. XIII, "Defenses of the Independent Retailer,"
for a more complete discussion.
 \Vholesaling and Retailing of Food 375
chain store development through the courts. In many cases discriminatory
antichain tax legislation was enacted. Resale price maintenance laws were
passed which were intended to protect the small operator. But as also has
been the case, the real defenses of independents against the chains were
found not in the courts, but rather in improving their own operations so
as to better meet the competitive threat of the chains.
Since both the independent retailer and the service wholesaler had
much at stake, it was logical that these two groups develop some kind
of joint action. This joint action took the form of retailer-owned whole-
salers, and the wholesaler-sponsored, voluntary retail chains. In some in-
stances, independents organized to purchase and operate their own whole-
sale facilities cooperatively. In other instances, a service wholesaler brought
together several retailers into a voluntary chain in which the wholesaler
offered many services in return for the guaranteed business of the par-
ticipating retailers. Both developments represented an effort to secure the
low price benefits of the mass buying power of the corporate chain and
at the same time retain whatever advantages there might be from owner
operation of the independent store. In addition, the larger voluntary
chains, such as the Independent Grocers' Alliance, have made available
such important services as advertising programs, store layout and design
advice, and pricing guides.
Voluntary and cooperative wholesaler-retailer groups have become a
very important part of the food retail picture. The Progressive Grocer
estimated that in 1950 such groups did 33 percent, corporate chains 38
percent, and unaffiliated independents 29 percent of the total grocery
business. Such groups also have become an important part of the whole-
sale picture (Table 5). Though only one-fifth of the total grocery whole-
salers is owned by or directly affiliated with groups of independent retail
stores, this group accounts for about two-fifths of the business volume.

TAB L E 5. Amount of Affiliation of General Line Merchant

\Vholesalers, 1948

TYPE OF WHOLESALE NUMBER OF ANNUAL SALES

OPERATION FIRMS VOLU1IE

PERCENT OF TOTAL

~ot SpOnSGl;:-tg cooperative groups 58

Voluntary group wholesalers 28
Retail, cooperatively owned warehouses 10
C:~sh-and-carry depots and others 4
All wholesalers 100 100
 1,IARKETING OF AGRICULTURAL PRODUCTS

In addition, even many of the nonsponsoring wholesalers have developed

many kinds of buying plans and other arrangements in order to give their
customers special competitive advantages.

Self-Service and the Supermark.et

Two of the most important recent developments in food retailing
have been the rise of self-service and the growth of the supermarket. Both
of these developments have occurred to a major extent since the end of
\Vorld 'Var II.
Self-service has been an outgrowth of both the scarcity and high cost
of labor. In the self-service operation, merchandise is mass-packaged in
consumer-sized units and displayed for the consumer to make his own
selection. Store personnel limit themselves to keeping the shelves stocked
and checking out the consumer with her purchases. In this way, the con-
sumer undertakes much of the work previously done by store employees.
The acceptance of the self-service idea has been a rapid one. The Pro-
gressive Grocer estimated that in 1951, nearly three-fourths of all the
grocery business was done in stores which, in the main, were self-service.
In fact, the self-service principle has been spreading into many other
retail fields such as drugs, clothing, and hardware.
Along with self-sen'ice has come the supermarket operation. No
completely acceptable definition of a supermarket has yet been worked
out. Basically the supermarket is a large volume operation carrying such
a complete line of foods that the consumer can purchase all her needs
at the one store. The merchandise has been departmentalized and is, to a
very great degree, arranged for se1f-service. Supermarkets are operated both
as units of corporate chains and as independent stores. In the main, how-
ever, supermarkets have provided one way for independents to compete
effectively with chains. It was estimated by a supermarket trade journal
that of the approximately 15,000 new units built in 1951, about one-
fourth were built by large corporate chains, about one-third by operators
of from two to twe~tr-five stores, and the remainder by single inde-
pendents. The same source estimated that about two-fifths of all the
grocery store business was transacted in supermarkets in 1951. It is not
unusual in towns and cities which have a great number of grocery outlets
for two or three supermarkets to do well over half of the total grocery
business of the community.
The early growth of the supermarket came from its vigorous high-
volume, low-price policy. Customer sen'ices, such as credit, delivery, and
personal attention wcre nearly eliminated. The large volume handled
 Wholesaling and Retailing of Food 377
enabled the store to departmentalize its bookkeeping and personnel. The
volume was large enough so that specialized management could be used.
No longer did the store manager have to divide his time among the various
jobs of being a clerk, stockman, and janitor. \Vith departmentalized rec-
ords, the manager could study the cost-and-profit performance of various
departments. He could even hire specialized department managers. The
advantages of specialization could now be utilized in the grocery business.
Too, the early snccess of many supermarkets was due, to some extent, to
the appearance of th~ store. New, bright, sparkling stores, carrying a wealth
of fairlike displays were a tremendous departure from the small, drab, and
often dirty stores about which many housewives had long complained.
The future of this development is uncertain. The business cream has
now been skimmed off. Supermarkets are now competing with super-
markets. :Many are now adding a wide range of nongrocery lines until the
modern supermarket often looks like a superbly dressed copy of the old
general storc. lVlany are also reintroducing many of the discontinued
services in order to attract customers. \Vill these developments send cost
of operations up again?
Regardless of the future, we can safely say that the wholesaling-
retailing part of food marketing has made vast improvements within a
few years. The corporate chains, the voluntary wholesale-retail groups,
and the self-service supermarkets have a11 had a part in giving the back-
woods cousin of the marketing machinery, retailing, a great push forward.
Retailing will always remain a relatively expensive phase of marketing.
The fnnctions it must perform are varied and complex. However, recent
developments show that substantial improvements are possible. And what
is of major importance, there appears to be a new desire on the part of
food wholesalers and retailers to search actively for new and better methods
and put them into practice.
SELECTED REFERENCES
Butler, R. S., "Is Our l'.larketing Machine Outworn?" in Changing Perspectives
in Marheting, cd. Hugh \Vales (Urbana, University of Illinois Press, 1951).
Cassady, R., and \V. L. Jones, "The Los Angeles ·Wholesale Grocery Structure,
1920-1946," Journal of lvlarheting, July, 1949:
Coles, J. V., "The Pattern of Retail Food Stores in a Small City," Journal of
Mark.eti1lg, October, 1948.
DlIJdy, E. A., and D. A. Revzan, Mark.eting, 2nd ed. (New York, :lI&Graw-
Hill,19:;3)'
Nystrom, P. H., "Retailing in Retrospect and Prospect," in Changing Perspec-
tires in Marheting, cd. Hugh \Vales (Urbana, University of Illinois Press,
195 1 ) .
 MARKETING OF AGRICULTURAL PRODUCTS

Teitelman, S., "Self-Service i'vIeat Retailing in 1950," Journal of Marketing,

October, 1948.
Tonsley, R. D., "Reducing Distribution Costs in the Grocery Field: A Case
Study," Journal of Marketing, April, 1948.
Toulme, M. L., "\Vholesale Grocery Industry," Journal of IVIarketing, July,
1949·
CHAPTER TWENTY-FIVE

Summing Up

\Ve have now had an introduction to some of the more important concepts
of marketing. \Ve initiated our study with a broad view of the marketing
task. Production is undertaken for consumption purposes. The responsi-
bility of the marketing machinery is to coordinate production and con-
sumption. In doing this, certain marketing functions must be performed.
Some of these, such as storage and transportation, we examined in con-
siderable detail. Pricing, which is the result of the functions of buying
and selling, received our attention. \Ve then turned to specific agricultural
commodities and studied their particular marketing structures and prob-
lems. The place of cooperatives, the role of government, and finally the
businesses engaged in food processing, wholesaling, and retailing received
our attention. Now it is proper to pull some of these many details back
into focus and perspective. \Ve must also point out some of the areas
which have been treated lightly or not at all. For it should be evident now
that the introductory statement made in the first chapter is very true. This
has not been a complete book on agricultural marketing. It can only open
wide the gate to the desire for further exploration in a very complex field.

THE BIG PICTURE AGAIN

\Ve have been exposed to a wide variety of detail. There is always
danger in the separate study of small parts, as anyone knows who has
attempted to assemble a jig-saw puzzle without the master picture to
guide him. One is likely to assume that each part represents a peculiar and
unrelated problem. Too, as the deficiency of each of the parts of the
marketing machinery is stressed, one may begin to think that very little
11'at is good exists in this marketing system of ours.
On the contrary, instead of being impressed with these shortcomings,
379
 l\I ARK E TIN G 0 FAG RIC U L T U R ALP ROD U C T S

the really astounding fact is that our agricultural marketing machinery

works quite well. The multitudinous agricultural commodities of various
degrees of perishability and quality are effectively assembled from the
many small volume producing units. The machinery adjusts itself to tre-
mendous fluctuations in volumes which occur both seasonally and from
year to year. These commodities, or products derived from them, are fun-
neled into the hands of consumers whose desires and ability to buy vary
widely and who are crowded into small congested areas far from the areas
of production.
Yet these consumers are among the best fed people of the world.
Relative to other countries, Americans spend less of their incomes to secure
this food. Think of it! Every day of the year, most of the 12 million people
of New York City can secure at a price a head of lettuce at their grocery
store. And this very perishable lettuce often has come by truck, rail, and
boat from far-away California. Consumers can buy bread which is baked
fresh daily. They can have their milk delivered at their doorstep-and what
is equally important, they can be assured that it is safe to drink. They can
assemble their meals by picking and choosing from literally hundreds of
different items at their grocery stores. \Vhen we think of it in this way,
it is not the high costs of the system which are remarkable. Rather the
real phenomenon is that we have assembled the combination of technology
and business organization that gets the job done at all!
The comparative well-being of the American consumer is a result of
a well-integrated team. The bread which consumers eat is a combined
result of the wheat producing success of farmers, the productive efforts
of wholesalers, millers, bakers, and retailers, and the policing and regulatory
efforts of society working through its government. All groups contributed
to placing the loaf of wholesome bread into the hands of consumers at a
price they would pay. The argument over which member of the team is
most important is a game played by the misinformed. All are necessary
to get the job done.
There is nothin;; which compels the marketing machinery to mesh
production efficiently to consumption. Efficiency in the production of farm
products does not assure efficient marketing. Neither is the reverse true.
In the course of our discussion, we have cited several examples wherein
there are considerable waste and inefficiency. So the job which is appar-
ently well done is not quite satisfactory to those who see where improve-
ments can still be made. This continued search for improvement is one
of the reasons why it is easy to overemphasize the shortcomings of our
marketing system.
\Ve should also remember that it is the purpose of this book to
 Summing Up 381
emphasize the aspects of marketing which are of the most immediate and
practical concern to farmers. The discussion of the various commodities
gave more attention to marketing from the farmer's viewpoint. Only a
brief survey has been made of the marketing organization and problems
of processors, food wholesalers, and retailers. This division of attention
was forced by limitations of space rather than relative importance. \Ve
know that marketing is not completed until the finished product is sold
to consumers. Many of the real problems in agricultural marketing occur
in the marketing channel often after the farmer thinks marketing has been
finished. For example, it may be far more important from the viewpoint
of over-all marketing efficiency to improve the retail handling of meat and
bottled milk than to improve the country assembly of livestock and milk.

PROBLEMS OF CHANGE
TIle marketing machinery is a changing one. Solutions which are
adequate today may be woefully inadequate tomorrow. Changes may be
initiated by some change in the production machinery. They may be
initiated by changes in the consumer and his actions. Or they may originate
with new developments in the marketing processes themselves. \Vherever
they initially occur, however, the repercussions will be felt throughout the
entire marketing channel.
\Ve have seen examples of various types of changes. As our country
bas expanded over the years, the relationship of production and con-
sumption areas has changed. This rearrangement has resulted in the rise
of new marketing centers and the decline of old ones. It has left excess
processing capacity for some of our industries scattered throughout the
country. Changing production technology has also had its effect. For
example, the increase in the efficiency of egg production per hen reduced
the supply of poultry meat from this source but helped make possible the
rapid expansion of the broiler industry. Increasing specialization in many
of our farm enterprises, such as dairying, has given increasing emphasis
to marketing.
Consumers, too, have changed. With increased urbanization and
smaller families, the demand for smaller purchase units has increased.
The turkey industry has had to recognize this by developing a smalIer-
sized product and by merchandising turkey parts. Retailers have had to
adjust by continually reducing the size of their sales unit. Consumers'
tastes and preferences have also changed. \Ve have seen the ramifications
of one of the demand shifts-the decreasing desire for animal fats-in two
;nstances. One was the problem created by the consumers' desire for
leaner pork. This raised issues of adequate grading standards and buying
 MARKETING OF AGRICULTURAL PRODUCTS

practice~ for hogs. Another was in the area of milk marketing. Here the
major pricing methods were still basing the value of \vhole milk on the
butterfat content, even though it was evident that butterfat value was a
declining source of milk value.
\Vithin the marketing area proper, we have noted the results of
technological change. Improved transportation and refrigeration have made
long hauling practical. New technology has permittcd improvement in
methods of grading and qnality control. The development of the integrated
retail grocery chain, self-service, and the supermarket has had its repercus-
sion in wholesaling, processing. and even in the buying structures at pro-
ducer leyels.
Such a few examples merely serve to illustrate that changes occur and
always have consequences_ These consequences pose new methods which
always must be evaluated. It is this evaluation process which throws down
the gauntlet to the status quo. Any method of doing a job soon develops
groups of people who have a vested interest in its continuing operation.
Change will often mean a loss of invested capital or even a loss of jobs
for them. The natural reaction of such groups is to fight the change. The
existing situation is often "right" because it is in operation. In such battles
the objective is to win, not necessarily to present an unbiased picture.
From this comes one of the cardinal rules in evaluating a controversial
subject: Ascertain \vho is involved and what they have to gain or lose.
Armed with this knowledge, we will be in a better position to give our
best judgment to the decision at hand.

Decentralization
Perhaps one of the most general changes which has occurred has been
the decentralization of the concentration precess of marketing agricultural
products. Old established central wholesale markets and associated insti-
tutions have declined in importance as buying agencies have increasingly
moved into producing areas. \Ve noted this tendency in livestock, eggs,
dairy products, and fr:lits and vegetables.
Basically much of this change was initiated by a changing transpor-
tation situation which has removed the dependence on the railroads.
\Vith this decentralization have corne other changes and problems. The
system of collection of news from only the large central markets is no
longer adequate. Old established pricing habits are no longer satisfactory.
The regulatory machinery which was established to cover the old centers
must be extended to provide the needed supervision of the newer market-
ing channels. Such circumstances put increasing responsibility on the in-
dividual farmer-seller for selecting the most advantageous outlet.
Integration
Another general development in most marketing channels has been
an increasing degree of vertical integration. Food processors have extended
themselves both backward to producers and forward to retailers. Retail
organizations have integrated under their management wholesaling, proc-
essing, and, in many instances, producing area procurement. Farmers'
cooperatives have also been active in this integration process. Such de-
velopments of large integrated firms often have offered considerable
opportunities to reduce marketing costs. However, integration has also
given us an additional challenge to maintain an effective oompetitive
structure. No longer can the competitive assumption of multitudinous,
small, independent firms be indiscriminately made.

Increasing IvIarhet Size

For almost all commodities, the real market area has been increasing.
The increasing versatility of transportation and the growing communica-
tions network have increased the area wherein buyers and sellers have
facilities to trade with one another. ?vIany markets which once were only
local in nature have now become regional or national in scope. For ex-
ample, milk can now be transported long distances in tank cars. On the
distribution side, paper containers have extended the effective market area
of a dairy plant. Perhaps the most outstanding example of this has occurred
with fresh fruits and vegetables. Fresh lettuce from the Salinas Valley of
California can now compete with lettuce grown near the large consuming
centcrs. Consumers in almost any city in the nation have at their disposal
the products of the farms of the entire nation.
The challenge is for the marketing system to grow up to the poten-
tialities of this broad national market. Increasing attention must be given
to the barriers of trade which arise from differences in regulatory measures
of different states. It also means that it is of increasing importance that
such things as grading standards, health requirements, and truck regula-
tions be made uniform over these wide areas. If we are to exploit the
potentialities of such a broad market, barriers which limit our efforts or
increase our costs must be removed.

THE PRIMARY ROLE OF

THE CONSUMER
\Ve have always maintained that servicing consumer desires is one
of the basic objectives of our marketing system, and in the final analysis
unde!" competitive conditions the consumer directs the entire process. This
 MARKETING OF AGRICULTURAL PRODUCTS

means that the freedom of consumer choice is a freedom to be guarded

jealously. It is upon this freedom that the framework of consumer direction
is built. The freedom of choice is more than a privilege of consumers to
accept or refuse an offered situation. It is a very limited freedom of choice,
indeed, which permits the consumer the right to accept or refuse milk
delivered to the home if he is not offered the opportunity to purchase it
under other circumstances.

Consumer Education
If the marketing system is to be consumer directed, then how the
consumers behave is of primary importance. Such direction, if it is to be
successful, requires that consumers be informed. It is axiomatic that a
successful democratic form of government depends upon an enlightened
and informed electorate. It is just as true that an effectively competitive
marketing system cannot be built upon the ignorance of consumers. If
quality standards are to serve their purpose, the consumers must be aware
of and accept their meaning. They must be aware that services frequently
are added to products and that these services are not costless.
No one has a right to choose for the consumer, but there is an obliga-
tion to see that he has adequate information upon which to base decisions
and choices. Uninformed consumers are an open invitation to chicanery
and abuse. The agricultural producer who is at the other end of the
marketing channel has a real stake in the field of consumer education.

Influencing Consumer Demands-Agricultural Advertising

It has often been pointed out that marketing institutions do not
passively accept consumer judgments. They try to change and influence
them. And one of the techniques most widely used in this campaign to
influence consumers is advertising. No marketing text would be complete
without some mention of the controversial question of agricultural adver-
tising. Slogans such as "Eat more poultry," "Drink more milk," and
"Observe national apple week" are merely a few examples of the efforts
of agricultural groups to influence consumers. In fact, it seems to many
people that most of the ills of agriculture could be solved by improving
quality and by better salesmanship. vVe have already examined the limita-
tions of the first approach; now let us briefly examine the second.
There is real confusion concerning the objective of an advertising
campaign. The objective is not just to increase consumption. vVe must
always remember that within any short-run time period, consumers will
eat what is produced-no more and no less. If per capita turkey con sump-
 Summing Vp 385
tion increases next year, no advertising campaign can take credit for this
development. It will be a result of increased turkey production. The real
objective is to affect the amount of money people spend for the available
supply. We want to sen the same amounts at higher prices or increased
amounts at unchanged prices. In other words, we want to increase the
demand and shift the curve to the right. And since advertising is really a
variation of the marketing function of selling, it is not costless. The final
question to be answered by any group, then, is whether the net returns
to the producers of the products are increased after marketing costs are
deducted.
l\-1any people have witnessed the apparent success of advertising in
selling the products of the nonagricultural industries. From this they have
generalized that a similar campaign by agriculture would have similar
results. Such a transference of results is not completely valid. It must be
recognized that the apple industry, pushing apple sales, is not in the same
position as the manufacturer of Oxydol pushing the sales of its particular
brand of soap. The first is attempting to increase the demand for a general
product; the latter is attempting to increase its particular share of a demand
for a general product. A more correct analogy to the apple situation in
the above illustration would be if the soap industry in general conducted
a campaign to increase the total amount of money which people spend
for all kinds of soaps on the market. If we observe carefully, we will find
very little of this type of advertising done by industry.
General agricultural commodity advertising must recognize two facts-
first, that the stomach is only so big, and secondly, that consumers tend
to spend a rather constant percentage of their incomes on food. The first
is probably of minor importance. We will recall from our study of con-
sumers that apparently American consumers are not near "stomach
capacity" in their food consumption (Chapter 3, Table 3). For, after
all, with increasing incomes, actual physical intake of food does increase.
Perhaps the few millionaires in the country are consuming at their
"stomach limit," but this group is rather small!
The second fact, however, is of a different nature (Chapter 3,
Figure 1). If the portion of incomes spent for an food remains relatively
constant, any increase in apple demand must come at the expense of some
other food. For example, perhaps citrus demand will suffer. Then the
citrus people must play the advertising game in order'to hold on to their
original market. Or if the citrus people are successful in increasing the
demand for their product, perhaps the demand for tomato juice is the
loser. Then tomato processors, too, must join the game. \Vill the end
 MARKETING OF AGRICULTURAL PRODUCTS

result simply be shifts of demand within agriculture plus the addition to

the marketing charges of the cost of ach-ertising? And since an agricultural
producer often produces several different types of products he cannot be
assured that the total demand for all of his different products has been
changed at all. The midwestern farmer might find that the success of his
butter advertising came at the expense of oleomargarine, which is an
important user of his soybeans.
There are other uses of advertising than the simple general industry
approach, however. \Ve know that selling and market information dis-
semination are functions which must be performed. \Vell-directed adver-
tising may contribute to the more efficient performance of these functions.
Consumers need to be informed about nutritional values, uses, and so on
of different products. Informative advertising may be a useful tool here.
For example, there is evidence that consumers feel a small pullet egg is
a low quality egg. Information concerning the facts of this situation would
be useful. If new products arc to be introduced, advertising may be the
most efficient informational and selling approach. Consumers had to be
told what concentrated frozen orange juice was and how it could be used.
They had to be informed concerning the proper handling of cut-up turkeys.
Informative advertising can be part of the effort to make a more informed
and rational consumer.
Other advertising might aid in moving commodities which in the very
short run are in large supply. Periodic market gluts occur for many prod-
ucts. And since these products are usually perishable, they cannot be stored
but must be moved into consumption or spoil. Special advertising cam-
paigns may be quite useful in calling the attention of consumers to special
price and supply situations. A concentrated selling effort might effectively
increase the demand for these commodities temporarily. Such a result
might even be beneficial to competing products. This would be especially
true if there is a tendency for price demoralization to spread from one
commodity to another.
Perhaps such a brief discussion on such a complex subject raises more
questions than it answers. This is good! For it is desirable to expose this
now popular "cure-all" to probing thought. General agricultural adver-
tising cannot be compared to industry advertising of branded products.
Some special situations may find advertising to be a useful way of per-
forming a specific and timely selling and informational job. And it is also
well to realize that even some of the companies which have had an
apparently successful advertising program are questioning just what are
the real net returns above the cost.
 MARKETING IMPROVEMENT
In our introductory chapter we suggested that the idea of marketing
efficiency is a complex one. On the one hand is the problem of maximizing
output in terms of consumer satisfaction. On the other is the problem of
doing this with a minimum of expenditure of economic resources. 'Ve
further suggested that there are two aspects of efficiency. One is the
technological issue of how a job can be best done with the resources and
know-how at hand. The other is the economic issue of maintaining com-
petitive conditions so that consumers, through the market place, can both
secure their wants and make their desires known.

Increasing Efficiency
Time and time again we have examined ways in which the techno-
logical efficiency is being improved and could be further improved. Ex-
amples were often given of labor saving arrangements, new machinery,
new processes for control of quality, and new methods to cut costs. Cer-
tainly in many areas science and invention are offering many opportunities
to do the job better or even produce a better product.
In many instances it was suggested that costs could be lowered if the
volume of operation of individual firms were increased. It was pointed out
that many grain elevators could reduce their unit costs if they could secure
a larger volume. ~Jany of our livestock and poultry buying agencies are
operating at less than optimum size. Milk routes could be advantageously
consolidated. \Ve have seen how many firms have integrated either hori-
zontally or vertically in their efforts to obtain larger volumes.
Against these possibilities of greater operating efficiencies from in-
creased size has always loomed the question of what would be its effect
on the economic efficiency of marketing. 'Vhat would be its effect on the
consumers' freedom of choice? To obtain lower marketing costs would
not in itself be desirable if, in obtaining them, we fostered conditions
bv which the marketing agencies secured increasing monopoly power. The
~;ld of marketing improvement should be not only more for the marketing
firms, but rather more for all.
I t was as an aid to understanding this issue that we studied aspects
of imperfect competition, government price programs, and government
regulatory laws. The challenge is to develop a sound marketing policy.
Bench Mlrks must be developed for judging the adequacy of competi-
tion. \Ve have seen that large numbers alone are not the key. Large
national giants are not necessarilv less competitive than small isolated local
 MARKETING OF AGRICULTURAL PRODUCTS

establishments. In many students' judgment, we have made more rapid

progress in the areas of technological efficiency than in this latter area of
economic efficiency.
However, there is good reason to be optimistic about the prospects for
future improvements in the marketing system. Sweeping cure-aIls, of course,
are highly improbable. The amazing complexity of the different problems
defies any blanket solution. Improvements in the future, as in the past, will
come piecemea1. Some will seem rather insignificant in themselves. For
example, recent research has uncovered ways of improving the check-out
service in retail food stores, how to rearrange milk receiving rooms in dairy
plants, and how to grade products more effectively. None may be of major
importance in itself. But many small improvements added together can
make a substantial contribution.
\Ve cannot afford to wait for the perfect solution to a marketing
problem. Each new partial suggestion must be evaluated for potentialities
as a step forward. Waiting for the complete and correct answer may mean
waiting forever.
Research, both public and private, will continue to pose new propo-
sitions. These must be tried and tested and then accepted or rejected.
Over a period of time in a competitive situation, the results of marketing
improvements will accrue in varying degree to all sectors of the economy.
The consumer will receive more or better products and satisfaction for his
expenditures. The marketing firms that operate most efficiently and best
serve producers and consumers will benefit. Farmer producers will receive
more for what they sell or have the opportunity to serve a growing market.
IN D E X

Abel, H., 225 American i\Ieat Institute, 160

Abrahamsen, 11. A., 331 Anderson, R. H., 270
Abshier, G. S., 74, 279 Animal Quarantine Act, 352
Adl'ance selling, 203, 280 Ashby, R. C., 225
J\dvertising and federal regulation, 346 Askew, \V. R., 276
Agent middlemen, 23
Agnew, D. B., 284 Babcock, H. E., 323
Agricultural Act of 1949, 131 Badger, H. T., 73
Agricultural Adjustment Act of 1933, 129 Baer, Julius B., 211
Agricultural advertising: Bail!, Mordecai, 251
and nonagricultural advertising, 385 Baker, R. L., 148
different uses of, 385-386 Bakken, H. H., 3 11 , 329, 337
objectives of, 384-385 Ballow, E. B., 279
Agricultural Estimates Division, 166, 351 Barley:
Reports of, 167-168 animal supply of, 275
Agricultural Experiment Stations, 348-349 utilization of, 275
Agricultural i\Iarketing Act of 1929, 127 Baron, Frank L., 181
Agricultural rvlarketing Agreements Act, Basic commodities, 131
133, 344 Bausman, R. 0., 42
Agricultural J\Iarketing Service, 162 Ba)ton, J. A., 39
agencies of, 3 51 Been, R. D., 67
Agricultural prices: Bitting, H. W., 39,73
and freight rates, 183-184 Bjorka, Knute, 74, 141, 230
relation to farm income, 116 Blais, R., 323
relation to nonagricultural prices, 113- Boulding, K. E., 86
115 Breakiron, P. L., 189
relation to prices paid, 116-117 Brensike, V. J., 276
Agricultural production: Broiler industry:
and marketing, 51-52, 55-56, 64 growth of, 266
difficulty in adjustment of, 57 location of, 266
land available for, 49 organization of, 267
regional concentration of, 56, 64 Brokers, 23
size of production unit, 50-51 Bureau of Labor Statistics, 161
specialization in, 50 Bureau of the Census, 161
total volume of, 53 Burkhead, C. E., 307
variability in, 53-55 Butter:
Agricultural products: cooperative marketing of, 325
nature of, 52 costs of marketing, 71
quality of, 56 decentralization of marketing of, 256
Agricultural Research Administration, 144, marketing channels of, 254
349 prices, 158-159, 256
Agricultnral Research Service, 351 seasonal production of, 193
Air transportation, 179-180 seasonal storage of, 193
Alderson, \V., 18 Butterfat, seasonal price variation of, 123
Amcric'1n Institute of Food Distribution, Buying, 18
Byer, E. G., 74, 279

389
39 0 INDEX

Capel, C. L., 74, 79 Consumer:

Capper-Volstead Act, 323, 330, 33-9, 344 and government regulation, 345-346
Carcass grade selling of livestock, 236 and standards, 142-143
packers' attitude toward, 236 direction of marketing system, 8, 9,
Ca riot dealers, 280 38 3-3 84
Cash grain commission merchants, 280 education, 384
Cattle: grades, 153
price cycles of, 121-122 preferenccs, 145-146
production areas of, 59 Convcrse, P. D., 18, 320
retail cuts from, 222 Cook, Hugh L., 171,255,257
seasonal price variation of, 123 Cook, l\[. J., 234
Census of Agriculture, 161 Cooperative marketing (see l\hrketing Co-
Census of Business, 369, 374 operatives and also specific commodi-
Census of 1Ianufactures, 161 ties)
Central cotton markets, 295 Cooperative patronage refunds, 324, 337,
agencies of, 295 339
location of, 295 Cooperatives:
Challenge Cream and Butter Association, and competition, 323, 334-335, 340
257 and taxation, 339
Cheese: comparcd with other forms of business,
consumption of, 44 32 5
costs of marketing of, 71 definition of, 323-324
marketing channels of, 254 distinctive features of, 323-324
pricing of, 256-257 failure of, 335
Chicago Board of Trade, 11 financing of, 335-337
Chicken: history of, 329-332
consumption of, 44 kinds of, 324-327
costs of marketing of, 71 organizational types of, 327-328
seasonal price variation of, 123 problems of, 335-340
Childress, Russell L., 145, 149 successful operation of, 333-335
Christenscn, R. P., ::: 59, 260 Cooperative wholesaler-retailer groups,
Church, Donald E., 17+ 178 375
Cigarettes: Cope, W. H., 189, 243
breakdown of costs of, 315, 316 Corn:
taxes on, 317 annual supply of, 273, 275
tobaccos used in, 307 grades of, 282
Clark, C. P., 342 production areas of, 62
Clark, F. E., 342 seasonal price variation of, 123
Class rates, 181 utilization of, 273, 275
Clayton Act, 343 Corporate grocery chain stores:
Coats, N., 284 importance or, 374
Cochrane, \V. \V., 45 nature of operations of, 374
Coke, E. \V., 37 Costs of marketing, 4, 66-81 (see also
Commission men, 23 specific commodities)
Commodity Credit Corporation, 130, 132, Cotton:
35 1 amount sold per farm, 287, 288
Commodity Exchange Act, 12, 21 5, 345, country assembly of, 291, 296, 304
35 1 exports of, 302
Commodity Exchange Authority, 215 foreign production of, 302
Commoditv rates, 181 international trade in, 302
Commodit)· Stabilization Service, 351 market information for, 163, 168, 169
Competition: marketing channels of, 293, 194
assumption of perfect, 100-101 production of, 64, 286-288
departures from, 104-109 seasonal price variation of, 123
effective, I I I utilization of, 290, 29r, 292
imperfect, 106-109 Cotton brokers, 295
in food marketing, 100-112 Cotton cloth, 291, 292, 297, 299
Concentration, 16-17 Cotton exchanges, 295
Conner, Maynard C., 250 Cotton Futures Act of 1914, 141
 INDEX 39 1
Cotton ginning, Z\)~ of livestock marketing:
costs of, 1.97 and prices, 232
cotton prices and, 301 arguments against, 23 2
excess capacity of, 305 growth of, 229-230
Cotton Grade and Staple Statistics Act, reasons for, 230-231
:89 problems of, 233, 382
Cotton grades: Demand:
basis for, 288 changes in, 9 2, 93
extent of, 304 effective demand, 88
federal government and, :89, 304 elasti~ity of, 94-96, 126, 135, 244, 245
producer knowledge of, 303 meamng of, 86-87
Cotton marketing: Department of Agriculture, 12, 162, 345
cooperative, 325, 333 34 8
costs of, 296, 297, 29 8, 299, 300 agencies of, 350-352
problems of, 303-3°5 Department of Commerce, 161
Cotton mills, location of, 292 Depression of the 1930's, 128-129
Cottonseed: Dewey, Ralph L., 181
buying of, 301 Dispersion, 16-17
importance of, 300 Diversion and reconsignment privilege,
utilization of, 300 182, 183
Cottonseed oil, importance of, 274 Dam, A. F., 338
Country assembly of: Dowell, A. A., 141, 235, 237
cotton, 29 1, 29 6, 304 Duddy, ~dward A., 139, 342, 371, 374
eggs, 261, 1.62 DummeICr, E. F., 334
grain, 277, 281, 284, 1.85
li\'estock, 223-225 Eddy, A. J., 128
milk, 24::' 243 Edwards, C. D., I I I
poultry, 264, 265 Effective competition:
tobacco, 311, 312, 320 and economic efficiency, 9, 387-388
Countr\' elevators: criteria of, 111
capacity of, 277 government regulation and, 342-344
costs of operation of, 278-279 Egg marketing:
economics of scale of, 278-279 channels of, 260-261
grading by, 285 cooperatives, 271, 32;
margins taken by, 279, 284 costs of, 71, 261
types of, 277-278 regional differences in, 261
variations in prices paid by, 285 Egg production:
Cowden, J. rvI., 255 areas of, 60
Cox, C. B., 1.28, 1.32, 286, 306 changes in, 259
Cox, R., 18, 342, 344 nature of, 259
Crop Reporting Board, 166 relative importance of, 258
Crops, production areas of, 61 seasonal variation in, 259, 261
Cyclic price fluctuations: Egg quality and grades:
cattle cycle, 121-l:Z1. and consumer acceptance, 148, 263
causes of, 120 and handling methods, 263
hog cycle, 121-122 deterioration during marketing of, I.f9,
262-263
Dairv products: farm seIling on basis of, 263
ca'ns'umption of, 239 prices and, 263
cooperativc marketing of, 325, 333 Eggs:
industries, 354, 355,357,359,3 61 consumption of, 44
market infornlation for, 163, 167, 169 country assembly of, 261-262
D:lVis, A. B., 244 market information for, 168-169
Davis, \V. K., 284 seasonal price variation of, 1::3
Dawson, L. E., 36, 269 Engleman, G., 235, 237
Decentralization: Equalization, 16-17
and poultry markcting, 265 Equilibrium price:
market news and, 171, 233 changes in, 93, 94, 98
of dairy marketing, 253, 25 6, 257 definition of, 90-91
 lNDEX

Erdman, Ho E., 147 and marketing improvement, 361-364

Evans, 1\1. Bo, :::: 5 buying operations of, 361-362
Excess capacity in food processing, 360 location of, 355-356
Extension Service, 350 output by size of firm of, 358-359
output concentration in, 357-360
Facilitative middlemen, z4 seasonal nature of, 361
Fair price, 1Z9, 130 selling operations of, 362 , 363
Fair trade acts, 343 size of, 353-354, 356--357
F;Hm Cooperative Service, 351 Food retailers:
Farm Credit Administration, 339 jobs performed by, 371
Farmer's Alliance, 11 markup practices of, 373
Farmer's "Marketing decisions, 13-14 size of, 37 1 , 37z
Farmer's Share of consumer's dollar: types of, 371-372
as measure of marketing efficiency, 78 Food Stamp Program, 13 2 , 347
changes over time in, 67 Food wholesalers:
definition of, 67 costs of, 369
difference bctween commodities in, 69- general-line, 367
7° importance of types of, 368
Farrington, Co Co, 153 jobs performed by, 365, 366
Farstad, E., 2::5, z31 limited-function, 367
Fats and oils for food, ::74 sales volume of, 367-368
Fawcett, K. L, 145 service or full-function, 366
Federal Communications Commission, 344 specialty, 367
Federal Farm Board, IZ7, 347 Foote, Ro Jo, 1°7, 119
Federal Food and Drug Act, 346 Foreign Agricultural Service, 351
Federal Market News Service, 16::, 351 Foreign markets:
coverage of, 164-165 commodities exported, 46
reports of, 163 for cotton, 301-30Z
Federal milk market orders: for tobacco, 318-319
cooperatives and, 246 importance of agricultural exports, 45
establishment of, ::47 portion of domestic supply exported, 47
importance of, 247 Foytik, Jo, 73
purpose of, 247 Freight rates:
Federal Trade Commission, 357 rail:
Federal Trade Commission Act, 343 and agricultural prices, 185-186
Fibers: making of, 183-184
foreign consumption of, 290 structure of, 181-182
United States' consumption of, 289, ::90 truck, 183
Financing, 20 French, Co Eo, 80
Fluid milk: Frozen food lockers, 195
characteristics of, z43 Fruits and vegetables:
consumption of, 44 consumption of, 44
demand for, 245 cooperative marketing of, 32 5, 333
distributors of, 244 costs of marketing for, 7 1 , 73
seasonal prices of, 123 market information for, 163, 168
seasonal production of, :44 marketing agreements for, 133-134
seasonal sales of, 244 processing industry of, 354-355, 357,
Food brokers, 366, 368 359,3 61
Food consumption: Fugett, K. Ao, 39
change over time in, 43 Futures contracts:
differences by income levels, 38, 39 cancellation of, z05
effect of race and nationality on, 41, definition of, z04
42 fulfillment of, :w8
effect of religion on, 41 Futures exchanges:
effect of special days on, 42 commodities traded on, 205
of selected foods, 44 government supervision of, Z 1 5
regional differences in, 39 location of, 204-;:05
Food processing industries: organization of, 20-1-
and marketing, 361-364 Futures prices and cash prices, 206--208
 INDEX 393
Futures trading: Grange League Federation, 33 1
argumen ts for and against, 212 Great Atlantic and Pacific Tea Company,
commodities adapted to, 210-211
374
effect on marketing costs of, 214 Grether, E. T., 342, 344
effect on prices of, 212-224
volume of, 205 Hall, T. E., 284
Hammerberg, D.O., 188
Gage, C. E., 311 Hardin, L. S., 80
Gardner, K. B., 328 Harp.er, F. A., 194
Gaylord, F. D., 1.f5 Hams, E. S., 249
General price level: Hatch Act, 348
and agricultural prices, 115-116 Haverkamp, L. J., 80
fluctuations in, 113-11.f Heckman, J. H., 327, 339
Gerald, J. 0., 73 Hedges, Harold, 323
Goldman, A. S., 148 Hedges, I. R., 249
Goldsborough, G. H., 327 Hedging:
Govemment price programs: and grain handlers, 281
effects on marketing, 136-137 and risk transference, 208-209
effects on pricing mechanism, 136 by cotton merchants, 295
history of, 126-132 mechanics of, 208-209
reasons for, 125-126 Heflebower, R. B., 334
Government regulation: Hemphill, P. V., ::84
and consumer protection, 345-346 Henning, G. F., 225
and prevention of monopoly, 343-344 Hensley, H. C., 328
and prices, 347 Herman, Louis F., 251, 261, 263
and progress, 347-349 Hester, O. C., 261, 263
to promote trade, 345 Hicks, J. A., 307
Grades: Hicks, J. \Y., 284
and health regulations, 149 Hirsch, Donald E., 145, 159, 256
brands and, 153-154 Hoecker, R. \V., 180, 189
consumer, 153 Hoffman, C. \Vright, 214
farm selling on, 15°-151 Hogs:
limits of, 147 carcass and live grading of, 234-236
measurcmcnt of, 1.f6 country assembly of, 225
relation of prices to, 144-145 price and production cycles of, 121-
terminology of, 140-141, 154 122
wholesale trade and, 1 55 l see also production areas of, 58, 219
specific commodities) retail meat cuts from, 222
Graf, T. F., 73, 262 seasonal price variation of, 123
Grain: Hogshead selling, 311
and livestock production, 272-273 Horizontal integration:
cooperative marketing of, 32 5, 333 definition of, 25-26
country assembly of, 277, 281, 284-285 in food processing, 357
market information for, 163, 168-169 in food retailing, 374-375
marketing channels of, 277-281 of grain elevators, 278
marketing costs of, 71 Howe, Charles B., 244
processing industries of, 354-355, 357, Howell, L. D., 213, 214, 29 0 ,29 6, 305
359, 361 Huegy, H. \Y., 18
processors and millers, 281
variable production of, 54, 27 6 Imperfect and monopolistic competition:
Grain grading: causes of, 10 5
and blending, 283 definition of, 105
f8ctors considered in, 282 examples of, 1°7-1°9
history of, 141 extent in agricultural marketing of,
Grain Standards Act of 1916, 141 110
Grain storage: in food processing, 364
costs of, 283-284 in grain buying, 285
farm, 283 in poultry and eggs, 270-271
price supports and, ::84 in tobacco marketing, 314-315, po
394 INDEX

Incomes: farmer's use of, 232

and food expenditures, 30-31 govemmcnt supervision of, 229, 233
distribution among occupational groups, Livestock production:
37 and consumption, 221
distribution among spending units, 36 and storage, 220
gcographic concentration of, 32 characteristics of, 54, 220
Independent Groccrs' Alliance, 375 location of, 58, 219
Insurance companies, 20, 203 Local cotton markets, 293
Integration: farmcr's choice of, 304
and compctition, 80 size of, 293
and marketing costs, 79 Local markets, 26
definition of, 25-26 Lowenstein, Frank, 290
Intcrstate Commerce Commission, 11,
180, 18 3, 184,344 MacPherson, D. D., 244
dccisions of, 184 l\lallott, D. \V., 277, 280
freight rates and, 184 .1\!anhart, V. C" 80
'\Ianufacturcd dairy products:
Jensen, A. L., 335 branding and, 256
John, .1\1. E., 333 marketing channels for, 253-255
Johnson, H. A., 150 plant specialization in, 255
Johnson, S. E., 46 pricing problems of, 2 56-z 57
product improvement of, z 56
Keirstcad, C. B., 284 .1\!arket area:
Kclley, P. L., 255, 257 definition, 101
Kigcr, H. C., 133 increasing size of, 383
King, R. A, 263 unifom1 prices in, 102
Kitchcn, C. \V., l.fO .1\!arkct information, 20
Kohls, R. L., 118, 119, 148, 154, 159, agencics of, 160-169
26 3,270,3::'3,373 and competition, 156
Koller, E. F., 255, 257 and decentralization, 171
Korzan, G. E., 244 and markcting, 157
Koshcr, 41, 356 goyemmcnt and, 161, 345
Kyle, O. :t\I., 331 problems in collcction of, 157-159,
16 9- 1 7 2
Lambs: probJcms in dissemination of, 159-160,
production arcas of, 59, ::'19 17:!-173
rctail cuts from, 222 Marketing:
seasonal price yariation of, 123 and thc farmcr, 13,14
Land 0' Lakes Cooperatiyc ,\ssociation, changes in labor productivity in, 80-81
25 6 comple;,ity of job of, 4
Larson, A. L., 284 definition of, 7
LcBeau, O. R., 339 cffccts of nature of production on, 51,
Lcwis, G. :t\I., 74, 75, 23 6 55, 64
Limmcr, Ezekiel, 176, 183, 186 cffccts of nature of products on, 52, 56
Liycstock: farmer's attitude toward, ;:
coopcrative marketing 0(, 223, 325, growth of, 6
333 history and developmcnt of, 10-13
market information for, 163, 167, 169 impron:ment in, 387-388
marketing channels for, 225-227 integration in, "' 5-26, 38:.
marketing costs of, 71 mass production and, 6
Liyestock grading: people employed in, 7
fedcral,237 problems of changc in, 381-383
relation betwcen liyc and carcass grades, relation of standard of ]il'ing to, 7
:: 34- 2 35 role of consumcr in, 8
shortcomings of, 237 specialization and, 6
Livestock ma;-keting agencies, 223-225, transportation and communication and.
~3° 6
costs of, 231 urbanization and, 6
 INDEX 395
l\1arketing analysis:
l\·leat packers:
commodity approach, 27
functional approach, 17 location of, 226
institutional approach, 22 number and size of, 225
marketing functions, 18-20 products of, 220-222
middlemen, 22-25 l\Ieat packing industry, 354, 355, 357,
uses of functional approach, 21 359, 361
uses of institutional apT:Jroach, 27 !\Ierchant middlemen, 3
l\Iarketing channels: Meyer, C. H., 284
definition of, 26 Meyers, D. E., 28 5
Middlemen, 22-25
of cotton, 293-294
of dairy products, 254 l\lighell, R. L., 259, 260
!\Iilk:
of grain, 277-281
of livestock, 225-227 costs of marketing of, 71
of poultry, 260-261 country assembly of, 24 2 - 2 43
of tobacco, 313-314 bulk tank method of, 243
l\[arketing cooperatil"Cs: reducing costs of, 242
seasonal price variation of, 12 3
COlllmodities handled by, 324, 333 Milk distribution:
lllembership in, 327, 330
changes in, 25 2
nature of, 325
costs of, 25°-2 51
number of, 3 2 7, 330
methods of, 25°- 2 51
regional business of, 3P
l\larketing efficiency: Milk markets, imperfect competition in,
defined, 9, 387
244- 2 45
Milk pricing:
cconomic, 9, 387, 388 blend prices, 24 8
technological, 9, 3S7
formula, 247, 248, 250
;'\1arketing margins: retail, 251
composition of, 70-73
seasonal problems of, 249
labor costs in, 74-75 Milk production:
nature of, 68-69, 77
by size of herd, 241
opportunities for reducing, 79-81 efficiency of, 241
profits in, 74-76 major uses of, 23 8
size of, 67
methods of farm sale of, 240- 2 4 1
l\brketing orders and agrcements, 133- regional distribution of, 60, 240
135,247 value in different uses of, 239
]\1arkcting principles, 28, 29 Milk standards, 149, 153
l\larketing processes, 16-17 public interest in, 243
l\1arketing quotas, IF l\liller, A. H., 255, 257
]\1arsh, J. F., 307 l\liller, J., 228
;'\[artin, J. II., 262 Miller, R. W., 335
J\[astcrs, B. ]\1., 189
l\lilling industry, history of, 360
l\[athis, A. G., 145,159, :56 l\Iixed feeds:
:\latzen, E. II., 1 SS, :4: importance of, 276
:\la\\'by, Russell, 373
"T.
;'\[cAllistcr,
:\[CGuirc ,\ct, 343
T., .F
utilization of, 27 6
Monopoly:
and federal regulation, 34 2 -344
:\[cGUIrl', E. D., 18 definition of, 105
:\[cKal', ·A. 'V., 3:8 in dairy products, 25:
\[c.'\'a·ry.IIaugcn Bill, 127 in milk marketing, 245
;-"[cat: Moore, E. M., 148
consumption of, 44 l\Iorrill Land-Grant College Act, 34 8
cost of marketing of, 71, 72 Mortenson, 'V. P., 73, 262
federal inspection of, ::6 l\lueller, W. F., 311
Illark~tinr; channels for, ::':7, ::8 Mutti, R. J., 285
production and consumption, ::n
retail cuts of, ::: National Farm Loan Associations, 327, 3)::
seasonal production of, 193 National Grocery l\Ianufacturers of Amer.
:', feat Inspcction Act, 34 6 ica, 160
 INDEX

National Industrial Recovcrv Act, _1::8 marketing channels of, 265

National School Lunch Act: 3-17 per capita consumption of, ::6-f
Nicholls, \\'illiam II., ::55, 31S pricing of, ::70
Non-price competition, 104-107, 172,252 relatil'e importance of, :: 58
Non-recourse loans, 130, 2S3, 317 Poultry processing industry, 354, 355, 357,
1\'orris, 1'. K., 297 359, 361
Norton, L. J., 1-13, 27 8 Price:
Nutritional levels of diets, 44-45 law of one, 101
Nybroten, N., ::63 relation of costs to, 102-103
Price controls, 135
Oats: Price discrimination, 134, 343, 3-f5
annual supply of, 277 Price information, 157-159
production areas of, 62 Prices:
seasonal price variation of, 123 and marketing, 85
utilization of, 275 fluctuation of, 117
Office of Experiment Stations, 350 jobs performed by, 86
Office of Illfonnation, 350 Price supports:
Office of Price Administration, 135, 347 levels of, 1)1
Office of Price Stabilization, 135, 347 methods of, 130-131
Oligopoly, 105 Pritchard, N. T_, 189, 243, 244
Olsen, R., 237 Processing cooperatives, 3'1.7
"On-track" bids, 280, 281 Produce Agency Act, 345
Oppenheimer, N., 14 8, 154, ::63 Product differentiation:
Orderly marketing, 127, 136 extent, 108
Otte, A. W., 152 purpose of, 108
Production controls, 1)2, 317
Paarlberg, Don, 118, 119, 23::, 274 Production Credit Associations, 327, 332
Packers and Stockyards Act, 1::, 2::8, 233, Public warehouses, 196
237,345,35 1 Purcell, iVIargaret R., 175, 187
Parity, 129 Purchasing cooperatives:
for individual commodities, 129-130 membership in, 32 7, 330
ratio, 129 nature of, 3::6
revision of, 130 number of, 3::7, 330
Parr, Kathryn, 7=, 222 products handled by, p6
Parvin, D. \V., 2::5
Patents and copyrights, 3.t7-348 Quality: (see also specific commodities)
Paul, Allen n., 52, 353 changes in, 148-1-f9
Peanuts, seasonal price variation of, 123 distribution of, I-f7
Perfect competition: Quintus, P. E., 257
assumptions of, 10D-I01 Quitslund, F. A., 37
departures from, 104
individual firm in, 101 Rail transportation, 179
usefulness of, 110 diversion from, 176, 178
Perishable Agricultural Commodities Act, Rasmussen, 1\1. P_, 37
345 Ratcliffe, H. E., 74
Phillips, D. C., 188, 242 Ray, 0_ R., 336
Phillips, Stanley, 179 Rayon, consumption of, ::89
Plymouth Cheese Exchange, 257 Reizenstein, H. H., 73
Pond, R. F., 152 Resale price maintenance, 343, 375
Population: Research and Marketing Act, 13, 3-fS-
effect on livestock distribution, 34 349
geographic distribution of, 31 Restaurants, 371
growth of United States, 33 Retail markets, 26
regional growth of, 33 Retail prices, and farm prices, 369-370
urban growth of, 35 Revzan, David A., 139, 34 2 , 371, 37-f
Poultry: Rice, S. T., 267
cooperative marketing of, P5, 333 Riley, H., ::::8
grading of, 265 Risk, 20
market information for, 163, 168 agencies assuming, 203
 INDEX 397
and hedging, 208-209
and financing, 142
types of, 202
and market news, 141
Roberts, A. L., 295
and methods of sales, 142
Robertson, L. S., 150 and transportation, 142
Robinson·Patman Act, 343
Rochdale principles, 323 g?\'ernment and, 151- 153, 345
hIstory of, 140-14 1
Rollefson, A. M., 284 of quality, 14 0
Rost, O. F., 128
Rothbauer, T. C., 262 of weights, measures, and containers,
139-140
Ruble, K. D., 331 problems of, 144-1 50
Rural Electric Associations, 32 7, 332 Standards:
Rye: cO.nsu.mer and, 142- 143
annual supply of, 277 cntena for, 143-144
seasonal price variation of, 123 mandatory, 15 1
u tiliza tion of, 275 objec~iv.es of, 142-143
permISSIvc, 151
Sabin, A. R., 277 tentative, 151
Samuels, J. K., 740 79 Starkey, W. N., 261, 26 3
Sartorius, Lester C., 369 Steagall Amendments, 13 1
Saxon, Olin G., 211 Stcm, J. K., 338
Scearce, J. L., 331 Stcvenson, J. H., 300
Schaars, 1\1. A., 329, 337 St~wart, Blair, 213
School Lunch Program, 132 StIcc, L. F., 285
Schmben, L. \V., 206 Stigler, G. L., 107
Schultz, T. \V., 54, 117 Stocking, Gcorge, 347, 348
Schum2ier, C. P., 285 Stokcs, D. R., 277, 284
Seasonal price fluctuations: Storage:
by commodities, 123 and seasonal price variation, 201
causes of, 122 capacity of, 195
use of, 124 facilities for, 194, 195, 196
Seaver, S. K., 263 farmer and, 197-198
Selling, 18 function of, 19, 192
Service cooperatives, )26 relation of production to, 192-193
Shaw, A. \\'., 17 Storage costs:
Sheep, production areas of, 59 computation of, 197
Sherman Act, 12, 320, 342, 343 consumcrs and, 200
Sicer, J. \V., 150 physical facilities and, 199-200
Situation rcports, 169 product deterioration and, 198-199
Smith, H. D., 42 production problems and, 200
Smith, William J. J., 25 2 reducing of, 198-200
Smith-Doxey Act, 289 speculation and, 200
Smith-Hughes Act, 348 Stuckenschneider, H. A., 2)2
Smith-Lcvcr Act, 348 Supermarkets:
Snitzlcr, J. R., 178 and self-service, 376
Soxman, R. C., 293, 295, 30 3, 304 and specialization, 377
Soybeans: efficiencies of, 377
annual supply of, 27 growth of, 376-377
importance in fats and oils, 274 Supply:
importancc in feed, 274 changes in, 93
production areas of, 63 effect of time on, 30, 97
seasonal price variation of, 123 elasticity of, 97
utilization of, 272, 274 meaning of, 88-<)0
Spangler, R:l)'Inond L., 141 response of crops to price, 119
Spcculati\'e middlemen, 24 Supply·and-demand:
Specula tors, 210, 314 and equilibrium price, 91
Spiller, D. 1\1., 263 effect of changes of, 94
StJlldardization and grading, 19 nature of in agricultural products, 118
ad\'ant~ges of, 141, 142 Support prices, 130-132
and demand, 142 and grain carry-over, 276
 INDEX
Surplus disposal, 1)2 public subsidy of, 190-191
Survey of Current Business, 161 rail, 175
Swantz, Alexander, 244 rail-truck diversion, 173-174
trucks, 172-173 (sec also Trucks and'
Terminal elevators: trucking)
capacity of, 280 water, 176
hedging of, 281 Trelogan, H. C., 95, 255, 370
Terminal markets for livestock, 228-229 Trucks and trucking:
posted, 229 importance of, 174
Thomsen, F. L., 13, 50, 107, 119, 342 interstate barriers to, 187
"To-arrive" sales, 280, 281 ownership of, 176
Tobacco: to initial markets, 175
cooperative marketing of, 313, 325, to tenninal markets, 176-177
333 Turkel' industry:
country assembly of, 311-312, 320 and' consumer problems, :269
exports of, 31 S cooperative associations, :269
foreign trade in, 318, 319 growth of, 268
market information for, 163, 168-169 location of, :268
price and control programs, 317-31 8, Two-price system, 127, 128, 134
320 Tydings-1\Iiller Act, 343
prices, 319, po Types of markets; local, wholesale, retail,
production areas of, 63, 306-309 26
production trends of, 308
utilization of, 310 Union Stockyards at CI:icago, 11
Tobacco auctions: United States \Varehouse Act, 19 6, 345
location of, 312 Utility creation, 5
procedures on, 313
Tobacco grades: Vaile, R. S., 34 2, 344
basis of, 306-307 Vertical integration:
farmer knowledge of, )20-321 and cooperatives, 287
Tobacco manufacturing: and retailing, 274
concentration in, 315 in dairy products, 253-257
products of, 310 in food processing, 357, 361, 362
Tobacco marketing: in grain, 281
channels of, 313, 314 in poultry, 267, 271
costs of, 315-316, 320 Voluntary grocery chain stores:
problems, 319-321 compared with corporate chains, 375
Tobacco types: importance of, 375
air-cured, 3°8-3°9 nature of operations of, 375
binder, 309
cigar, 309 Waite, W. C., 95, 370
filler, 309 \Valnut i\Iarketing Agreement, 133-134
fire-cured, 308 Walz, T. C., 159,27°
flue-cured, 307 \ Varehousc receipt, 196
wrapper, 309 \Vater transportation, 179
Tomato grades, 145 Watkins, Myron, 347,348
Trade barriers, 108 \Vebb-Pomcrene Act, 344
Transit privilege, 182 \Vheat:
Transportation, 19 (sec also Freight rates) annual supply of, 275
air, 176 marketing channel for, 278
barriers, 187 production areas of, 61
basic problem of, 189-190 seasonal pricc variation of, 123
costs of: storage of, 194
maximum loads and, 188-189 utilization of, 275
products, 190 \Vheeler-Lea Act, 346
reduction of, 186-191 Whitney, E. S., 284
spoilage, damage and, 189-190 \VhittCIl, 1\1. E., 300
methods of, 174, 175 \Vholesale Grocers' Association, 369
national costs, 171 \Vholcsale markets, :!6
 INDEX 399
\Vholcsalc-rctail food structure: Winter, J. C., 189
change in, 374-377 \\Tood, G. B., 36, 74, 80, c.37, 262, 26 3,
nature of, 365-366 26 9, 279
Wiley, J. R., 237 Wooten, H. H., 49
Wilkie, H. F., 234 Wooten, J. J., Jr., po
Wills, \\T. J., 225 Working, Holbrook, 208
Wilson, R., 237
\\'inter, E. P., 265 Yohe, H. S., Ig6