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Mr. ARNALL. The theory behind our action is that you have got to have control of the distribution of meat; that if you let every man go out and slaughter a few cattle or hogs you will soon develop a system that you cannot control because of black markets and other things.

Although I tell you, in all candor, that there is something about that particular approach that is a little hostile to my fundamental views, it has to be done, under the circumstances.

Mr. Berts. Well, it is certainly hostile to mine, and I was wondering what your views were.

Mr. ARNALL. I regret it very much, but that is the only way I know in which we can control the meat situation. We have got to maintain those ordinary, normal channels of distribution.

Mr. Berts. Well, that is an ordinary channel of distribution; isn't it?

Mr. ARNALL. Well, let me show you that, no matter how much we try to avoid it, we run into some hardship cases. Of course we do. Suppose a man was in some business when the price freeze went into effect, and he had one price, and his competitor was having a sale on, or some other situation where he had a lower price. Those prices were frozen at that time, and we have had a lot of complaints from people who say that their prices competitively are out of line with other prices. We have tried to remedy those situations.

But in the slaughter business it is different. If a man does not have a slaughter license, and cannot show a need for it, we deny him that license, because we try to control the channels of distribution.

Mr. Berts. I appreciate your views, but I do not agree with them.

Mr. ARNALL. I will tell you there are a lot of things that we do today that give me fundamental concern, but the theory behind the Defense Production Act is that there is an emergency, and a necessity to do these things, and naturally there are some hardships that result. I would not be fair if I did not tell you that.

Mr. BROWN. Are there any other questions? Mr. Hays.

Mr. Hays. I do not want to belabor this point, Governor, but I have found this testimony that I was looking for, and this particular man is from the State of Washington. He is the same man Mr. Nicholson was talking about, and he says that his profit has been 1 percent, and that when he was asked to absorb part of the price cost without an increase in volume, which he has not had and which the milk business generally has not had, he just cannot do it.

Mr. ARNALL. Does the testimony show what his historical profit was, or his profit during the base period?

Mr. Hays. Well, I think it does, but his testimony is quite lengthy.

Mr. ARNALL. Well, I will digest it for you. We will have that done and I will furnish you with an analysis.

Mr. Hays. But I did have them furnish me with some statistics on that, and they took a study by the Indiana University of 316 milk distributors, and I was amazed to find that the average profit was 0.2 cent per quart on retail milk distribution. I always thought it was much higher than that. And if that is true, and if that is a fair study, you could not expect them to absorb very much of a price increase if they have an increase in costs. Two-tenths of a cent on a unit is not going to permit them to absorb very much.

Mr. ARNALL. That is right. I agree with you.

Mr. Hays. And they even went so far as to make the statement here that they would gladly submit to price control if the unit-price profit ever got to 1 cent, which it never had. They say historically it never has been that much.

Mr. ARNALL. I will be delighted to analyze that and give you the facts. Let me ask you this: Have you bought a quart of milk recently?

Mr. HAYS. I buy it very day.

Mr. ARNALL. I do not do much grocery shopping, but my wife sent me down to the store to get a quart of milk, and, just to show you how much I am behind the times, I gave the fellow 10 cents. He looked at it like I was trying to play some kind of trick on him. I think it was 28 cents. Is that about right-28 cents?

Mr. Hays. I want to tell you, Governor, that I know a little bit about that. I happen to know that the producer on the farm is being paid more than 10 cents a quart, when they come there and pick it up.

Mr. ARNALL. Oh, yes; I am sure of that.

Mr. Hays. But I could not understand, until I saw this breakdown, where the rest of that money went. But, of course, labor takes a good slice of it, and another thing that is yery interesting is that the housewife does not want to set a bottle out on the doorstep any more, and a lot of the companies have been forced into this paper-container thingsome of them against their will—in order to stay in business, and the price of containers is quite an item because the housewife wants this paper container that she can throw into the incinerator when she is through. They do not want to put them outside the door any more.

All of those things have entered into it and have beaten these small distributors down to the place where, according to this testimony -May 15—they are just not able to exist any more.

Mr. ARNALL. I will give you a report, and if there is anything we can do or ought to do about this case we will surely try to do it. Mr. Hays. Thanķ you. (The information referred to above is as follows:)

JUNE 3, 1952. Hon. BRENT SPENCE, Chairman, Committee on Banking and Currency,

House of Representatives, Washington, D. C. DEAR CONGRESSMAN SPENCE: On May 15, 1952, Mr. Ariel C. Merrill, manager of Arown Guernsey Farms, Inc., of Everett, Wash., a firm engaged in the distribution of fluid milk and other dairy products, testified before the House Banking and Currency Committee concerning H. R. 6546. He testified, in essence, that a combination of the substantive provisions of OPS regulations dealing with the milk industry, together with the administration of those regulations by OPS personnel, had forced his firm into a loss position.

An effort to ascertain the factual basis of Mr. Merrill's expressed conclusions has revealed that (1) Arown, although claiming that its ceilings were unreasonably low and causing it serious loss, was in fact, during a good part of the period complained of, selling its products at prices below ceiling; and (2) Arown, although claiming that OPS was making it difficult to stay in business, has in fact expanded its operations by the acquisition of four other dairy companies between August 1951 and April 1952.

The following is a presentation of Mr. Merrill's major contentions as expressed to your committee, together with the factual materials which I believe relevant to an evaluation of those contentions:

1. Mr. Merrill told the committee that Arown Farms had attempted to obtain relief from OPS on the basis of individual hardship. This attempt, which Mr. Merrill described as a "test" of OPS response to a hardship application, was unsuccessful because, Mr. Merrill stated, Arown was unable to furnish the "technical and voluminous information” required by OPS in addition to the information contained in Arown's original letter of application.

On June 25, 1951, Arown filed an application for relief of individual hardship under General Overriding Regulation 10. GOR 10 is an OPS regulation that protects processors from being placed in a loss position caused by OPS ceiling prices., On June 28, 1951, OPS replied to Arown's letter of application asking that Mr. Merrill furnish six items essential to the consideration of the application. A copy of OPS's reply is attached for your information.

Arown's letter of application for relief contained a schedule of prices on milk and milk product items which Mr. Merrill referred to as both the firm's selling and ceiling prices. Mr. Merrill requested upward revision of these prices in order to relieve Arown's financial hardship. The following is a listing of the prices on which Arown requested adjustment, together with Arown's ceiling prices e fective at the time that the hardship adjustment was requested:

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It is apparent from a comparison of the foregoing prices that if Arown was in a hardship position at the time Mr. Merrill submitted the GOR 10 application such hardship was not caused by Arown's ceiling prices. Rather, the facts would seem to bear out Mr. Merrill's statement to the committee that the application was merely a "test."

2. Mr. Merrill testified that OPS, by "flagrant inefficiency,” imposed a deliberate price squeeze between January 26, 1951, the effective date of the general ceiling priee regulation, and September 24, 1951, the effective date of Supplementary Regulation 63 to the general ceiling-price regulation. Implicit in this statement is the suggestion that during the period January 26-September 24, 1951, Arown was compelled to absorb costs that, were it not for its ceiling prices, could have been recovered by an upward adjustment in selling prices. Of course, if Arown elected not to reflect increased costs by adjustment of selling prices up to its legally established ceiling prices, then clearly it is not a case of cost absorption compelled by OPS ceilings.

Further, on August 31, 1951, Arown notified OPS of an increase in its raw-milk cost that permitted an increase in its ceiling prices of 2 cents a quart. This was in accordance with OPS regulations permitting a 100-percent direct pass-through of increased milk costs. However, Arown added that it would increase its actual selling prices only 1 cent a quart for reasons of competition.

3. In his testimony Mr. Merrill pointed out that, although Supplementary Regulation 63 to the general ceiling-price regulation was effective on September 24, 1951, it was not until December 21, 1951, that OPS issued an area milk price regulation in Arown's area. Mr. Merrill refers to the period September 24, 1951-December 21, 1951, as another example of “unnecessary delay” by OPS with further compelled cost absorption.

About November 1, 1951, Arown and other sellers of fluid-milk products in western Washington petitioned OPS for the issuance of an area milk price regulation pursuant to Supplementary Regulation-63. The petition submitted by Arown at that time was so inaccurately and deficiently prepared that, after unavailing conferences with Mr. Merrill, it ultimately became necessary for OPS accountants to secure personally the information on Arown's operations necessary to the issuance of the area milk price regulation. This chore was completed approximately December 1, 1951, and the area milk price regulation was issued

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:3 weeks later. At the time of his request for relief on November 1, 1951, Mr. Merrill stated that his costs of items other than milk had increased 2 to 3 cents per sales point. His records showed that, in fact, such costs had increased slightly over '1 cent per sales point. Area milk price regulation 7, effective December 21, 1951, generally raised existing ceiling prices, including Arown's, 1 cent per sales point.

4. It should be noted, in light of Mr. Merrill's testimony concerning financial hardship caused by OPŚ ceilings, that during the period December 24, 1951, to March 10, 1952, Årown sold milk at prices below the ceiling prices established under the area milk price regulation applicable to his operations. In fact, Arown 'has consistently sold many items well under its ceilings since the issuance of area milk price regulation 7 on December 21, 1951.

5. Mr. Merrill testified that Arown employees were granted a wage increase on March 1, 1952, which represented a cost increase of approximately orie-fourth cent per unit sold, He states that OPS has again practiced cost absorption by delay and has granted no ceiling-price relief to offset this increased cost.

The facts show that on April 28, 1952, Arown submitted a petition to OPS requesting an increase in ceiling prices. This petition, signed by Mr. Merrill, specified the following costs: Plant wages

$10, 292 Delivery wages.

12, 552 Cans, containers, etc.

5, 090

27, 934 On May 7, 1952, OPS accountants found, upon an examination of Arown's records, the following: Plant wages.

$5, 483 Delivery wages.

14, 187 Cans, containers, etc..

2, 700

22, 370 Mr. Merrill, in the petition for relief, had overstated Arown's costs to the extent of $5,564.

In another portion of this petition Mr. Merrill specified that Arown's sales volume was 433,729 sales points. Subsequent examination of Arown's records revealed Arown's true volume to be 495,000 sales points. Consistent with the findings taken on a composite milk marketing area basis it was found that on the basis of Arown's actual monthly volume of sales points the March 1 wage increase had not increased Arown's cost per sales point.

6. Mr. Merrill stated before the committee that the small increase (2 percent) in consumption of milk since Korea does not justify the possibility that unit costs may not have risen because of increased sales volume. As a matter of fact, notwithstanding the operation of OPS regulations, Arown's physical sales volume increased from approximately 373,000 sales points in August 1951 to 560,000 sales points in April 1952, an increase in sales of over 50 percent.

7. On May 27, 1952, Representative Hays of Ohio, in discussion concerning the milk industry with Mr. Arnall during the latter's testimony on H. R. 6546, expressed concern over the trend of absorption of small operators by the larger companies in the industry.

This observation should be made in connection with Congressman Hays' apprehension about the declining number of smaller firms in the fluid milk industry. In the State of Washington, where Arown is located, over a period of the last 8-10 years, the number of State-licensed firms engaged in the distribution of fluid milk products has declined from approximately 900 to 230. As a matter of fact, Arown itself has contributed to this rather rapid rate of absorption. Since January 26, 1951, the inception of present price controls, Arown has absorbed the following dairies into its own operations:

Cyr Bros. Dairy, August 1951
Twin City Dairy, December 1951
Marrymoor Dairy, December 1951

Happy Valley Dairy, April 1952
It is difficult to reconcile Arown's recent and rapid expansion with Mr. Mer-
rill's charge before the committee that the firm was being “bureaucratically
liquidated" by OPS.

I trust that the foregoing answers the questions which may have been raised in the minds of the members of your committee by Mr. Merrill's testimony. If I can be of any further assistance on this subject I shall be glad to cooperate in any way possible. Very truly yours,

ELLIS ARNALL.

Mr. A. C. MERRILL,

l'ice President, Arown Guernsey Farms, Everett, Wash. DEAR MR. MERRILL: This will acknowledge receipt of your letter of June 18 requesting relief under Government Overriding Regulation 10. Before review of your petition can be completed we would appreciate the following additional information:

1. Ceiling prices of your principal competitors for similar commodities and the past relationship of your prices to those of the competitors named in your letter.

2. You have furnished a schedule of proposed ceiling prices but have not shown how these adjustments will operate to bring your operation to a break-even position.

3. What percentage of your total sales is to jobbers? 4. What percentage of your total sales is to Alaska? 5. Have you made ceiling price adjustments caused by iņcreases in "parity"? If so, to what extent and how many?

6. 'To what extent of total capacity is your plant working?

In addition to answers to the above, we would like to have balance sheets covering the same periods as profit and loss statements which you submitted. Yours very truly,

E. W. TIEDEMAN,

Chief, Dairy Branch. Mr. Brown. Governor Arnall, we are delighted to have your views Thank you very much.

Mr. ARNALL. Thank you, sir, and thank you all. And do the best you can for us.

Mr. BROWN. We will recess to reconvene at 2 o'clock when we will hear from some Members of Congress, and we will conclude the hearings tomorrow.

(Whereupon at 12:05 p. m., a recess was taken to reconvene at 2 p. m, the same day.)

(The following communications were submitted for inclusion in the record of the hearing:) PROPOSED STATEMENT TO BE SUBMITTED BY SECRETARY OF DEFENSE ROBERT A.

LOVETT TO THE HOUSE COMMITTEE ON BANKING AND CURRENCY IN SUPPORT OF H. R. 6546, A BILL TO AMEND AND EXTEND THE DEFENSE PRODUCTION ACT of 1950, AS AMENDED, AND THE HOUSING AND RENT Act of 1947, AS AMENDED

The Department of Defense would like to reaffirm its support of the Defense Production Act of 1950, as amended, and to ask the Congress that it be extended and amended in the manner proposed in H. R. 6546, the bill now before your committee. Appreciating the desires of the committee to expedite the progress of the hearing on this bill, I am furnishing this written statement of support rather than appearing to testify in person.

The Defense Production Act of 1950 has been in effect for nearly 2 years. During that time it has served as the principal statutory framework upon which the Nation's mobilization effort has been based. It is indisputable that without it the Nation in general, and the Department of Defense in particular, could not have achieved substantial progress in meeting the mobilization objectives demanded by national security. Moreover, any build-up that might have been accomplished without the powers and controls provided by the Defense Production Act could have been done only at the cost of an extended dislocation of the economy, and by the creation of an inflationary wave so great that our national economy might have been greatly weakened during the very period when it had to be strengthened.

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