fluid milk used in both the Federal order and the non-Federal order markets.

EQUITABLE HANDLING CHARGES FOR COOPERATIVES

The National Milk Producers Federation has called to the attention of the Office of Price Stabilization the discriminatory nature of section. 11 (b) (3) (iii) of the general ceiling price regulation.

Section 11 (b) (3) (iii) is discriminatory because it denies to cooperative organizations subject to its terms the flexibility with respect to margins that other types of business organizations enjoy under section 11 (b) (2) of the same order.

This results from the fact that cooperatives under section 11 (b) (3) (iii) must pass back to producers the total gross sales revenue resulting from price increases above base ceiling prices.

The chief discrimination, however, results from the fact that organizations pricing under section 11 (b) (2) need not reduce their ceiling prices as the amount paid to producers for raw agricultural products declines. This gives them a chance, particularly in the milk industry, to offset in seasons of low milk costs the losses which they suffer in their margins during the seasons of high milk costs. Section 11 (b) (3) (iii) was not in the original general ceiling price regulation. Prior to the time it was added, cooperatives were pricing under section 11 (b) (2) and treating their current payments to producers as their most recent customary purchase. They were thus in exactly the same situation as other groups, and there was no unjust discrimination against them. The sharp competition, particularly in the dairy industry, kept prices charged by cooperatives closely in line with those charged by others and also kept the prices paid producers in line with the buying prices of other organizations. The original order had some advantage of greater simplicity in that it set up one rule instead of two.

In order to correct the inequities which now exist in section 11, we suggested the following points to OPS on February 21, 1952:

1. That cooperatives pricing under section 11 (b) (3) (iii) be permitted to compute their ceiling prices under section 11 (b) (2), treating the prices currently paid to producers as their most recent customary purchases. This should be done immediately to relieve the unfair discrimination that now exists;

2. That in any revision of section 11 (b) (2), or in any new pricing formulas applied to the dairy industry, reasonable adjustments be provided to cover increased costs, and

3. That an appropriate general order be issued approving price increases made by cooperatives during the time section 11 (b) (3) (iii) was in effect, provided all net margins are allocated or returned to producers. This would relieve to some extent the harm already caused by section 11 (b) (3) (iii).

We now point out to the committee that to date we have not been advised of any satisfactory action taken on these recommendations. It appears that there are two major proposals of revision in OPS policy that are of major concern to our people. The first is concerned with the earnings standard. It has been the policy of OPS to establish resale prices of dairy products at levels which would reflect 85 percent of average profits enjoyed by the entire industry during the three best

of the last 4 years. It is now proposed that this criterion be applied to individual firms rather than to the industry as a whole.

An illustration of the effect that such a change in policy may have is as follows: Suppose the producer price of milk went up from $5.50 to $5.96 per hundredweight. Under past policy OPS would be required to allow a 1-cent-a-quart increase to fluid distributors. Under the proposed policy the profits of the individual firms would be examined and if a full cent increase resulted in profits in excess of the 85 percent standard the full cent increase would be denied. This, of course, would have the effect of basing increases in the resale price on profits of the more efficient firms, since, even though granted, the less efficient firms could not stay in business with a resale price above that charged by the more efficient firms.

The second matter of concern deals with the proposed amendment to Fluid Milk Price Regulation 63 which has delegated the establishment of resale prices to local offices. Under this regulation the base period is January to June 1950 (with provision for more representative periods in areas where necessary). Price adjustments will allow up to approximately 85 percent of cost changes in each of these areas. Now it is proposed that an examination be made of the base period selected in each area to determine whether profits during that period were higher than necessary.

In cases where that situation would be found to exist it is presumed that the usual price increases necessitated by cost changes would not be permitted.

The National Milk Producers Federation feels that these two changes would have the result of discriminating against the more inefficient plants, and would place OPS in the position of attempting to revolutionize the marketing system by forcing the weaker plants out of business. We do not believe that these are the objectives that the Congress had in mind as being a proper field of action for OPS. We therefore favor an amendment to the Defense Production Act that would prevent these two described changes in OPS policy.

Why are import controls necessary? Import controls for dairy products entering the United States have been made necessary because of the various forms of trade barriers that have been instituted by foreign countries. In a recent speech made by Secretary of State Dean Acheson before the National Conference on International and Economic Development, Mr. Acheson said that for 12 years he had worked to reduce international trade barriers, but that today there were perhaps more such barriers than 12 years ago.

Of the nine principal countries from which the United States receives cheese imports, eight have some form of control over all or certain imports from the United States. Argentina, Canada, Denmark, France, Italy, New Zealand, and Norway all require import licenses for some or all goods imported from the United States (appendix A). The Netherlands and the British Commonwealth each have their monetary areas, exchange controls, preferential tariff rates, and political ties.

In September 1949 Denmark, the Netherlands, Norway, and New Zealand, all heavy exporters of dairy products, devalued their currencies more than 30 percent (appendix A). What has been the effect of this devaluation? The effect may be illustrated by Danish butter and cheese. The comparative prices of Danish and United States

97026-52-pt. 2——9

butter before and after devaluation were as follows. (International Financial Statistics-International Monetary Fund, April 1952.)

Before devaluation, Danish butter sold for 3 cents less in Denmark than our domestic price. Since devaluation, Danish butter has sold for 28 to 36.5 cents per pound less than United States butter.

An additional factor is that Denmark and other dairy product exporting countries establish different prices on exports to different countries without reference to cost or the relationship of prices of other dairy products. The case of blue-mold cheese is an example. It was brought out at a hearing on blue-mold cheese before the United States Tariff Commission on April 14, 1952, that Danish blue cheese prices quoted to United States cheese importers were set by a Danish quasi-governmental dairy export association at arbitrary levels on the advice of a representative stationed in the United States. At this same hearing articles from Danish publications were read setting forth statements that the currency devaluations should greatly assist cheese exports.

At this hearing, the National Milk Producers Federation presented evidence showing sharp downward trends since 1947 in the production of blue cheese at a typical midwestern plant and in the United States as a whole (chart 1).

Domestic production of blue cheese has suffered because of two sets of adverse price relationships that have existed since late 1949. First, the price of imported Danish blue cheese moved from a differential of 11 cents above domestic blue in August 1949 to a differential 3.7 cents below in July 1950. This price relationship continued unfavorable to domestic blue cheese through 1951, with the Danish price to wholesalers in New York 2 cents under the domestic price in September 1951. Second, this depressed price of imported blue cheese has tended to hold the price of domestic blue cheese down during 1951 relative to prices paid farmers for milk for all manufacturing purposes. Domestic blue cheese prices, in terms of milk equivalent, rose 60 cents per hundredweight from June 1950 to December 1951. During the same period manufacturing milk prices rose $1.38 per hundredweight. This disparity has resulted in blue cheese being crowded out of the competitive market for domestic milk supplies in some areas (chart 2).

With these price relationships and no import restrictions what happened to imports and domestic production? From 1945 through 1951, total supplies of blue cheese were fairly constant, averaging about 10.5 million pounds (chart 3). In 1947 our annual total supplies were about 11 million pounds, with almost 100 percent supplied by domestic production. During 1948 and 1949 foreign milk production

apparently increased and about 13 percent of our total annual supplies of approximately 10 million pounds were imported, with a corresponding reduction in domestic production.

On September 18, 1949, Denmark devalued its currency 30.5 percent, and in May 1950, the tariff was reduced from 5 to 3 cents and from 25 to 15 percent advalorem on the signature of Denmark to the Trade Agreements Pact. In 1950, 3.5 million pounds of blue-mold cheese were imported, of which 3.2 million pounds came from Denmark. Imports represented 31.3 percent of our total supplies. In 1951, over 5 million pounds of blue-mold cheese were imported of which more than 95 percent came from Denmark. In 1951, imports represented about one-half of total domestic supplies.

Therefore, during the period 1945-51 our domestic market has absorbed an annual volume of blue cheese which has varied little from 10.5 million pounds, and as imports have increased domestic production has been forced to adjust itself downward to the total market demand. In 1947 the total market supply was 10.6 million pounds. We supplied it all. In 1950, the total market supply was 11.1 million pounds. Imports supplied 31 percent of it. Domestic production was 28 percent below 1947. In 1951, the total supply was 10.2 million pounds. Imports supplied one-half. But domestic production was only one-half that of 1947. The other half had been displaced by imports.

What has happened to imports and domestic production since import quotas were instituted in August 1951?

Actual imports of blue cheese in 1951 were 5.05 million pounds, or 98 percent of domestic production. But after August, imports were on a quota basis as determined by the Secretary of Agriculture under the provisions of section 104 of the Defense Production Act. Prior to the establishment of quotas, 1951 imports were at the annual rate of 6 million pounds, or about 50 percent of 1951 domestic production.

Also the annual quota rate is about one-half actual imports in 1951, but about equal to the average rate during 1937-41. The response of the domestic blue-mold-cheese industry to this changed policy is indicated by the fact that total United States production in January and February of 1952 was 30 percent above that of a year earlier.

In view of these developments let us speculate on what would happen to domestic blue-cheese production in the next 3 years if import quotas were abandoned. The decline of domestic production when imports have been restricted lend credit to the inference that without quota controls domestic production would be practically eliminated in the very near future (chart 4).

Would a foreign-trade policy which produces this result be a just or reasonable one? Quotations from a statement filed by the United States Department of Agriculture with the Tariff Commission in the blue-cheese hearings indicate that it would not be:

Recommendation of Secretary of Agriculture:

It is our belief that tariff concessions on blue-mold cheese and unforeseen developments in recent years have caused serious injury to domestic producers of this cheese prior to the control of imports under section 104 and threaten to cause further serious injury to these producers upon the expiration of that authority.

Under section 7, authority is provided for the withdrawal or modification of a tariff concession, its suspension in whole or in part, or the establishment of import quotas to the extent and for the time necessary to prevent or remedy injury to the domestic industry.

Import quotas would, in our opinion, give the most definite assurance that imports would not result in serious injury to the domestic industry. Quota limitations on imports would thus permit domestic producers to plan their production of blue-mold cheese on a basis of knowing the maximum quantities which could be imported and sold in competition with their supplies. Furthermore, quota limitations would make it impossible for foreign countries to negate the effect of a tariff increase by devaluation of their dollar-exchange rates.

In March, the Secretary of State filed a letter with the Senate Banking and Currency Committee in which he stated:

Italy's sensitivity to the possibilities which these cheese restrictions have created for Communist propaganda is due in part to the fact that southern Italy has been particularly hard hit by the restrictions. As you know, the widespread poverty and unemployment in southern Italy have created a fertile ground for Communist agitators. Before section 104 was enacted, one of the bright spots in the economy of soutern Italy was a growing export trade in cheese. Pecorino, romano, and other pungent cheeses of the area were coming to the United States in growing volume, giving employment to southern Italy, and giving dollars to the Italian economy.

As of March 1, 1952, Italy had supplied less than three-fourths of the cheese imports allocated to her for the August 1951 through June 1952 period. If Italy was hurt by these restrictions it appears that she would have used up these allocations as quickly as possible in order to be ready to take advantage of any additional allocations. that may have been made available by congressional or administrative action. This is particularly true in view of the apparent encouragement given by the State Department that such action was possible.

There are those who have said that the only proponents of section 104 were 22 blue-cheese manufacturers. Recorded testimony, taken by the Senate Committee on Banking and Currency during March 1952, shows that representatives of the National Milk Producers. Federation, the Dairy Industry Committee, the National Grange, and the National Council of Farmer Cooperatives urged the retention of section 104. Representatives of the American Farm Bureau Federation stated it was their opinion that the failure of the administration to act under other available, but nonmandatory, provisions to control imports was responsible for the enactment of mandatory section 104. Under the standards established by section 104, the Secretary of Agriculture has ruled that importations of butter, cheese, nonfat drymilk solids, casein, peanuts, peanut oil, flaxseed, and linseed oil should be limited to protect domestic production goals and attendant implementing price-support programs. Does the Congress wish to censure the Secretary for his action, or itself for making this action possible? The Secretary of Agriculture in his findings under section 104 has ruled that ineffectively controlled imports of dairy products would unquestionably shrink our domestic dairy industry or greatly increase the cost of our support program designed to prevent the shrinkage of that industry. Under American standards and price levels and with the stage of technology existing for milk production, American farmers will not maintain the level of milk production that has been announced as being in the national interest at price levels which are competitive with the production of nations where currency is devalued, where costs are much less, and where standards of living are lower. Resultant prices for dairy products would mean that domestic pro