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and discourages in no way an expanding production of milk and milk products.

The Dairy Industry Committee favors the continuation of import restrictions on fats and oils because we are convinced it is another means of stimulating the increase in farm milk production so necessary in this country. If farmers believe fats will come in unlimited from abroad, domestic production will be curtailed.

Europe provides the logical market for these world supplies.

The Congress should place no obstacle in the way of increased domestic production of milk.

The philosophy of decontrol or suspension formulas as advocated by many, based on decontrolling or suspending price ceilings, if the product remains below some specified price level for a given period of time, is valueless to the dairy industry for the simple and cogent reason that these prices are supported virtually at ceiling levels by statutory requirement. As evidence of this, we give below the farm price of butterfat and manufacturing milk in June 1950 and January 1951, compared with the support price:

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We need price-control termination on dairy products as an added stimulus to increase production. Without such termination, this industry may be irreparably harmed for years to come, and our entire Nation injured far beyond any good the supporters of price control can ever conjure.

The present supply of dairy foods is sufficient for current domestic demands, so that arguments for price controls based on scarcities are not valid.

Generally speaking, there are no present shortages of foods or feeds in the United States, although feed production has been less than feed consumption, so that we are eating into our feed reserves. Crops have been ample.

Dairy products are not now in short supply. Every year, to be sure, during the period of seasonally low production, à few spots experience shortages, which are met by shipments of milk from other areas. In contrast to conditions in the last World War, there is now no significant demand for export of dairy products to foreign countries. The bulk of our national production is available for domestic consumption.

The USDA expects that the total milk production in 1952 will be about the same as the 115.6 billion pounds in 1951 and states that the pattern of milk use probably will continue to change in 1952. The Department expects consumption of butter to decline to a new low and consumption of fluid milk, ice cream, and some of the other manufactured dairy products to show slight increase over 1951.

The end of price controls on dairy foods at this time will not result in inflationary price advances, so the arguments for controls based on runaway prices are not valid. The industry does not foresee any abrupt and pronounced rise in dairy products prices. The price regu

lation by the Federal milk marketing orders issued under the Agricultural Marketing Agreement Act, whose influence spreads far beyond the areas regulated, will keep prices in line with economic conditions.

Laws in effect in 16 States further regulate the price of milk in accordance with the economic conditions of those States. In addition, the perishability of dairy foods, the customary low-profit margin per unit, and the keen competition among processors and distributors guarantee reasonable prices. This is illustrated by the fact that profits after taxes of 15 dairy companies were 2.2 cents per dollar of sales compared with 6.2 cents for all companies in 1951, as reported in the monthly letter on economic conditions of the National City Bank for April 1952. In the previous year the comparison was 3 cents and 7.7 cents. Price adjustments, when required, would be moderate and no more than necessary to promote needed adjustments in production, utilization and capital requirements of the industry. Dairy foods are certain to remain cheap in comparison with foods in general and with the increased consumer purchasing power.

The price-control mechanism diminishes and weakens the processing and distribution facilities of the industry. Postponement of the termination of controls will magnify these problems.

The United States Department of Agriculture says that 1952 milk production may be slightly smaller than 1951, because: (a) Feed concentrates will continue high in price; (6) decline in feed supplies relative to livestock numbers; (c) supply of dairy farm labor will be no greater; (d) and wages will be higher. This apparent shrinkage in milk production in 1952 is in the face of an increase in the human population at the rate of 2.5 million annually. It is our belief that production will shrink more than the Department indicates, unless dairy foods are freed from price controls.

Since the price freeze in December 1950, the price of milk at the farm has not been directly controlled because of the parity passthrough. But farmers do not know what the Secretary of Agriculture and the Director of Price Stabilization may do under the law, which provides that ceilings cannot be placed on the farm price of milk when it is below parity or below prices of June 1950. Milk and butterfat have been at parity most of the time since January 1, and it is the fear that ceilings may be placed on farm prices at any time. Farm prices of milk at 103 percent of parity and butterfat at 96 percent of parity are in a position of disadvantage compared with meat animals which are at 131 percent parity. The United States Department of Agriculture reporting on an index number basis shows the farm price of dairy products at 291 compared with meat animals at 372. All kinds of livestock compete for the common feed supply. Under free pricing, there is a continuous balancing of the numbers of different classes of livestock when one class gets out of fair relationship with the others. This is one of the principal factors determining the long-time trend of milk production Controlling the farm prices of milk at this time would freeze those prices in an unbalanced competitive relationship to other livestock products where competition with alternative farm enterprises exists.

Cost absorption, as applied to the processor, manufacturer, and distributor of dairy foods, both proprietory and farm cooperatives-is injuring dairy products business enterprises, particularly small business.

As stated in an editorial appearing in the New York Times on February 21, 1952, the general approach to stabilization by the authorities seems to be that, while escalation is to be the guiding principle in the case of wages and agriculture, cost absorption should be the key to policy in the field of business and industry.

The 1951 Eric Johnston so-called profits test holds that ceilings are fair and equitable if an industry's dollar profit before taxes is running at 85 percent of the best 3 years of the 4-year span 1946-49, The Putnam modification adds that an industry must earn before taxes not less than 10 percent of its net worth.

Neither of these formulas makes adequate allowance for the inordinately large proportion of the post-Korea tax rise borne by business nor for the declining value of the dollar. Earnings before taxes are used by the Government as a guidepost, despite the fact that a business concern has no real profits until after it has paid its taxes. And earnings on net worth are used as a guidepost, although net worth is based essentially on original value, which has little relation to reproduction costs in terms of the buying power of the present dollar.

Cost absorption, as practiced under OPS price orders, squeezes earnings to a point of danger for the maintenance of business. Price controls interfere with the normal and efficient functioning of the industry. Controls create additional costs, deplete financial strength, work against proper maintenance and expansion of facilities, and lead to deterioration of quality and service. In the dairy industry, where profit margins have always been small, exemption of dairy foods from price control is imperative if the processing industry is to continue to be the strong, able tool providing the greatest share of food on American tables.

Price controls should be ended now on dairy products to restore incentive and to permit flexibility within all branches of the industry, so that production will be expanded and adequate industry facilities maintained to meet the ever-increasing nutritive needs of the Nation.

One of the many important nutritional elements is calcium, of which nearly three-fourths is supplied by dairy products. Even now, a considerable share of our population does not receive a sufficient quantity of calcium and other vital nutrients, because dairy products are not more abundantly available.

Milk production in the United States reached a peak in 1945 and has since declined, although not drastically. Production in 1951, with the advent of price controls, was less than in 1950, before price controls. During the first quarter of 1952, daily production of milk was 0.93 percent less than in the first quarter of 1951. Meanwhile, population has been growing at a rate of 242 million persons a year. Production of milk per capita in the United States was the lowest in 1951 of the past quarter century.

In the last few years the per capita consumption of fluid milk, cheese, evaporated milk, and ice cream has been maintained by diverting milk to domestic use which was previously exported and by expanding production in the market milk areas to offset the drop in milk production areas where butter is the important outlet. From now on, unless milk production is expanded, the per capita consumption of those products will have to decline as has butter because there are no longer substantial export surpluses available for diversion to domestic use,

In order to contribute a maximum to the Nation's health and morale in case of a continuing emergency, the dairy industry's greatest incentive is price flexibility.

Price flexibility directs milk in proper volumes and proportions to different milk products and to different markets; price controls create maladjustments in production and distribution and interfere with the normal flow of milk to meet consumer needs.

Price flexibility is needed because production gains on dairy farms can only take place slowly. Milk cows that have gone to the butcher cannot be brought back nor can they be replaced within less than 3 years' time.

An incident in contrast to that is the potato situation at the present time. This potato famine can be relieved in maybe 6 months, maybe 12 months, by another crop. We have about two crops a year in the North and South. But it takes 3 years to replace an extinguished dairy herd.

Mr. TALLE. If I may interrupt, a cow is equipped with only one udder so the possibility of increased production is limited by that physical fact.

Mr. Haymes. That is true. Their productive capacity is distinctly. limited.

In the competition of our diminishing feed reserves dairy farmers, in making their necessarily long-time plans, must not believe that price incentives will be lacking. Without question, prices of dairy products are low, relative to prices of many other livestock products.

Just as price controls and allocations may have helped to get the Nation's armament program under way, the incentive of flexible prices in the absence of price controls would help the dairy industry to supply, process, and distribute its products.

Price controls should be terminated on dairy foods at this time to restore incentive, restore necessary flexibility within the industry and expand production to meet the ever-increasing nutritive needs of the consuming public. Price adjustments, where required, would be moderate. Under no circumstances should price control of dairy foods be extended beyond June 30, 1952. The burden should be on those who would extend price control to show its necessity-and none exists. Our free institutions are in jeopardy if Government continues to control for control's sake. Actually, everything possible should be done to maintain this industry as a great source of strength to our country.

The dairy industry stands definitely opposed to further extension of price controls on dairy foods. Termination of price controls on dairy foods is in the public interest. Adequate supplies and keen competition in a free economy will do a better job for consumers, farmers and the industry than will controls.

Mr. Chairman, we have an appendix and a chart which we would like to have included in the record. I would like to call your attention to the chart, which is taken from the Department of Agriculture, which gives you an idea of the increase in all cattle, and particularly in beef cattle in recent years, as compared to the decrease in dairy cows kept on farms in the United States.

You will note that for the past 75 years our total number of cattle has continued to increase at a slightly greater increase than the total number of milk cows, and at the extreme right-hand side of the chart you see that beef-animal numbers have been continuing steadily upward since the last war, while our dairy-cattle numbers have been decreasing

The CHAIRMAN. Without objection, the chart and appendix may be included in the record. (The information is as follows:)

APPENDIX A The committee on economic policy of the United States Chamber of Commerce, in its report entitled "The Price of Price Controls," develops the inadequacies of price controls as a means of combating inflation in digest about as follows:

The price system in a free economy performs three basic functions. It guides the consumer in choosing what he buys with his income. It facilitates the movement of goods and services from producer to consumer. It conveys the wishes of consumers to producers and distributors, indicating to them what to produce and supply.

For a short-run emergency, there may be a case for emergency control over prices during a period when supplies of certain resources are unavailable for sudden and large changes in demand and the price system in a free market economy cannot correct the situation in a reasonable period of time. But such conditions do not lessen the long-run adverse implications of price controls with the market distortions they bring about.

What happens when prices are held below market levels?

1. Restraints upon consumption are lifted and the consumer is encouraged to buy.

2. But producers are not encouraged to raise production. In fact, the. restraints placed upon prices serve notice on producers to reduce production. Consequently, shortages develop and available supplies have to be rationed.

3. With artifically restrained prices encouraging consumption and discouraging production, inevitably subsidies to producers have to be adopted in order to maintain incentives.

If price controls are imposed over any length of time, rationing and subsidies become inevitable. As Professor Paarlberg phrases it:

"Ceiling prices, rationing and subsidies are the three-legged stool of an economy which endeavors to hold prices below the equilibrium level. A stool will not stand for any length of time on one or two legs, but needs all three.

“In England, they understand this better than we do for they have been at it longer. They fix prices, ration, and subsidize agricultural commodities pretty well across the board; they have had to do this to make the system work. We will have a similar experience if we stay with it long enough. If we don't let the price system function, we shall have to step in and do the jobs that the price system formerly did for us." 1

Price controls are at best a temporary stop-gap measure. They are not a legitimate long-term means for combating or handling inflation. This is the record, as quoted from The Price of Price Controls:

"1. Price controls have never worked for any length of time. These controls can be no more than a short-term expediency. Even with the patriotism of World War II, it didn't take long for price controls to break down.

"Contemporary experience of other countries suffering from inflation shows that the use of direct price controls and drastic penalties did not prevent prices from rising.

“2. Price controls exact a heavy toll on our resources. Price controls involve tremendous costs that are both measurable and less definitely measurable. These costs are spelled out in manpower, money, diversion of resources; in costs to the taxpayer, the consumer, the businessman-and the entire economy.

"3. Price controls mean heavier burdens for the taxpayer. Price control machinery necessitates a Nation-wide organization and the diversion of manpower and other resources from productive channels.

“4. Price controls involve heavy burdens on business and industry. Compliance with the flood of control regulations, often times conflicting and confusing necessitates additional labor, diverting regular employees to handle the added workload, and a waste of management's time. The heavy compliance costs hit smaller enterprises particularly hard.

"5. Price controls delude the consumer. Price controls do not guarantee adequate amounts of any product, but, in fact, present the consumer with evershort supplies. The shortages during and after World War II testify to this.

"Price controls mean black market in which prices are higher than those determined by a free market. 1 Price Freedom-The Key to Economic Freedom, from an address by Professor Don Paarlberg, Purduo University.

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