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industry. Our industry is one that has historically very small margins.

When Mr. DiSalle appeared before this committee, or at least before the Senate committee, or perhaps both, he held forth on cost absorption, and he pointed out that in this period of increasing economic activity, the volume of production would increase, and therefore it would be possible for manufacturing corporations to absorb costs.

Well, you gentlemen know that in the aircraft industry you could have orders for a hundred planes today, and a thousand at the end of the month. Obviously, your overhead would be spread over a larger number of units and there may be something in cost absorption for the durable goods industry. But definitely it is not applicable to our industry.

Mr. KILBURN. You do not get my question, I do not think.
Mr. CASTLE. Pardon me.

Mr. KILBURN. If the State people regulate all those densely populated areas as far as your industry is concerned, how does our law affect them. It does not affect them at all, does it?

Mr. CASTLE. Wby, yes, sir, it does, the ceilings are prescribed by the Federal Government today, regardless of what the State thinks would be a fair price.

Mr. KILBURN. I do not think that is true in New York State.

Mr. CASTLE. They have to bave approval from the Office of Price Stabilization.

Mr. Hays. As I get it, the States regulate the price you pay for the raw product to the farmer e nd the Federal Government is regulating the price you can sell it for, so that you are in between them.

Mr. CASTLE. Well, in some cases the State-if it were left alone would prescribe the resale price. Now in Pennsylvania it does that.

Mr. NICHOLSON. They do it in Massachusetts. Mr. CASTLE. They do it in Massachusetts, and they do it in Alabama. They do it in California. They do it well. They have had, for a long time, experience in this work, and we never dreamedat least I did not--that when the OPS came in, "We are going to grant you autonomy, you are doing a good job on price control now." Oh, no. They had to start mixing in with it.

In California, for example, they issued an order that destroyed the historic spread between store and retail prices. Well, they finally revoked it. But it would not have been done by the California Milk Control Commission, because they are experienced and know their business.

Mr. KILBURN. What do you want us to put in this bill?

Mr. Castle. My recommendation would be that where you have State milk-control boards, you simply say, "The OPS will not be operative for milk."

If we believe in State autonomy, in home rule, that is the way to do it. And the economy aspect of it is not to be overlooked, in my opinion, gentlemen.

Now another point. We have plenty of evidence to support the view that milk dealers are having a difficult time surviving under price control as administered by OPS. I quote from two letters which, I assure you, are samples only.

The first letter is from a milk dealer in Florida who wrote to his Senator on February 16 telling him that he had just sold his business. This is what he had to say in explanation:

One of the contributing factors to our decision to sell was the ever-narrowing margin of profit in our industry. This, coupled with the OPS theory of cost absorption, is forcing many independent dairies out of business. Not only is this deplorable situation affecting the independents but it is also having its effect on the larger companies, the only difference being that the larger companies can stand the squeeze a little longer.

Here is an extract from a letter written by a small dealer in New Jersey to his Senator. He says:

There are milk men in the northern part of New Jersey that are absorbing, in addition to the approximate half-cent-per-quart increase in operating costs, a labor increase of approximately $8 to $12 per man per week and have been since the first week in November. That means that it has been about 492 months that these dealers have been absorbing this increased labor cost awaiting relief from the OPS.

I am sorry to have to assume this attitude, but I believe the OPS is deliberately seeking every way they can to delay this relief. If it is continued much longer, I am afraid you are going to have some casualties among the smaller independent milk dealers who cannot subsidize their fluid-milk operations with the profits derived from their manufacturing operation of other products as they do not have any other line than fluid milk and cream. These dealers will be forced out of business, and I think it is very unfair to have a price control set up with the authority to make these kinds of moves.

They cannot stand the unfair and inequitable policy of cost absorption which is being inflicted upon them by the operation of OPS-a policy contrary to the intent of the Congress as shown by a careful reading of the Defense Production Act. The words "fair and equitable ceilings)) certainly meant something to you gentlemen, but they do not apparently mean very much to those who are charged with the administration of the act.

Controls are nothing new for the fluid-milk industry. The map which I show you of the United States indicates the great extent of Federal marketing order controls and State milk controls. The Federal controls administered by the Production and Marketing Administration of the Department of Agriculture, as you see, cover a very substantial segment of the United States from the standpoint of population density. The Federal orders issued in these marketing areas prescribe the minimum price to be paid to dairy farmers for class 1 milk and other classes of milk.

In passing, I would like to remark that the milk handlers pay the class 1 milk price which runs from $1 to $1.50 per hundredweight higher than fluid milk sold in other classifications. This works out at 2 to 3 cents per quart higher than milk, for example, that is used for making butter, cheese, and evaporated milk. The State milkcontrol boards in at least 12 States not only fix the minimum price to be paid to dairy farmers, but fix the retail prices to consumers. About seven other States have milk-control boards which fix the minimum price to be paid to the dairy farmer.

So even before the advent of the Office of Price Stabilization, our industry was thoroughly controlled from the standpoint of Federal and State administrative agencies. However, the supreme control of the fluid-milk business is the competitive situation that exists in all milk markets. A differential of 1 cent in the retail price of milk will

cause an immediate shift of customers from the higher-price seller to the lower-price seller.

I am speaking now, of course, of home delivery. In most cities and towns in the United States for a number of years there has been a differential between store retail prices and home-delivery prices due to the fact of course that it costs more to deliver in small quantities to homes than in large quantities to stores. The trend of stores sales has been upward. It is estimated that now about 55 percent of sales are for home delivery whereas in 1935 it is estimated that 70 percent throughout the country were home deliveries.

In light of the fact that the fluid milk industry was already substantially controlled, we did not regard the advent of the controls indicated by the Defense Production Act as anything substantially new. We had had a disillusioning experience with the OPA, but after reading the Defense Production Act of 1950 and noting its several references to "fair and equitable” ceilings and margins, we could not believe that an industry operating under a very low profit margin, such as ours, could be subjected to the price absorption doctrine put forth by Mr. DiSalle.

Also, we were very proud of the record which fluid milk had made with respect to the general food average; we realized that it was a healthy situation and felt confident that OPS would recognize the fact that although we were paying the farmer substantially higher prices for milk as compared to the pre-Korean period, our retail prices had not advanced in the same proportion. We did not believe that the theory of cost absorption, which certainly has some application to production by, say, airplane manufacturing companies, would be made to apply to our industry. The fact is that as of today, where milk handlers are under an area price regulation of OPS, they are allowed only 85 percent of their operating cost increases in computing price ceilings. In my opinion this is a fantastic, unwarranted and presumptuous position to be taken by OPS.

It will astonish you to know that increases in such unavoidable costs as repairs and repair parts, tires, tubes, and chains, fuel (oil, coal, and gasoline), outside transportation, indirect labor including general office and administrative labor, washing powders, refrigeration materials, purchased power and water, building upkeep, credit losses, sales promotion expense, insurance, traffic losses, uniforms and laundering, depreciation charges, taxes and licenses, motor-vehicle registration, purchased storage, rent, purchased ice, communications, telephone, telegraph, postage, office supplies, dues and subscriptions, are not considered in establishing ceilings for milk, cream, cottage cheese, buttermilk, and chocolate milk. OPS has stated that they are allowing us 85 percent only of the increase in operating costs which have occurred since the pre-Korean period. This is applying cost absorption with a vengeance.

The root of the trouble with SR 63, which is the procedural regulation of OP$ about which we are now complaining, is the application of the theory of cost absorption to an industry which cannot stand this strain.

Gentlemen, I will quote from a few letters which we have seen confirming the statement I have just made that cost absorption for our industry is a method of business strangulation for the unfortunate

milk dealers. Here is one from a milk dealer in Pennsylvania written to his Congressman. He says:

On February 8, Mr. Benjamin F. Castle, executive director of the Milk Industry Foundation, mailed a letter to you in which he stated how seriously hurt the milk dealers are in many parts of the country.

I happen to be one of them who had higher operating costs in 1951 than I ever experienced before, resulting in a profit of less than 1 percent in our sales dollar, I operate as an individual, and it is impossible to continue to live personally and continue to operate on such a small profit. We should have between 3 percent and 4 percent on above-mentioned basis.

The OPS theory of cost absorption does not work with such small profits. Presently OPS is expecting the industry as a whole to absorb increases in our operating expenses. " Labor, containers, and repair costs have increased to the extent that insufficient profit is left.

Here is another one from a leading milk executive who quite recently became president of one of the largest milk companies in the country. He is noted for his operating efficiency and for his ability to analyze costs, and I may say that he has been operating in a highly competitive market. This is what he has to say to his Congressman about cost absorption:

Certainly the theory of asking the fluid milk distribution industry to absorb increases in items which represent about 40 percent of our operating costs is an unreasonable one. This is particularly true when the industry has a very narrow margin of profit, in fact less than 3 percent of the selling price and in this area even much less than that. These delays alone amount to considerable cost absorption and can be well exemplified by two examples which I would like to relate to you involving our company.

In the first instance, in this market the Office of Price Stabilization has failed to act to allow us to adjust our cream prices and this has now continued for nearly 2 months with the result that we will have no relief in this connection. One branch of the Federal Government, namely the Department of Agriculture, establishes our prices which we must pay to producers. For the past 2 months our cream prices in this market have been increasing but the Office of Price Stabilization has not yet acted allowing us to pass on these increased costs to our customers. In the case of our own company, this item alone during this 2 months' period has cost us about $70,000.

The second example is in the case of northern New Jersey. Here we were confronted with a tremendous labor increase on the 25th day of October of 1951 and in spite of our immediately filing for price relief as allowed under SR 63, we yet have (February 21, 1952) 'no price adjustment allowed us by the Office of Price Stabilization. In other words, delays upon delays have occurred so that we have been forced to absorb this labor increase ever since the 25th day of October 1951 in spite of numerous conferences, the submission of profit and loss figures and considerable other data. No relief has yet been granted even though almost å 4-month period has elapsed. This item has cost us a considerable loss amounting to over $175,000.

These two examples are cited to show how these delays "squeeze" the industry.

Here is another letter written to his Senator by a milk dealer in Oklahoma. He says:

I just want to say briefly as possible, that this information that Mr. Castle has given you is correct in every respect and that this principle or policy that is being promulgated by OPS of cost absorption by the dairy industry is so destructive that in all of my experience in this industry in the past 25 years, I have never seen the people in our industry so discouraged as they are at this time. Over all the State of Oklahoma today, there is a very definite trend of the smaller plants toward closing up and discontinuing operations. This is, of course, because the dairy business has always been on a very narrow margin of profit based on volume and turn-over and when you affect that margin in any manner whatsoever, the immediate results are a loss to the dealer or processor.

One-fourth to one-half cent per quart may not seem very much to you but to the dairy industry it means the difference sometimes between losing money and making enough money to pay bills and expenses.

The profit per unit of sale and profit per dollar of sale are, and always have been, very small due to the number of competing dealers in every market and the highly competitive character of the business, and profits have depended on volume and rapid turn-over. There has been no appreciable increase in volume of sales since Korea resulting from the defense effort. The sales volume has remained almost constant, the increases over 1950 being less than 2 percent. So an increase in cost per unit cannot be offset by an increase in volume. It can only have the effect of decreasing profits.

Parenthetically, I ask here, did the Congress have an intent to decrease profits of small-business men? Personally, I do not think so I believe that the so-called standard issued by Mr. Eric Johnston was contrary to the spirit of the Defense Production Act. Operating costs have risen since June 1950 gradually, continuously, and inexorably and our industry must be able to adjust prices to compensate for these increased costs.

I have referred to the small profit per dollar of sales generally earned in the fluid-milk industry and I show you a chart which illustrates profit per dollar of sales for typical markets for typical years on the basis of various Federal and State Government reports and reports of State experiment stations. The most recent survey in 1949 of 313 dealers in 42 States as developed by the bureau of business research, Indiana University, shows an average net profit of 2.1 cents per dollar of sales after taxes. Again, I say, in my opinion it is ridiculous to talk about cost absorption for an industry like ours.

(The survey chart above referred to appears on the following page.)

I would now like to emphasize the splendid performance which fluid milk has made relatively with respect to the cost-of-living index. As of March 15, 1952, the Bureau of Labor Statistics retail index showed that since 1945, the last full year of OPA controls, all foods had risen 63.6 percent, whereas milk had risen only 55.1 percent. During this same period, Bureau of Agricultural Economics figures reveal that the prices we have paid farmers have increased 67.5 percent. Thus, the industry is now absorbing approximately 1 cent per quart by not passing this amount of its paying prices on to the con

We maintain that this is a substantial, and in some situations, an unwarranted, unfair, and inequitable contribution to the fight to control inflation.

We appear before you here today to emphasize as strongly as we can on the basis of our experience with Office of Price Stabilization, our sincere belief that those concerned with the administration of the Defense Production Act as written by the Congress are not administering it in the spirit with which it was enacted. In other words "fair and equitable margins” are not recognized for our industry and we are being squeezed by a policy of cost absorption. We believe that when SR 63 was being drafted in OPS that there was a feeling of confidence on the part of his economic advisers that Mr. DiSalle would be successful in his efforts to defeat the so-called Capehart and Herlong amendments. In our opinion, these amendments which were adopted by the Congress showed that it was the intent that all costs would be allowed. The Capebart amendment was inapplicable to our industry because one company cannot raise its prices in an area without losing all its business. OPS also construed the Capehart


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