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The reason why this system of private middlemen has developed is simply that it furnishes the most economical and most expeditious method that has ever been discovered for performing these difficult and intricate marketing services.
Now, to come more specifically to dairy products: I shall speak especially about the marketing of butter, but shall also refer to the marketing of milk and cheese. The marketing of these products illustrates some of the most important fundamentals in marketing. Each of these three products presents a different problem. Each is marketed in a different way. Each has its own marketing cost.
Referring to the methods of marketing and the channels of trade through which these products flow, first, take butter which is marketed in various ways. Perhaps the most typical example would be to trace butter from the small Minnesota creamery through to the consumer in New York City. It is manufactured in the creamery, then passes over the railroad, then into the hands of the wholesale receiver. This wholesale receiver assembles the goods from country points; he has sent out solicitors to make business connections with the country creameries. He finances the shipper by letting him draw draft on the day of shipment. He provides storage for the goods after they arrive in New York. He sorts out the goods by quality. He sells in large lots, usually to a jobber, another middleman. This jobber sends out salesmen and sells to the retailers. He breaks the goods up into very small lots. He delivers one tub at a time to individual retailers just the quality and just the quantity that each wants, and he also extends credit. In smaller cities, there is usually one wholesaler who attends to both wholesale receiving from the country and the distribution direct to the retailer. It is only in the largest cities that we generally have the separate steps described above.
Butter may be marketed through the centralizer who often has his own jobbing houses, his own distributing organization, especially in larger cities, for selling direct to retailers; or he may sell through independent wholesalers. Or, butter may be marketed through the meat packer who distributes direct to retailers through his own nation-wide distributing organization. I will tell you more in detail about that at one of the Syracuse meetings.
Milk is marketed in an entirely different way. There is usually only one middleman--that is, besides the railroad. Sometimes it is sold to retailers by the wholesale milk distributor, but more commonly direct to the consumer at his own back door.
Cheese, again, is marketed through different chann Is. It differs from butter in that there is usually a whol, sale dealer in the cheeseproducing regions who assembles cheese from the many small factories. For distribution in distant cities he sells sometimes to a wholesale grocer, sometimes to a specializ d wholesaler, sometimes to a meat packer.
So you see that the methods of marketing these three products are entirely different.
Now we come to the cost of marketing. The two most interesting things are: First, the very narrow margin of cost on which butter is marketed; and, second, the great difference in the marketing costs of these three commodities. It is convenient to measure the marketing cost by showing the percentage of the final retail price that the farmer receives.
I have had prepared a chart showing the cost of marketing butter from the Minnesota creamery to the New York consumer.
Cost of marketing butter from Minnesota creamery to New York consumer, 1922.
These figures are really based on rough averages for 1922 and they are approximate figures. This shows the price paid by the consumer for butter in New York as 48 cents. The farmer received 341 cents for enough butterfat to make a pound of butter-approximately five-sixths of a pound of butterfat. The creamery margin is 34 cents per pound; freight 1} cents per pound; wholesale receiver's margin, three-quarters of a cent; the jobber's margin 14 cents. That varies. Often it is 2 cents or more, especially if butter is cut into pound prints. The retailer's margin approximates 6 cents.
It is a significant thing that the percentage received by the farmer is almost 72 per cent.
I might say that butter is marketed on about as small a margin between producer and consumer as any product that there isany farm product or manufactured product. I don't know of another product, either agricultural or manufactured, where the producer gets as much as 70 per cent of the final retail price. For farm products in general, the farmer gets only about 50 per cent. For many farm products he gets only 30 or 40 per cent. But for butter he gets approximately 70 per cent.
The reasons why butter is marketed on such small margins are: First, that it is a product of high intrinsic value and small bulk. This means it is easy to handle and that the freight rate is an insignificant part in the marketing cost. Second, it moves in large volume throughout the year, even though there is a pronounced seasonal variation. Third, it is easily graded. The scoring system of grading butter is unique. There are very few products that have such a fine method of measuring and of indicating quality. Fourth, there are accurate market quotations that can be used as a basis of trading. A great deal of trading in wholesale markets is done on the basis of published quotations, which means that the ordinary dickering and bickering on price for every transaction is not necessary, The New York quotations, which are most generally used, are made by a private concern that has been in business for a great many years, and in whom everybody has confidence. Fifth, the turnover of butter in dealers' hands, especially in retailers' hands, is very rapid. A dealer does not have to carry a dozen different kinds of butter as he
does of a great many other products that he handles. Generally one or two grades will suffice, and he can stock up every day or two, and move it out very rapidly.
On the chart the retail margin is only about 12 per cent of the final retail price. It costs a retail store about 18 to 20 per cent of its sales to do business. So you see that butter is sold by the retailer on a gross margin that is very much smaller than the average cost of doing business for the whole store. That does not mean that he necessarily loses money on butter, because butter is turning over in his hands much more rapidly than are his other products, and consequently the selling cost is lower.
The sixth reason is that there is practically no waste in marketing butter as there is in marketing many other perishable products, such as fruits and vegetables.
To compare this marketing cost for butter with the cost of marketing cheese and milk, the producer gets about 70 per cent of the final retail price in the case of butter, about 50 per cent in the case of cheese, and only about 40 per cent in the case of milk. There is a very marked variation.
The reasons why milk is so expensive to market as compared with butter are:
First. It is probably the most highly perishable product that is marketed at all
. It requires constant care; it has to be moved very rapidly, which means special railroad service.
Second. Milk is hard to handle, since it is a liquid; it has to be put in cans or in glass bottles. There is much breakage and loss of bottles, and there is expense in keeping bottles clean, etc.
Third. It is expensive to deliver. It has to be delivered from house to house at early hours in the morning of every day.
Fourth. It is different from all other products in that an entirely separate and special marketing organization has had to be developed to handle it all the way through. The existing marketing organizations can't be used in marketing milk.
Now, note that for butter the farmer gets approximately 70 per cent and that it passes through the hands of three or four different middlemen. In the case of milk, the farmer gets only about 40 per cent and yet it passes through the hands of only one middleman. This illustrates an important marketing principle, viz. that the cost of marketing does not depend upon the number of middlemen through which a product passes; it rather depends upon the characteristics of the commodity itself.
The mere statement of these facts blasts the common notion that middlemen are responsible for multiplying market costs, for butter passes through the hands of three or four middlemen, and yet is marketed on a smaller margin than any commodity that I know of.
On the whole, the marketing machinery for dairy products is highly efficient. It has developed under private initiative and in the hands of private companies. 'Wholesalers are in keen competition with each other. Net profits are kept at a minimum. If I could have shown the net profit of the different dealers on that chart it would have been a very, very, insignificant part of the final retail price.
I have laid emphasis, as I was asked to when I was requested to write this paper, on the middleman system as it has developed in private hands. I don't want you to think that by laying the emphasis, as I have, on the efficiency of the present system, I am at all against cooperation. I have always favored cooperation-cooperative marketing. No one admires the accomplishments of the cooperative creameries more than I do. When I was on the faculty at the University of Minnesota I studied them at first hand.
But what I have said does mean this: First. That the present system of wholesale distribution is highly efficient and hard to improve on.
Second. That by extending cooperation to terminal markets this will not eliminate the marketing services—the marketing functions that have to be performed. An organization will have to be built up to perform them and expense will have to be incurred in performing them.
Third. There is no chance for success unless the management of the cooperative organization is in the hands of highly efficient (and that means high-salaried) men who can cope with successful and experienced private companies, which will offer severe competition, just as severe as they are offering each other.
Finally, let me congratulate the dairy farmer on the situation that he finds himself in to-day. There is a great deal said about how badly off the farmer is; that the prices of farm products are lower than the prices of manufactured products, so that the farmer gets relatively less for what he sells than the prices he has to pay for manufactured goods. That is true of farm products in general, but, fortunately for you people, it is not true at the present of dairy products. The wholesale price of dairy products is on a parity with the prices of manufactured products and this means that the dairy fariner is better off, relatively, than other farmers. Of this I am sure we are all glad, and I congratulate you that it is so.
Chairman ScoviLLE. The author of the next paper is unavoidably absent and, under the rules of the congress, his paper will be placed at the end of the program, to be read if opportunity permits.
We have exactly 51 minutes left and, allowing 1 minute for the necessary transition from one speaker to the other, it is quite obvious that the two remaining speakers have 25 minutes apiece if the time is divided equitably.
I will waste none of their time in introducing them except to say that Mr. Miller was drafted into the dairy industry. If my memory serves me right he was called upon to aid the New York State Dairymen's Association in one of their hours of need and he became so much interested in the proposition that he devoted all of his time -to their work and has since been elected president of the National Milk Producers' Federation.
I take great pleasure in introducing to you Mr. J. D. Miller, of New York. Applause.]
COOPERATIVE MARKETING OF MILK.
John D. MILLER, president, National Milk Producers' Federation ; vice president and general counsel, Dairymen's League Cooperative Association, New York City.
Mr. Chairman, ladies, and gentlemen : May I in the beginning, as the humble representative for the time being of the men and women who milk the cows, extend to the foreign delegat s here assembled a welcome to this great World's Dairy Congress, and may I express the hope that has been express d by other speakers, that this may be but the beginning of such meetings to be hold in different places of the world by which those engaged in the great dairy interests may come together for mutual consultation and information.
It is a disappointment to your present speaker that he who was on the program to speak at this time is unavoidably absent, a man who has been a master builder of cooperative associations and one who has written a cooperative marketing law that has be n adopted by many of the States of the Union. I refer to Mr. Sapiro. His address no doubt would have laid the foundation, or at least have been the background, for something that I might say, but which by the limitations of time it will not be expedient for me to discuss.
I take it that all will agree that it is not a healthful thing in industrial or commercial circles to have any body of m n, be it buyer or be it seller, with power to arbitrarily' fix prices on commodities moving in commerce, that there should be at all times an equality of bargaining power, and that no body of men, however upright and able, should be intrusted with the power to arbitrarily determine the prices of commodities.
One of th greatest industrial movements in this country during the last four decades has been the centralization of the control of industries and of commerce. In the old days, a farmer could go to the village sho maker or the village blacksmith or the village tailor and exchange his butter, cheese, milk, or vegetables for their articles, but by this process of centralization these articles are now made in great plants covering hundreds of acras; and while owned by many different people widely separated, the control is centralized in the hands of a few men who have established sales agencies for their wares throughout the civilized world.
While these great organizations, all, or nearly all, corporate in form, have sometimes abused their power, as a whol:, they stand for efficiency and economy and have become such a part of the industrial and commercial life of the Nation that their elimination would stagger industry and commerce. While this process of consolidation has been going on in other industries, farmers (in that they must continue to produce singly) have lagged behind in the method of marketing and have not followed the example of the great commercial and industrial captains who both produce and sell collectively. The economics of agriculture dictate that farmers must produce singly. By cooperation, they arz now attempting to market collectively.
If I were to state in a sentence the object and purpose of the cooperative marketing associations of the United States, it would be that farmers are thus seeking to retain the control of their prod