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BUTTER - THE ECONOMIC BALANCE WHEEL Remarks by Chas. N. Shepardson, Member, Board of Governors, Federal Reserve System, at the Forty-seventh Annual Meeting of the American Butter institute, Hotel LaSalle, Chicago, Illinois, on October 6, 3.955. Gentlemen, I especially appreciate Mr. Fifer's introduction because, while I am presently engaged in reserve banking, I am still so new in that field that I hardly know the language. Hence, I certainly would not attempt to appear before you to discuss credit and monetary policy. Neither is it proper in my present position to discuss national agricultural policy. I told Russell this when he invited me to speak to you and he said, "That is all right — we want you to talk as the former head of the Dairy Department at Texas A. and M. College." So it is in that capacity th at I appear before you today. Even that position may seem questionable to some of you when we consider what lias happened to the butter industry in Texas in the last 15 years. In 1930 Texas agriculture was suffering from a depressed cotton Market and farmers were looking for some way to improve this situation. that time we had relatively little commercial dairying. At While we had approx- imately l.l million dairy cows, or, more properly, cows being milked, they We re scattered as family cows or in small farm dairy herds of three to six cows. Most of our fluid milk was distributed raw by the producer. virtually no cheese, condensed or powdered milk business. We had And we were mak- ing about 26 million pounds of creamery butter and 57 million pounds of farm butter. - 2 From 1930 to 1940 we saw many changes. While it was generally a Period of tight times for the farmer, dairying expanded rapidly and made considerable advances in efficiency. During the worst of the depression it was truly a life-saver for many areas of the State, While milk and butter fat prices fell to pitifully low levels, other farm prices were even lower so that the milk or cream check provided the margin of difference enabling the farmer with a few cows to hold on when many others were being closed out. I expect that the topic which Russell assigned to me for this discussion grew out of statements that I made repeatedly during that period and subsequently at a hearing in Washington in 1949 on the importance of dairying, ar td butter in particular, as a balance wheel in our farm economy. At a time w hen all other commodities were depressed, dairying provided an outlet for otherwise non-marketable pasture and rough feed on the farm, the skim milk Provided a valuable protein supplement for a growing swine and poultry enterPrise, Diversion of surplus cotton land to pasture and feed crops helped re- lieve the pressure on a glutted cotton market. And with the use of the manure, dairying made a real contribution to the soil conservation and fertility program that was just getting into full swing. Finally, it provided the only source of cash income that many farmers had. In 1940 the picture had changed materially. We then had 1.3 million mi 3.k cows. While milk production was still low, it had increased about 500 Pounds pGr cow per year. We We had a rapidly expanding fluid milk business. We re the sixth State in the Union in cheese production with a total of 18 mil- lion pounds. Powder. We had a number of powder plants producing 3 million pounds of Although farm butter had fallen off to 41 million pounds, creamery - 3 butter production had increased to 36 million pounds. In that year dairy *arm income, including dairy beef, in the great cattle and cotton State of Texas equalled the beef cattle income and amounted to about two-thirds of the cotton income. Even more important, thousands of small tenant farmers w-vtn little or no capital had built a sma?ul weekly cream check into a toehold that enabled them ultimately to become farm owners or at least tenant operators on a more substantial basis. From 1940 to date we have seen a different trend. The rapid mech- anization and technological advances of agriculture, a rising industrial economy stimulated by the world-wide needs of a war and postwar situation, and the accompanying shift in rural and urban population have produced a sharply contrasting situation. Farm units, including dairy herds, have be- come larger. VJith these larger mechanized farms and, until recently, favorable cotton, cattle, and wheat prices, the farm dairy herd with its daily chores has largely disappeared. In 1954- Texas had 950,000 dairy cattle concentrated largely in G ?ade A herds in our fluid milk sheds. Cheese production was down to 5 mil- lion pounds, farm butter to 16 million pounds, creamery butter to 7 million Pounds, and powder plants and condenserie3 were out of the picture except as surplus outlets for our fluid milk plants. In fact, a considerable part of our cheese and butter production comes from surplus Grade A milk rather than frcm ungraded milk and farm separated cream. All right, you say, so what? After all, Texas represents only a P ^ t and not a major part of the national dairy picture. Certainly that is true but while the shifts which I have described may be extreme, they appear - 4 to have followed the same trend that has taken place in the rest of the country. In 1930, 42 per cent of the nation's total milk production went into butter and about 80 per cent of that was marketed in the form of farm separated cream. In 1940, 40 per cent cf our milk went into butter, of which about 70 per cent came from farm separated cream. In 1954, only 27 per cent went to butter, of which only about 50 per cent came from farm separated cream. How then can we still refer to butter as an important bal- ance wheel in our farm economy? I think there are sev3ral points which we should consider and the order in which I list them has no particular significance because their relative importance will vary depending on conditions ln different sections of the country. 1. For the young farmer making a start with a limited amount of capital and therefore dependent on a high proportion of labor to capital inthe old cow, sow and hen program is still sound. True, it is pretty confining. it involves lots of chores, it is not as susceptible of extensive mechanization and does not offer the possibility of as large a gross, and, We hope, net income as a more specialized operation. probably shift from it as soon a3 he can. The young farmer will Still, it has the safety of diver- sification, it calls for a large amount of the one thing he has to invest — namely, labor and initiative in proportion to capital. Thus, it affords him an opportunity to establish a credit rating on which he may be able to get k the necessary capital to move into a Grade/operation or even some other type of farming. 2. While we have had a remarkable expansion and improvement in our national farm road net and in transportation and refrigeration facilities in - 5 recent years, we still have large areas that are too remote or too sparsely Populated to avail themselves of either a Grade A. or a manufactured milk market. Yet we have many small farmers in some of those areas who need a farm dairy herd for the benefits that it can contribute to-this farm program. These benefits are diversification, stability, use of labor, and regular cash income. Even in this day of wide-spread and increasing use of credit, there ai> e many of us, and this isn't limited to farmers, who lack the business acumen and self-restraint to rely too heavily on credit and for whom a dependable regular cash income, even though small, is a real life-saver. 3. Vie are much concerned about strategic reserves and stockpiles ^ i 3 period of world tension and uncertainty. of True, we are prone to think these stockpiles in terms of metals, chemicals, and other war materials, but we are also concerned about food stocks. We all remember the big demand ^ l k powder, both whole milk and non-fat powder, during the last war. That portion of our national dairy herd used for the production of farm separated cream constitutes a constant reserve in being that, in case of necesSlt y> c an be diverted as a source of manufactured milk. 4-. During the war we expanded both our agricultural plant and our agricultural productivity at a prodigious rate to meet the needs for food and fih °er, not only of ourselves but of our war-torn allies around the world. °Ur ex Ports of farm commodities reached tremendous volume. Since the war, those countries have been rehabilitated, frequently with our assistance, and the demand for our production has subsided accordingly. True, we have a grow- l s Population and eventually we will probably need all that we can produce f °r our own use but up to now that increased consumption has not been able to - 6 absorb the reduction in exports and we find ourselves faced with burdensome surpluses and depressed commodity prices. Much of the land that was brought lr ito cultivation during this period is normally sub-marginal crop land and should be put back into pasture or forage crops and diverted to the production of meat and milk. But, you will say, what about our present surplus of butter and °ther milk products? I think there is an answer to that. Fortunately, practically all segments of our economy are operating at a high level. With a high level of Personal income, we have increased consumption of fresh fruits and vegetables an 3 moat, poultry and milk products. While our increased consumption of butter has been small, we have a tremendous potential for further increase. 1 nes d not remind you that in 1934 we had an annual consumption of IB.3 pounds Per capita. That figure dropped to a low of 8.5 pounds in 1953. It has since 3 risen to 9.-QT pounds but that is still a long way from the 1934 peak. There were many factors that caused the big drop. Va s the increased competition of substitutes following the change in the col- led margarine law. as Certainly, one One was the distorted sense of butter values and prices a result of the O.P.A. price control end butter subsidy program, which resulted in consumer misunderstanding and resentment when prices were freed to seek their normal economic level. Another was the fact that, while we gave lip service to quality improvement, we too often failed to follow up with real action, with the result that we had too much inferior butter on the Market. - 7 Along with these depressing market factors, there was a decrease xxx cream production. In part, this was due to the increased demand for whole milk and milk products by a rapidly increasing urban population. In part, was due to the trend toward larger farms and mechanization which afforded more attractive alternatives to a lot of former cream producers. j] From the standpoint of the dairy industry as a whole, this shift •j. greater use of whole milk for human consumption is all to the good. It has not only provided a better return to the producer but the closer superVXsion lty in exercised over graded milk has resulted in a big improvement in qual"the whole fluid milk supply, including the surplus which is account- ' s for an increasing proportion of our raw material supply for butter manufacture. If an d when we develop a profitable outlet for all of our non-fat s °lids of milk, it may be that all of our supply will come from plant separated c ream. Until that time comes, however, there is still a place for the ° r e a m Producer for the reasons that I mentioned earlier. And there is an °PP0rtunity and responsibility for the butter manufacturer to continue his Q fforts to enlarge and improve that market. To accomplish this entails, ai5] ong others, at least three important points that I want to mention in clos- ing: One is continuing efforts toward improvement of quality, especially ln Gutter from farm separated cream. Increased availability of electricity ° n -arms, improved farm refrigeration facilities, and somewhat larger size iarm dairy herds should all facilitate this program. In this connection, want to congratulate the industry on the sincere efforts that are being rcade by the Association and by individual members to make real progress in this quality program and on the achievements to date. The second is continuing and intensified efforts to further increase e fficiency and lower costs of production. The wide range in production from a n av erage of 109 pounds of butter fat per cow per year in the low state to 309 pounds in the high state or even the range from 193 pounds in the heaviest cream Producing area to 270 pounds in the high area is indicative of ths pos- sibilities for improvement. Program, raore efficient feeding and management will produce even greater and faster results. SUr While breeding is an important part of such a The trend toward larger herds, together with increased ores- e on quality improvement, should lend impetus to such a program. In this c °nnection, I would urge that more attention be given by fieldmen to the devel- opment of production rather than the procurement of production that has somstimes existed in the past. And, last, I would commend the industry, including both processors an 3 producers, on their increased awareness of the importance of selling butter and dairy products. feel °n For too long the producer,particularly, seemed to little responsibility for the sale of his product. the In the current battle Part of all foods for an increased share of the limited space in the hl ®ian stomach, the dairy industry cannot afford to lessen and might even in- ° r e a s e the fine merchandising program which is being carried on by the American Dai *y Association as well as by other segments of the industry.
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