7 -/ 1
I
Agricultural Economics
Series 19
EFFECT OF 
QUOTA PLANS
ON
MILK SUPPLIES 
IN ALABAMA
AGRICULTURAL EXPERIMENT STATION
OF AUBURN UNIVERSITY
E. V. Smith, Director
June 1970
I I
Auburn, Alabama

TABLE OF CONTEI1TS
INTRODUCTION*.~
USE OFOQUOTA PLANS IN AABANA * . . 2
COM~PARISON OFTHE QUOTAFPLANS .5
Number and Size of Producers . "0.5
Out-of-State Purchases of Milk by Distributors. . . .
. 7
Changes inlabamnaSupply * ...... 
8
Class I Utilization of Alabama Supply ... ........ 9
PURCHASES OF SUPPLEMSEN'TARY SUPPLIES BY DISTRIBUTORS 
.. 10
SUMARY AND COCLUSIONS. . .s. . 0. .46... .
. 10

EFFECT OF QUOTA PLANS ON MILK SUPPLIES IN ALABAMA*
Lowell E. Wilson, Professor
Alabama Agricultural Experiment Station
Auburn University
For many years the Alabama Milk Control Board has recognized the
need to adjust milk production seasonally to meet the demand for fluid
milk products. The Milk Control Law gave the Board authority to
apportion quota of base milk among producers.! Official orders
number 2 through 9, effective June 1, 1939, provided for establishment
of producers quotas of Class I and II milk in the milk sheds established
at that time
2 /
. Quota systems supervised by the Milk Control Board
have been in effect for producer licensees continuously since the 1930's.
A producer shipping milk under a quota or base plan, the two terms
will be used synonymously, establishes a base by his milk 
deliveries
made during fall and winter months when milk supplies tend to be
inadequate. The size of a base depends on the amount of milk producers
shipped during the base-building period. Producers are paid the Class I
price for base milk, milk used in fluid products. A lower price, Class
II, is paid for milk shipments in excess of base.
*The Experiment Station project on which this report is based was
supported by funds provided by the Research and Marketing Act of 1946
and by State research funds. The study was under Alabama Research
Project 627, a contributing study to the Southern Regional Dairy
Marketing Project SM-40, "Market Organization, Power, and Policies and
Programs in the Dairy Industry.
1/ Code of Alabama, Title 22. Milk Control Board, Amended, 1965.
Section 223.
2/ Alabama State Milk Control Board, Official Orders 2 through 9,
Establishing price schedules in the several milk sheds. May 24, 1939.
1
2
Two quota plans are being used by the Milk Control Board to
determine producer bases. The "plant usage" plan has been in effect
since the 1930's, while the "alternate quota" plan was initiated in
1962. The basic purpose of each plan is the same, to adjust production
to seasonal demand. However, differences in the provisions of the two
plans may cause different supply responses of producers shipping under
each plan. The purpose of the study was to determine the effects the
two quota plans were having on milk supplies in Alabama.
Use of Quota Plans in Alabama
Until 1962, almost all Alabama producers licensed by the Milk
Control Board earned quotas under the plant usage method.
3 / 
In 1961
the Board put into effect an order providing for an alternative quota
plan. Producers selling milk to three plants changed to the alternative
plan for the 1961-62 base-building period. Producers of two additional
plants voted to change to the alternative quota plan prior to September
1962. Since then, producers shipping to additional plants have voted
to use this method of determining milk bases. By September 1967,
producers shipping to nine milk plants were under the plan. In 1968,
producers of three more plants voted to use the alternative quota plan.
A base earned under either plan is determined during the base-
building period from September 1 through the last day of February. The
new base is then in effect from March 1 through the last day of February
of the following year.-
3/ A "winter production is summer base" quota plan is permitted by the
Milk Control Board, but it has not been used to any appreciable extent by
producers.
4/ Procedures for establishing bases under the plant usage and
alterate quota plans are described in Alabama Agricultural Experiment
Station Circular 142, November 1962.
3
With the plant usage method, each producer's quota is determined
by the percentage his deliveries of milk during the base-building 
period
are of total producer deliveries to his plant. For example assume a
producer shipped 2 per cent of all producer deliveries to his plant
between September and February. He then becomes eligible to receive
the Class I price for that quantity of milk equivalent to 2 per cent
of his plant's Class I product sales for the next 12 months. In
determining base by this method, there is no restriction on base
adjustments from year-to-year. A producer can make a large adjustment
in the relative size of his base in one base building period.
In the late 1950's and early 1960's, Grade A milk production in
Alabama was increasing more rapidly than demand for fluid products.
A growing volume of excess milk was being used in lower class 
products,
resulting in a general lowering of blend prices. Percentage of 
Alabama-
produced milk used in Class I products declined from 81 per cent in
1958 to a low of 69 per cent in 1962. Average blend price declined
from $5.87 per hundred pounds to $5.64 during the same period, Table 
1.
Some producers were rapidly expanding production to gain additional
quota and thereby improve their income position. Other producers had
already reached a level of production they desired to maintain. Suppose
a producer is earning base under the plant usage method and total
producers supplies to this plant is increasing. If he wants to maintain
the same percentage quota from year-to-year, he must increase production
at the average rate of increase of all producers shipping to the plant
or purchase base.
5/ 
Thus, assignment of a base to a producer on the
5/ Base may be purchased from another producer shipping to the same
distrTbutor upon dispersal of the producer's herd, or upon special per-
mission from the Milk Control Board.
4
basis of deliveries, the plant usage method, was creating a "race for
base" by many producers. Those producers who did not wish to expand
were unwilling participants in the "race".
Table 1. Grade A Milk Supply, Class I Utilization and Average Blend
Price, Alabama, 1958-1969
Total milk
sales by
Alabama producers
Mil. lb.
. . 451
. . 500
S. 526
. . 566
. . 590
. . 587
. . 607
. . 652
. . 663
. . 669
. . 668
S. 678
Class
Volume
Mil. lb
364
389
406
404
408
420
453
491
520
548
569
566
I use of Alabama supply Average blend
Percentage price
. Pet. Dol.
81 5.87
78 5.82
77 5.83
71 5.68
69 5.64
72 5.71
75 5.87
75 5.91
79 6.07
82 6.05
85 6.50
83 6.77
Source: Alabama Milk Control Board.
To help relieve this problem, the Alabama Milk Control Board issued
an order in 1961 providing for the alternative quota plan, whereby quotas
could be assigned on the basis of sales of fluid milk products. The
order stated that the quantity of a producer's milk delivered during the
base building period to be used in calculating quota will not be more
than 115 per cent of his share of Class I and Class II sales (fluid
product sales) at the plant during the base building period../
In 1963 the Board reduced the percentage of a producer's quota
to be used in calculating the new base from 115 to 110 per cent.7
/
6/ Alabama Milk Control Board. Pricing Order No. 6, September 7,
1961. The quota provisions of the order were effective beginning
September 1, 1961.
7/Alabama Milk Control Board. Official Order 3-63. October 16, 1963.
Year
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
.....
5
Procedure used in calculating the alternate quota has been unchanged
since that time. A producer is assured he will not lose base (a per-
centage of his plant's fluid sales), if during the six-month base-
building period he shipped 110 per cent of his base, whereas, under the
plant usage method he may have to ship a substantially larger quantity
than base milk to maintain base.
Since initiation of the alternate quota plan, the Alabama milk
supply situation has changed. Rate of increase in milk supplies from
Alabama producers has dropped sharply. Since 1962 total sales by
Alabama licensees increased 88 million pounds while Class I use of
Alabama supplies increased 158 million pounds. Demand for fluid
products was relatively unchanged in 1968 and 1969. The blend price
increased, however, because of higher class prices.
An hypothesis explaining the leveling-off of milk production, in
spite of higher prices, is that the alternate quota plan restricts
total milk supply increases. The analysis was made to determine if the
type of quota plan was having an effect on supply response.
Comparison of the Quota Plans
Data used in the study were obtained from the Office of the Alabama
Milk Control Board. Staff of the Board assisted in compiling information
about milk producers and milk supplies for the period from 1962 to 1969.
The number of plants under the alternate quota plan has changed over the
seven-year period. To simplify a comparison between the two quota plans,
a sample was taken of five distributors under each quota plan since 1963.
Number and Size of Producers
A comparison of the number of producers and average annual sales per
producer for each group is shown in Table 2. Total number of producers
6
and volume of milk supplies to the five alternate quota distributors
were somewhat smaller on the average than for the five plant usage
distributors selected.
Table 2. Number of Alabama Grade A Milk Producers and Average Annual
Sales Per Producer by Type of Quota Plan, 10 Selected Milk
Distributors, 1963, 1966, 1968, 1969 1/
Year Number of Index of change
(March-February) producers 
(1963-64=100) sales per 
change
No. Thous..b._ .
Five distributors under
plant usage quota:
1963-64 344 100 469 100
1966-67 327 95 621 132
1968-69 260 76 809 172
1969-70 258 2/ 75 843 180
Five distributors under
alternate quota:
1963-64 281 100 473 100
1966-67 208 74 650 137
1968-69 157 56 868 183
1969-70 148 2/ 53 912 193
J/ Number of Alabama producers for the selected distributors was
obtained from list of producers licensees of the Alabama Milk Control
Board.
2/ As of December 31, 1969.
Number of Alabama producers shipping to the alternate quota dis-
tributors was 281 in 1963-64 as compared with 344 producers for plant
usage distributors. Since then, number of Alabama producers shipping
to both groups of plants has declined, but the sharpest drop in number
was alternate quota producers. At the end of 1969, plant usage
producers declined to 258, 75 per cent of 1963-64, while alternate
quota producers dropped to 148, 53 per cent of the 1963-64 total.
Average sales of milk per farm increased for both groups of
producers. However, alternate quota producers increased sales more
rapidly than plant usage producers. In 1969, average sales for alternate
quota producers were 912 thousand pounds, 93 per cent above the 
1963-64
average for that group. Plant usage producers averaged 843 thousand
pounds,an 80 per cent increase.
Out-of-State Purchases of Milk by Distributors
Plants under the plant usage plan were more dependent on out-of-
state milk supplies in 1963 than alternate quota plants--13.7 per cent
for the former and 11.4 for the latter, Table 3. Since 1963, both
groups have increased their dependency on out-of-state sources, but
the five plant usage plants made the larger increase
Table 3. Percentage Alabama Produced Milk Supplies and Imports Were of
Total Supplies by Type of Quota Plan, 10 Selected Distributors,
1963-1969
5 distributors under 5 distributors under
Year plant usage quota alternate 
quota plan
(March-Feb.) Alabama Out-of-State Alabama Out-of-State
produced purchases produced purchases
milk milk
------------------- Pet.----- ma-------------------
1963-64 86.3 13.7 88.6 11.4
1964-65 86.8 13.2 89.1 10.9
1965-66 86.9 13.1 89.2 10.8
1966-67 85.2 14.8 88.1 11.9
1967-68 82.9 17.1 88.0 12.0
1968-69 80.1 19.9 85.6 14.4
1969-70 79.6 20.4 85.9 14.1
Changes in Alabama Supply
It was anticipated that the data would show little change in total
Alabama supplies of alternate quota producers and continued increases
by plant usage producers. Also, average annual sales per alternate
quota producer were likely to be more stable than plant usage producers.
In the first case, Table 4 shows that total Alabama supplies for the
five alternate quota distributors have been practically unchanged since
1963--increasing in 1965-66 to a high of only 4 per cent above 1963-64
and back to the beginning level in 1969. Plant usage 
distributors
received 35 per cent more Alabama-produced milk in 1969 than in 
1963-64.
In the second case, average alternate quota producers are making produc-
tion increases greater than plant usage producers, Table 2. However, a
larger proportion of alternate quota producers left dairying.
Table 4. Index of Change in Alabama Produced Milk 
Supplies by Type
of Quota Plan, 10 Selected Distributors, 
1963-1969
Year 5 distributors under 5 distributors under
(March-Feb.) plant usage plan alternate 
quota plan
---------Index Number (1963-64=100)-----------
1963-64 .............. .. 100 100
1964-65 .... ............ .113 
102
1965-66 ............ 123 104
1966-67 ..... ........ .126 102
1967-68 .... ............ .136 
102
1968-69 .... ............ .130 
103
1969-70 .... ............ .135. 
101
Class I Utilization of Alabama Supply
It was hypothesized that milk producers voting to go under the
alternate quota plan generally were receiving a larger percentage of
9
surplus than producers remaining under the plant usage method. Also,
if the alternate plan tended to restrict supplies, then the relative
proportions of milk used in Class I would have changed since 1963.
Empirical observation bears out these hypotheses, Table 5.
Table 5. Percentage of Alabama Milk Supplies Used in Class I Products
by Type of Quota Plan, 10 Selected Distributors, 1963-1969
Year 5 distributors under 5 distributors under
(March-Feb.) plant usage plan alternate quota plan
1963-64 .. ....... 78.0 69.6
1964-65........ . 79.0 73.9
1965-66. ..... ... 81.175.2
1966-67.....,. 85.5 78.3
1967468 ....... 84.2 86.3
1968-69. ...... .... 84.2 91.2
1969.76 ....... .... 83.7 890
In 1963, Alabama producers shipping to the five alternate quota
plants received Class I payment for 69.6 per cent of deliveries.
Producers shipping to the five plant usage plants received Class I
prices for 78.0 per cent of deliveries. Since then, the percentage of
Alabama milk supplies utilized in Class I products increased for both
groups of plants. However, by 1967 alternate quota producers were
receiving a higher proportion of Class I than the other group. During
10
produce larger and larger amounts of surplus milk. Under the plan
these producers have little opportunity of expanding quota by increasing
production during the base-building period. On the other hand, plant
usage shippers may make large base adjustments in short periods of time.
Purchases of Supplementary Supplies by Distributors
Data showing purchases of supplementary milk supplies by all
Alabama distributors were obtained from the Milk Control Board. A
comparison was made of supplementary purchases by distributors by type
of quota plan. Information was obtained for the 12-month period from
March 1968 through February 1969. During this period distributors
under the plant usage plan received 72 per cent of all milk supplies
purchased by Alabama distributors and alternate quota distributors
the remaining 28 per cent.
A total of 19.1 million pounds of supplementary purchases was
reported by distributor licensees, Table 6. Of this amount alternate
quota plants purchased 9.4 million pounds or 49 per cent of the total.
(These plants received 28 per cent of total supplies). Thus, alternate
quota plants were relatively more dependent on supplementary purchases.
Sales of bulk milk supplies by all Alabama distributors were
studied for the same 12-month period, Table 7. Alternate quota dis-
tributors made relatively fewer sales of bulk milk than plant usage
distributors, 18 and 82 per cent, respectively.
Summary and Conclusions
The alternate quota plan has not only ended the race for base
existing among producers who went under the plan, but it also appears
to have stopped aggregate supply increase from these producers. In
11
Table 6. Purchases of Supplementary Bulk Milk Supplies by all Alabama
Distributors, by Type of Quota Plan, March 1968-February 1969 1/
Distributors under Distributors under
plant usage quota alternate quota 2/
Mil. lb. Pet. Mil. lb. Pet. Mil. lb.
March-May ........ 1.5 38 2.4 62 3.9
June-August ...... 2.4 64 1.4 36 3.8
Sept.-Nov.. ..... .3.1 55 2.5 45 5.6
Dec.-Feb . . . . . . 2.7 46 3.1 54 5.8
Total 9.7 51 9.4 49 19.1
1/ During the 12-month period distributors under the alternate
quota plan received 28 per cent of all milk supplies purchased by
distributor licensees of the Alabama Milk Control Board. Distributors
under the plant usage quota plan received 72 per cent of all milk
supplies.
2/ Alabama distributors whose producers earned quotas under the
alternate quota plan for the period March 1968-February 1969 were
Barber Dairy (Mobile), Consolidated Dairies, Dairyland Farms, Hall
Brothers, Paschal Dairy, Streit Dairy, Tro-Fe Dairy, Turner Dairy, and
Woodhaven Diary. During 1968 producers shipping to Barber (Montgomery),
Delview, and Pet voted to use the alternate quota plan. Bulk purchases
made by these distributors are included as part of the plant usage
distributors.
Table 7. Sales of Bulk Milk Supplies by all Alabama Distributors by
Type of Quota Plan, March 1968-February 1969 1/
3-mo. eriodsDistributors under Distributors under Total
- pplant usage quota 
alternate quota
Mil. ib. Pet. Nil. lb. Pct. Nil. lb.
March-May . . . . . . 5.2 84 1.0 16 6.2
June-August . . . . . 3.4 74 1.2 26 4.6
Sept.-Nov. . . . . . 1.4 91 .1 9 1.5
Dec.-Feb. ...... 4.9 84 .9 16 5.8
Total. ........ 14.9 82 3.2 18 18.1
I/ See footnotes 1 and 2, Table 6.
12
1969, total producer sales to the five alternate quota plants studied
were at the same level as in 1963-64, the first year of operation of
the plan. Producer sales to the five plant usage plants studied
increased about one-third.
The 15 per cent increase in Alabama produced milk supplies since
1962 was less than the demand increase for Class I products, up 33 per
cent. Percentage utilization of Alabama supply in Class I products
rose from approximately 70 per cent in 1962 to 85 per cent in 1968
and dropped slightly to 83 per cent in 1969. During the period Alabama
distributors increased out-of-state purchases 40 per cent.
Since the early 1950's there has been a trend among producers to
either expand their production units or go out of business. In this
study, the tendency to get larger or go out of business was more
pronounced for alternate quota producers. In the past 7 years, 
almost
half of the alternate quota producers shipping to the five distributors
studied left dairying, while those remaining in the business almost
doubled milk sales per farm.
Reasons for producers leaving dairying were not determined in
the study. A number of factors both economic and non-economic influence
dairymen in this decision. It is likely that the differences in pro-
visions of two quota plans influence the rate of exit of producers,
as well as adjustments being made by those who remain in dairying.
Plant usage producers can make substantial increases in bases in only
one base-building period by increasing production at a rapid rate. An
alternate quota producer or a potential alternate quota producer cannot
increase base in this manner. His most practical way is through base
13
purchases, and then only when other dairymen shipping to his plant
leave the business.
Base is a valuable and negotiable asset for diarymen. Alternate
quota bases have generally sold for a higher price than plant usage
bases. Value of an alternate quota base may have been a determining
factor to sell for some dairymen. 
From the producer's viewpoint,
uncertainty regarding regulations providing for sale of base, as well
as uncertainty of continued regulation by the Board, may influence him
to leave the business. In some instances, income from base has been
an important proportion of total dispersal income. With a larger per-
centage of milk being used in Class I as has occurred during the past
few years for alternate quota producers, the reported market values for
base has declined, however.
The alternate quota plan is having a discernible effect on the
dairy industry in the State. The plan tends to encourage production
and marketing efficiency, as well as protecting quota holding producers
share of the market. However, some aspects of the alternate plan may
work to endanger the adequacy of Alabama produced milk supplies. The
production restriction under the alternate plan (110 per cent maximum
to establish base) is too low to encourage adequate supply response.
Raising the maximum percentage to determine base may stimulate a
supply increase. A formula could be devised to adjust the maximum
percentage of producer shipments to be used in determining base
dependent upon the percentage of milk used in Class I products. The
base percentage would be raised when most of the milk supply is used in
Class I and lowered as excess supply increases.
14
Information is needed regarding the reasons so many alternate
quota producers have left dairying. If the plan has been a factor
in this respect, other changes in the plan should be considered.