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OCEAN TRANSPORTATION AND COST OF LIVING IN PUERTO RICO
The general price index in Puerto Rico registered a 13.5 percent increase between November 1964 and November 1967; * increasing approximately 4 percent between November 1966 and November 1967.5 In terms of 1957–59 dollars this November 1966–67 increase reduced the purchasing power of the dollar from 81 cents to 78 cents. Food items were the most seriously affected: fruits and vegetables jumped 17 percent, and dairy products climbed approximately 7 percent. In addition, the price of consumer durables increased markedly.
Domestic production of food and many other consumer articles in Puerto Rico is insufficient to satisfy local demand.? Consequently, distributors in Puerto Rico import great quantities of food staples and basic household goods. Although some foods are imported from foreign countries, including the Dominican Republic, Haiti, and Spain, the largest quantity of imported food is purchased from U.S. mainland distributors (wholesalers).8 Puerto Rico also imports large quantities of consumer durables and semi-manufac
This chapter examines the effect of ocean rates on price levels in Puerto Rico (i.e., Puerto Rico's pricetransportation cost relationship). The primary purpose is to determine the extent to which ocean rates have affected the prices of important consumer items, including beans, rice, meats, eggs, vegetables, stoves, and refrigerators, moving from the Mainland to Puerto Rico. Specifically, the examination considers: (1) the ocean freight charge as percentage of the U.S. mainland wholesale price on selected consumer commodities; (2) the Puerto Rican retail merchant's markup ? as a percentage of the U.S. mainland wholesale price on the same commodity; (3) the relationship between Puerto Rico's retail prices and ocean rates; and (4) the effect of the Island's marketing system (wholesalers and retailers) on general price levels in Puerto Rico.
As previously indicated, approximately 99 percent of Puerto Rico's total imports are transported by water; the remainder moves by air. For that reason, the impact of ocean freight rates on the economy of Puerto Rico is analyzed in depth in the following pages."
1 In this chapter, “ocean freight charge" refers to the delivered transporta. tion charge to port of destination in Puerto Rico. This charge includes U.S. mainland terminal charges plus June 1, 1968 ocean freight charges. San Juan terminal charges (Arrimo) and trucking charges from San Juan to inland destination are not included in the ocean freight charges.
2 The term “markup" as used in this chapter is more fully explained in the following pages.
3 A Puerto Rico Planning Board document, entitled Selected Social and Economic Indices of Puerto Rico, listed ocean freight charges as one of the principal factors affecting the economy of Puerto Rico.
* During the same 4-year period the U.S. mainland general price index rose 8.4 percent.
5 Puerto Rico Department of Labor (Cost of Living Division), Consumer Price Index for Wage Earners in Puerto Rico, (San Juan: November 1967) pp. 2-3. Since the current inflationary trend began in 1968, the general price indices have climbed considerably. & Ibid., pp. 2, 4.
* Although the Island's food production is substantial, about 40 percent of the local needs must be satisfied from outside sources. (Section D deals with the relative importance of imported foods and domestic production in Puerto Rico.) Prices on these domestic foods rose considerably during the 4-year period, 1964-67.
8 Food imports from foreign countries ($56.7 million) amounted to 3 percent of total imports including foods from all areas (Puerto Rico Planning Board, External Trade Statistics-1967).
In this analysis, the reasonableness of rates is not at issue. The examination only serves to demonstrate the probable impact of rate levels on economic conditions in Puerto Rico.
B. THE U.S. MAINLAND WHOLESALE
PRICE AND THE SAN JUAN RETAILER'S MARKUP
The relationship of ocean freight charges to price levels is demonstrated by comparing the U.S. mainland wholesaler's prices 12 on 45 actual shipments with Sea-Land's corresponding ocean freight charges 13 from U.S. port of origin to San Juan. The examination demonstrates that the effect of ocean freight charges on the wholesale selling price 14 is relatively small compared to the impact of Puerto Rico's marketing system on the same price (app. G, table 1).
1. Consumer Goods
tured commodities from the Mainland to satisfy local demand and the industrialization program. During 1967, imports from the continental United States rep. resented about 81 percent of the total value of Puerto Rico's imports. Of these imports, approximately 50 percent ($750 million) were food and other consumer goods; the remainder were largely semimanufactured goods.
Selection of commodities for examination in this chapter was predicated mainly on the basis of the commodities listed in the publication entitled, Goods and Services Priced for the Calculation of the Consumer Price Index for Wage Earner's Families in Puerto Rico. This publication lists the consumer items which are the most important to Puerto Rico's wage earners' families (low-income groups). These families spend a substantial proportion of their annual income on these consumer items. Only the rates of the principal common carriers from each region were taken into consideration. These carriers include Sea-Land (North Atlantic), TMT (South Atlantic) and GPRL 10 (Gulf) which, combined, carried about 85 percent of the traffic, in terms of freight revenues earned, to retailing outlets in San Juan, Ponce, and Mayaguez.
Appendix G, table 1 contains U.S. wholesale and Puerto Rican retail prices (San Juan), ocean freight and delivery charges, and the markup of the Puerto Rican merchant. In this chapter, "markup” refers to the difference between the landed cost in Puerto Rico (which landed cost includes the U.S. wholesale price, ocean freight charge, and terminal charges, Puerto Ri trucking charges and excise taxes) 11 and the retail selling price in Puerto Rico. In addition, tables containing indices of 1958–67 retail prices in Puerto Rico and the corresponding ocean rate indices of SeaLand, GPRL, and TMT, have been prepared (app. G, table 2). The ocean freight rate indices take into consideration all of the rates offered by each carrier on the commodities involved.
At the outset, it is important to observe that the pricetransportation cost relationship is not indicative that the ocean freight rates are reasonable or unreasonable.
Table V-1 shows that 1967 ocean freight charges from U.S. mainland ports increased the U.S. mainland wholesale selling price of various food items from some 6 to 45 percent, or an average of 11 percent, while the average
effect of retail markups was approximately six times greater.15 For example, in 1967 the wholesale selling price in New York (FAS price) for one pound of red kidney beans was 10 cents. The ocean freight charge to San Juan on this commodity was 1.08 cents per pound. This transportation cost increased the New York price 10.8 percent. The San Juan terminal plus pickup and delivery charges to the retailer's door, which amounted to only 0.11 cents, raised the New York sell. ing price on the one pound of beans by only one percent. Thus, total transportation cost to doorstep increased the New York wholesale price of 10 cents by
Puerto Rico Department of Labor, Goods and Services Priced for the Calculation of the Consumer Price Index for Wage Earner's Families in Puerto Rico (San Juan : July 1967), p. 8.
10 For the most part, their rates were similar to those of the other common carrier(s) serving the same region.
11 The Puerto Rican excise tax does not apply on food items. In addition, excise tax does not apply on household articles when their cost at the factory does not exceed a prescribed level. The cost of the items considered in this examination was generally below the taxable level (Source: Puerto Rico De. partment of Treasury, Taxes in Puerto Rico-1968, San Juan, 1968, pp. 25-26).
12 The term "U.S. mainland wholesaler" refers to the continental supplier who ships commodities to Puerto Rican retailers. This wholesaler's price is considerably less than the final shelf price in Puerto Rico.
13 Sea.Land's ocean freight charges were used because Sea-Land's rates have affected more than 60 percent of the traffic transported to Puerto Rico by common carrier.
14 The U.S. mainland wholesale prices on selected commodities, contained in appendix G, table 1, were obtained from 1967 average price lists solicited from various U.S. mainland distributors by means of correspondence and questionnaires (form FMC-119). Unfortunately, valid wholesale prices could not be obtained on all of the consumer commodities which were under consideration.
15 The proportion of ocean freight charges to price on potatoes, eggs, and onions were about two to four times above the average. Rates on onions and eggs have remained constant or declined during the last 8 years. The rate on potatoes, however, increased more than 50 percent during the same period, based on rates in effect Sept. I, 1968.
Price-Transportation Cost Ratio and Markup on Consumer Goods—1967
1.19 cents, or about 12 percent. On the other hand, the San Juan retailer’s markup of 8 cents on this commodity raised the U.S. wholesale price of beans almost 80 percent or more than six times as much as the total price-transportation cost relationship.
The low price-transportation cost relationship on foods partly reflects the Federal Maritime Commission's policy of permitting low rate structures on commodities which are essential to the economy of Puerto Rico. This policy, as already noted, was established in the Commission's 1965 investigation of automobile freight rates entitled, Reductions in Freight Rates on Automobiles-North Atlantic Coast Ports to Puerto Rico; 8 F.M.C. 410 (1965), which stated:
Bootstrap' at a level which will not endanger the health of the overall Puerto Rican economy."
Table V-1 also shows that transportation charges on selected household goods, including refrigerators, stoves, sewing machines, washing machines, and T.V. sets, increased the average U.S. wholesale price on these items by 9 percent. By comparison, the average Puerto Rican markup on the same items increased the price by about 112 percent. Ocean transportation charges increased the average U.S. mainland wholesale price of selected automobiles 8.5 percent whereas the Puerto Rican markup on these automobiles increased the price about 61 percent. Puerto Rico's excise tax on automobiles alone has a greater impact on their U.S. mainland wholesale price than the ocean transportation.
“The 37.cent rate will allow the automobile shippers to share in the benefits of this increase in carriage. At the same time, however, it will be high enough to allow a sufficient number of carriers to remain in the trade adequately to maintain the transportation of basic foodstuffs and products for 'Operation
16 If the rates on some articles do not cover their full share of the cost of transport, it is axiomatic that other articles (high-valued nonessential goods) must bear more than their proportionate share if the carrier is to maintain adequate service.
For example, the Puerto Rican excise tax on a U.S. passenger car valued at $1,937 FAS Baltimore increases the wholesale price about 21 percent, or $400."? In contrast, the ocean transportation on this vehicle increases the price about 10 percent, or $207.20. Excise taxes can also apply on petroleum products, cigarettes, matches, tires and tubes, rugs, photographic equipment, appliances, radios and T.V. sets, trucks, and motor vehicle accessories.
The Puerto Rican markup on foods, consumer items, and automotive items has greater impact on the price level than does the ocean transportation charge because retailers typically calculate their markups on the basis of the total cost to them of the merchandise which includes ocean transportation. This is not to say that retailers in Puerto Rico are making excessive profits. It is recognized that high markup margins on the Island may be prompted by high expenses including large inventories, as well as accompanying storage expenses and other costs. These factors and the effect of Puerto Rican wholesalers on price levels are discussed in section D following. The examination of markups is made simply to setforth the relative effect of Puerto Rico's marketing policies on the cost of living.
Puerto Rico. The impact of the freight cost on cost of living with respect to these goods acquires importance mainly when the final product is sold locally. It appears, however, that rates have a significant impact on these items.
Appendix B contains a list of basic foods and intermediate goods on which the Commonwealth hopes that together the ratemaking practices of common carriers and the FMC's regulatory policy can maintain low rates. This appendix also describes the Commonwealth's reasons why these commodities are important to the economy and industrialization of Puerto Rico. The intermediate commodities include: industrial acids, industrial alcohol, boxboard, carbon black, carbon electrodes, animal feed and feed stuffs, paperboard, silica gel, synthetic resins, rubber, urea, yarn, hides, and agricultural implements.
C. THE ISLAND'S RETAIL PRICE
2. Intermediate Goods
The examination of the price-transportation cost relationship on various southbound intermediate goods, or nonconsumer articles, revealed that ocean transportation often comprises a significant part of the final selling price on this category of cargo. The ocean freight charges increase the U.S. wholesale price on: animal feed and poultry, 42.9 percent; cast iron pressure pipe, 50 percent; pipe fittings, 33.3 percent; paint thinner, 27.4 percent; wooden barrels, 33.2 percent; synthetic enamels, 5.7 percent; lacquer, 9.3 percent; and lubricat. ing grease, 11.3 percent.19
In considering the impact of ocean freight costs on these goods, it should be borne in mind that the retailer's markup is absent in most of these items since there usually exists a straight buyer-seller relationship between the Mainland supplier and the manufacturer in
The retail price-transportation cost relationship possesses positive analytical value because it indicates the direct burden that transportation might have on Island consumers. This relationship was, therefore, examined.
Two separate examinations have been made. First, the rates 20 on 24 foods of paramount importance to the Island's low income groups were compared to the corresponding retail prices 21 in Puerto Rico for the calendar years 1958 through 1967. Second, ocean freight as a percentage of the retail prices in Puerto Rico was examined on 47 general consumer items. At the outset, it is important to observe that this analysis is limited to consumer commodities and did not consider intermediate goods which comprise a substantial part of Puerto Rico's imports from the United States.
1. Effect of Ocean Transportation on Cost
of Livng for Low Income Groups (24 foods)
Although Puerto Rico, in general, enjoys a relatively high standard of living compared to other Caribbean Islands, its low income groups constitute a substantial part of its total population. They eat the least expensive foods, but few clothes and manufactured goods, and
17 Taxes in Puerto Rico, op. cit., pp. 25-26.
18 The term "intermediate goods” refers only to those nonconsumer products which need further processing before being marketed for final consumption or those raw materials which are derived from other raw materials or subcom. ponents of completed products (e.g., construction materials). Some of these are: cast iron pipe, lacquer, paint thinner, yarn, unfinished hides, shoe uppers, furniture, boxboard, ingots, plastic resins, and all semiprocessed articles.
19 While the price-transportation cost relationship on consumer goods being sold directly to consumers can be measured very easily, the same ratio on inter. mediate goods which must be further processed into finished goods before sale cannot be measured with the same accuracy.
20 Ocean freight rates of Sea-Land, TMT, and Gulf.Puerto Rico combined. 21 Average retail prices corresponding to the 24 foods.