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indices on these imported foods climbed from 100 in 1958 to 230.5 in 1967. Consequently, it follows that ocean freight rates on essential foods have not played an important part in contributing to Puerto Rico's rising retail food prices. On the contrary, these divergent trends on rates and prices contradict the generally held opinion that ocean transportation is a significant determinant in Puerto Rico's food prices, although transportation is a factor present in the price level.

2. Percent Ocean Freight is of Retail Price

in Puerto Rico

spend almost one-half of their total annual income on food. Consequently, the group of commodities selected for this analysis is that used by the Commonwealth's Department of Labor to obtain the Island's cost of living for low income groups.

Chart V-1, p. 94, illustrates the comparative indices of ocean freight rates, retail prices in Puerto Rico and traffic volume, for the fiscal years 1958–67. These indices apply to the 24 primary foods selected for ex. amination. The chart demonstrates that the retail price trend increased steadily since 1958 while ocean transportation rates, for the most part, had a declining trend during the same period. Although the price and rate indices commenced at 100 percent in 1958, diverging trends in these indices resulted in an 18 percent differential by 1967. By 1967, retail prices had climbed by 16 percent while ocean freight rates declined about 2 percent.

Of the 24 food items considered, the comparative rate indices of about 60 percent or 15 items, are below the levels existing 9 years ago as a result of ocean freight

9 rate reductions. The decreases on dairy and poultry products were considerable, for example, 13 to 18 percent on butter, eggs, and oleomargarine. Chicken enjoyed the largest decline, dropping to 70 percent of the comparative rate index level existing in 1958.22 The rate index levels on rice (in cartons) and beans, two of Puerto Rico's most important food staples, remained the same during the 9-year period. On the other hand, the rate index on rice (in sacks) increased by 5 percent by 1967. Comparatively, there were rate index increases also on floor (8 percent); ham (9 percent); potatoes (10 percent); pig's feet (10 percent); lard (7 percent); and onions (12 percent). Codfish experienced the highest increase, reaching an index level of 133.

For the most part, retail prices climbed markedly compared to the ocean freight charges. For example, chart V-l shows that a declining trend existed in the 1960 ocean freight rates while the corresponding prices showed the opposite trend. The same pattern continued in 1963, 1964, 1965, 1966, and 1967. In many cases, the increase in price greatly exceeded any rise in rates. Moreover, chart V-1 also indicates that traffic volumes on these food items climbed considerably while rates were steady during the same period. The overall traffic

The unit freight and price-transportation cost relationship on retail prices was computed on 41 articles to analyze the impact of transportation on the total price structure.23 Of these 41 commodities for which ocean freight costs as a percent of the retail selling prices were computed, the price-transportation cost ratio was from five to 19 percent on some 23 commodities, most of which are foodstuffs, and of the remaining items (also mainly foods) the ocean freight charge was 4 percent or less. Comparatively, ocean transportation is high on the low-valued foodstuffs. The ratio was 11 percent on onions, 8 percent on eggs and on rice. In this food group, potatoes revealed the highest increase. Freight on this item amounted to about 19 percent of the retail purchase price. In addition, four, tomatoes, and chicken were relatively high. The freight on these commodities amounted to 7 percent of the purchase price. In the case of televisions, tires, and stoves, freight is far less important than on food. Their freight was 2.4, 2.8, and 2.0–3.1 percent respectively of the retail prices. In general, the retail price-transportation cost ratio of these commodities was relatively low compared to the ratio of the same transportation cost to the initial wholesale price discussed previously. This reflects the higher values involved in retail prices due to markups and other costs.

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22 The other commodities which experienced declining rate indices were: oatmeal (98 percent); beef steak (92 percent); pork chops (92 percent); sausages (95 percent); cornbeef (95 percent); salmon (95 percent); evaporated/powdered milk (92-93 percent); fruit juice (97 percent); vegetable soup (96 percent); and tomato sauce (99 percent). Appendix G, table 2, table contains the rate and price indices on each commodity for the 9 years under consideration.

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CHART V-1

INDICES OF OCEAN FREIGHT RATES, RETAIL PRICES,

AND TRAFFIC VOLUME COMPARED - 1958-1967

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D. THE IMPACT OF PUERTO RICO'S FOOD

MARKETING SYSTEM ON PRICES

newspapers, electricity, gasoline, rents, fertilizers, and construction are indirect, these expenses are sizable and contain elements of ocean transportation. The unit ocean transportation-price cost relationship was not estimated for these items.

In 1967, the total transportation charges comprised 7.1 percent of the Island's total value of imports as shown in table V-2, which follows. Of this, 83 percent of the total transportation charges and import values were attributable to U.S. traffic.

On the whole, the relationship between total transportation and imports registered a declining trend between 1945 and 1967, particularly since 1964 when the ratio dropped from 7.8 to 7.1 percent in 1967. The ratio remained constant from 1965 to 1967. During this period, ocean transportation services between the Mainland and Puerto Rican ports improved considerably, as indicated previously. Although the decreased freightimport relationship evidenced from 1964 to 1967 may be in part a consequence of increased imports of consumer goods and raw materials having a high value-toweight or volume relationship, this declining freightimport relationship does reflect an actual reduction in certain ocean freight rates. Chart V-1 shows an overall declining trend existed in 1964, 1965, 1966, and 1967 on 24 important foods which comprised a substantial amount of tonnage moving from the Mainland to Puerto Rico. These rates declined about 2 percent overall. chapter IV and appendix E contains a comprehensive examination of rate reductions on specific major commodities that undoubtedly have had a favorable effect on Puerto Rico's decreasing freight-import relationship.

The reasons for the high rise in Puerto Rico's 1960_ 1967 food prices are quite naturally of importance to the people living on the Island. Consequently, this increase in food prices should be explained as fully as possible. The factors already considered, including (1) the impact of transportation, and (2) the impact of the retailing markups on final prices do not, however, completely account for the rise in Puerto Rico's food prices which increased almost 16 percent on selected food staples during the past 9 years. Because approximately one-half of the food consumed in Puerto Rico was locally produced, the Island's distribution system affecting these locally produced goods requires examination. The discussion focuses on the impact of the distribution of locally produced goods on the final selling price to determine the extent to which this distribution system has affected the final retail price.

1. Relative Importance of locally Pro

duced and Imported Foods The Commonwealth of Puerto Rico's Department of Labor publication, entitled, Relative Importance of the Major Groups of Goods and Services in the Consumer Price Index for Wage Earners' Families in Puerto Rico as of June 1967, indicates that locally produced foods comprise approximately 50 percent of all foods consumed on the Island; the remainder are imported foods, mainly from U.S. mainland sources of supply. The price levels on these locally produced commodities are reflected in Puerto Rico's retail price structure. Locally produced foods include: many cereals and bakery products; 24 meats and poultry items; fresh milk; 25 various

TABLE V-2 Total Transportation Charge on Imports, 1945–67 (In thousands of dollars)

TOTAL FREIGHT
ON IMPORTS

YEAR

TOTAL IMPORTS

TOTAL FR GHT AS A
PERCENT OF TOTAL

IMPORTS

1945
1950
1960
1961
1962
1963
1964
1965
1966
1967

$187.0
350.3
922.1

931.6
1,098.9
1,168.2
1,362.7
1,514.6
1,659.4
1,811.5

$15.4
25.1
71.8
74.1
81.5
89.1
106.2
108.1
117.9
127.8

8.2
7.2
7.8
8.0
7.4
7.6
7.8
7.1
7.1
7.1

Source: Puerto Rico Planning Board letter dated June 17, 1968, to Paul Gonzalez, Chief, Branch of Trade Studies and Special Projects, FMC.

; fruits and vegetables; 26 and other foods, including eggs, sugar, coffee, and beverages. These locally produced foods are largely distributed by food wholesalers on the Island.

2. Price Increases on Locally Produced

Foods

A considerable part of Puerto Rico's cost of living increase may be attributed to the high prices of locally produced foods which are supplied through the wholesale marketing system. As previously noted, between November 1966 and November 1967 the overall cost of living increased 4 percent. During this period the price of locally produced foods increased almost three times as much as that of imported foods. For instance, the cost of living index on locally produced foods climbed 9.7 percent while the index on imported foods rose 3.5 percent.27 Because about 40 percent of the foods consumed were locally produced, the effect of locally produced foods on increases in retail prices was considerably higher than that of foods imported from the Mainland.

It appears that the wholesalers, who largely distribute the Island's production, have had a very sig. nificant effect on the rise in Puerto Rico's retail prices. The operations of these wholesalers are discussed below.

ber of supermarket retailing facilities now exceeds 100.28 Nevertheless, there is still considerable room for improvement, particularly in the wholesale sector of distribution. Although the Central Market, established in 1963,29 and certain warehouses, which have been built by Pueblo Supermarket, have improved wholesaling methods, in general, wholesaling methods have not changed greatly over the last 17 years.30 Food wholesaling facilities are still composed of many small-volume operations in antiquated and inadequate facilities. In 1963, there were about 540 wholesalers in Puerto Rico.31 A total of approximately 85 operators were classified as wholesalers in the San Juan area. (A large part of the population receives food in. directly through the wholesale facilities in San Juan.) Of these, 18 handled fruit and vegetables, 15 handled meat and meat products, and 52 handled grocery products. 32

The fruit and vegetable producing industry and its methods of distribution are substantially the same as in 1950. The bulk of production comes from many small producers clinging to traditional crops rather than producing items consistent with consumer demand. Dis. tribution of the produce is inefficient. Many small wholesale truckers buy at the farm, truck the produce to market, and peddle the produce in small lots either in the plaza or to the store. Their transaction costs are high and affect many stores.33 The new Central Market area and retail supermarkets have improved these conditions, but additional new wholesale warehouses are needed.

4. Retail Food Distribution

3. Wholesale Food Distribution of Lo

cally Produced Foods in Puerto Rico Although Puerto Rico's retail food distribution sys. tem has greatly improved over the past 5 years, there is room for considerably greater improvement in the Island's wholesale food distribution system. Much of the food is distributed through supermarkets and other retail operations which are modern and efficient. In addition, the Commonwealth is engaged in programs aimed at improving food distribution centers and providing food inspection. During the last 5 years (1964-68) modern market places have been set up or older markets adequately modernized and the num

Although a substantial portion of the sales in the San Juan area move through supermarkets, the most wide-spread type of retail food store is still the small grocery store. These small stores find it difficult to obtain credit from wholesalers and to obtain payment from their retail credit customers. For this reason, their cost have been relatively free in setting price levels, and have tended to fix the price level according to "what the traffic will bear” (i.e., depending on what the consumer will pay). As previously indicated, the average markup on various consumer foods amounted to about 64 percent in 1967. The retailer's markups on eggs, tomatoes, and onions were among the highest, amount. ing to 160, 120, and 128 percent respectively. 37 It is clear, therefore, that a program was needed to mitigate price levels in Puerto Rico. This need led to the enactment of law No. 148 which will deal more strongly with consumer protection, education, and fixing the price of essential consumer articles. A program tect the Puerto Rican consumer might well also include public action and private effort to encourage the development of voluntary consumer unions for the purpose of concerted action against unfair price levels. It should also make the wholesale and retailing system conscious through mass education of the adverse effects that unfair prices have on the public.

18 Letter of Jose M. Rivera, Puerto Rico EDA, November 1, 1968 to Paul Gonzalez, Chief, Branch of Trade Studies and Special Projects, FMC, p. 3.

* In 1963, the Central Market was established in San Juan for the purpose of helping food wholesalers relocate outside the congested streets of Old San Juan. The Market, located in a modern warehouse complex at Puerto Nuevo, is adjacent to trailership service.

30 Latin American Studies Center, Michigan State University, The Role of Food Marketing in the Economic Development of Puerto Rico. (Michigan: 1966),

31 Latin American Study Center, op. cit., p. 26.

32 U.S. Department of Agriculture, Agriculture Research Service, Improved Food Handling Facilities for San Juan, Puerto Rico, (Washington : October 1965), p. 8.

33 Latin American Studies Center, op. cit., p. 63.

, p. 44.

24 Cornmeal, flour, rice, and spaghetti, however, are imported from U.S. mainland suppliers.

25 Evaporated milk, powdered milk, and butter are imported items. 26 Beans, onions, potatoes, and canned goods are largely imported.

Puerto Rico Department of Labor (Cost of Living Division), op. cit., p. 6.

35

of operation is high. These high costs have burdened price levels in Puerto Rico. However, fairly rapid changes in Puerto Rico's marketing system can be expected in the near future. FOMENTO has encouraged improvements in food distribution, and representatives of all segments of the food distribution system have been offered help, including loans and advertising. In addition, the Puerto Rico Department of Commerce has helped many small grocers in modernizing their stores.34 Further, there is, as already noted, an increasing trend toward establishing supermarkets. These supermarkets often sell certain basic commodities at or near cost; and the variety of foods in these markets has increased so that consumers are buying more meats, more milk and more high protein foods. Direct shipment of Mainland cargoes is another practice that has grown rapidly, particularly since Sea-Land and other containership operators entered the trade. These carriers established low rates on trailerload quantities and per container rates. Some supermarket operators are now buying over 75 percent of their merchandise directly from the U.S. mainland. These purchases are largely from New York and Miami pricelists which are utilized particularly when wholesale prices for Puerto Rican produced items are too high. Trailerload quantities of foods and other consumer merchandise often move directly from Mainland warehouses to the Puerto Rican terminal where the trailer is off-loaded and delivered directly to the store; by-passing local wholesalers. For this reason, the retail prices of supermarkets have been lower than that of the small grocery stores. To the extent that foods are transported directly from the Mainland to supermarkets, the benefits of low rate levels on foods have been passed on to the public in the form of lower retail prices. However, as a whole, the methods of distributing food and consumer merchandise in Puerto Rico still have a substantial impact on retail prices in Puerto Rico.

to pro

6. Regulatory Policy

As indicated in chapter III, the Commission's policy with respect to carrier competition has assisted efficient economic performance in the common carrier segment of Puerto Rico's transportation system. In addition, private enterprise and initiative as well as competition have induced great technological advances by common carriers including jumbo size container trailerships, and roll-on/roll-off operations. These advances have caused the general level of ocean freight rates to remain virtually steady and rates on essential goods to decline over the past 8 years.38

F. CONCLUSIONS AND RECOMMENDATIONS

1. Conclusion

5. Consumer Associations

a

On June 27, 1968, the Commonwealth enacted law No. 148 which created the Administration for Consumer Service to organize and protect the Puerto Rican consumer.36 There are no private consumer unions on the Island. The wholesaler and retailer in Puerto Rico

Although 1968 freight charges were a factor present in the Island's retail prices, they do not appear to be as significant as other factors in the final selling price of most essential foods. The low price-transportation cost relationship on these food articles reflects the efforts of the Commission, common carriers and the Puerto Rico Ports Authority to prevent a high-priced

37 Obviously, the high density San Juan tourist trade also has had an impact on prices, particularly in the Condado Beach sector.

Sept. 1, 1960 the June 1, 1968 period.

34 EDA letter of Nov. I, 1968, op. cit., p. 3.
35 Latin American Studies Center, op. cit., p. 37.

* Estado Libre Asociado de Puerto Rico Administracion de Servicios Al Consumidor, Ley Num 148 de 27 de junio de 1968 (Santurce, P.R. June 1968),

pp. 1-5.

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