With the foregoing general view of the raisin industry in mind, the commission now proceeds to examine, separately. the two questions brought before it, (1) reasonable ness of prices and (2) readjustment.

THE REASONABLENESS OF PRICES.

With respect to your first inquiry as to whether the California Associated Raisin Co. is obtaining and maintaining more than fair and reasonable prices for its products, the commission reports:

The evidence shows that prior to the organization of the Raisin Co., the average price realized by the grower was not a reasonable return. Subsequently, under the operation of the Raisin Co. the prices have been as follows:

In 1918 the United States Food Administration had a part in the determination of the price of raisins, both to the growers and to the buyers, so that the prices shown in the raisin market for 1918 can not be regarded as a test of the actions of the Raisin Co. in this particular. The control of the United States Food Administration having ceased the Raisin Co. was free to fix prices as it saw fit in 1919 and did so. The crop production in 1919 was about the same as that in 1918. Evidence offered shows that according to the declarations of the official organ of the Raisin Co., The SunMaid Herald, the price fixed for the 1918 crop would assure the growers a good and fair profit. The Raisin Co. now asserts that the 1918 price did not give a profit to the growers and that the language used in the Sun-Maid Herald was altruistic and patriotic in purpose and in support of the Food Administration's price. In the same publication in 1919, with reference to the 1919 price, it was stated:

*

"Probably few growers have expected so high a price, and, on the other hand, the consumer is paying such a high price for everything else that we do not believe he will hesitate to continue using raisins at what may seem to us a very high price. * * These prices are admittedly the result of an unique situation so far as market conditions are concerned, and though it may be proper to take advantage of this situation, we do not believe that these prices can be maintained for a long period of time. The president of the Raisin Co. placed the increase in the cost of production in 1919 as against 1918 at about 14 cents per pound, including the growing, manufacturing, and marketing processes.

A study of the prices paid to growers and charged to purchasers from the organization of the company down to and including that fixed for the 1919 crop shows a slow and steady rate of increase until the 1919 crop is reached. Between 1912 and 1918 the success of the company was tested by the expiration of its three-year contracts with its growers. It appears that the company has during the greater portion of this time steadily maintained its control of crop acreage, which indicates satisfaction on the part of the growers, with the operations of the company. The argument that the marked advance in 1919 is justified by a comparison with prices charged for other dried fruits in California, upon which the Raisin Co. very largely defends the 1919 price, does not control the question of the reasonableness of price. In the absence of a showing of a greater increase in the cost of production, there having been no diminution in production but rather a slight increase over 1918, after considering the diminishing purchasing power of the dollar, our conclusion is that the price fixed by the Raisin Co. for the 1919 crop was in excess of a fair and reasonable price.

This is the answer of the Federal Trade Commission to the first of your two inquiries.

READJUSTMENT.

You request the Federal Trade Commission "to make recommendations for the readjustment of the business of said corporation in order that the corporation may hereafter maintain its organization, management, and conduct of business in accordance with law."

We understand your request to imply that the present organization, management, and conduct of business are not maintained in accordance with law and that power exists to require the necessary readjustment. The commission has proceeded on this assumption.

PRESENT ORGANIZATION, MANAGEMENT, AND CONDUCT OF BUSINESS.

The California Associated Raisin Co. was organized and incorporated in 1912 under the laws of the State of California, with a total authorized capital stock of $1,000,000, consisting of 10,000 shares of a par value of $100 each.

The purposes of the corporation, as set forth in its original charter, are as follows: "To buy, cure, pack, handle, sell, market, and otherwise dispose of and deal in raisins, dried fruits, grapes, and other orchard and vineyard products, and to act as agent and factor in the handling and disposing of the same in every manner; to purchase, rent, build, sell, operate, and maintain packing houses, warehouses, and other buildings and structures, and such real and personal property as may be necessary to effect the purposes of said corporation; to buy, own, hold, assign, exchange, sell, or pledge shares of capital stock of all private corporations, including this corporation; to borrow and lend money and to gi e and take mortgages, notes, bonds, and shares of capital stock of all public and private corporations, including this corporation, as security for the payment thereof; and in general, do all things necessary and proper to carry out all of the provisions of these articles and effect the objects and purposes of the corporation above set out."

The articles of incorporation were amended in 1913 so as to permit the corporation to deal in warehouse receipts and bills of lading as security for the payment of money borrowed or loaned. In the same year the capital stock was increased from $1,000,000 to $1,500,000. In 1914 the capital stock was increased to $2,500,000. In February, 1919, the par value of the stock was changed to $1 per share, and in August, 1919, the capital stock was increased to $5,000,000.

The ownership of the corporation is evidenced by common stock which, with respect to the original issue and assignment, is not limited to raisin growers or other agriculturists, but which in fact was originally subscribed for and purchased by merchants, professional men, and others as well as by vineyardists. On September 24, 1919, nongrowers to the number of 853 held 2,553 shares of stock and growers to the number of 2,454 held 7,765 shares of stock, of the par value of $100 each, the total number of stockholders being 3,307, the total number of shares outstanding being 10,319. The company then had a paid-in capital of $1,031,900 and a surplus of $323,568.76.

Under a plan in operation subsequent to September 24, 1919, some 6,000 growers who have been selling their raisins under contract, but who have not been stockholders, are to be paid in part in stock of the corporation, which plan, if carried to conclusion, will increase the number of growers connected with the corporation, making the holdings of 1,000 nongrowers amount to approximately 265,000 shares of $1 par value and the holdings of 9,000 growers amount to approximately 1,425,650 shares of $1 par value, making a total paid-in capital of $1,690,650 and a surplus of $323,568.76.

The capital stock is permitted to earn and distribute a dividend dependent upon the profitableness of the corporation's operation from year to year, with the limitation that there shall not be charged to any year's operations a dividend which will yield more than 8 per cent of the par value of the stock.

After certain provisions for surplus to provide working capital have been complied with, any profit remaining after setting aside a sum of money equal to 8 per cent on the capital stock, is distributed back annually to the sellers of raisin grapes on a prorata basis proportionate to the tonnage delivered to the corporation by each individual

grower.

That the organization of the company is that of an ordinary private corporation, having capital stock, conducted for profit and not limited in the qualifications of its stockholders to those who are raisin growers.

The control of the corporation under the terms of a voting-trust agreement created in 1919, is vested in voting trustees until 1926. Under the terms of this agreement all the stock to which those who otherwise would be stockholders of the corporation would be entitled, except stock necessary to qualify directors, not to exceed one share

for each director, is issued by the corporation to the trustees and their successors in the trust, to be held for the common benefit.

Upon the issuance of certificates of stock the trustees are required to deliver to those who otherwise would be stockholders, trust certificates representing the number of shares to which the otherwise stockholders would be entitled. This trust certificate declares the existence of a beneficial right including a proportionate share of all dividends declared on the stock so held in trust.

The legal title to the stock is vested in the trustees and is not capable of assignment. The certificate of beneficial interest may be assigned. Vacancies among the trustees are filled by the remaining or surviving trustees.

The company is shown to carry on its business in the following manner:

It makes contracts for a period of years with growers of raisins, whereby the grower agrees to tender all his raisins to the company and to sell to no other buyer or packer of raisins. These written contracts provide that in case the grower shall dispose of his raisins otherwise than under the contract and to the Raisin Co., the company shall be deemed to have suffered and may collect, as liquidating damages, a penalty of $40 per ton. Approximately 9,000 growers, about 3,000 of whom are stockholders, supply grapes to the Raisin Co. under these contracts. Under the contract the company agrees to advance a fixed tentative price to the grower within 6 days after the receipt of the grapes. The Raisin Co. is then obligated to put the grapes through such processes as will suit them for marketing and thereafter to pack the raisins; dispose of them in the various markets; to stimulate the demand through advertising and otherwise; to finance the operations of manufacturing, marketing, and distributing, and to finally realize from the raisins, if possible, a price greater than the tentative or upset price advanced to the grower, plus the expenses of manufacturing and merchandising.

Under the contract the Raisin Co. agrees further, to pay back to the growers on a pro-rata tonnage basis, any excess received by it over the original tentative price and subsequent expenses, with the provision that an amount not exceeding onefourth of 1 per cent pound may be deducted in addition to the necessary expenses and applied to a dividend to be paid to the stockholders with the limitation that such a dividend may not exceed 8 per cent, and that any balance remaining after the 8 per cent stock dividend shall go to the fund which is distributed back to the growers on the pro-rata tonnage basis.

It is conceded that the Raisin Co. produces and markets somewhere between 80 and 90 per cent of all the raisins produced in this country.

The Raisin Co. in the sale of its raisins to jobbers uses two devices, the first being known as "firm-at-opening price," and the second, "guarantee against decline." The "firm-at-opening price" device consists of a contract of sale on the future delivery of raisins whereby the purchaser is obligated to take the stated quantity at a price then unknown and subsequently to be named by the Raisin Co. The contract is absolute as to the buyer except as to total cancellation, while the Raisin Co. can, in event of crop shortage, decrease delivery.

These two devices, backed by the dominance of the market by the Raisin Co, fasten upon the commodity the price to the wholesaler which the Raisin Co. selects. The result is a substantial lessening of competition in wholesale buying.

In addition to the general course of business as just outlined, the Raisin Co., on occasion, put into operation other business methods which are the proper subject of specific comment: (a) By purchase; (b) by contract; (c) by curtailment of supply. (a) Elimination of competition by purchase of competitors. In the first year of its existence the Raisin Co., having leased packing plants and entered into contracts for packing raisins, purchased the property and business of Mowalt & Co., the Selma Fruit Packing Co., and Fowler & Co., competitors in packing and selling raisins. The next year the Raisin Co. purchased Fresno Home Packing Co., King's County Packing Co., North Ontario Packing Co., Giffen & Hobbs Co., Malaga Packing Co., and the Farmers' Union, also competitors.

(b) Elimination of competition by contract.-In 1913 the Raisin Co. entered into a series of contracts with certain of the packers. By one of these contracts the packer's plant was leased for three years with a provision for two years' extension conditioned upon the Raisin Co.'s continued control of 60 per cent of the acreage. The second contract bound the packers for the same period to pack raisins for the Raisin Co. exclusively and not to deal in raisins with or for anyone else. The third contract appointed the packer the selling agent for the Raisin Co. for the same period, the selling price to be fixed by the company, and excluding the packer from marketing raisins either for himself or any other than the company. A fourth contract required the packer to sell at a fixed price, to the Raisin Co., all unsold raisins owned by him and to assign all growers' contracts.

In 1918 the Raisin Co. entered into a contract with the California Packing Corporation, one of the largest packers and distributors of dried fruits in the United States. This contract contained provisions contemplating the fixing of prices, an exclusive dealing clause and involved price discrimination against other independent packers. The contract also involved a guaranty to the Packing Corporation against decline in price, which arrangement, taken with the exclusive dealing clause, and the fixing of an agreed differential between the price at which raisin grapes were supplied to the Packing Corporation and the price at which the Raisin Co. sold the finished product, practically completed the elimination of the Packing Corporation as a competitor.

(c) Elimination of competition by curtailment of supply.—In 1913 the Raisin Co. found itself confronted in the marketing of its product, with a competing carry over from the 1912 crop amounting to about 25,000 tons of raisins, which were being offered in eastern markets at a lower price than the Raisin Co. was asking. Whereupon, the Raisin Co. purchased the raisins so offered by its competitors, thereby eliminating the lower price competition. The fact that this practice has not been repeated has less significance than it otherwise might have when it is considered that there has been no carry over since 1913.

CURTAILMENT OF PRODUCTION.

The Raisin Co. in 1915 urged its growers under contract, whether members or nonmembers, not to dry their second crops of muscats, giving as the reason that such an addition to the production for that year would tend to lower prices or result in a

carry over.

RECOMMENDATIONS FOR READJUSTMENT.

The commission approaches the question of readjustment of the organization, conduct, and management of business of the Raisin Co. with due recognition of the original motives and purposes of those who joined in the primary cooperative movements which, after repeated failures, culminated in the creation of the Raisin Co These were, in our judgment, the desire to secure marketing facilities which would assure to the producers a reasonable return and to construct an organization capable of successful operation.

Readjustment to the law may mean in the present instance either conformance to the provisions of section 6 of the Clayton Act or, as an alternative, to the provisions of the other antitrust legislation. Choosing either alternative, the Raisin Co. should abandon certain methods which it has practiced in times past.

READJUSTMENT UNDER THE CLAYTON LAW EXEMPTION.

That part of section 6 of the Clayton law which is applicable is:

"Nothing contained in the antitrust laws shall be construed to forbid the existence and operation of labor, agricultural, or horticultural organizations instituted for thepurposes of mutual help, and not having capital stock or conducted for profit, or to forbid or restrain individual members of such organizations from lawfully carrying out the legitimate objects thereof; nor shall such organizations or the members thereof be held or construed to be illegal combinations or conspiracies in restraint of trade under the antitrust laws."

By this section three classes of organizations are given certain exemptions under the antitrust laws. The Raisin Co.'s primary objects are such that that company may be brought within one of those classes. We purpose now to show what changes are necessary to readjust it for inclusion therein, whereupon it could conduct its business in accordance with law.

To conform to the legal requirements of an agricultural or horticultural organization instituted for the purposes of mutual help, the Raisin Co. must take the necessary legal steps to accomplish the following results:

(a) The elimination of capital stock and the substitution therefor, if necessary, of a nonprofit sharing basis of providing financial resources.

(b) The elimination of profit to the corporation or to its stockholders, as profit on the operations of the corporation.

(c) The restriction of membership or beneficial interest in the corporation to those whose interests are identical, i. e., to actual growers of raisin grapes.

Modification of the charter granted by the State of California will afford the necessary groundwork for the subsequent changes which lie in corporate action.

It is recognized that a cooperative agricultural association, to perform the service for which it is organized, must have the means of raising capital out of which to provide

the necessary equipment and working capital and also to furnish a basis of credit upon which seasonal working capital may be borrowed.

It is therefore suggested that bonds may be issued to provide working capital, carrying a fixed rate of interest not dependent upon the profitable operation of the company's business. To preserve the mutuality of interest in the membership, these bonds should be nonnegotiable except after tender to the company and its refusal to buy at par and accrued interest or the lapse of a reasonable time after tender.

The outstanding stock should be called in and exchanged for bonds on an equal basis or paid off.

Membership should be incident to a contract with a grape grower and terminate therewith. Each member should have but one vote irrespective of acreage, tonnage delivered, or otherwise.

With an amended charter, capital stock retired, and a membership constituted solely of grape growers under delivery contracts, the Raisin Co. would be in structural conformance with the Clayton law.

Thereafter it might handle the grapes produced by its members, and upon their sale deduct from the proceeds its expenses, the interest upon its bonds, and make provision for their amortization and any additional working capital necessary, and distribute all surplus among its members on a pro rata tonnage basis.

But the conduct of the Raisin Co.'s business should be modified, as well as its organic structure. Some of its methods have been and would, unless changed, continue to be in violation of the Clayton law even after the company is readjusted in form to the requirements of section 6.

As the Clayton Act did not become a law until October 15, 1914, this law can have no application to the transactions of the Raisin Co. prior to that date nor to the conditions which arise therefrom. The contract with the California Packing Corporation which is summarized on page 11 of this report was made in 1918 and appears to be in violation of law. Its cancellation would seem to be necessary to a continuance of business in accordance with law.

Of course, any similar contracts made subsequent to the enactment of the Clayton law would fall in the same category.

The lawful continuance of the Raisin Co.'s business in the future depends, assuming the readjustment to the "agricultural or horticultural organization" basis to be completed, upon the conduct of its business within the law.

In view of the Raisin Co.'s statement that it does not claim to come within the reading of the Clayton law, it may be that that company will prefer to stand as an ordinary business corporation conducted for profit and choose not to make the readjustments indicated, in which event it is subject to all the provisions of the Clayton law and the Sherman law as well. The readjustments necessary under this alternative. will now be examined.

READJUSTMENT UNDER THE ANTITRUST LAWS.

If the Raisin Co. shall fail to claim the exemptions of section 6 of the Clayton law, then its continuance would involve no amendment of its charter and no changes in the organic structure. Its membership would be self-determined and the making of profit one of its lawful objects.

But the conduct of business must be reformed so as to eliminate any contractual relationships which may have been established since the passage of the Clayton Act, involving price fixing on the basis of exclusive dealing.

It has been shown that the Raisin Co. controls about 80 per cent of the raisin grapegrowing acreage and the marketing of approximately 90 per cent of the raisin crop. By purchase of competing packing plants and the leasing of others, by contracts involving price fixing on the basis of exclusive dealing, by the curtailment of production and the purchase of competing carry over, by its substantial lessening of marketing competition through the "firm-at-opening price" and "guarantee against decline" devices, the Raisin Co. at present dominates the raisin market of the United States.. These methods of business are open to challenge as an attempt to create a monopoly in violation of the Sherman law.

To be free from challenge of the Sherman law, readjustment implies no change in organic structure, but it does involve:

(a) Cancellation of all contracts fixing selling prices on the condition of exclusive dealing.

(b) Separation of plants purchased or leased from competitors so far as may benecessary to insure freedom of competition.

(c) Abandonment of purchase of carry-over and curtailment of production as inci-dents of business.