Distribution services take more than half of spending on food at home in EU countries

Anger over the gap between farm and retail food prices has been one of the factors behind the farm protests earlier this year. Particularly when  prices at farm level move in the opposite direction to retail prices – more specifically, when retail food prices increase even when farm prices are falling so that margins are increasing – there is suspicion that more powerful players in the food chain are exploiting a period of price volatility for their own benefit. There is a strong belief among stakeholders that farmers’ remuneration can be improved if changes are made to the operation of the food value chain (all of the downstream actors up to and including consumers).

In March 2024, the Commission circulated a non-paper with proposals to address this issue. The Commission proposed a portfolio of immediate, short-term and longer-term measures. The measure of particular interest for this post is the proposal to create an Observatory of costs, margins and trading practices in the agri-food chain. The function of the Observatory will be to bring increased transparency on costs and margins in the supply chain, as well as on trading practices. The Observatory will be organised as a Commission Expert Group with up to 80 members representing national authorities in charge of agriculture, fisheries and aquaculture or the food supply chain, as well as organisations representing stakeholders active in various stages of the chain. The call to apply to become a member of this Expert Group was published by the Commission in April 2024.

One of the functions of the Observatory in the medium-term will be to develop methodologies to assess and monitor the structure of costs and the distribution of margins and value added along the food supply chain. This will complement the existing highly aggregated data on the distribution of gross value added along the food supply chain published in the ‘Added value’ section of the DG AGRI Agri-food data portal. This suggests a slight fall in the share of agriculture in total value added from around 28% to 25% in recent years (see Figure 1).

Figure 1. Distribution of added value along the food chain (million euro and percent agriculture share). Source:  DG AGRI Adding value domain in the Agri-Food Data Portal.

This indicator looks at the structure of the food chain and calculates the share of primary production (agriculture) in the total value added generated by different participants in the food chain (primary production, food manufacturing, food distribution and food service activities). However, it is a rather crude indicator as it does not allow for international trade. For example, some of the agricultural value added may be generated by products that are directly exported (live animals, raw milk) and thus do not incur further marketing services along the EU food chain. Similarly, some of the value added in the downstream sectors may be associated with imports rather than domestic production. So calculating the share of agriculture in total value added in this way can be misleading. Also, only looking at the value added generated by the downstream sectors does not allow a full understanding of the total marketing bill in getting farm products to the final consumer. It ignores the need for other inputs such as energy, packaging and transport which will also influence the share that farmers receive of domestic food expenditure. In a previous post on this blog in 2015, I criticised both the statistical limitations of this measure as well as the naïve interpretation of the results.

The FAO ‘global food dollar’ approach

An alternative approach pioneered in the US is the ‘food dollar’ approach which estimates the average industry group share of each dollar spent on domestically produced food in a year. More recently, FAO has introduced the ‘global food dollar’ method which adapts the US approach globally. The method is based on using input-output tables linked to the System of National Accounts which allow tracing the flow of commodities and services throughout the economy. The method makes use of the harmonised input-output data curated by the OECD which covers 61 medium- and high-income countries including the EU countries. FAO has recently devised a methodology which allows the approach to be extended to other developing countries that do not produce input-output tables but which do produce supply and use tables. The resulting data are published in the FAOSTAT Food Value Chain (FVC) domain which was officially launched in November 2022.

The global food dollar method divides consumer food purchases between farmers’ receipts from sales of food (thus including both their input costs and operating surplus) and the value added by food supply chain actors for all post farmgate activities. Imported ingredients (such as imported grains milled domestically) are captured in this approach, but imported foods and beverages directly marketed to consumers without further domestic processing (for example, imported cheeses sold in retail stores) are excluded, as the measure focuses on consumers’ domestic food expenditures. Given consumer final expenditure on domestic food, the input-output method calculates the value of agricultural production supplied both directly to consumers and indirectly as input to the food manufacturing sector and hence allows the farm share of consumer expenditure to be computed.

The FAOSTAT FVC domain presents three different variants of the global food dollar based on three different expenditure categories. namely: (1) Food At Home (FAH); (2) Food and Tobacco at Home (FTAH); (3) Food and Accommodation Away From Home (FAAFH), disaggregated by four primary factors (Operating Surplus, Labor, Taxes, Imports) and by five food value chain industries (Agriculture, Forestry and Fishing; Manufacture of food, beverages and tobacco products; Transportation and storage; Wholesale and retail trade; Accommodation and food service activities). FAH refers to domestic expenditure on personal consumption for food consumed at home, at purchaser prices. The FTAH measure is similar but includes tobacco, as food and tobacco expenditures are not always separable in the original data. Finally, FAAFH refers to domestic expenditure on personal consumption for food consumed away from home (e.g. in restaurants), at purchaser prices, and it also includes expenditures for accommodation in all the cases where the two types of expenditures were not separable in the original data. However, based on US data, food accounts for the majority (around 85%) of FAAFH expenditure even in high-income countries (Yi et al., 2021). The Food at Home and the Food away from Home measures are distinct and complementary and do not overlap with each other.

The FAOSTAT FVC domain goes beyond a simple calculation of the farm share in domestic food expenditure to also provide a breakdown of the marketing bill by industry and primary factor. Normally, an input-output table distinguishes dozens of different industries. For the FVC dataset, these are aggregated into four Supply Chain industries as well as Agriculture, Forestry and Fishing. The decomposition of food expenditure classified by these industries includes both the direct value added by these industries, their purchases of imports, plus their purchase of inputs from the non-Supply Chain industries. Similarly, the decomposition of food expenditure by primary factor inputs includes the direct factor remuneration in the Supply Chain industries (including imports) as well as the factor remuneration implicit in the purchases they make from the non-Supply Chain industries. In this way, the method describes the entire economy in terms of the Supply Chain industries of interest without distorting any of the basic structural relationships.

Results from the ‘global food dollar’ approach are only relevant to the decomposition of margins for the three expenditure categories which are all highly aggregated. It is likely that the Observatory will also want to explore margin formation in individual product supply chains (e.g. milk, pork). The level of product detail possible in the FAO approach will be limited by the extent of disaggregation of the underlying Supply and Use tables. For more disaggregated supply chains, a report from the Joint Research Centre (Baltussen et al, 2019) explores various approaches that might be possible with available data and resources. The discussion in this post refers to macro-level trends.

General results from the FAOSTAT FVC domain

FAO has published a series of papers in which they summarise some of the main results from the newly created domain (see this paper in Nature Food, or this FAOSTAT Analytical Brief, or this FAO working paper). I first reproduce some of the main findings before proceeding to examine the data for EU countries in more detail.

Figure 2 shows the decomposition of food expenditure for the three different expenditure categories on average for the years 2005-2015. Keep in mind that different countries report data for the different categories with relatively limited coverage for the FAH series and more observations for the FAAFH series. The farm share is 22% for the FAH series and drops to 20% if expenditure on tobacco is also included given that tobacco has, compared to most other items, a high retail price. The breakdown by industry for FAAFH is quite different since accommodation and food service activities account for two-thirds of the total, thus reducing the share of the other industries significantly and the farm share falls to 7%. Using the FAAFH series, the average share of agriculture decreased slightly from 7% in 2005-2007 to 6.5% in 2013-2015.

Figure 2. FAOSTAT Industry and primary factors decomposition, quoted in Cerilli et al. 2024.

A more meaningful comparison between the different series can be made by deducting accommodation and food service expenditure, which makes the average contribution of each industry to value added comparable in scale (Figure 3). All series are affected but mostly the FAAFH series.  After the adjustment, for FAAFH, the share of manufacturing is higher, and that of wholesale and retail trade lower, than for the at-home measures. The farm share is now comparable across series but somewhat lower, at 18-19%.

Figure 3.  FAOSTAT Industry and primary factors decomposition, quoted in FAOSTAT Analytical Brief 51, 2022.

EU country comparisons

Data for EU countries are relatively scarce in the FAO FVC domain.  Only two countries, Belgium and Slovakia, have data for the FAH series and then only for 2015. Nearly all EU countries have data for FTAH but again in most cases only for 2015 but not earlier years. However, for the FAAFH series there are data for nearly all countries covering all years between 2005 and 2015.

We first show the data for the share of agriculture in domestic food at home expenditure (Figure 4). This varies from 11% to 31% (Ireland is a wild outlier and elsewhere the FAOSTAT team indicates that there are problems with the Irish data). There is a clear relationship between the overall level of economic development (or, alternatively, the share of agriculture in GDP) and the share of consumer spending that goes to farmers. The countries at the top of the chart have generally lower per capita incomes than those at the bottom of the chart. This confirms a similar conclusion drawn by FAO using their wider sample of countries using the FAAFH data. One possible explanation is that, when purchasing food for home consumption, households in richer countries demand a wider range of marketing services at the wholesale/retail levels (e.g. more freezer cabinets, in-store bakeries, prepared meals) than households in lower-income countries.

Figure 4.  Own calculations based on the FTAH series in the FAOSTAT Food Value Chain domain.

Another explanation is that the relative price of wholesale and retail services in higher-income economies is higher than in lower-income economies. Figure 5 shows the relative shares of total consumer spending on domestic food at home received by different industries in selected EU countries. The countries on the left hand side of the graph are those where the agricultural share is lowest, and the countries on the right hand side of the graph are those where the agricultural share is highest. In high-income economies with low agricultural shares, the share of wholesale and retail services in household food expenditure is around 55-60% of the total. In lower-income economies with higher agricultural shares, the share is 35-50%. These numbers do not help to distinguish between the different possible explanations for the different shares of distribution services. Overall, however, distribution services claim more than half of all food and tobacco expenditure by households for consumption at home in the EU.

Figure 5. Own calculations based on the FTAH series in the FAOSTAT Food Value Chain domain.

Further light is shed on this conclusion when we examine the distribution of value by primary factors. In addition to labour and operating surplus, value is also assigned to taxes (as flows are valued at purchasers’ prices) and to imports. Rather striking is the high share of imports of wholesale and retail services as shown in Figure 6 for selected countries.  These are not imports of food products for sale to consumers which, by definition, are excluded from the FTAH series (Yi et al., 2021). As distribution services themselves are largely a non-traded sector, it is likely that these are imports into the non-Supply Chain industry inputs into the wholesale and retail sector, such as energy or packaging.

Figure 6. Own calculations based on the FTAH series in the FAOSTAT Food Value Chain domain.

As a final example of the information available in the FAOSTAT FVC domain, we look at the breakdown of value by industry in expenditure for selected EU countries on Food and Accommodation Away from Home (FAAFH) (Figure 7). Recall that for the total FAO sample the share of agriculture in FAAFH expenditure was around 7%. In the EU, this share is even lower at around 4%, but varies from as low as 2% in Luxembourg and Austria, to 7% in Greece and 8% in Hungary. By far the greatest addition to value in the FAAFH chain is derived from the accommodation and food services sector which accounts for over 70% of consumer spending on food in that supply chain.

Figure 7. Own calculations based on the FAOSTAT Food Value Chain domain.

Conclusions

The inaugural meeting of the Agriculture and Food Chain Observatory will take place shortly. The Observatory is one element in the Commission’s response to farmers’ arguments that farm prices and the share of farmers in the food value chain are too low.  It is intended to bring increased transparency on costs and margins in the supply chain, as well as on trading practices. One of its early tasks will be to develop methodologies to assess and monitor the structure of costs and the distribution of margins and value added along the food supply chain.

This work would do well to take note of and build on the pioneering work of the FAO in conjunction with Cornell University in developing the ‘global food dollar’ series decomposing the value created along the food chain among the different actors and different primary factors. The FAOSTAT Food Value Chain domain builds on an input-output methodology which helps to ensure consistency in food chain value decomposition. Examination of data for the EU countries currently available in this domain highlights significant gaps which the future Observatory could help to complete.

Still, the existing data are already sufficient to underline that providing data on margins in the food supply chain is only a first step. These data require significant interpretation particularly when trying to understand the factors that might explain changes in the agricultural share of consumer spending on food over time. It is not necessarily the case that a declining farm share in consumer spending is indicative of unfair trading practices or unequal bargaining power.

The farm share of consumer spending on food is much lower for food consumed away from home than for food consumed at home. Thus, the farm share in total consumer spending on food will vary over time depending on the relative shares of consumer spending on food in the two channels. This will be important in explaining possible changes in the agricultural share of food spending during the COVID years when the food service sector was severely curtailed. The fact that consumers tend to shift their spending towards purchasing food away from home as incomes rise is one explanation for a fall in the share of farmers in food spending over time.

Also, even within the different expenditure categories there are significant differences in the farm share of consumer spending partly reflecting the overall income level of a particular country. Over half of consumer spending on food consumed at home accrues to the distribution sector. As incomes rise, this share tends to rise, reflecting either a growing demand for more varied and higher quality services at retail level or a change in the relative prices of providing distribution services relative to other goods and services in the food supply chain. Consumers can also alter their purchasing patterns within these channels. For example, consumers purchasing food for home consumption may buy more organic brands or purchase more food-preparation services like prepared meals where margins are higher, while consumers buying food away from home may trade up from fast-food establishments to full-service restaurants. These examples of changes in the product mix purchased within each expenditure category can add to the value of marketing services and thus depress the share of final expenditure accruing to farmers, without it being evidence of unfair trading relations.

We have good data on what happens at the beginning and end of the food supply chain, but very limited data on what happens in between farmers and consumers. The greater transparency and information on the costs and margins of those supplying marketing services promised by the new Observatory can only be welcomed. But there will be a heavy responsibility on those making use of these data to draw well-founded conclusions that go beyond demonstrating that, in modern food value chains, the share of farmers is low and falling.

This post was written by Alan Matthews.

29 June 2024. I added a minor correction where I proposed a potential explanation for the high share of imports in the value addition in the wholesale and retail sector.

See also the post ‘Price formation in the market for organic products’ discussing Dutch findings on price formation along the marketing chain.

Photo credit: Koljamboss, CC licence

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