More on farm-retail price spreads during food price inflation

My previous blog post dealt with trends in the farm-retail price spread at the aggregate food basket level in EU Member States (both for food purchases for at home consumption and for food consumption away from home) based on a new FAOSTAT data series on the food value chain. A key conclusion was that farmers’ share of consumer spending on food tends to fall over time because of the increased quantity and quality of the marketing services added to farm raw materials as living standards rise. A falling farm share in every euro spent on food at retail or food service level is not necessarily an indicator that there is unequal bargaining power and thus an unfair distribution of value added along the food value chain, although neither does it rule out that possibility. I suggested that the soon-to-be-established Agri-food Chain Observatory intended to make developments in margins along the food value chain more transparent would do well to build on this initiative.

The FAOSTAT data are extremely useful, but they have some limitations. They are aggregate data and not able to shed light on the situation within specific commodity supply chains. They are also annual data, which limits their ability to track the transmission of prices along the supply chain.

Eurostat maintains a Food Prices Monitoring Tool which is designed to follow the evolution of farm-retail price spreads on a monthly basis for specific food commodity supply chains (while for some commodities also tracking the evolution of prices at processor and import levels as well). The Tool was first introduced on an experimental basis in 2008 and has since been further elaborated and developed. It now covers 26 supply chains including all food, broad commodity aggregates such as meats, fruits or oil and fats, and some specific commodity chains such as bread, whole milk, beef, sugar and potatoes (see the meta-data explanatory text associated with the dataset for more information). The dataset itself is found in the Eurostat domain prc_fsc_idx and Eurostat has also made a visualisation tool available. The data are presented either in index form (which I use here) or as percentage monthly changes. The data do not represent absolute prices, which will limit their usefulness to the Agri-food Chain Observatory. Only national competition authorities have the powers and means to probe into the required level of detail. Establishing close links with these authorities should be a priority for the newly-established Observatory.

Farm-retail price spreads for three commodities

In this post, I use the Food Price Monitoring Tool to examine trends in the farm-retail price spread for three basic food commodities with minimal levels of processing – bread, whole milk, and pork – during the recent period of food price inflation. Apart from the trend in the average EU price spread, I have also included three Member States – France (as the main producer of milling wheat for bread), Ireland (as a significant milk producer) and Germany (as the main producer of pork in the EU). Not all countries have supplied the relevant data, so the EU values are estimates. Eurostat states that, where data are missing or incomplete, its usual procedure is to estimate the missing values, purely for the purpose of calculating the EU-level aggregates.  

Bread

The first set of charts (Figure 1) presents the trends in farm-retail price spreads for bread. All charts are presented on the same scales and rebased to January 2020=100 so they can be directly compared. As the series are index numbers, they represent the trends in the respective price series relative to one another over time. For three of the charts, a series for prices for bakeries (sales of bread and pastries) is also available.

Figure 1. Farm-retail price trends for bread in selected EU Member States, 2020-2023.

What is interesting is that the enormous increase in wheat prices (more than doubling in just over two years) hardly impacted bread prices initially. While wheat prices increased after September 2020, bread prices at the EU level did not rise for another six months until March 2021. Subsequently, retail prices began to increase, actually growing somewhat more rapidly than the bakeries’ price of bread, with an overall increase in retail prices of around 35% two years later by March 2023. The story in Germany and Ireland is very similar.

Interestingly, despite a similar increase in the price of wheat after September 2020, French retail bread prices hardly moved at all for 18 months and then ended only 20% higher at the end of the period. Retail prices rose by less than bakery prices, suggesting a possible squeeze on supermarket margins after the Russian invasion of Ukraine took place. Although bread prices are no longer formally regulated in France, the intense public focus on the price of ‘la baguette’ may have led to reluctance on the part of bakeries and retailers to raise prices for this staple.

Whole milk

When we examine trends in the farm-retail price spread for whole milk (Figure 2), France is again an outlier, but this time because the dramatic increase in milk producer prices that occurred elsewhere in Europe (an increase of between 70-80%) appears to have passed French producers by, and milk prices only rose by 35% at peak.  The reason for this discrepancy would be interesting to understand – it may reflect a higher dependence on the cheese market as an outlet for milk in France but there may be other more convincing reasons.  

Figure 2. Farm-retail price trends for whole milk in selected EU Member States, 2020-2023.

What is striking is the relative stability in retail milk prices, particularly in France and Ireland and to a lesser extent in Germany and the EU as a whole, up to the end of 2021 although raw milk prices had already started to increase some months previously. Milk prices continued to increase until November 2022 after which they fell rather precipitously (though less so in France). While there is evidence that fresh milk prices at retail have recently begun to fall, it remains the case that (again, except in France), the overall increase in raw milk prices ends up (in December 2023) as a smaller increase than in the retail price of milk, thus suggesting that the marketing margin has increased. The Food Price Monitoring Tool does not provide series for dairy processor’s prices after transport, pasteurisation and packaging so it is not possible to apportion changes in the farm-retail price spread between processors and the distribution sector. Nor is it clear if the recent improvement in milk margins beyond the farm gate reflects simple price-stabilisng behaviour by downstream actors or whether there will be a more permanent shift in the farm-retail price spread.

Pork

The final product chain we examine is pork (Figure 3).  Here retail prices were broadly stable until the Russian invasion of Ukraine (German prices were slightly increasing while Irish prices were falling) after which we saw increases of 30-35% at the EU level (much less in Ireland). Producer prices for pigs follow the same pattern in all four countries. Margins on pork increased initially but subsequently narrowed again.

Figure 3. Farm-retail price trends for pork in selected EU Member States, 2020-2023.

The relative levels (but not the trends) of the series for farm and retail prices depends on the base month assumed. To illustrate the point, I show in Figure 4 the farm-retail price spread for pork in Germany which is the largest EU producer.  The left-hand panel reproduces the previous chart showing the price spread for the period 2020-2023 but with the scale adjusted to base January 2015. The right-hand panel shows the same price spread but for the longer period 2015-2023. The farm-retail price spread was at its absolute minimum in January 2020. Essentially, there was a dramatic increase in pig prices in 2019 due to the outbreak of African Swine Fever in China. This resulted in a massive cull of pigs in China and sent buyers scouring for pork to make up the shortfall. EU exports to China increased as a result. Then in 2020 pig prices fell even more dramatically, partly because of restrictions on the operation of slaughtering plants in Germany due to COVID-19 regulations, and later because the appearance of ASF in Germany led the Chinese to ban imports from that country from September 2020. In the same way that retailers held prices steady during the previous periods of high pig prices, retail prices also remained stable during this period of low pig prices. There was a sharp uptick in retail prices immediately following the Russian invasion of Ukraine, after which retail prices have broadly stabilised again.

Figure 4. Farm-retail price trends for pork in Germany for periods 2015-2023 and 2020-2023.

Conclusions

We noted in the previous post that the Commission plans to establish an Agri-Food Chain Observatory to monitor production costs, margins and trading practices in the food chain. This is intended as a measure to strengthen farmers’ position in the food supply chain and to reinforce trust between all actors throughout the chain. The Observatory is expected to develop methodologies to assess and monitor the structure of costs and the distribution of margins and value added along the food supply chain, building inter alia on the Food Prices Monitoring Tool.  

The exploratory review of the data in this Tool in this post for a selected number of commodity supply chains gives some insights into its strengths and weaknesses. Among its strengths are its disaggregated nature which now permits to describe trends in the farm-retail price spread by Member State for 26 different commodity chains on a monthly basis. But these trends still require careful interpretation. One lesson is that prices can evolve very differently in different Member States, despite the attempt to forge a single market. Commodity supply chains appear to still be very national in orientation, which complicates drawing policy conclusions that may be relevant across all the Union.

Retail prices generally lag farm producer prices, whether on the way up or on the way down. This means marketing margins tend to decrease when producer prices increase, but vice versa when producer prices are falling. It is this latter phenomenon that often draws critical comment. The relative stability of retail prices in the face of fluctuations in producer prices, even for commodities that are relatively lightly processed and thus where the share of the raw material price in the final retail price should be relatively high, can be explained in various ways. It may reflect risk management behaviour by downstream actors (e.g., if millers make use of future markets to lock in particular price levels when wheat is delivered), or the role of contracts (e.g., which fix delivery prices for some months or even years into the future regardless of movements in raw material prices and which are particularly important in the food supply chain, see this UK Competition and Markets Authority report p. 33) or simply price stabilisation behaviour particularly by retailers (e.g., retailers understand that consumers are easily confused by frequent price changes and hence will opt to smooth price changes over time). A second lesson is thus that it is important to look at trends in the farm-retail price spread over a longer period of time and at least over a full price cycle.

A further limitation is that the Tool can only describe trends in relative prices and thus whether margins are increasing or decreasing. It does not shed light on trends in absolute prices and margins and whether any changes (increases) in these margins can be justified by increases in costs. To take an example, suppose we have a product (call it whole milk) which costs 100 units and where the cost of the farm product (raw milk) amounts to 50 units. Suppose now that the price of raw milk increases by 20% to 60 units but there is no increase in the cost of other inputs or the share of operating profits. Then a price index for raw milk will show an increase of 20% and the price index for whole milk will increase by 10%. It will look as if the downstream actors in the marketing chain are being squeezed but in practice their operating profits remain the same. If the price index for whole milk also increased by 20% without any increase in the cost of other inputs, this would represent profit inflation (also referred to as ‘greed inflation’ in the recent food price inflationary period) even though the farm share of the retail price remains the same. A third lesson is thus to really understand the implications of price transmission in the food chain also requires data on absolute prices as well as their change for all inputs into the food chain and not just the farm raw material.

This requires very detailed data which is likely beyond the powers of statistical agencies to provide, and which requires the investigative powers of national competition authorities to be able to probe. One example is the work of the UK Competition and Markets Authority which published two reports into the extent of competition in the UK food supply chain in 2023 given ongoing high food price inflation. In its first report in June 2023, it concluded that there was effective competition between retailers, largely due to the entry and rising market share of discounters. Specifically, it noted that operating margins in supermarket businesses almost halved in 2022/2023 compared to the two previous years, indicating they did not ‘pass through’ to consumers all the cost increases they incurred.

This first report also noted that larger retailers appear to have the information and bargaining power necessary to ensure that the prices they pay to own-label suppliers are reflective of underlying costs. However, they generally have less ability to negotiate with suppliers of powerful, ‘must stock’ brands. The Competition Authority published a second study that looked more closely at the role of own-label and branded suppliers. This found, in general, that the profitability of suppliers of own-label products to supermarkets was generally low and had fallen in the recent period. On the contrary, it found evidence that the majority of branded product manufacturers had pushed up their prices to supermarkets by more than the rise in their input costs, thus increasing their profitability. However, the study found that this may have been at the cost of consumer loyalty as consumers traded down and thus of their overall profitability. Because of this willingness of consumers to switch and the competitive nature of own-label supplies, the Authority concluded that ineffective competition did not contribute to food price inflation during this period.  

National competition authorities have the power to compel evidence and are thus in a position to identify situations of weak competition and market power. The Expert Group that will constitute the Agri-food Chain Observatory will not have these powers. It remains to be seen how willing supply chain actors will be to share important commercial information on a voluntary basis. The absence of a direct link with national competition authorities seems to be a flaw in the architecture of the proposed Observatory, one that should be quickly overcome if it is to have a real impact.

This post was written by Alan Matthews.

Photo credit: PxFuel, CC licence.

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