Brian Gardner's Blog

With world food commodity prices rising again on the prospect of poor harvests in some of the major grain producing areas of the world, it is inevitable that the price of food in the shops will rise. What is also inevitable is that if and when supplies improve and bulk commodity prices fall again retail prices will not fall. Charting the relationship between producer prices and consumer prices over the last couple of decades illustrates one stark fact: food retail markets are becoming less and less competitive.

As Europe’s food shops become ever more concentrated in fewer hands so the retail industry finds it easier not to pass on raw material price reductions to the consumer. At the same time, this increasingly monolithic structure allows any increase in commodity prices, however small, to be used to jack up prices at the supermarket counter. This, despite the fact that cost of food raw material ingredients such as wheat, vegetable oils or milk powder rarely exceed 5 per cent of the total cost of the finished product. Neither farmer nor shopper get the benefit of this activity.

This phenomenon has been closely monitored by all of the leading authorities: the European Commission, the UN Food and Agriculture Organisation and the OECD. It has been particularly noticeable in the wake of the 2006-08 food price crisis.

For example, FAO figures show that in the Eurozone countries of the EU retail food prices declined only by 0.2 per cent in the year to May 2009, US consumer food prices were 2.7 per cent higher than in May 2008. In the UK, food prices were 5.4 per cent higher year-on-year in May 2009 – this despite substantial reductions in all the major food commodity prices between mid 2008 and 2009. ”Consumer food prices remained high because of the ‘ratchet effect’ of prices in the food market”, the Organisation reveals. Prices adjust upwards more easily than downwards. Lack of competitiveness in the food retail and wholesale sectors makes it possible, the FAO argues, for wholesalers and retailers not to pass on price reductions to the consumer.

What makes matters worse for the effective functioning of the food marketing chain is that the same market power that harms consumers is also increasingly being used against food producers. Analyses of food market trends by the same international authorities show quite clearly that the share of the total return from the food market gained by food producers is continuously declining. Significantly, only specialist producers delivering to local markets are able to maintain a reasonable share of consumer spending.

Tweet about this on TwitterShare on Facebook0Share on Google+0Share on LinkedIn0
Author :
Print

Comments

  1. There is a geographic logic to the economics of your concluding paragraph. Across France there are half a million farmers, 10,400 food manufacturers (80% SMEs) and six nationally-present retailers. So there are no prizes for guessing who has the whip hand nationally.

    When it comes to regional specialisations, then (for now) there is a greater number of outlets and buyers in local markets, therefore regional specialist producers will stand better a chance of earning a fair return for their output. This does beg the question of why so many farmers should be in such a rush to see commodities exported to distant markets where they will be competing on price rather than any other aspect of their value.

    As you said yourself in your 1995 book on the CAP (…still got it…), the real winners out of the CAP were always the traders and middlemen, not producers. Nothing has really changed since then in real world trading terms, either.

    Take the cereal price hikes of 2007-8 and their subsequent relapse: cereal futures were being traded like betting slips, which earned a lot of money for a very few people before the bubble burst, leaving the physical end-users to pick up the tab. As usual.

    There may have been some savvy livestock farmers who bought ahead on commodity markets (anecdotal reports), but they are hardly the representative of the sector: or are they? I’m not aware of any robust figures for farmers who ringfenced their input costs by buying cereal futures for physical delivery.

Comments are closed.