March 7, 2011
Retail prices of food, according to a UK bank, have increased almost twice as much as they should have done as a result of recent food commodity price increases. Prices to consumers have increased far more than indicated by the small proportion of raw material cost in the total cost of processing and delivering. An analysis by UBS indicates price of food in UK shops increased by 6 per cent when in fact production costs increased by only 3.5 per cent, including the price of commodities, labour and currency exchange rate changes.
This information will not come as a surprise to anyone with knowledge of the activities of what is essentially an oligopolistic industry – both in its processing and retailing sectors. The most blatant example is the continuous rise in the price of a loaf of bread, always blamed on the rise in the price of wheat, when the cost of flour is less than 10 per cent of total production cost of a loaf.
What should be of more concern however is the undoubted fact while farmers’ prices fall as world markets recover from short term ‘food price crises’, the price of food in the shops very seldom falls. As one of the European Commission’s excellent Agricultural Policy Briefs graphically demonstrates: as commodity prices fall wholesale and retail profits rise as the supermarket till price remains at the crisis induced level.
“The distribution sector and the food industry have experienced growing value-added and profits, driven by growing volumes and prices, while the agricultural sector has been receiving a declining share of value added and struggled to maintain the farm income level,” the Brief points out. “There is a clear lack of transparency of prices along the food supply chain, which prevents market signals from reaching all economic agents active along the chain, and thereby prevents the market from functioning properly”.
The Commission poses several possible answers to the question why prices paid by consumers and paid to farmers do not signal the true state of supply and therefore of market conditions. The most important and obvious reason must be the lack of bargaining power – on both sides of the till. Consumers face a retail food market which in western Europe is between 70 and 80 per cent controlled by no more than 5 retail chains. At the same time, farmers and small scale processors and wholesalers, for the same reason, are price takers rather than price makers.