Farm price margins constructed under alternative price calculation
Hyunok Lee*, Daniel Sumner**, and Jessica Vergati*** [1]
June 2012
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This research was funded by California Department of Food and Agriculture, Specialty Crop Block Grant Program (SCBGP) Grant CFDA #10.170: “Measuring and Understanding the Pattern of Margins between Farm and Retail Prices for California Specialty Crops to Increase Growers Returns”
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Issues and background
In the past decades, the increase in retail fruit price has been much higher than the increase in other retail food prices. At the same time, the price received by fruit growers has either remained constant or risen only slightly. This price divergence between retail and grower prices has been widely accepted and there has been some concern about this widening price margin among farm policy analysts.
Agricultural products are linked from farms to consumers through food marketing systems such as food manufacturing, wholesaling, and retailing. At each level of marketing system, the cost of marketing services are added, such as transportation, processing, and distribution of farm products, and they constitute a substantial portion of food prices.
We present two figures which describe the historical movement of aggregate price indices. The first figure presents annual Consumer Price Indexes (CPI) for urban consumers for general food and two different food bundles, fresh fruit and fresh vegetables, for the period of 1950-2009 with the index values based on the prices of 1982-84. All three CPIs increased together at a relatively low rate until the early 1980s. However, since then, all three indexes have increased at considerably different rates, showing that fresh produce prices rose far more than general food prices. Compared to 1982 prices, the CPIs for fresh fruit and vegetables rose 3.5 times and 3.1 times in 2008, respectively, while the general food index rose 2.3 times.
The second figure presents the producer price index (PPI) and the consumer price index (CPI) for fresh fruit, representing the general producer price and retail price levels for fresh fruit. The diversion between these two price indices can be consistent with the widening spread between retail price and farm price. Up to the early 1980s, the producer price index (PPI) (representing farmgate prices) is slightly higher than the consumer price index (CPI). However, after this period, the CPI rose very rapidly while there was little change in the PPI. As a result, the gap between the CPI and PPI widened. These two graphs show the central point of our project—for the past two decades, fresh fruit retail prices have risen more than any other food groups. On the other hand, producer-received prices have either decreased or changed little.
Figure 1.
Figure 2.
Source: BLS http://data.bls.gov/PDQ/servlet/SurveyOutputServlet
Table 1 below presents the retail farm price margins for fresh fruit since 1997. Table 2 presents farm shares in retail prices for various commodity categories. Compared to the overall market basket, fresh fruit tends to generate a relatively low farm share, whereas animal (meat and products) tend to generate a relatively high farm share. However, the lowest farm share was generated by the cereal and bakery products, which in general are processed and contain high value added. Table 2 confirms our usual expectation that product perishability lowers the farm share (such as for fresh fruit or vegetables) and that more processed products are associated with lower farm shares.
Table 1. Farm share (%) in retail price for fresh fruit
1997 / 1998 / 1999 / 2000 / 2001 / 2002 / 2003 / 2004 / 2005 / 2006 / 2007 / 2008 / 2009 / 201017.7 / 17.3 / 16.5 / 15.7 / 15.8 / 16.4 / 16.7 / 19.3 / 16.6 / 17.6 / 16.6 / 15.8 / 14.9 / 15.9
Table 2. Farm share in retail price for major commodity groups
2008 / 2009 / 2010Market basket1
Farm value-retail cost (%) / 22.9 / 19.8 / 22.5
Meat products
Farm value-retail cost (%) / 31.2 / 28.8 / 31.6
Dairy products
Farm value-retail cost (%) / 33.2 / 25.3 / 31.9
Poultry
Farm value-retail cost (%) / 41.4 / 38.4 / 42.3
Eggs
Farm value-retail cost (%) / 46.3 / 38.0 / 40.0
Cereal and bakery products
Farm value-retail cost (%) / 9.6 / 6.9 / 7.1
Fresh fruit
Farm value-retail cost (%) / 15.8 / 14.9 / 15.9
Fresh vegetables
Farm value-retail cost (%) / 18.7 / 19.0 / 21.1
Processed fruits and vegetables
Farm value-retail cost (%) / 17.0 / 15.3 / 15.6
Source: Agricultural Outlook: Statistical Indicators, January 2011
http://www.ers.usda.gov/publications/agoutlook/aotables/
Previous studies
Stewart (2006)[2] investigated the farm share of consumer food expenditures using the updated market basket data for fresh fruits and fresh vegetables. His study found that the farm share of consumer food expenditures has been shrinking and the farm share for these two commodity groups has decreased less than previously believed. The updated estimates show a larger farm share than the current, unadjusted data series. The unadjusted data series estimates the 2004 farm share at 19 percent for fresh vegetables and 20 percent for fresh fruit; the updated consumer baskets yield farm shares of 23.5 percent for fresh vegetables and 26.6 percent for fresh fruit. His study indicates that the existing (unadjusted) series has overstated the decrease in farm share.
Leibtag (2006, 2010)[3] investigated the relationship between the emergence of large discount food stores and retail food price. Nontraditional stores, such as mass merchandisers, supercenters, club warehouse and dollar stores have increased their presence over the past decades and often present lower-priced alternatives to conventional supermarkets. According to Martinez (2007)[4], the U.S. food system has the increasing presence of nontraditional grocery retailers, and these developments have contributed to sharp increases in concentration in the grocery retail sector, changing conventional relationships among retailers, wholesalers, and manufacturers. The share of food retail by type of outlet indicates that nontraditional retail has increased its 17 percent share in consumer food retail purchase in 1994 to 32 percent in 2005.
He pointed out that the current CPI for food does not fully take into account the lower price option of nontraditional retailers and thus a gap exists between price changes as measured using scanner data versus the CPI estimate. Comparisons of identical items, at the Universal Product Code (UPC) level, show an expenditure-weighted average price discount of 7.5 percent (with differences ranging from 3 to 28 percent) lower in nontraditional stores than in traditional stores.
Possible causes for farm share for fresh fruits
Among the possible explanations for the relatively low farm share for fresh fruits, a few stand out.
· Existence of retailers’ market power: There are many studies examining this possibility and past research indicates the existence of retailers’ market power. Nevertheless, this is not fully convincing given the high level of competition among grocery retail chains. However, this hypothesis would be consistent with falling farm income.
· Increasing marketing costs: The increase in marketing cost can be due to two sources.
1) Increase in regulatory compliance (or institutional) costs: These regulations may be associated with public health and exotic pest outbreaks. The increasing levels of regulations are placed in response to higher awareness of potential losses from pest outbreaks or other food contaminations. Firms incur costs from regulation and these costs are passed down to consumers in the form of higher retail prices.
2) Implicit quality improvement: There has been inexplicit quality improvement of products, and this improvement is reflected in the retail price but not in product counting. For example, consumers demand better and fresher quality of products along with improvement in post-harvest technology. Thus, a higher share of cost is allocated to this process. Quality improvement incurs costs and these costs are reflected in higher retail prices, which subsequently increase the margin between retail and producers’ prices.
· Price accounting: In price accounting, there are three layers of issues.
· Retailers’ constant pricing behavior: Fruits are available throughout the year due to the expanded global market. There is an incentive for retailers to maintain the same price during the off-season as during the season. Keeping the retailers’ profit constant and the presumption that off-season producer prices are higher than in-season producer prices, such pricing behavior leads to higher in-season retail prices and lower off-season retail prices. As such behavior intensifies (and accordingly, prices become more uniform throughout the in-season and off-season), the gap between retail price and producer in-season price widens.
· Overestimated retail prices due to the expanding share of nontraditional stores: BLS data do not accurately reflect the expanding share of nontraditional retailers, e.g., big-box stores, which tend to offer lower prices than traditional retailers (Leibtag, 2006 and 2010)[5].
· Longer season in retail markets: Even in the absence of constant pricing, falling farm shares can be realized as fresh produce is increasingly available to consumers (because of the increase in off-season imports). Retail price data include non-season prices which may be relatively high compared to the season price. However, producer prices include values only during the season.
Due to the BLS’s retail pricing calculation, retail prices are overestimated, which results in widening marketing margins over time. The possibility of retail prices being overestimated is based on the following facts. Retail prices are mostly collected from BLS. Grower-received prices are collected from USDA. Increased imports during the off-season and the wider availability of early and late fruit varieties expand the availability of fruits at the retail level beyond the period that is considered traditionally as a season for each fruit. Thus, retail prices are collected over the span that expands beyond the season.
Impact on farm income
Farm share in retail price has decreased over time. Retail prices increased more rapidly than farm prices or general food prices, and the farm share in retail value has decreased over time. Given rising retail value, the falling farm share does not necessarily mean a reduction in producers’ net profit. Producers’ net profit may be either unchanging or falling.
Issues regarding BLS commodity prices and indexes
The primary issue regarding price data in the context of grower margins concerns aggregation issues surrounding retail prices.
Commodity level prices and price indexes are available at the grower as well as retail levels mostly from USDA and BLS. USDA collects and provides market level price data for many major agricultural products. Even though USDA provides data at all marketing levels, their data effort especially focuses on the grower level. For the retail level, USDA does not provide a comprehensive data base, and often relies on BLS sources. For example, grower margins provided by USDA are based on BLS retail price data. Thus, in understanding and interpreting these values, it is very important to understand how these BLS price data are generated.
All prices or indexes published by BLS (as well as other places) are the products resulting from some type of aggregation process. Publicly accessible data are usually generated from initially disaggregated information. That is, monthly prices can be created by aggregating weekly or daily prices, or in the case of spatial aggregation, urban prices in a region, for example, can be created by aggregating prices collected from designated urban locations in that region. In general, the data collection agency initially collects data on a daily, weekly or monthly basis (depending on the transaction of commodity) at many locations of the country for a given commodity. In general, this initially very detailed data information is further summarized (or aggregated) over time and locations, which then is published as monthly or annual data for a region or the nation as a whole.
BLS usually uses the simple average method to construct annual data, rather than the quantity-weighted method. USDA uses both weighted average and simple average methods in the construction of annual grower-received prices. (Shipment quantities are supplied by USDA’s Agricultural Marketing Service.) During the peak season, market quantities tend to be high and prices tend to be low, and during the early or late season, market quantities tend to be small and prices are usually high. A similar situation extends even to off-seasons. In the past decades, imports of fresh fruit have continued to increase and fresh fruits have been more readily available during the off-season. Naturally, off-season products consist mostly of imports, and off-season prices are typically higher than the season price. This implies that the annual consumer prices generated using in-season as well as off-season prices are expected to be higher than the typical price that would prevail during the season. The consequence of the simple average (say, a simple average of monthly prices) method used in generating annual retail prices is the upward bias of the price compared to say, the weighted average.
USDA relies on BLS for retail price information in their analysis of price, including marketing margins. For instance, the Economic Research Service obtains retail data on national average prices (U.S. city-average price data) from the BLS and uses them in their calculation of grower margins (published in the USDA yearbook for fruits and nuts). (For documentation of data collection descriptions, refer to the website: http://www.ers.usda.gov/Data/FarmToConsumer/pricespreadsdoc.htm) The implication of these higher retail prices in farm share calculation may lead to a consistently biased number, in this case, a lower farm share.
Construction of weighted prices
We have selected five representative fruits as our focus commodities: oranges, apples, grapes, peaches and strawberries. These five fruits represent between 60–70 percent of cash receipts for all fruits received by U.S. fruit farmers.
Value share for selected fruits in total cash receipt from all fruits
1980 / 0.23 / 0.12 / 0.23 / 0.06 / 0.04 / 0.69
1981 / 0.22 / 0.13 / 0.22 / 0.07 / 0.05 / 0.70
1982 / 0.22 / 0.14 / 0.23 / 0.04 / 0.07 / 0.70
1983 / 0.24 / 0.13 / 0.19 / 0.05 / 0.07 / 0.69
1984 / 0.23 / 0.16 / 0.16 / 0.05 / 0.07 / 0.67
1985 / 0.22 / 0.14 / 0.15 / 0.05 / 0.07 / 0.64
1986 / 0.19 / 0.14 / 0.18 / 0.05 / 0.08 / 0.64
1987 / 0.19 / 0.15 / 0.19 / 0.04 / 0.08 / 0.66
1988 / 0.22 / 0.12 / 0.20 / 0.05 / 0.07 / 0.65
1989 / 0.22 / 0.12 / 0.22 / 0.04 / 0.07 / 0.67
1990 / 0.20 / 0.13 / 0.20 / 0.05 / 0.07 / 0.65
1991 / 0.17 / 0.18 / 0.20 / 0.04 / 0.07 / 0.67
1992 / 0.16 / 0.18 / 0.21 / 0.04 / 0.08 / 0.67
1993 / 0.17 / 0.16 / 0.23 / 0.04 / 0.08 / 0.68
1994 / 0.18 / 0.15 / 0.21 / 0.04 / 0.09 / 0.68
1995 / 0.18 / 0.16 / 0.21 / 0.04 / 0.09 / 0.68
1996 / 0.17 / 0.18 / 0.23 / 0.04 / 0.07 / 0.69
1997 / 0.16 / 0.13 / 0.28 / 0.04 / 0.08 / 0.69
1998 / 0.21 / 0.13 / 0.24 / 0.04 / 0.09 / 0.72
1999 / 0.14 / 0.13 / 0.28 / 0.04 / 0.11 / 0.70
2000 / 0.16 / 0.13 / 0.28 / 0.04 / 0.09 / 0.70
2001 / 0.15 / 0.12 / 0.28 / 0.05 / 0.10 / 0.69
2002 / 0.15 / 0.13 / 0.26 / 0.04 / 0.11 / 0.68
2003 / 0.14 / 0.15 / 0.23 / 0.04 / 0.12 / 0.68
2004 / 0.12 / 0.14 / 0.25 / 0.04 / 0.11 / 0.66
2005 / 0.14 / 0.13 / 0.26 / 0.04 / 0.10 / 0.66
2006 / 0.14 / 0.14 / 0.23 / 0.04 / 0.11 / 0.66
2007 / 0.12 / 0.14 / 0.23 / 0.03 / 0.12 / 0.64
2008 / 0.13 / 0.17 / 0.21 / 0.03 / 0.12 / 0.66
2009 / 0.12 / 0.13 / 0.23 / 0.04 / 0.14 / 0.66
2010 / 0.12 / 0.13 / 0.21 / 0.04 / 0.13 / 0.63
Source: Fruit and tree nut yearbook 2011 Economic Research Service, USDA