The disconnect between farm commodity and retail food prices is worsening. Throughout 2013, major media warned consumers of rising food costs, with BNN on May 16 reporting, “How much Canadians pay for their food is becoming a major concern.”
That same day, CBC added its voice, saying, “Canadian families are planning to cut back on the amount they spend at the grocery store in the face of rising food prices, a new report from one of Canada’s largest banks said Thursday. The RBC Canadian Consumer Outlook Index showed Canadians are displeased with rising food prices at the grocery store.”
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A month later, on June 27, 2013, Globe and Mail entered the fray with, “Food prices far outpace consumer price index,” followed on August 5 by the Toronto Sun headline, “Canadian consumers cope with dramatic increase in food prices.”
Then came the fall of 2013, and as everybody on the farm knows, crop prices began a dramatic drop.
But there was no corresponding drop in food prices. In fact, spring 2014 headlines continued to report high food-price inflation.
This gap between what the farmer earns and what the consumer pays comes even more sharply into focus if you examine the slice of the food dollar that the farmer receives. South of the border, the USDA has been tracking this since 1950, and a September 2013 study entitled, “Farm-to-Food Price Dynamics,” by Dr. Randy Schnepf, agricultural policy specialist with the U.S. Congressional Research Service (CRS) concluded, “Since 1950, the average farm share has been declining as a share of total consumer food expenditures, falling from about 41 per cent in 1950 to 15.5 per cent in 2011.”
It is important to note this 15.5 per cent farm share is simply the portion of the food dollar that farmers receive at the farm gate. It has nothing to do with how much the farmer gets to keep.
The USDA Economic Research Service estimates that in 2011, only about half of that 15.5 per cent farm share actually stayed with the farmer, with 7.6 per cent flowing from the farmer to agribusiness to pay for production expenses.
Since 1950, it should also be noted, consumer spending on food has jumped immensely. In 1970 U.S. consumers spent $102 billion on food. In 2011, they spent $1.1 trillion.
Even though consumer spending on food has increased more than 1,000 per cent over the last 40 years, the share of the retail food dollar that farmers receive dropped by more than half.
So, while consumers are spending more and more, the bulk of the added spending by consumers has been captured by handlers, processors, wholesalers, retailers and food-service providers.
- More from Country Guide’s Gerald Pilger: The Canadian-made bottleneck
The value-adding and marketing share of U.S. consumer spending on food rose from $69.2 billion in 1970 to $963 billion in 2011. In 2011, 84.5 per cent of the money U.S. consumers spent on food went into transforming agricultural commodities into food products, transporting those products to retail outlets, and on marketing and sales.
According to Schnepf, the relationship of food prices to commodity prices is not one to one. Food does not exactly follow commodity prices. Furthermore, food prices tend to be sticky. While they usually go up as commodity prices rise, often food prices do not fall when commodity prices decline.
Schnepf pointed out biofuels have been blamed for raising food prices but he has found the 25 to 30 per cent rise in corn prices attributed to biofuel only added about one per cent to food costs. “Commodity prices are now a small component of food prices,” he says.
Schnepf also says there are many other costs that have a much bigger impact on food prices, including energy costs, labour costs, transportation, processing and market competition.
The affluence of consumers
In 2012, while working as an extension agent at Colorado University, Kim Dillivan wrote a fact sheet entitled, “Where Does the Money Go? Food Marketing Margins Explained.”
“Contrary to popular belief,” Dillivan wrote, “commodity-price increases contribute little to food-price inflation.”
Dillivan attributes much of the drop in farmers’ share of the food dollar to changing consumer preferences. “Improved economic conditions, both in the U.S. and internationally, increase consumer demand for value-added food. Instead of buying flour and baking bread, consumers prefer to purchase ready-to-eat bread. Consumers are spending more of their food dollar to buy convenience and save time.”
Dillivan believes the general public does not realize how small a portion of their food dollar actually goes to the farmer. He also thinks the general public has been misled as to why food prices increase, so he sees farm-share data as an opportunity to inform the public about food pricing, and he suggests producers should use any chance they get to talk to consumers about food pricing and farm share.
Farm Share in Canada
Instead of tracking farm share as they do in the U.S., Canada tracks the cost of a specific basket of food.
“Canada’s tracking of farm share has been sporadic at best,” says Jessica Kelly. While a graduate student at the University of Guelph, she analyzed the Canadian farm share for her 2014 master’s thesis entitled, “The Farm Share in Canada from 1997 to 2010: Identifying Trends in Value Distribution Along the Agri-Food Supply Chain.”
Kelly found farm share has also declined in Canada, dropping roughly 0.20 per cent per year.
However, her analysis has also identified two significant differences from U.S. trends. First, farm share is much more volatile in Canada.
Second, the farm share that U.S. farmers receive is consistently higher than the Canadian farm share, averaging about 4.2 per cent more between 1997 and 2010.
Part of this can be explained by higher food imports in Canada, especially fresh fruits and vegetables, yet Kelly suspects there are other reasons Canadian farmers receive a lower percentage of consumer spending on food than U.S. farmers get, although her research did not investigate this difference.
Even so, Kelly says, “Declining farm share does not necessarily mean farmers are being treated unfairly.”
Instead, Kelly says declining farm share reflects the changing dynamics of our food system. It is an indication of changing consumer demand for more processed food products, as well as increased eating outside the home.
It may also reflect the farmer’s ability to produce greater volumes of commodities more efficiently, Kelly says, so a falling farm share may actually be a signal of a strong and efficient food system.
Action needs to be taken
Regardless of whether our declining farm share is good or bad, farmers and ranchers should be making consumers aware of where their food dollars are actually going.
Understanding farm share gives producers facts they can use to inform consumers that food prices are less a function of commodity prices and more the result of consumer demand for highly processed foodstuffs.
Even more important, we as farmers need to be aware of the changing demands of consumers.
Consumers want to use their food dollars to purchase not only food, but also convenience and time savings. Unless we as producers can either provide the food products that consumers demand — or partner with processors and retailers who can provide those products — we can expect the share of the consumer spending on food we receive will continue to decline.
Most of the spending by consumers on food is captured by value adding rather than production of raw commodities.
As an industry, agriculture needs to recognize this fact and expand rather than contract our food-processing sector. Unfortunately this is not happening in Canada (read, “Is Canada losing our food-processing industry?” on page 13 of the Country Guide digital edition).
Producers wanting a better understanding of food pricing and how it relates to commodity pricing should read Schnepf’s paper: Farm-to-Food Price Dynamics, available on the web as a pdf.
