The farmer's shrinking share of food prices

Monday, October 7, 2013

Not much has changed in the last 40 years in the percentage of retail income ending up on the farm. But reduced household spending on food right across Europe means there's even less left for the farmer in real terms

by NORMAN DUNN

I recall an argument in a milk bar way back in the 1970s. The root of the problem was a glass of plain pasteurized milk, 3.8 per cent fat and ice cold. There was nothing wrong with the milk, just its price. This was a time when farmers in the same locality were getting the equivalent of C$0.06 per litre for delivering their milk to the creamery. In the stores, the customer paid around $0.14 for a litre of pasteurized. The price I was asked for in the milk bar was also $0.14, but for a little less than half a litre.

Was this 100 per cent mark-up justifiable for simply keeping the milk cold and then pouring it into a glass? The milk bar tender told me he was free to charge whatever price he wanted to, and as a businessman he charged customers what he thought they would pay. Anyway, that was the context of his side of the argument, although he expressed it a bit more brusquely than that.

I still had to pay the full whack for my glass of milk. But the incident got me thinking about what farmers were actually left with when seen as a proportion of the final over-the-counter price. Research at that time showed me that roughly around 40 per cent of the average retail price landed in the dairy farmers' pockets. The respective figure for locally produced and processed meat was 25 per cent. On the other hand, potatoes often left European growers with rather less than 20 per cent of the store price for sorted, cleaned and prepacked tubers.

In Britain, scene of my initial research some 40 years ago, the dairy producer's share of pasteurized milk retail prices has moved up to 47.7 per cent on average since then, according to the government dairy marketing information organization, DairyCo. But wheat leaves a much smaller share: just nine per cent of the final bread price. Potatoes haven't changed much in this respect with 19 per cent left on the farm.

So at least dairy farmers appear to be much better off over the years. But, of course, food prices as a percentage of average income have fallen steadily since the 1970s. Where European farmers might now be getting almost 50 per cent of the sum milk finally realizes in the stores, lower retail prices and rising input costs for producers usually fail to hike returns above the break-even line.

The latest facts in this respect have just been published by the Swiss farmers' union (SBV) and, even for this relatively high-price food market (EU food price index in Switzerland is 160 per cent against 96 per cent in the Netherlands), farmers there seem to end up with much the same share of the final price.

Swiss milk producers get 45 per cent of the retail price on average and just 33 per cent if the milk happens to be processed into cheese. Covering all foods produced in Switzerland, the SBV reckons farmers' final proportion of the retail price at around 30 per cent.

Looking back over the years in this respect and comparing average farmer incomes, it becomes very clear that the much-quoted farmer percentage of end price doesn't really matter that much. What's really important is the price of food in the stores. This is why in countries such as Germany, where discounters account for almost half the sales of main foods, farmers see their real enemy in the retail outlets and their continuous cheap food marketing strategies.

Naturally, consumers lap this up. In Switzerland, for example, 11 per cent of the average citizen's income was spent on food 23 years ago. Now, this figure has crashed to 6.8 per cent. The same opportunities in Britain and on the European mainland mean that the respective household food spend there has settled lately at just 10 and 12 per cent of income.

At the same time the margins of the retailers remain usually extremely healthy and, as usual, the primary producers are left footing the bill for cheaper food.    

Will the "greening" policies of new EU plans, where farmers receive more money for environmentally sustainable production systems and for taking care of the countryside and wildlife habitat, provide some protection from the cheap food strategies and their effect on farmer incomes?

There's no shortage of family farming businesses throughout Europe that hope this will be the case. And the same applies to an increasing proportion of consumers who are realizing that cheap food means they're losing their local food farmers along with all the transparency and safety that regional production brings. BF

Norman Dunn writes about European agriculture from Germany.