Rising food prices seem to be on everyone’s mind these days. Consumers are frustrated that prices have not come down from pandemic levels, even after the reasons for those cost increases seem to have abated. Food price inflation has slowed this year according to official CPI numbers, but consumers still perceive prices to be increasing quickly. The proposed merger between Kroger and Albertsons highlights the growing concentration in the food retail sector, and the proposal has generated concern among the public as well as federal regulators. Here in Oregon, the merger would result in the sale of 60 Kroger stores to C&S Wholesale Grocers. In the last week, the issue was further elevated when food prices were brought up by the Kamala Harris campaign and the idea of a federal ban on price gouging was floated.
Since I spend most of my time working on issues related to farm production and profitability in Oregon, for me, the discussion of food prices always leads back to the relationship between the prices that consumers face at the grocery store and the prices that Oregon farmers and ranchers receive for their products. The ‘price spread’ is the difference between what consumers pay at the store and what farmers receive. This gap covers the costs of processing, shipping, marketing, and any profits made along the way. An increase in the price spread could be caused by an increase in the cost of shipping, increased labor costs among processors, increased cost of regulatory compliance, or an increase in the profits generated by processors and retailers.
The degree to which retail prices filter down to the farm sector also depends on market power and concentration at the processing and retail levels. For example, if a competitive meat processing market became a monopoly overnight, we would expect the price spread for meat to increase because the processor would be able to charge higher prices while passing relatively little on to beef producers.
This blog post will use historical beef price data to discuss the changes in the retail-farmgate price spreads and farm share of the retail food dollar over time. Beef is a good example because cattle production is spread across many small beef producers, processing is concentrated largely in the hands of four very large firms, and recent increases in meat prices are often a source of consumer complaint. While this type of simple analysis cannot identify the specific reason for a change in the farm-retail price spread in a given quarter or year, it can reveal the degree to which food expenditures are captured by supply chain steps downstream from the farm. It can also be helpful when thinking about the impact that further consolidation might have on the food prices and farm profitability.
These figures, based on USDA-ERS meat price data, show the price spreads and farm share of the food dollar for beef. Price spreads for other commodities are available here. For the beef industry in particular, the value captured by processing, distribution, and retail has increased by a factor of 15 over the past 5 decades. The farm share of the retail beef dollar has fallen from 65% to about 45%, dipping below 35% during the pandemic. Although it is difficult to generalize, these charts can help us put the current discussion about market power and food prices into perspective.
I think there are three main conclusions to make.
- The Covid years were very difficult for some sectors. Meat processing provides a perfect example of a Covid-related capacity constraint that temporarily changed the relationship between producers and processors and led to high retail prices (see Lusk et al., 2021 for more detail). As meat processing facilities reduced throughput because workers were sick or to comply with health and safety protocol, the volume of meat being processed fell, driving down average farmgate prices. In other agricultural sectors, shipping costs, input prices, and labor costs increased rapidly, and the processors/distributors share of the food dollar increased.
- In the case of beef at least, the farm share of the food dollar has recovered in the last year or two as the pandemic has faded and supply chains have normalized. Cattle inventories are currently at historically low levels and many beef processors are struggling to maintain their desired production volumes. This should not be taken as a conclusion that there is not significant market power in meat processing, but the market dynamics currently give beef producers a stronger hand in the market. We may see price spreads adjust downward again as cattle inventories return to more typical levels.
- The farm share of the food dollar will look different for commodities like beef, milk, and potatoes than it will for highly processed foods. Intuitively, the supply chain costs for highly processed foods are much higher than for “whole” foods. As diets have incorporated more highly processed foods, farm revenues have increased at a slower rate than food sales. It remains an open question whether or not the farm share of the overall food dollar will shrink further, or if we have reached a point of stabilization.
Further Reading: This is a huge topic and there is a lot of academic literature that has addressed food prices, market power, and the consolidation in the modern food system. A few interesting academic works and other resources are below:
- Ma et al., 2017: An article about market power in grocery, which reminds us that market power can also exist at the neighborhood level.
- Howard, P. H. 2016. Phil Howards book “Concentration and Power in the Food System: Who Controls What We Eat?” is not an economic approach to this topic, but he presents an interesting viewpoint and does rigorous work. There are some excellent figures.
- Raw data on retail food prices, rather than agricultural commodities are managed by the Bureau of Labor Statistics. They can be found here.