Farm to Retail Price Spreads
9/10/09
Review from 9/8/09
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Be able to distinguish between the marketing bill and the
market basket
Identify factors that have led to a significant increase in U.S
consumer food expenditures over the past several decades.
Does the decline in the share of the consumer food dollar going
t ffarmers d
to
definitely
fi it l indicate
i di t a decline
d li in
i the
th economic
i wellll
being of farmers? Why or Why not?
Does the increase in the consumer food dollar going to
agribusinesses (expanding marketing bill) definitely indicate that
these firms are exploiting producers (farmers) and consumers?
Why or Why not?
Be able to update and interpret the data in Table 2.1
(Schrimper).
Source: USDA photo
AEC 305, Food and Agricultural Marketing Principles
AEC 305, Food and Agricultural Marketing Principles
Measuring the Economic Importance
of the U.S. Food Marketing System
Farmers
„
Consumers
Description:
p
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„
“Middlemen”
Farm to Retail Price Spreads
Value added after a good leaves the farm until it reaches the consumer
Cost of resources to perform various marketing functions
Quantitative Measures
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Contribution to GNP and Employment
Consumer Food Expenditures vs. Farm Value
Marketing bill
Market basket
Farm-Retail Price Spreads
AEC 305, Food and Agricultural Marketing Principles
Factors Affecting Farm to Real
Price Spreads
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•Marketing Bill – aggregate measure of marketing costs
•Market Basket – comparison of a “basket” of food items at farm vs
retail
•Price Spread – isolating on the price difference for a single food item
(e.g. steak) or group of similar items (e.g. beef) at different stages in
the marketing system (e.g. retail and farm levels)
AEC 305, Food and Agricultural Marketing Principles
U.S. Corn Prices
Degree of processing
Bulkiness/Perishability
Degree of competition
Level of commodity supplies
Changes in marketing costs
Changes in commodity prices
AEC 305, Food and Agricultural Marketing Principles
How did this impact
the price of products
th t use corn??
that
AEC 305, Food and Agricultural Marketing Principles
1
U.S. Corn Prices
„
http://www.youtube.com/watch?v=2KqO3B3
8eAI
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http://www.youtube.com/watch?v=MxCXSqv
8-LM
„
http://www.youtube.com/watch?v=eHWd8eR
Q8jE
How did this impact
the price of products
that use corn?
$3.00
AEC 305, Food and Agricultural Marketing Principles
Impact of the Higher Corn Prices (farmlevel) on the Price of Consumer (retail)
Products that Use Corn as an Input
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USDA Resources – Farm to Retail
Price Spreads
The classic example is a box of corn flakes. (Feb 2008 USDA report)
“When field corn is priced at $2.28 per bushel (the 20-year average), the actual
3.3 cents
value of corn represented in the box of ($3.00) corn flakes is about _____
(The remainder is packaging, processing, advertising, transportation, and other
costs.)
Dairy Market Data
Milk and dairy basket
4.6 cents.
At $3.40 per bushel, the average price in 2007, the value is about _____
The 49-percent increase in corn prices would be expected to raise the price of a
box of corn flakes by about 1.6 cents, or 0.5 percent, assuming no other cost
increases.”
www.ers.usda.gov/AmberWaves/Scripts/print.asp?page=/February08/Features/CornPrices.htm
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Using their methodology, $5.00 per bushel corn would translate into approximately
_____
7.0 cents of corn in a box of corn flakes today – an increase of a little over one
percent.
www.ers.usda.gov/Features/
Butter
Steps Behind Calculations
Cheddar
cheese
Steps Behind Calculations
Ice cream
Steps Behind Calculations
Whole milk
Steps Behind Calculations
www.ers.usda.gov/Data/FarmT
oConsumer/pricespreads.htm
Another example is soft drinks which USDA estimates higher corn prices boosted
the price of a 2 liter bottle by 1.9 cents or one percent in 2007.
3.3
Farm-Retail Price Spreads
Calculations
Farm to Retail Price Spreads
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Conceptually, the difference between the retail price
and the farm value for individual food items, where:
¾
The retail price reflects the price of individual food items
purchased at retail outlets for at-home consumption
consumption.
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PR(i) = Price of Food Item (i) at retail (what the consumer pays for
the item at the grocery store or some other purchasing location)
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PFV(i)= Farm Value Equivalent for food item (i) sold at
retail
(what the farmer receives from the food item that is sold at retail)
¾
the farm value represents the appropriate quantity of the
basic commodity require to produce a unit of the final
product at the retail level.
Thus retail to farm price spreads are not simply the difference
between retail and farm prices … must put it on an equivalent unit basis.
AEC 305, Food and Agricultural Marketing Principles
Where:
PFV(i)= PF * CF
Where:
PF = the price the farmer receives at the
farm market level
CF = a conversion factor that indicates the
amount of the farm product needed to
produce one unit of a retail product
AEC 305, Food and Agricultural Marketing Principles
2
Farm-Retail Price Spreads
Definitions
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Farm to Retail Price Spread:
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Price Spreads: Conversion
Factors
PR(i) – (PF * CF)
F
Farm
V
Value
l
as a Percent
P
t off the
th Retail
R t il Price
P i
„
(PF * CF)
PR(i)
x 100
Fresh fruit conversion factors
Measurement Challenges – Easier for
commodities with less proccessing
Must determine appropriate
quantity conversion factors (e.g.
eggs vs beef …. What about fruits
and vegetables?)
www.ers.usda.gov/Data/F
armToConsumer/pricespre
adsdoc.htm#Conversion
Percentage
loss
Conversion
factor
Apples
4
1.042
Cantaloupe
8
1.087
Cherries
1
Grapefruit
3
1 031
1.031
Grapes
9
1.099
Honeydew melon
8
1.087
1.087
Kiwifruit
9
1.099
Lemons
4
1.042
Oranges
3
1.031
Peaches
6
1.064
Pears
5
1.053
Plums
5
1.053
Strawberries
8
1.087
Watermelon
10
1.111
Source: ERS Food Availability Per Capita Data System
AEC 305, Food and Agricultural Marketing Principles
Beef Price Spread Example
Assume
„ Retail Beef Price: $5.00/lb
„ Farm Level Beef Price -- $1.00/lb
What is the Retail-Farm Price Spread?
ƒ Conversion Factor: Assume a 1000 lb steer yields
420 lbs of retail beef cuts or it takes about 2.4 lbs of
steer to produce 1 lb of beef at retail
‰ What’s the retail price?
‰ What’s the farm value
‰ What’s the farm-retail price spread?
‰ What’s the farm value as a percent of the retail price?
AEC 305, Food and Agricultural Marketing Principles
Journal Entry #5 (9/10/09)
#A.
Assume
„ Retail Carrot Price: $1.61/lb
„ Farm
F
L
Levell C
Carrot P
Price
i
-- $9.26/48
$9 26/48 lb sack
k
„ Conversion Factor – 1.031
AEC 305, Food and Agricultural Marketing Principles
USDA Examples of Farm to Retail
Price Spreads
Look at the Data in Table 8 (Parts 1 and 2)
Market Basket and other Aggregated Price Spreads
www.ers.usda.gov/publications/agoutlook/aotables
More detailed Meat Price Spreads located at:
www.ers.usda.gov/data/meatpricespreads
Fruit, Vegetable, and Dairy Price Spreads:
www.ers.usda.gov/Data/FarmToConsumer/pricespreads.htm
AEC 305, Food and Agricultural Marketing Principles
Determining “Quantities” of Farm
Products “Consumed”
Farm Value
„ Farm Price * Farm Production
But How Much of Farm Production is “Consumed”
Consumed
in the U.S. or “Disappears” from the Supply Levels?
What is the Retail-Farm Price Spread?
‰ What’s the retail price?
‰ What’s the farm value
‰ What’s the retail-farm price spread?
‰ What’s the farm value as a percent of the retail price?
AEC 305, Food and Agricultural Marketing Principles
AEC 305, Food and Agricultural Marketing Principles
3
Measuring Consumption
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USDA calculates total consumption
as a residual from a supply/use
q
and refers to it as a term
equation
called “disappearance.”
Total Supply must equal Total Use
What comprises Total Supply?
What comprises Total Use?
AEC 305, Food and Agricultural Marketing Principles
Supply vs Use
Total Supply (ST):
Beginning Stocks (BST) + Production (QT) + Imports (MT)
Total Use (UT):
Disappearance (DT)+ Exports (XT) + Ending Stocks (EST)
Total Supply (ST) = Total Use (UT)
AEC 305, Food and Agricultural Marketing Principles
Journal Entry #5 (9/10/09)
Assume the following
BST = 100, QT = 500, MT = 50, XT = 25, EST = 25,
What is DT?
Total Supply (ST):
Beginning Stocks (BST) + Production (QT) + Imports (MT)
100
500
+ 50
+
Total Use (UT):
Disappearance (DT)+ Exports (XT) + Ending Stocks (EST)
?
575
+
50
+
25
For examples go to: www.ers.usda.gov/publications/agoutlook/aotables/
www.ers.usda.gov/data/FoodConsumption/FoodAvailIndex.htm
AEC 305, Food and Agricultural Marketing Principles
A. Farm-Retail Price Spread Problem
B. Fill in the Missing Data for Each Year Using the Supply/Use Identity
Source: USDA Data on Beef (expressed in mil lbs)
Beg.
Produc-
stocks
tion
2004
518
2005
637
2006
571
26,256
2007
630
26,523
2008
24,650
26,682
Total
Imports
supply
Ending
Total
Exports
stocks
Consumption
637
3,679
28,847
460
3,599
29,023
697
3,085
29,912
2,930
571
27,754
630
28,137
30,205
1,431
630
28,144
30,242
1,515
600
28,127
New Consumer Food/Beverage
Products for the Week of 9/7/09
http://www.supermarketguru.com/index.cfm/go/sg.videoSlideshow/categoryId/34
Note: Next week – Chapter 3, Schrimper on Developing Price Indices
AEC 305, Food and Agricultural Marketing Principles
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