Declining farm value
share of the food dollar
Food prices include
payments for both the raw farm product and activities that occur once the
product has moved past the farm gate, such as processing, transportation,
wholesaling, and retailing. Thus, food prices comprise both farm
prices paid to producers and charges for marketing services such as processing
and distributing. For many years, farmers’ share of the of the consumer
food dollar has been decreasing.
In 1998 the USDA
reported that the farm-to-retail price spread, which represents the difference
between the amount farmers receive for the goods they produce and the retail
price consumers pay for food in foodstores, had been increasing every year
for the past 30 years (United States Department of Agriculture).
In 1997, the farm value (which represents the payment for the raw farm
product) averaged 23 percent of the retail cost of a representative basket
of U.S. foods sold in foodstores. The remaining 77 percent represented
the farm-to-retail price spread, which consists of the processing, transportation,
wholesaling, and retailing charges that add value to farm products after
they leave the farm. In 1980, the farm value share of the consumer
food dollar had been 37 percent, and in 1987 it was at 30 percent (Elitzak).
The farm value
share has generally declined over time as rising farm productivity has
created abundant food supplies that have held down farm prices. At
the same time, rising food processing and distributing charges such as
increased labor costs have raised retail prices. Thus, retail prices
have risen at a faster pace than farm prices. The result has been
an increasing trend regarding the farm-to-retail price spread. Moreover,
increases in these marketing input costs that occur past the farm gate,
such as labor, packaging, and transportation, have a greater effect on
retail prices than do fluctuations in farm prices that producers receive
for their raw farm products. Retail prices have been known to rise
even when farm prices have declined, reflecting an increase in marketing
charges. The USDA has reported that the farm-to-retail price spread
has increased at a greater annual rate than the farm value nearly every
year for the past decade (Elitzak).
The
farm-to-retail price spread examined above focuses on a market basket of
retail grocery store foods. When examining the total expenditures
for food at grocery stores, restaurants, and other food service institutions,
the farm value share of the consumer food dollar is slightly lower; in
1997, approximately 21 percent of expenditures on domestically grown and
consumed food represented the gross return paid to farmers. The remaining
79 percent covered charges for the marketing of foods that originated on
U.S. farms. These marketing charges represent the difference between
the farm value and the consumer expenditures made for food originating
from U.S. farms.
In
1997, consumers spent $561 billion for food originated on U.S. farms.
Of that amount, approximately $120 billion went to farmers. The remaining
$441 billion represented the marketing bill for functions performed by
the food industry - processing, wholesaling, transporting, and retailing.
Labor represents the largest portion of food marketing costs; in 1997,
labor represented almost half of the total marketing cost. Labor
includes workers employed by food assemblers, manufacturers, wholesalers,
retailers, and eating places. As the graph indicates, labor represented
38.5 cents of a dollar spent for food in 1997. In 1998 this amount
increased to 39 cents while the farm value of a dollar spent for food decreased
from 21 to 20 cents (Elitzak September 1999).
The amount of workers involved in food marketing has been increasing, with
the majority of the growth occurring in employment at public eating places.
This is consistent with the trend towards Americans eating more away from
home meals; in 1997, the USDA reported that away from home meals and snacks
accounted for 46 percent of the U.S. food dollar, compared to 38 percent
in 1977 (United States Department of Agriculture). In 1997, spending
for food purchased away from home increased more than spending for food
purchased at grocery stores (Elitzak). The farm value share for food
purchased away from home is less than that for food purchased at grocery
stores, mainly due to the fact that one of the primary costs involved with
food purchased away from home (such as in restaurants) is the labor involved
in preparing and serving the food.
Consumer food
expenditures have been increasing primarily because of increases in the
cost of marketing food, rather than increases in the gross return paid
to farmers. From 1987 to 1997, consumer expenditures for U.S. grown
food increased by $185 billion. Of that amount, nearly 85 percent
resulted from an increase in marketing costs. Rising marketing costs
are also the primary reason for the increase in farm-to-retail price spreads;
in 1997, the farm-to-retail price spread rose by an average of 4.7 percent
while farmers received 4.4 percent less for the food they produced (United
States Department of Agriculture).
While farmers’
share of the consumer food dollar has been shrinking, their costs of production
have been rising. Thus, farmers have seen their net incomes pressured
from both the revenue and expenditure sides (Hegland).
Cooperative
investment in value-added processing has been used as a method to increase
farmers’ share of the consumer food dollar. By maintaining control
of their raw products past the farm and expanding their reach into activities
such as processing and packaging, producers hope to obtain some of the
marketing portion of the consumer food dollar.
Some have also
suggested that the relative profitability of food processors has been another
primary reason for the increase in value-added cooperative processing activity
(Boland, Lusk and Barton). Comparisons of return on equities between
farmers and food companies show a large difference. Based on
data from the USDA's Economic Research Service, the average return on equity
between 1986 and 1991 for U.S. farmers was roughly 2 percent while the
average return on stockholder equity for food manufacturers was roughly
17 percent.
Although agriculture
represented a good portion of North Dakota’s economy at the end of the
1980s, most of the activity took place on the farm with raw commodities,
and processing took place outside of the state. Producers began to
realize that potential profits existed in activities that occurred past
the farm gate (North Dakota State University). As Jack Dalrymple,
a state representative who was involved in several new generation start-ups,
said, "It took us farmers 100 years to figure out the big grain and flour
milling companies and sugar refiners were making all the money" (Alster).
"…we
had a change in attitude. We faced the fact that we were a colony
-- we exported raw commodities and imported processed goods. We realized
farmers got too small a share of the food dollar" - Sarah Vogel, former
North Dakota Commissioner of Agriculture
References
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