Farm-to-Food Price Dynamics
Randy Schnepf
Specialist in Agricultural Policy
November 6, 2009
Congressional Research Service
7-5700
www.crs.gov
R40621
CRS Report for Congress
P
repared for Members and Committees of Congress
Farm-to-Food Price Dynamics
Summary
The heightened commodity price volatility of 2008 and the subsequent acceleration in U.S. food
price inflation have raised concerns and generated many questions about farm and food price
movements from Members of Congress and their constituents. This report responds to those
concerns by addressing the linkage between farm and retail food prices. Food price inflation is
addressed in CRS Report R40545, Consumers and Food Price Inflation.
Price is the primary mechanism that links raw farm commodities through the various levels of the
market system to the retail food product. The nature of price transmission between farm and retail
levels depends, in general, on the size of the farm-value share of the retail price and the degree of
market competition at each stage of the marketing chain.
An array of costs are layered on top of the price of a raw agricultural commodity at each stage of
the marketing chain as it moves to the consumer. As a result, the farm-value share of a food
product’s price declines as it moves to the retail outlet. Since 1950, the average farm-value share
has been declining as a share of total consumer food expenditures, falling from 40.9% to 18.5%
in 2006. This has important implications for farm-to-retail price linkages because the smaller the
share of farm value in the retail product, the smaller will be the effect of a change in farm price on
the retail price.
Economists have identified three fundamental components that define the nature of farm-to-retail
price transmission: magnitude (how big is the response at each level to a shock of a given size at
another level?); speed of adjustment (are there significant lags in adjustment between marketing
levels?); and asymmetry (do adjustments differ depending on whether a shock is transmitted from
farm to retail or vice versa?). Price transmission tends to occur both more quickly and more fully
for farm commodities that account for a larger share of the final retail product price and that move
through more competitive marketing chains.
Economic analysis of farm-to-retail price transmission leads to three generalizations: first,
causality usually runs from changes in farm prices to changes in retail prices; second, time lags in
retail price response to farm price changes are generally months in length, even for perishables
like milk, meat, and fresh fruits and vegetables; and third, retail prices appear to respond
asymmetrically, with adjustments to increases in farm prices occurring faster and with greater
pass-through than adjustments to decreases in farm prices. This last generalization is often
referred to as “sticky” retail food prices—that is, retail prices follow commodity prices upwards
rapidly, but fall back only slowly and partially when commodity prices recede. “Sticky” retail
price behavior is supported by empirical evidence; however, economic theory does not fully
explain the observed phenomenon. Economists have noted that certain aspects of consumer
behavior, as well as store inventory management and retailing strategies, may limit retail prices
from adjusting fully to downward farm price movements. As a result, the presence of asymmetric
price transmission alone does not necessarily imply abnormal or excessive market power.
Comparisons of price data for major food groups confirm that farm-to-retail price transmission
behaves slowly, with substantial lags and asymmetry. The rise in farm prices that occurred
between 2006 and mid-2008 was substantially larger and occurred about six months earlier than
the rise in corresponding retail food product prices. Similarly, the subsequent fall in farm prices
from their 2008 peaks preceded the downturn in corresponding retail food prices by several
months.
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Contents
Note to Readers........................................................................................................................... 1
Introduction ................................................................................................................................ 1
Food: A Value-Added Commodity............................................................................................... 2
Farm-Value Share of Total Consumer Food Purchases ........................................................... 3
Farm Share of Retail Food Price Varies by Commodity and Product ...................................... 6
The Marketing Bill................................................................................................................ 9
Linking Farm and Retail Prices ................................................................................................. 11
Farm-to-Retail Marketing Margin ....................................................................................... 12
Measuring Farm-to-Retail Price Linkages ........................................................................... 12
Farm-Value Share ......................................................................................................... 12
Market Competition ...................................................................................................... 13
Potential Measurement Difficulties................................................................................ 13
Farm-to-Retail Price Transmission ...................................................................................... 14
What Is Known About Price Transmission?................................................................... 16
Why Do Retail Prices Tend to Be Sticky?...................................................................... 17
Incidence of a Change in Marketing Costs..................................................................... 19
Extenuating Circumstances for Farm-to-Food Price Linkages........................................ 19
Farm and Retail Prices Compared ............................................................................................. 20
Aggregate Price Indexes...................................................................................................... 21
Grocer Margins ............................................................................................................. 22
Declining Real Farm Prices........................................................................................... 23
Price Indexes for Major Food Groups.................................................................................. 23
The Market Basket Concept Defined ................................................................................... 36
Constructing the Farm-Value Share ..................................................................................... 36
Different Methodology for Retail Cuts of Meat ................................................................... 37
Figures
Figure 1. Value Added to Farm Products Along the Marketing Chain........................................... 2
Figure 2. Evolution of U.S. Food Expenditures, the Marketing Bill, and the Farm Value
of U.S. Foods, 1950-2006 ........................................................................................................ 4
Figure 3. U.S. Food Marketing Bill, Real and Nominal, 1950-2006 ............................................. 5
Figure 4. U.S. Farm Value of Total Food Expenditures, Real and Nominal, 1950 to 2006............. 5
Figure 5. Decline of Farm-Value Share as the Food Marketing Bill’s Share of U.S. Food
Expenditures Has Grown.......................................................................................................... 6
Figure 6. What a Dollar Spent on Food Paid for in 2006 ............................................................ 10
Figure 7. Hypothetical Price Transmission Following an Upward Farm Price Shock.................. 15
Figure 8. Hypothetical Price Transmission Following a Downward Farm Price Shock ............... 16
Figure 9. Price Indexes for Farm, Wholesale, and Retail Food Products, 2006-2009 .................. 22
Figure 10. U.S. Monthly Farm Price for Corn, 1930-2009 ......................................................... 23
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Figure 11. Cereal Price Indexes: Farm Food Grains vs. Retail Cereals
and Bakery Products .............................................................................................................. 25
Figure 12. Egg Price Indexes: Farm Prices Received vs. Retail Price ......................................... 25
Figure 13. Dairy Price Indexes: Farm Prices Received for Dairy Products, PPI for
Wholesale Fluid Milk, and CPI for Retail Fresh Milk ............................................................. 26
Figure 14. Dairy Price Indexes: Farm Prices Received for Dairy Products, PPI for
Wholesale Fluid Milk, and CPI for Retail Cheese................................................................... 26
Figure 15. Poultry Price Indexes: Farm Live Broilers, PPI for Wholesale Slaughter
Chickens, and CPI for Retail Poultry...................................................................................... 27
Figure 16. Beef Price Indexes: Farm All-Beef (500+ lbs.), PPI for Whole Slaughter
Cattle, and CPI for Retail Beef ............................................................................................... 27
Figure 17. Pork Price Indexes: Farm All-Hogs, PPI for Wholesale Slaughter Hogs,
and CPI for Retail Pork .......................................................................................................... 28
Figure A-1. Rice Prices: Farm Rough, All-Rice versus
Retail White Uncooked Long-Grain ....................................................................................... 29
Figure A-2. Wheat Prices: Farm High-Protein Wheat versus White All-Purpose Flour ............... 30
Figure A-3. Wheat Prices: Farm High-Protein Wheat versus White Bread.................................. 30
Figure A-4. Chicken Prices: Farm Live Broilers versus Retail Fresh Whole Chicken ................. 31
Figure A-5. Chicken Prices: Farm Live Broilers versus Bone-in, Chicken Legs ......................... 31
Figure A-6. Beef Prices: Farm All-Beef Cattle (500+ lbs.) versus
Retail 100% Ground Beef ...................................................................................................... 32
Figure A-7. Beef Prices: Farm All-Beef Cattle (500+ lbs.) versus USDA Choice, Boneless
Round Roast .......................................................................................................................... 32
Figure A-8. Pork Prices: Farm All-Hog versus Retail Sliced Bacon............................................ 33
Figure A-9. Pork Prices: Farm All-Hog versus Chops (Center-Cut, Bone-In) ............................. 33
Figure A-10. Dairy Prices: Farm All-Milk versus Retail Fresh, Whole Milk............................... 34
Figure A-11. Dairy Prices: Farm All-Milk versus Retail Cheddar Cheese................................... 34
Figure A-12. Egg Prices: Farm versus Retail ............................................................................. 35
Tables
Table 1. Farm-Value Shares for All Foods and Nine Major Food Groups, 2006-2008................... 7
Table 2. Average Farm Share of Selected Food Products.............................................................. 8
Table 3. Farm, Wholesale, and Retail Price Movements, 2006 to 2009....................................... 24
Appendixes
Appendix A. Farm versus Retail Price Comparisons for Select Food Products ........................... 29
Appendix B. Market Basket Approach to Calculating Farm-Value Share ................................... 36
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Contacts
Author Contact Information ...................................................................................................... 38
Acknowledgments .................................................................................................................... 38
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Note to Readers
This is one of three CRS reports that respond to concerns about the nature and causes of farm and
food price movements. This specific report focuses on the linkages between farm and retail
prices. A related report, CRS Report R40545, Consumers and Food Price Inflation, provides both
background and complementary information for the material presented in this report. It describes
how aggregate food price inflation is measured and compares recent price inflation for both at-
home (i.e., retail) purchases and away-from-home consumption, as well as by major food groups.
An earlier report, CRS Report RL33204, Price Determination in Agricultural Commodity
Markets: A Primer, describes unique characteristics of market conditions for agricultural products
in general, as well as for specific types of agricultural commodities.
Introduction
Producers, consumers, and Members of Congress have all expressed strong interest in the
connection between farm prices for agricultural commodities and retail prices for food products.
Their interest and concerns were heightened in 2008, when prices for many farm commodities
rose to record highs in the first half of the year.1 The higher farm prices quickly worked their way
through the marketing system to consumers, where they translated into higher retail food prices—
U.S. retail food prices rose an estimated 6.4% in 2008, the largest annual gain since 1990.2 But
the farm price rise was short-lived. Prices for most farm commodities reversed direction in mid-
2008 and declined so sharply that they had given back nearly all of their rise by early 2009. In
contrast, most retail prices continued to rise until late 2008 or early 2009 before leveling off
and/or starting to decline.
These farm and retail price movements were followed closely in the news media,3 and generated
many questions from both interest groups and Congress. What is the relationship between the
price of raw agricultural products at the farm and the prices of food products that consumers
purchase in retail outlets or at restaurants? Are they subject to the same economic forces? Is there
necessarily a lag in retail price response to farm price changes and, if so, what is the nature of that
lag? If farm prices rise or fall by a certain percentage, will retail food prices rise or fall by a
similar amount, or are retail prices “sticky”—that is, do they tend to follow farm prices up, but
not down? What are the principal factors that influence U.S. food prices as commodities move
along the marketing chain from producers to consumers? What is the “farm share” of a retail food
price and does it matter? What are the primary and secondary data sources for information
concerning all of the above issue areas, and how is that information used to help market
participants and policymakers make informed decisions?
1 For more information, see CRS Report RL34474, High Agricultural Commodity Prices: What Are the Issues?, by
Randy Schnepf.
2 For more information, see CRS Report R40545, Consumers and Food Price Inflation, by Randy Schnepf and Joe
Richardson.
3 For example, “Food Bill Still High? Blame ‘Sticky’ Prices,” Associated Press, ©2009 Journal Gazette and Times-
Courier, Oct. 19, 2008; Scott Kilman and Laren Etter, “Grain Costs Down, Groceries Not,” Wall Street Journal, Mar.
13, 2009; “Food Prices Continue to Rise, Despite Fall in Overall Inflation,” The Land, online, Jan. 29, 2009.
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This report examines the elements contributing to the cost of our food—from the cost of the raw
commodity at the farm, through the processing and marketing costs until it is sold to consumers.
It also reviews the nature of price transmission between farm and retail prices, and describes how
food costs and marketing margins are measured by the government. In particular, it includes a
discussion of the evidence concerning “sticky” retail prices (i.e., the idea that retail prices adjust
upward quickly when farm prices rise but respond slowly, and possibly not fully, to farm price
declines). In a final section, the report uses national average price data to examine farm-to-retail
price linkages for several major commodities during the 2006-2009 period, when volatile prices
characterized many agricultural markets. In so doing, it attempts to shed light on the evolving
structure of U.S. food price formation while providing answers to the above set of questions.
Food: A Value-Added Commodity
When a consumer spends a dollar for food at the supermarket, not all of the dollar reaches the
farmer. As the raw ingredients for retail food items move along the marketing chain from the farm
to a grain elevator or collection terminal, then on to a processor, a wholesaler, and finally to the
retail customer, an array of costs are layered on top of the price of the raw agricultural commodity
(Figure 1). These marketing costs include labor expenses for handling, sorting, cleaning, and
packaging the product, transportation charges to move the product along at each stage, and fees
for processing, storing, insuring, financing, and retailing the product (e.g., store maintenance and
utilities, refrigeration, labeling, shelf display, advertising and promotional costs).
Figure 1. Value Added to Farm Products Along the Marketing Chain
(average farm-value share of retail food prices as %)
100%
Value-Added Marketing Share:
- Labor
80%
- Energy
- Transport
- Retailing
- Other
60%
100%
40%
Farm-Value
20%
Share
18.5%
0%
Farm Gate
Elevator
Processor
Wholesaler
Retail
Source: The retail share is for 2006 from ERS, USDA. All other category shares are imputed by CRS.
The farm share of the market price declines as the commodity moves to the retail outlet and
consumer. The relative importance of the marketing costs versus raw farm input costs varies
widely for different retail food products depending on the degree of processing and
transformation. For raw fruits and vegetables, this marketing chain may be significantly shorter
than for highly processed products such as a box of breakfast cereal or a ready-to-eat meal.
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Marketing costs can also vary by type of retail outlet—for example, farmer’s market, big box
discount store, local supermarket, in-store deli, 24-hour quick-mart, or ballpark concession
stand—as some outlets include substantially more marketing and retailing costs than others.
The U.S. Department of Agriculture’s (USDA’s) Economic Research Service (ERS) has
developed a methodology for monitoring and reporting on the value-added nature of food prices
paid by U.S. consumers. Specifically, ERS divides retail prices into two major components:
• the farm-value share, which represents the share that the farmer earns from the
retail sale of a food product; and
• the farm-to-retail price spread (also referred to as the marketing margin), which is
the difference between a food product’s retail price and its farm value.4
Note that the farm value should not be confused with the farm price. The farm price represents
the value at the farm for a unit of agricultural commodity (e.g., a bushel of wheat or a pound of
potatoes). In contrast, the farm value of a retail food product is the share of the retail price
represented by the amount of raw agricultural commodity needed to produce that retail product.
For example, a bushel (60 lbs.) of wheat may cost $4 at the farm, whereas a loaf of bread may
cost $1 at the grocery store. The loaf of bread contains substantially less than 60 lbs. of wheat.
ERS estimates that a $1 loaf of bread contains about 5¢ worth of wheat.
ERS calculates both the farm-value share and farm-to-retail price spreads for:
• an average “total” food market basket (shown in Figure 1, including both at-
home and away-from-home purchases);
• nine major food groups (exclusively for at-home consumption, i.e., retail
purchases)—meats, poultry, eggs, dairy products, fats and oils, fresh fruits, fresh
vegetables, processed fruits and vegetables, and bakery and cereal products; and
• several important individual food items (exclusively for at-home consumption).5
The farm-value and the farm-to-retail price spreads provide useful information concerning the
potential effect of a farm price change on retail prices, and vice versa. (This is discussed in more
detail in the section of this report entitled “Linking Farm and Retail Prices.”) They are examined
more closely for various food groups in the following four sections.
Farm-Value Share of Total Consumer Food Purchases
At the most aggregate level, ERS calculates the total U.S. food marketing bill—this is an estimate
of the difference between total U.S. consumer food expenditures and the total farm value of
domestically grown foods.6 Total consumer food expenditures (for both at-home and away-from-
home consumption) are calculated by combining retail sales data from the Bureau of Census with
the value of food served by schools, hospitals, and other institutions. Imported food and seafood
are excluded based on supermarket industry data. ERS calculates the total farm value by
4 The farm-to-retail price spread expressed as a share of the retail price yields the “marketing cost” share.
5 For more detail on the distinction between at-home and away-from-home food expenditures, see CRS Report R40545,
Consumers and Food Price Inflation, by Randy Schnepf and Joe Richardson.
6 The expenditure totals are reported by ERS as part of its marketing bill database. For more information, see
“Calculating the Food Marketing Bill,” Amber Waves, ERS, USDA, February 2004.
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multiplying average farm prices from USDA by the quantity of farm products purchased for
domestic food use, and then subtracting the value of non-food byproducts. Finally, the resulting
difference—the food marketing bill—represents the total U.S. expenditures to transform and
deliver domestically produced agricultural products from the farmgate to U.S. consumers as food
products.
ERS estimates that total U.S. consumer food expenditures—for both at-home and away-from-
home food—have expanded rapidly from about $110.6 billion in 1970 (Figure 2) to nearly
$880.7 billion (in nominal dollars) in 2006.7 However, a substantial portion of the increase in
consumer food expenditures has been attributable to general price inflation rather than an increase
in the volume of foods purchased. In 1982-1984 dollars, the 2006 total food expenditures bill was
$451.2 billion.8
Figure 2. Evolution of U.S. Food Expenditures, the Marketing Bill, and the
Farm Value of U.S. Foods, 1950-2006
1000
800
Total Consumer
Food Expenditures
600
ns
io
ill
B
$
400
Marketing BIll
200
Farm Value
0
1950
1960
1970
1980
1990
2000
Source: “Price Spreads from Farm to Consumer: Marketing Bill,” Food Marketing System in the U.S. briefing
room, ERS, USDA, at http://www.ers.usda.gov/Data/FarmToConsumer/Data/marketingbilltable1.htm.
During that same period, the marketing bill rose from $75.1 billion to $717.5 billion ($367.6
billion in 1982-1984 dollars, Figure 3). In other words, costs for marketing services—such as
transportation, processing, and retailing—have grown in both nominal and real terms. In contrast,
the farm value of consumer food expenditures has been rising in nominal terms, from $35.5
7 The definition of total food expenditures used here is more restrictive than other food expenditure estimates produced
by ERS. For example, ERS’ standard measure of food expenditure (based on national account data) for 2006 is
$1,032.3 billion in sales and $1,081.4 billion when including home production, institutional food, donations, and child
nutrition subsidies. For more information on ERS food expenditure estimates see “Measuring the ERS Food
Expenditure Series,” Food CPI, Prices and Expenditures briefing room, ERS, USDA, at http://www.ers.usda.gov/
Briefing/CPIFoodAndExpenditures/measuringtheersfoodexpendituresseries.htm.
8 Deflated using the general CPI for all food, Bureau of Labor Statistics (BLS).
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billion to $163.5 billion, but has been slowly declining in real terms from the mid-1970s to 2006
(from a peak of $107.3 billion to $83.6 billion in 1982-1984 dollars, Figure 4).
Figure 3. U.S. Food Marketing Bill, Real and Nominal, 1950-2006
750
Nominal Dollars
500
ns
io
ill
B
$
250
1982-84 $s
0
1950
1960
1970
1980
1990
2000
2010
Source: “Price Spreads from Farm to Consumer: Marketing Bill,” Food Marketing System in the U.S. briefing
room, ERS, USDA, at http://www.ers.usda.gov/Data/FarmToConsumer/Data/marketingbilltable1.htm.
Notes: The nominal marketing bill for consumer expenditures of domestically produced farm foods is deflated
by the al -item CPI (1982-84 = 100) obtained from the Bureau of Labor Statistics.
Figure 4. U.S. Farm Value of Total Food Expenditures, Real and Nominal,
1950 to 2006
180
Nominal Dollars
120
ns
io
ill
B
$
1982-84 $s
60
0
1950
1960
1970
1980
1990
2000
Source: See source and notes for Figure 3.
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In addition to a decline in real terms, the farm value of consumer expenditures also has fallen by
more than half as a share of consumer food expenditures, falling from a 41% share in 1950 to an
18.5% share in 2006 (Figure 5). This means that U.S. farmers have been receiving an
increasingly smaller share of what consumers pay for many retail food products over time.
However, this should not be misconstrued to suggest that marketing costs are too high, or that
farmers’ well-being has declined. These statistics do not address either of those issues. Marketing
services expand in direct response to consumer demand for more marketing services, which, in
turn, occurs for a variety of reasons.9
Figure 5. Decline of Farm-Value Share as the Food Marketing Bill’s Share of
U.S. Food Expenditures Has Grown
50%
40%
30%
41%
20%
10%
Farm-Value Share of
18.5%
Consumer Food Expenditures
0%
1950
1960
1970
1980
1990
2000
Source: “Price Spreads from Farm to Consumer: Marketing Bill,” Food Marketing System in the U.S. briefing
room, ERS, USDA, at http://www.ers.usda.gov/Data/FarmToConsumer/Data/marketingbilltable1.htm.
Farm Share of Retail Food Price Varies by Commodity and Product
In addition to its estimate of total food expenditures (including both at-home and away-from-
home expenditures), ERS also constructs food market baskets for consumer at-home expenditures
on nine major food subgroupings—meats, poultry, eggs, dairy products, fats and oils, fresh fruits,
fresh vegetables, processed fruits and vegetables, and cereal and bakery products—as well as for
several important individual food products. ERS then uses the market basket results for the
individual foods and groups of food to build an aggregate all-food retail market basket.
These food market baskets contain the average quantities of food from a particular food group
purchased by a typical American household during a one-year base period. They include only at-
home expenditures on U.S.-produced foods originating on the farm; imports and seafood are
excluded, as are away-from-home expenditures. See Appendix B of this report for a brief
9 For more information, see the discussion under “Consumer Income and Expenditures,” in CRS Report R40545,
Consumers and Food Price Inflation, by Randy Schnepf and Joe Richardson.
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discussion of how the market baskets are derived and then used to estimate the farm-value and
marketing bill shares.
ERS derives annual estimates of farm-value share and marketing spreads for each of the nine
major food groups (Table 1) as well as for several individual food items (Table 2) based on the
respective market baskets. Among these different food products and groupings, the farm-value
share varies considerably.
As a rule of thumb, the farmer receives a smaller portion of the shopper’s dollar for foods
requiring a higher degree of processing or special handling. Among the major food groups, the
principal example of this is “cereals and bakery products,” where the farm-value share was just
8.1% during the 2006-2008 period. Cereals and bakery products involve a substantial degree of
processing, first through a flour mill, then through a food processing plant, where the grain flour
is combined with other products and baked before being packaged and shipped off to retail
outlets. In addition, substantial costs are involved in shipping bakery products (e.g., each item is
individually shelved so as not to crush ready-to-eat products). Finally, most cereal and bakery
products are subject to substantial advertising and retailing costs, as competition for consumer
interests can be fierce. This contrasts with poultry and egg products, whose average farm-value
shares were both estimated to be above 40% during 2006-2008.
Table 1. Farm-Value Shares for All Foods and Nine Major Food Groups, 2006-2008
Food Groupa Farm-Value
Shareb Marketing-Bill
Sharec
Poultry 40.8
59.2
Eggs 40.3
59.7
Dairy 32.6
67.4
Meat Products
31.6
68.4
Fats & Oils
22.7
77.3
Fresh Vegetables
19.0
81.0
Processed Fruits & Vegetables
17.0
83.0
Fresh Fruit
16.7
83.3
Cereals & Bakery Products
8.1
91.9
Total Market Basketd 22.4
77.6
Source: “Table 8—Farm-Retail Price Spreads,” Agricultural Outlook: Statistical Indicators, ERS, USDA, available at
http://www.ers.usda.gov/publications/agoutlook/aotables/.
Notes: Shares are the three-year average values for 2006-2008 based on the 1982-1983 market basket.
a. Includes foods purchased for at-home consumption only. Farm values for fresh fruits and fresh vegetables
are based on prices at first point of sale, and may include marketing charges such as grading and packing for
some commodities.
b. The value of the farm input contained in a retail food product, expressed as a share of the retail price.
c. The difference between the retail food product price and the farm-value share.
d. This “total market basket” is limited to at-home expenditures. As a result, it differs from the total farm-
value share of 18.5% for 2006 which includes both at-home and away-from-home expenditures.
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The low farm-value shares for fresh fruits (16.7% in Table 1) and vegetables (19%) suggest that,
as perishable fresh products are shipped greater distances, handling and sorting, shelving and
crating, refrigeration, shipping, and labeling have become increasingly important components of
retail prices. However, ERS research has shown that the fresh fruit and vegetable farm-value
share is particularly susceptible to understatement due to the inflexible calculation method
adopted by ERS.10
Table 2 presents ERS calculations of the farm-value share for several individual food items. The
rule of thumb mentioned earlier clearly holds—the more highly processed food items have
significantly lower farm-value shares than less processed products.
Table 2. Average Farm Share of Selected Food Products
(averages for 1998-2000 period)
Average Farm Share of
Food Type
Food Item
Retail Price
Animal products
Eggs, Grade A large, 1 doz.
50.7
Animal products
Chicken, broiler, 1 lb.
50.3
Animal products
Beef, choice, 1 lb.
48.3
Animal products
Milk, ½ gal.
38.0
Frozen
Orange juice concentrate, 12 fl. oz.
36.0
Animal products
Cheese, natural cheddar, 1 lb.
33.3
Crop products
Sugar, 1 lb.
30.0
Dried
Raisins, 15-oz. box
27.0
Animal products
Pork, 1 lb.
27.0
Prepared foods
Peanut butter, 1 lb.
23.7
Fresh
Fresh—Lemons, 1 lb.
23.3
Canned and bottled
Canned and bottled—Apple juice, 64-oz. bottle
23.0
Fresh
Fresh—Lettuce, 1 lb.
23.0
Canned and bottled
Canned and bottled—Corn, 303 can (17 oz.)
22.3
Canned and bottled
Canned and bottled—Peas, 303 can (17 oz.)
22.0
Fresh
Fresh—Oranges, California, 1 lb.
21.3
Dried
Beans, 1 lb.
19.7
Fresh
Apples, red delicious, 1 lb.
19.7
Crop products
Shortening, 3 lbs.
19.7
Crop products
Margarine, 1 lb.
19.3
Crop products
Flour, wheat, 5 lbs.
19.0
10 ERS uses a fixed market basket of consumer food items based on what U.S. households bought during the 1982-
1984 period for calculating farm-value shares. When a more recent (1999-2003) market basket is used, the 2004 farm-
value share estimates are substantially higher at 23.5% for fresh vegetables and 26.6% for fresh fruit. For a discussion
of this issue, see Hayden Stewart, How Low Has the Farm Share of Retail Food Prices Really Fallen? Economic
Research Report No. 24, ERS, USDA, August 2006.
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Average Farm Share of
Food Type
Food Item
Retail Price
Crop products
Rice, long grain, 1 lb.
18.3
Fresh Grapefruit,
1
lb.
17.3
Fresh
Potatoes, 10 lbs.
17.0
Canned and bottled
Applesauce, 25-oz. jar
14.7
Canned and bottled
Peaches, cling, 2-1/2 lb. can
14.3
Canned and bottled
Pears, 2-1/2 lb. can
14.0
Canned and bottled
Green beans, cut, 303 can (17 oz.)
13.3
Prepared foods
Chicken dinner, fried, frozen, 11 oz.
13.3
Frozen
Broccoli, cut, 1 lb.
11.0
Prepared foods
Pork and beans, 303 can (16 oz.)
11.0
Prepared foods
Potatoes, french-fried, frozen, 1 lb.
10.7
Prepared foods
Potato chips, regular, 1-lb. bag
8.3
Frozen
Corn, 1 lb.
7.7
Canned and bottled
Tomatoes, whole, 303 can (17 oz.)
7.0
Frozen
Green beans, cut, 1 lb.
6.0
Prepared foods
Oatmeal regular, 42-oz. box
5.3
Prepared foods
Bread, 1 lb.
5.0
Prepared foods
Corn flakes, 18-oz. box
4.0
Prepared foods
Corn syrup, 16-oz. bottle
3.0
Source: USDA, ERS; calculated by ERS based on data from government and private sources. Available as the
“Individual foods” database at http://www.ers.usda.gov/Data/FarmToConsumer/pricespreads.htm.
The Marketing Bill
By definition, the difference between the retail price of a food product and its farm value is the
marketing bill (referred to earlier as the farm-to-retail price spread or marketing margin). As such
it includes all costs associated with getting the raw commodity from the farm to the consumer
(including any profits).
The size of the marketing bill is affected by changes in the amount and type of products
consumers buy.11 For example, restaurant meals have more marketing costs associated with them,
and are therefore more expensive than foods at grocery stores. So, as consumers spend more of
their food budget at restaurants, the marketing bill increases. Similarly, as consumers purchase
more highly processed food products, such as microwave-ready dinners, relative to less processed
fruits, vegetables, and meats, the marketing bill increases. Also, as food products travel greater
distances to reach consumers, their marketing bill increases. Since 1950, the U.S. marketing bill
has increasingly taken a larger share of the consumer food dollar, growing from 59.1% of
consumer food spending to 81.5% in 2006 (Figure 5).
11 “Calculating the Food Marketing Bill,” Amber Waves, ERS, USDA, February 2004, available at
http://www.ers.usda.gov/amberwaves/february04/indicators/behinddata.htm.
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In 2006, USDA estimated that the average farm-value share of all food products of U.S. farm-
origin consumed in the United States (both at-home and away-from-home) was 18.5% (Figure 6)
out of an estimated $880.7 billion. The other 81.5% covered the cost of transforming the raw U.S.
farm commodities into food products and getting them to the retail store shelves, restaurants, and
other consumer outlets.
Figure 6. What a Dollar Spent on Food Paid for in 2006
n
se
tio
g
n
x
g
in
tio
ta
in
rta
t
s
g
o
y
ia
s
r
p
s
rtis
c
irs
e
o
ak
s
rg
r
fits
re
e
re
t
a
in
b
c
n
e
v
p
n
p
s
e
a
a
ro
n
te
d
e
e
e
u
th
L
ra
P
P
T
E
In
A
D
R
R
B
O
18.5¢
38.7¢
8.0¢
4.5¢
3.8¢
4.0¢
2.7¢
3.5¢
4.0¢
4.3¢
3.6¢
1.5¢
2.9¢
Farm Value
Marketing Bill
Source: ERS, USDA.
Besides showing how much the marketing system as a whole receives, the national marketing bill
provides a good indication of how these expenditures are divided among such marketing inputs as
labor, energy, profits, transportation, and so forth. Moreover, it enables ERS analysts to measure
annual changes in the individual components of the total marketing bill. ERS estimates 11 cost
components of the marketing bill, as listed in Figure 6.12 These major components (and their
respective marketing-bill shares) are briefly listed below.
• Labor (38.7%) is the single largest cost in the marketing bill. Labor costs include
wages and salaries of employees (e.g., meat cutters in the slaughterhouse,
grocery clerks, and store managers); imputed earnings of proprietors, active
partners, and unpaid family workers in retail stores and away-from-home eating
12 See “Marketing Bill: Documentation,” Price Spreads from Farm to Consumer, Food Marketing System in the U.S.
briefing room, ERS, USDA, at http://www.ers.usda.gov/Data/FarmToConsumer/componentsdoc.htm.
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places; and supplements to wages and salaries such as pensions and health
insurance.
• Packaging (8%) is the second-largest component of the marketing bill and
represents 8¢ of every dollar spent on a consumer food item. Packaging material
costs include the cost of paper products, and metal, glass, plastic, and wooden
containers. Firms that process and distribute foods purchase nearly half of all
containers and packaging materials used in the United States.
• Profits (4.5%) are ERS estimates of pre-tax profits earned by corporations for
manufacturing, wholesaling, and retailing U.S.-produced farm foods.
• Transportation (4%) represents the costs associated with moving farm output
along the marketing chain to the consumer, including both truck and inter-city
rail movements. Costs specifically include fuel, drivers’ wages, and other related
charges.
• Energy costs (3.8%) include only the costs of electricity, natural gas, and other
fuels used in food processing, wholesaling, retailing, and food-service
establishments. Transportation fuel costs are counted separately.
• Interest costs (4.3%), net of any interest income, are related to financing
charges.
• Advertising costs (4.0%) include expenditures for television, radio, and
newspaper advertising. In 2006, nearly $35 billion was spent on food advertising
costs in the United States, suggesting a high degree of competition for consumer
dollars.
• Depreciation (3.6%) is an allowance for the decline in value of capital assets
caused by obsolescence and physical deterioration of buildings and equipment.
• Rent expenses (2.7%), net of any rent income, are charges on any of the capital
assets used in retailing food products.
• Repair costs (1.5%) are expenditures for maintenance and incidental repairs and
costs of labor, supplies, and other items that do not add to the value or
appreciably prolong the life of a capital asset.
• Business taxes (3.5%) include property, state, unemployment insurance, and
social security taxes but not federal income taxes.
• Other costs (2.9%) are a miscellaneous collection of expenses that do not fit into
any of the above categories. On average, they account for about 2.9¢ of every
consumer food dollar.
ERS calculates labor costs using payroll data from the Bureau of the Census and the Bureau of
Labor Statistics. Packaging and energy costs are calculated from Census data. The remaining cost
components are derived from Internal Revenue Service statistics.
Linking Farm and Retail Prices
Price is the primary mechanism by which various levels of the market system are linked. While
farmers and consumers sometimes do meet directly in farmers’ markets, in most cases the raw
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farm product is separated from the retail food product by a complex processing and distribution
system.13 Farm-to-retail price changes may originate from three potential sources: (1) changes in
farm prices; (2) changes in prices of marketing inputs along the farm-to-retail marketing chain; or
(3) changes in retail prices. This section will briefly discuss the various factors involved in
understanding farm-to-retail price linkages—in particular, how they are measured and what
influences them.
Farm-to-Retail Marketing Margin
As defined earlier, the farm-to-retail price spread is the difference between the farm-value share
(i.e., the portion received by producers) of a food product’s price and the price paid by final
consumers. To estimate a food product’s farm-to-retail price spread, the farm-value share must
first be calculated. Once the farm-value share of a retail price is determined, then the price spread
itself is determined. As a result, the Economic Research Service (ERS) reports both farm-value
shares and price spreads together.14 Price spreads may be calculated at various stages along the
market chain as, for example, the farm-to-wholesale margin, the wholesale-to-retail margin, and
the farm-to-retail margin.
Measuring Farm-to-Retail Price Linkages
Farm and retail prices are linked by the evolving dynamic embodied in the marketing system’s
attempt to respond to consumers’ demand for marketing services. Changes in consumer
preferences for food products at the retail level (e.g., increased demand for consumer-ready food
products) can drive the food marketing system to add more or fewer services to the commodities
grown by farmers. As the mix and price of services required to transform raw agricultural
commodities into consumer food products changes, so too does a food product’s farm-value share
and farm-to-retail price spread.15
As a result, the nature of price transmission between the price paid by the consumer for the retail
food product and the farm price of the underlying agricultural commodity can be better
understood by evaluating two key aspects of any particular food product: (1) the farm-value share
of the retail price, and (2) the competitiveness of markets at each stage of the marketing chain.
Farm-Value Share
The larger the share of farm value in the retail product, the greater will be the effect of a change
in farm price, other things being equal. In direct contrast, the greater the degree and duration of
processing and value-added that is accumulated between the farm and the consumers, the smaller
will be the effect of a change in farm price on the retail price. In other words, more highly
processed food products are likely to show less price response to a change in the related farm
commodity price than are less-processed retail products like meat. (However, some factors
13 Much of this discussion is based on William G. Tomek and Kenneth L. Robinson, “Marketing Margins,” Chapter 6
of Agricultural Product Prices, 4th ed. (Cornell University Press, 2003), pp. 117-142.
14 See “Price Spreads from Farm to Consumer,” Food Marketing System in the U.S. briefing room, ERS, USDA,
available at http://www.ers.usda.gov/Briefing/FoodMarketingSystem/pricespreads.htm.
15 Ibid.
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affecting farm commodity prices, e.g., energy costs, may concomitantly affect marketing inputs
and services, which, in turn, would impact retail prices.)
The share of marketing inputs and services embodied in retail food products has been growing
steadily over time relative to the farm-value share, as shown earlier (Figure 2). This would
suggest that retail price responsiveness to farm price changes has been gradually diminishing over
time.
Market Competition
Price transmission will tend to occur both more quickly and more fully to changes in market
conditions for farm commodities that move through marketing chains subject to more highly
competitive market conditions—that is, markets with a large number of buyers and sellers dealing
in commodities that have several potential close substitutes and where market information is
transparent and easily accessed by all participants—than for those subject to less competitive
market conditions.16 In uncompetitive markets, certain participants may wield an abnormal degree
of market power and, as a result, prices may be less responsive to changes in market conditions.
The growing concentration of processing and retail firms in many food product markets has led
many to question whether certain market participants wield excessive market power and exert
undue influence in price formation. This concern has attracted greater scrutiny to changing
market structures within the U.S. food distribution network, and their potential effect on farm-to-
retail price linkages. However, several factors other than market power can also make measuring
the farm-to-retail price spread a difficult exercise.
Potential Measurement Difficulties
First is the fact that many agricultural commodities are used for numerous final products. Take
corn, for example. Corn’s primary use is as an energy source in animal feed rations. However,
corn is also processed into a large number of food and industrial products, including corn oil,
starch, high fructose corn syrup, corn flour, grits, corn meal, beverage alcohols, and ethanol. The
demand for corn at the farm level is derived from the demand for each of these uses, each of
which trades in its own market subject to its own set of economic conditions. The same is true for
soybeans, sorghum, wheat, and most other raw agricultural commodities.
In other words, U.S. and international consumers must compete with livestock and poultry
feeding operations, and industrial and other types of non-food uses, for a portion of U.S.
agricultural output. The portion of non-food uses has expanded rapidly in recent years with the
emergence of agriculture-based biofuel production as a new source of demand for raw
agricultural commodities. These multiple sources of demand weaken the price linkage between
the price for any single retail product and its related farm commodity price.
Another emerging factor that weakens the direct farm-to-retail price linkage is the evolution of
the U.S. food distribution network, which has experienced a substantial expansion in the number
and type of outlets in recent decades. This includes the growth of big box discount stores, the
16 For a discussion of agricultural markets for major field crops, see CRS Report RL33204, Price Determination in
Agricultural Commodity Markets: A Primer, by Randy Schnepf.
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integration of ready-to-eat foods and/or deli sections at grocery stores, mini-marts, gas stations,
pharmacies, and other non-traditional outlets, and online food delivery services. As a result of this
dynamic evolution in commodity markets and food retailing, simple pricing structures have
increased in complexity and the link between farmers and consumers is gradually becoming more
diffuse, especially for highly processed products.
A prime example of this is how, in response to changing consumer preferences, grocery stores
have been expanding consumer convenience by offering prepared entrees and side dishes ready
for the oven, microwave, or even the dinner table. Many grocery store chains now include ready-
to-eat food buffets and deli sections where made-to-take meals are prepared. All of these
transformations are increasing the share of services needed to convert agricultural commodities
into retail food products. This lowers the farm-value share of retail prices and weakens the
potential retail price response to a change in a farm commodity price.
Farm-to-Retail Price Transmission
Vertical price transmission (hereafter referred to simply as price transmission) is the process by
which changes in farm prices are transmitted along the marketing chain both downstream from
farm to retail and upstream from retail to farm.17 The adjustment to price shocks along the
marketing chain is an important characteristic of the functioning of markets.
Economists have identified three fundamental components that define the nature of price
transmission:18
• Magnitude. How big is the response at each level to a shock of a given size at
another level? This is referred to as the extent of pass-through. For example, a
100% pass-through from farm to retail would imply equal percent price changes
at both the retail and farm level.
• Speed of adjustment. Are there significant lags in adjustment between
marketing levels?
• Asymmetry. Do adjustments differ depending on whether a shock is transmitted
downwards (from farm to retail) or upwards (from retail to farm) along the
marketing chain?
Asymmetry in price transmission directly encapsulates the concept of “sticky” retail prices
mentioned earlier and addressed later in this report. To better understand asymmetric price
transmission, consider two hypothetical examples (Figure 7 and Figure 8) where a price rise at
the farm level transmits both faster and more fully to the retail level than does a price decline. In
the first scenario (Figure 7), an upward farm price shock of 40% occurs immediately at the start
of the first month (M1). The farm price shock translates into a gradual 15% retail price rise that
begins one month later and is spread over an entire month. In this case the magnitude or degree of
pass-through would be (15%)/(40%) = 37.5% with a two-month lag.
17 Horizontal price transmission is the linkage between prices at the same stage of the marketing chain but at different
locations (also referred to as spatial price transmission). For a detailed discussion of analytical issues related to
measuring and interpreting vertical price transmission, see “Analysis of Price Transmission Along the Food Chain,” by
Pavel Vavra and Barry Goodwin, OECD Food, Agriculture and Fisheries Working Papers, No. 3, OECD, Paris, 2005.
18 Ibid., p. 3.
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In contrast, the second example (Figure 8) is of a downward farm price shock of 50% that
eventually transmits into a 10% decline in retail prices. The retail price decline begins three
months after the initial farm price shock, and is extended over a three-month period for the 10%
retail decline to fully occur. Most of the pass-through occurs during the fourth and fifth months,
followed by a very gradual sixth month of decline. In this later example, the magnitude of pass-
through is (10%)/(50%) = 20% with a six-month lag.
Figure 7. Hypothetical Price Transmission Following an Upward Farm Price Shock
Price
300
Retail
230
+15%
200
Farm
140
+40%
100
0
M1
M2
M3
M4
M5
M6
M7
M8
M9
Time in months
Source: Hypothetical construct by CRS for exposition purposes only.
Note: In this example, the farm price rise occurs immediately at the start of the first month, and is 40% of the
initial farm price of 100. In contrast , the rise in the associated retail price begins one month later and takes one
month to occur. When ful y expressed, the retail price rise is 15% above the initial 200.
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Figure 8. Hypothetical Price Transmission Following a Downward Farm Price Shock
Pri300
ce
Retail
200
-10%
180
Farm
100
-50%
50
0
M1
M2
M3
M4
M5
M6
M7
M8
M9
Time in months
Source: Hypothetical construct by CRS for exposition purposes only.
Note: In this example, the farm price decline occurs immediately and is roughly 50% of the initial price (100). In
contrast , the decline in the associated retail price starts three months later and is spread over a three-month
period, with most of the transmission taking place during the fourth and fifth months following the initial shock.
When fully expressed, the full retail price decline is roughly 10% of the initial retail price of 200.
The implication of asymmetric price transmission as portrayed by these examples is that
consumers at the retail level would not fully benefit from a price reduction at the farm level. In
contrast, processors and retailers would likely benefit from such “sticky” retail prices. One could
also envision a case where an upward shock to retail prices due to a surge in consumer demand is
only partially passed through to farm prices such that producers would not fully benefit from the
retail price increase.
Agricultural producer groups are often annoyed when farm prices fall by more than retail prices,
but economic analysis has shown that this can occur in a competitive market.19 In other words,
abnormal market power (e.g., monopoly, oligopoly, monopsony) need not be present for the
phenomenon of asymmetric or “sticky” retail prices to exist. This is discussed further in the
section of this report entitled “Why Do Retail Prices Tend to Be Sticky?”
What Is Known About Price Transmission?
While much empirical evidence exists in support of asymmetry between farm and retail prices,
the empirical analysis is still inconclusive concerning the specific nature of price pass-through
between farm and retail markets.20 This is perhaps largely because agricultural markets in general
encompass such a vast array of commodities and products—each with their own particular set of
19 “Marketing Margins,” Chapter 6, Agricultural Product Prices, by William G. Tomek and Kenneth L. Robinson, 4th
Edition, ©2003, Cornell University Press, p. 119.
20 “Price Spreads from Farm to Consumer,” Food Marketing System in the U.S. briefing room, ERS, USDA.
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product characteristics and market conditions. However, a broad review of economic analysis on
the relationship between farm and retail prices leads to three generalizations:21
• first, causality usually runs from changes in farm prices to changes in retail
prices;
• second, time lags in retail price response to farm price changes are generally
months in length, even for perishables like milk, meat, and fresh fruits and
vegetables; and
• third, retail prices appear to respond asymmetrically, with adjustments to
increases in farm prices occurring faster and with greater pass-through than
adjustments to decreases in farm prices.
Why Do Retail Prices Tend to Be Sticky?
The general perception (supported by considerable empirical evidence) is that retail food prices
are “sticky”—that is, retail prices follow commodity prices upwards rapidly, but fall back only
slowly and partially when commodity prices recede. A common concern of policymakers is that
this retail “stickiness” is due to imperfect price transmission perceived to be caused by market
power and oligopolistic behavior at some stage of the marketing chain.22
According to economic theory, the “stickiness” of retail prices should be inversely related to the
degree of retail competition in a locality. More retail shopping opportunities in close proximity
would engender greater price competition and should diminish the “stickiness” of retail prices.
The same would be true of wholesale prices and markets, or any other stage of the marketing
chain. However, economic theory does not fully explain the observed phenomena.
Economists have noted several exceptions to the “retail price competition” paradigm that may
limit retail prices from adjusting fully to downward farm price movements, including certain
aspects of consumer behavior, as well as store inventory management and retailing strategies. As
a result, the presence of asymmetric price transmission alone does not necessarily imply the
presence of excessive market power. This section briefly discusses some of the various factors
that might produce asymmetric price transmission other than market power.
Consumer Behavior
First, consider how consumer behavior could encourage price stickiness. Consumers often must
make their food purchases while considering tight budget constraints. However, several factors
other than retail price may enter into their grocery purchase decision, including time and
convenience of food acquisition, strong consumer store preference, or strongly established
consumer shopping patterns (e.g., picking up groceries at the nearby store on the way home from
work). Also, the average level of a consumer’s wealth is important, since higher-income
consumers tend to be less price-conscious and less likely to change stores or shopping patterns
due to food price changes. All of these factors contribute to a lower price responsiveness by
21 William G. Tomek and Kenneth L. Robinson, “Marketing Margins,” Chapter 6 of Agricultural Product Prices, 4th
ed. (Cornell University Press, 2003), p. 131.
22 Pavel Vavra and Barry Goodwin, “Analysis of Price Transmission Along the Food Chain,” OECD Food, Agriculture
and Fisheries Working Papers, No. 3, OECD, Paris, 2005, p. 3.
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consumers to retail price changes, which, in turn, allows retail outlets to keep prices higher than
they otherwise would (were consumers more price-responsive) without losing market share,
revenues, or profits.
Search Cost
Retail prices are local in the sense that consumers do not venture far to buy milk and fresh
produce for daily consumption. When retail prices for certain food products rise, consumers may
be reluctant to invest the necessary time to find cheaper alternatives. This concept is referred to as
“search cost” by economists. A consumer will accept a “higher” retail price if the cost to change
shopping patterns and search out a better price is perceived as exceeding the potential savings
from such an act, particularly when the consumer would have to balance the savings for any one
item obtained by switching grocery stores against possible price losses on other retail products in
the new store.
Retail Inventory Management
Retail inventory management could also contribute to sticky prices. Large retail inventories
purchased or forward-contracted during a period of high commodity prices may limit a
shopkeeper’s ability to lower prices. This would depend on how much profit margin exists on
each item and how much loss on each item a store is willing or able to absorb. As a result of such
inventory management issues, there is often a substantial time lag between farm and retail price
changes—a decline in farm prices may take several months to pass through to retail stores as
retail stores work through higher-priced inventories and contractual purchase obligations.
Menu Cost
The cost to a retail store of lowering prices may be prohibitive. Referred to in economic jargon as
menu cost, this refers to the costs associated with making changes in retail prices such as re-
marking in-store price labels, updating advertisements and promotional flyers, and the like. Also
associated with menu cost is the risk to the retailer’s reputation from frequent price changes that
send complex signals to shoppers. A retail store’s perception of menu cost and its influence is also
related to consumers’ price responsiveness for a particular food item. For example, if the increase
in sales generated by the lower price would fail to offset the cost associated with re-marking price
labels, then a retail store would likely not lower its prices.
Market Uncertainty
Market price uncertainty regarding whether a price shock is permanent or temporary may
influence retail price strategy, as firms are generally reluctant to chase temporary price
movements. Such uncertainty may contribute to asymmetry in retail and farm price movements.
For example, during periods when commodity and energy prices are particularly volatile (as in
2008), retailers may be reluctant to lower prices if there is a significant probability that their costs
may turn around and rise quickly thereafter.
Volatile commodity prices generally translate into higher retail prices as dealers try to lock in
profit margins in the face of uncertain costs. Subsequent “sticky” retail prices mean that
consumers benefit only partially when commodity prices recede and are left with the perception
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(if not the reality) of paying for higher retail profit margins. In contrast, farm prices respond
quickly to market conditions because most agricultural markets are highly competitive and
because, unlike retailers, farmers have little say in the price at which they sell their products, only
in the timing of such sales.
Incidence of a Change in Marketing Costs
In addition to the timing and pass-through aspects of price transmission, policy makers and
market participants have also expressed concern over the incidence of an increase in the price of
an input to the retail food production process (such as an increase in energy costs). Who bears the
added cost? Is it passed on to consumers in the form of higher prices, or to farmers in the form of
lower prices, or is it absorbed by food processors in the form of lower revenues? Most economists
would agree that the time period under consideration is critical when evaluating the incidence of a
change in a marketing input cost.
Economic theory suggests that the price of the average food product will be more sensitive to an
input price change in the short run than in the long run due to the time needed for price-induced
behavioral adjustments to occur. For some commodities there may be a substantial time lag for
food processors and consumers to adjust their behavior in response to a change in retail prices
that result from a change in the price of a retail food product input (whether it originates from the
farm component or the non-farm marketing component)—whether an input purchase or
technology adjustment in the case of food processors; or an adjustment to inventories held by
wholesalers or retailers; or a different consumption choice in the case of a consumer.
In the long run, both firms (food producers) and consumers have more time to adjust their
behavior to relative input price changes, thereby mitigating the effects on consumer food prices.
Some firms may exit the industry, while others may adjust their input mix by finding a cheaper
alternative input or by altering the food processing technology so as to use less of the more
expensive input or perhaps switch to a different input entirely. Finally, some firms seek out
increased supplies of the more expensive input via imports or expanded domestic production
(which would require a new growing cycle).
Similarly, in the long run, consumers have more time to substitute among food products in favor
of obtaining their nutritional needs at the lowest cost. In so doing they shift their demand among
individual food products.
In the short run, the time period is sufficiently short that wholesalers and retailers are unable to
adjust their behavior or their technology or to acquire additional lower-cost supplies of the
relevant marketing input. Then, food producers and consumers are limited in their response to an
unexpected input price change. Under these conditions, a larger portion of an input price increase
is usually passed along to consumers in the form of higher retail prices.
Extenuating Circumstances for Farm-to-Food Price Linkages
Certain characteristics of individual farm commodities can play an important role in determining
the price transmission between the farm and the retail consumer. For example, livestock
production tends to have a cyclical pattern driven by biological constraints in the gestation-birth
process that limit producer response to market conditions. As a result, meat and dairy product
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prices are influenced by the long lag time involved in industry adjustments to input (feed costs) or
output price changes.
Annual crops tend to have seasonal patterns, although this pattern is strongly influenced by the
storability of the individual commodity. Perishable products have shorter shelf-life and often
require greater handling. As a result, prices for perishable products tend to show strong seasonal
patterns; they are vulnerable to volatile swings as near-term conditions change; and long-term
price formation is less correlated with current supplies and more correlated with producer
behavior. In contrast, storable commodities (e.g., grains) can be moved in bulk and stored for
several years at a time such that current supplies are an important factor in determining price
volatility as well as both current and long-term price formation.
On the demand side, many food products have strong seasonal patterns of demand. For example,
meat demand tends to rise in the summer months when grilling activity is at a maximum, and the
demand for turkey is strongly correlated with the Thanksgiving and Christmas holidays.
Farm and Retail Prices Compared
During the 2006 to 2009 period, the news media has reported on unusually wide variances
between low farm and high retail prices, suggesting that perhaps some food retailers were
profiting unfairly by engaging in price gouging.23 The retail grocery business is highly
competitive, making it unlikely that such activity could occur either on a large scale or for a
sustained period of time. Sometimes consumers tend to focus on a single highly visible item that
is purchased routinely (such as milk) to draw their conclusions about retail price responsiveness
and market power, without fully understanding the time lag involved in a farm-to-retail price
response for most commodities.
Another retail marketing consideration that may cloud retail price perceptions by consumers
(about whether asymmetric price transmission has occurred) is the use of “loss leader” items,
whereby a retail outlet sets the price for highly visible consumer items at below cost as a
marketing strategy to attract consumers into the store. Supplementary consumer purchases of
other goods with normal retail markups would then offset the loss on the leader items. Consumers
may be easily confused when neighboring stores use different products as loss leaders,
particularly in a period of volatile prices.
This final section uses national average price data to examine the farm-to-retail price linkages for
several major commodities during the 2006 to 2009 period, when volatile prices characterized
many agricultural markets. Price indexes for major food groups are presented in a series of graphs
to allow for a visual comparison of farm, wholesale (when available), and retail price movements
for differences in magnitude, timing, and asymmetry in adjustment. This section is followed (in
Appendix A) by a series of comparisons of actual price data for certain select retail food products
and their corresponding agricultural commodities.
23 For example, “Food Bill Still High? Blame ‘Sticky’ Prices,” Associated Press, ©2009 Journal Gazette and Times-
Courier, Oct. 19, 2008; Scott Kilman and Laren Etter, “Grain Costs Down, Groceries Not,” Wall Street Journal, March
13, 2009; “Food Prices Continue to Rise, Despite Fall in Overall Inflation,” The Land, online, Jan. 29, 2009.
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Aggregate Price Indexes
In 2008, retail food prices rose by an average of 6.4%, the largest percentage increase since 1989.
This increase is extremely modest when compared to the price rise during the first half of the year
for most farm commodities. However, to fully capture the potential time lags in price response
between the relative rise in farm and retail prices, a longer historical perspective is preferable.
Since the rise in farm prices began in mid-2006, that year is selected as the reference base.
A comparison of national aggregate indexes for farm (monthly average farm price received, or
MAFP, for food commodities), wholesale (Producer Price Index or PPI for finished consumer
foods), and retail (Consumer Price Index or CPI for food-at-home purchases) indicates that
average farm prices for food commodities rose 33.2% from the 2006 base (i.e., 2006 = 100) to
their peak in July 2008 (Table 3 and Figure 9). Wholesale food prices rose 15.8% to their peak in
September 2008 (two months later), and retail food prices rose 13.8% to a peak in January 2009
(six months after the farm price peak). The percent rise in farm commodity prices was more than
double the percent rise in either wholesale or retail prices.
Now consider how far farm and retail prices have fallen from their peaks. Aggregate farm-
product prices fell nearly 22% from their July 2008 peak until their trough eight months later in
March 2009. Wholesale prices fell slightly over 4% from their peak in September 2008 until their
bottom (10 months later) in July 2009. By April 2009, retail prices had dropped about 3% from
their January 2009 peak, but were still trending lower. If retail prices hit their trough with the
same lag to farm prices as their peak (i.e., six months), then they can be expected to bottom out in
September 2009. This cursory examination of national aggregate indexes suggests that it is
wholesale prices (at the food processor level) that have adjusted only minimally to farm-level
price declines. However, it is possible that wholesale prices may still resume their downward
adjustment in 2009. As for retail prices, which are still in a downward adjustment phase, only
time will tell how fully retail prices will ultimately adjust.
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Figure 9. Price Indexes for Farm, Wholesale, and Retail Food Products, 2006-2009
135
Farm Price Index
125
Wholesale Price Index
100
115
2006 =
105
Retail Price Index
100
95
2006
2007
2008
2009
2010
Source: The Farm Price Index is the farm food commodities prices-received index from the National
Agricultural Statistics Service (NASS), USDA; the Retail Price Index is the Food-at-Home CPI from the Bureau of
Labor Statistics (BLS); and the Wholesale Price index is the Producer Price Index (PPI) for Finished Consumer
Foods from BLS.
Grocer Margins
The spread between the food-at-home CPI (reflecting retail prices) and the PPI for finished
consumer foods (reflecting wholesale prices) is often studied by market analysts as a gauge for
grocer margins.24 Clearly, by this comparison, the first three months of 2009 (Figure 9), when the
CPI exceeded the PPI, represented a period of profitable margins for grocers (as did the first half
of 2006).
Of course, retail price changes vary widely by specific commodity and market. In addition, it is
likely that retail prices will continue to decline in early 2009, as farm-to-retail price transmission
can often entail a substantial time lag of a several months.
Grocery store sales are generally competitive and, as a result, most prices stay within a fairly
narrow trading range to avoid altering consumer behavior. In addition, the value added by the
food marketing system is largely independent of farm prices, as evidenced when consumer prices
have held steady or risen in the face of a decline in farm prices. 25
24 “U.S. Government Data Show Food Prices Falling,” CME News for Tomorrow, © Dow Jones & Company, Inc., May
15, 2009.
25 “Price Spreads from Farm to Consumer,” Food Marketing System in the U.S. briefing room, ERS, USDA.
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Declining Real Farm Prices
Historically farm prices have been subject to significant downward pressure due to tremendous
gains in agricultural productivity. Improvements in farm machinery, cultivation and conservation
practices, fertilizers and pesticides, animal husbandry, and animal and plant genetics have all
contributed to significant productivity gains in U.S. agricultural production, which in turn have
resulted in agricultural output tending to expand faster than demand. As a result, farm prices have
been declining in real terms steadily since the late 1940s, as exemplified by the farm price of corn
(Figure 10).
In contrast, the marketing bill has been subject to general inflationary pressures despite certain
technological gains (e.g., in the processing, storage, and transportation sectors). As a result, the
food marketing bill has risen rapidly in nominal dollars, and slowly but steadily in real terms
(Figure 3). As a result, the farm share has tended to decline for most foods, while farm-to-
consumer price spreads have widened. This is indicative of the extent to which the components of
general inflation (i.e., energy, labor, rental rates, etc.) have increased in importance as a share of
retail food prices.
Figure 10. U.S. Monthly Farm Price for Corn, 1930-2009
$10.00
$8.00
1982-84 $s per bushel
$6.00
hel
bus
per $4.00
$
$2.00
Nominal $s per bushel
$0.00
1930
1940
1950
1960
1970
1980
1990
2000
2010
Source: National Agricultural Statistics Service, USDA.
Notes: The nominal farm price is deflated by the al -item CPI (1982-1984 = 100) obtained from the Bureau of
Labor Statistics.
Price Indexes for Major Food Groups
This section uses a series of charts (Figure 11 to Figure 17) and a table (Table 3) to compare
price indexes for farm and retail prices for several major food groups. The corresponding
wholesale price index is included when available. The monthly average farm price (MAFP)-
received data represent national averages that have been adjusted to comparable indexes where
the average price for the year 2006 = 100. This allows a pure comparison across all prices
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Farm-to-Food Price Dynamics
indexes—farm (MAFP), wholesale (PPI), and retail (food-at-home CPI)—relative to their 2006
base. As mentioned earlier, most agricultural prices began their rise in 2006, making it an obvious
point of comparison.
Readers should note that, in every case, the farm and wholesale price movements are substantially
larger than the corresponding retail price movements over the 2006-2009 period. Also, in all of
the following price index charts, the retail price peak follows the farm price peak with a lag of
one to two months, with the exception of egg prices, where the farm and retail price indexes
peaked in the same month, and cereal and bakery products, which peaked several months later
than the farm price.
Table 3. Farm, Wholesale, and Retail Price Movements, 2006 to 2009
Corresponding
Market
% Change:
% Change:
Figure
Commodity or Food Group
Level
2006-to-Peaka Peak-to-2009b
Figure 9 MAFPc Index: Al Food Commodities
Farm
33.2%
-21.8%
PPI:d Finished Consumer Foods
Wholesale
15.8%
-4.5%
CPI:e Food-at-Home
Retail
13.8%
-3.0%
Figure 11
MAFP Index: food grains
Farm
128.5%
-48.0%
CPI: cereals & bakery products
Retail
19.5%
-1.3%
Figure 12
MAFP Index; eggs
Farm
134.0%
-56.9%
CPI:
eggs
Retail
58.8%
-28.3%
Figures 13 & 14
MAFP Index; dairy products
Farm
33.2%
-21.8%
PPI: fluid milk
Wholesale
69.5%
-47.9%
Figure 13
CPI: fresh milk
Retail
24.1%
-22.0%
Figure 14 CPI:
cheese
Retail
23.0% -11.0%
Figure 15
MAFP Index; broilers
Farm
38.6%
-20.0%
PPI: slaughter chicken
Wholesale
48.8%
-21.3%
CPI:
poultry
Retail
13.0%
-1.3%
Figure 16
MAFP Index: al beef, 500+ lbs.
Farm
10.3%
-18.0%
PPI: slaughter cattle
Wholesale
17.3%
-19.9%
CPI:
beef
Retail
13.5%
-6.8%
Figure 17
MAFP Index: barrows & gilts
Farm
31.4%
-38.8%
PPI: slaughter hogs
Wholesale
38.9%
-43.4%
CPI:
pork
Retail
8.7%
-6.5%
Source: Calculated by CRS from the source data identified in each of the figures cited in the table.
Note: The price data are adjusted such that average prices for the year 2006 = 100.
a. Peak value was selected as the highest value that occurred during the 2007-2009 period.
b. Percent change from peak value to lowest value point in 2009 (through August 2009).
c. MAFP = Monthly Average Farm Price received as reported by NASS, USDA.
d. PPI = Producer Price Index as reported by the Bureau of Labor Statistics (BLS).
e. CPI = Consumer Price Index as reported by BLS.
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Figure 11. Cereal Price Indexes: Farm Food Grains vs. Retail Cereals
and Bakery Products
250
MAFP Index: Food Grains
200
0
0
150
006 = 1
2
100
CPI: Cereals
& Bakery Products
50
2006
2007
2008
2009
2010
Source: Monthly average farm prices (MAFP) received are from NASS, USDA; Consumer Price Indexes (CPI)
for major retail food groups are from the Bureau of Labor Statistics (BLS).
Figure 12. Egg Price Indexes: Farm Prices Received vs. Retail Price
250
220
MAFP Index: eggs
190
100
160
2006 =
130
CPI: eggs
100
70
2006
2007
2008
2009
2010
Source: Monthly average farm prices (MAFP) received are from NASS, USDA; Producer Price Index (PPI) and
Consumer Price Indexes (CPI) for major retail food groups are from BLS.
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Figure 13. Dairy Price Indexes: Farm Prices Received for Dairy Products, PPI for
Wholesale Fluid Milk, and CPI for Retail Fresh Milk
175
160
145
PPI: fluid milk
MAFP Index:
Dairy Products
= 100 130
2006
115
CPI: fresh milk
100
85
2006
2007
2008
2009
2010
Source: Monthly average farm prices (MAFP) received are from NASS, USDA; Producer Price Index (PPI) and
Consumer Price Indexes (CPI) for major retail food groups are from BLS.
Figure 14. Dairy Price Indexes: Farm Prices Received for Dairy Products, PPI for
Wholesale Fluid Milk, and CPI for Retail Cheese
175
160
145
PPI: fluid milk
MAFP Index:
Dairy Products
= 100 130
2006
115
CPI: Cheese
100
85
2006
2007
2008
2009
2010
Source: Monthly average farm prices (MAFP) received are from NASS, USDA; Producer Price Index (PPI) and
Consumer Price Indexes (CPI) for major retail food groups are from BLS.
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Figure 15. Poultry Price Indexes: Farm Live Broilers, PPI for Wholesale Slaughter
Chickens, and CPI for Retail Poultry
150
PPI: slaughter chickens
140
130
120
MAFP Index:
100
broilers
110
2006 =
CPI: poultry
100
90
80
2006
2007
2008
2009
2010
Source: Monthly average farm prices (MAFP) received are from NASS, USDA; Producer Price Index (PPI) and
Consumer Price Indexes (CPI) for major retail food groups are from BLS.
Figure 16. Beef Price Indexes: Farm All-Beef (500+ lbs.), PPI for Whole Slaughter
Cattle, and CPI for Retail Beef
120
PPI: slaughter cattle
115
CPI: beef
110
0
0
105
006 = 1
2
100
95
MAFP Index:
all beef, 500+ lbs.
90
2006
2007
2008
2009
2010
Source: Monthly average farm prices (MAFP) received are from NASS, USDA; Producer Price Index (PPI) and
Consumer Price Indexes (CPI) for major retail food groups are from BLS.
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Figure 17. Pork Price Indexes: Farm All-Hogs, PPI for Wholesale Slaughter Hogs,
and CPI for Retail Pork
140
130
MAFP Index:
barrows & gilts
120
CPI: pork
0
0 110
006 = 1 100
2
90
80
PPI: slaughter hogs
70
2006
2007
2008
2009
2010
Source: Monthly average farm prices (MAFP) received are from NASS, USDA; Producer Price Index (PPI) and
Consumer Price Indexes (CPI) for major retail food groups are from BLS.
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Appendix A. Farm versus Retail Price Comparisons
for Select Food Products
This appendix includes several figures that graph retail and farm prices for those food products
that have clearly identifiable farm commodities as their raw ingredient. The farm prices are
national average farm prices received as reported monthly by the National Agricultural Statistics
Service (NASS) of USDA. The retail prices are U.S. city average retail prices as reported
monthly by the Bureau of Labor Statistics (BLS).
Readers should note that the farm and retail prices in the following charts each relate to a
different axis with different measurement scales. As a result, these charts are not useful for
evaluating farm-to-retail margins. Instead they are useful for evaluating differences in direction
and response behavior between farm and retail prices.
In all the figures presented here, retail prices are highly correlated with the farm price of their
corresponding raw commodity. In most cases, retail prices alter their direction in response to farm
prices changes with only a slight lag.
Figure A-1. Rice Prices: Farm Rough, All-Rice versus
Retail White Uncooked Long-Grain
$0.90
$18
$0.80
$15
Farm: all rice
ds
nd
oun
$0.70
$12
d p
re
r pou
pe
und
r h
il: $ $0.60
ta
$9
pe
e
R
: $
rm
Fa
$0.50
$6
Retail: rice, white,
long-grain, uncooked
$0.40
$3
2003
2005
2007
2009
Source: Farm prices received data are from NASS, USDA; U.S. city average retail price data are from BLS.
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Figure A-2. Wheat Prices: Farm High-Protein Wheat versus White All-Purpose Flour
$0.60
$12
Farm: hard red spring (HRS) wheat
$0.50
$9
l
nd
e
h
s
u
r pou
r b
$0.40
pe
$6
pe
Retail: flour, white, all-purpose
il: $
: $
ta
rm
e
R
Fa
$0.30
$3
$0.20
$0
2000
2002
2004
2006
2008
2010
Source: Farm prices received data are from NASS, USDA; U.S. city average retail price data are from BLS.
Figure A-3. Wheat Prices: Farm High-Protein Wheat versus White Bread
$1.50
$12
Farm: hard red spring (HRS) wheat
$1.40
$10
l
$1.30
nd
e
h
$8
s
u
r pou
r b
$1.20
pe
pe
Retail: bread, white, pan
il: $
: $
ta
$6
rm
e
R $1.10
Fa
$4
$1.00
$0.90
$2
2000
2002
2004
2006
2008
2010
Source: Farm prices received data are from NASS, USDA; U.S. city average retail price data are from BLS.
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Farm-to-Food Price Dynamics
Figure A-4. Chicken Prices: Farm Live Broilers versus Retail Fresh Whole Chicken
$1.35
$0.55
Farm: broilers, live
$1.25
nd
$0.45
nd
r pou
pou
$1.15
pe
il: $
: $ per
ta
e
rm
R
$0.35
a
F
$1.05
Retail: chicken, fresh, whole
$0.95
$0.25
2000
2002
2004
2006
2008
2010
Source: Farm prices received data are from NASS, USDA; U.S. city average retail price data are from BLS.
Figure A-5. Chicken Prices: Farm Live Broilers versus Bone-in, Chicken Legs
$1.55
$0.55
Farm: broilers, live
$1.45
nd
$0.45
nd
r pou
pou
$1.35
pe
il: $
: $ per
ta
e
rm
R
$0.35
a
F
$1.25
Retail: chicken, legs, bone-in
$1.15
$0.25
2000
2002
2004
2006
2008
2010
Source: Farm prices received data are from NASS, USDA; U.S. city average retail price data are from BLS.
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Figure A-6. Beef Prices: Farm All-Beef Cattle (500+ lbs.) versus
Retail 100% Ground Beef
$2.50
$100
Farm: cattle,
all beef 500+ lbs
$2.25
$90
s
nd
nd
pou
d
e
r pou
dr
$2.00
pe
$80
r hun
il: $
ta
pe
e
R
: $
rm
$1.75
$70
Fa
Retail: ground beef,
100% beef
$1.50
$60
2000
2002
2004
2006
2008
2010
Source: Farm prices received data are from NASS, USDA; U.S. city average retail price data are from BLS.
Figure A-7. Beef Prices: Farm All-Beef Cattle (500+ lbs.) versus USDA Choice,
Boneless Round Roast
$4.50
$100
Farm: cattle,
all beef 500+ lbs
$4.00
$90
s
nd
nd
pou
d
e
r pou
dr
$3.50
pe
$80
r hun
il: $
ta
pe
e
R
Retail: round roast
: $
USDA Choice, boneless
rm
$3.00
$70
Fa
$2.50
$60
2000
2002
2004
2006
2008
2010
Source: Farm prices received data are from NASS, USDA; U.S. city average retail price data are from BLS.
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Figure A-8. Pork Prices: Farm All-Hog versus Retail Sliced Bacon
$3.90
$70
Retail: bacon, sliced
$3.70
$60
s
nd
$3.50
nd
pou
$50
d
e
r pou
dr
$3.30
pe
r hun
il: $
ta
$40
pe
e
R $3.10
: $
rm
Fa
$30
$2.90
Farm: all hogs
$2.70
$20
2000
2002
2004
2006
2008
2010
Source: Farm prices received data are from NASS, USDA; U.S. city average retail price data are from BLS.
Figure A-9. Pork Prices: Farm All-Hog versus Chops (Center-Cut, Bone-In)
$3.65
$65
Retail: chops, center cut, bone-in
$3.40
$55
s
nd
nd
pou
d
e
r pou
dr
$3.15
pe
$45
r hun
il: $
ta
pe
e
R
: $
rm
$2.90
$35
Fa
Farm: all hogs
$2.65
$25
2000
2002
2004
2006
2008
2010
Source: Farm prices received data are from NASS, USDA; U.S. city average retail price data are from BLS.
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Figure A-10. Dairy Prices: Farm All-Milk versus Retail Fresh, Whole Milk
$4.10
$24
Retail: fresh, whole milk
$22
$3.70
$20
n
t
llo
w
r ga
$18
r c
e
p $3.30
pe
: $
il: $
$16
rm
ta
e
Fa
R
$14
$2.90
$12
Farm: all milk
$2.50
$10
2000
2002
2004
2006
2008
2010
Source: Farm prices received data are from NASS, USDA; U.S. city average retail price data are from BLS.
Figure A-11. Dairy Prices: Farm All-Milk versus Retail Cheddar Cheese
$5.20
$22
Farm: all milk
$20
Retail:
$4.70
cheddar cheese
nds
u
d
$18
o
un
d p
re
r po
d
n
$4.20
pe
$16
u
: $
r h
il
ta
pe
e
R
$14
: $
rm
$3.70
Fa
$12
$3.20
$10
2000
2002
2004
2006
2008
2010
Source: Farm prices received data are from NASS, USDA; U.S. city average retail price data are from BLS.
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Figure A-12. Egg Prices: Farm versus Retail
$2.40
$1.40
Farm: all eggs
$1.20
$2.00
Retail: eggs,
n
grade A,
e
n
e
large
z
$1.00
o
r doz
r d
e
$1.60
pe
p
il: $
: $
ta
$0.80
rm
e
a
R
F
$1.20
$0.60
$0.80
$0.40
2000
2002
2004
2006
2008
2010
Source: Farm prices received data are from NASS, USDA; U.S. city average retail price data are from BLS.
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Appendix B. Market Basket Approach to
Calculating Farm-Value Share
The Market Basket Concept Defined
For aggregate food groups, the individual food-group members are combined into market baskets
derived from Bureau of Labor Statistics (BLS) data based on the Consumer Expenditure Survey
(CES). This is the same data used for maintaining the Consumer Price Index (CPI).26
Conversion factors are used to specify the amounts of agricultural goods needed to produce a
specific quantity of retail food product. For fresh fruits and vegetables, these conversion factors
inflate the retail quantity by the amount necessary to compensate for waste and shrinkage that
occurs as goods are prepared for sale in retail outlets. For example, ERS estimates that farmers
must supply 1.031 pounds of carrots for marketers to provide 1 pound at retail.27
Unlike the CPI, whose market basket is updated every two years, the ERS market basket is fixed
on consumer expenditures made during the 1982-1984 period. This is an inherent weakness in
ERS methodology, and their own research has shown that updating the expenditure shares within
the market basket to a more current period can produce significantly different results.28
Constructing the Farm-Value Share
The farm value of the retail price of an individual food item (or a market basket of food items) is
obtained by comparing the retail price of that food item (or basket of items) with the revenues
received by farmers for the contents of a corresponding agricultural commodity (or basket of
commodities).29 In other words, this is the retail-weight equivalent of the farm products used to
produce the specific retail food item, but valued at the farmgate price.30 The retail-weight farm
value must take into consideration any weight losses that might occur during the processing and
marketing steps from raw to finished product, as well as the value of any by-product that results
from the transformation process (an example of this is given below).
The marketing-bill component of a retail food price is the resulting difference between the retail
price for that specific food item and the retail-weight-equivalent farm-value component (referred
to simply as the farm value henceforth).
26 For a discussion of BLS data, including the CES and CPI, see CRS Report R40545, Consumers and Food Price
Inflation, by Randy Schnepf and Joe Richardson.
27 For examples of conversion factors for fresh fruits and vegetables, see Tables 3-5 in Hayden Stewart, How Low Has
the Farm Share of Retail Food Prices Really Fallen? Econ. Res. Report No. 24, ERS, USDA, Aug. 2006, pp. 10-11.
28For a discussion and empirical evidence, see Hayden Stewart, How Low Has the Farm Share of Retail Food Prices
Really Fallen? Econ. Research Report No. 24, ERS, USDA, Aug. 2006.
29 “Glossary,” Food Marketing System in the U.S. briefing room, ERS, USDA, available at http://www.ers.usda.gov/
Briefing/FoodMarketingSystem/glossary.htm.
30 Hayden Stewart, How Low Has the Farm Share of Retail Food Prices Really Fallen? Economic Research Report No.
24, ERS, USDA, August 2006.
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The calculations are fairly straightforward for individual food items that undergo only a minimal
degree of transformation, such as most fresh fruits or vegetables. The calculations become more
involved for food products with more processing, such as ice cream, which involves adding sugar
and other ingredients to milk, or for meat products that can involve substantial by-product
components such as the hide, offal, and inedible fat which are sold into secondary markets.
For aggregate groupings such as dairy products, which includes grouping milk with cheese,
yogurt, ice cream, and other individual dairy products, ERS calculates a weighted-average of
individual market baskets to produce a group market basket.31 This permits the construction of
farm-value shares and farm-to-retail price spreads for aggregate food groups.
Different Methodology for Retail Cuts of Meat
ERS calculates a separate data series for estimating the farm share of retail cuts of beef, pork, and
poultry. This series is not based on a market basket of retail food purchases. Instead, it is based on
a combination of the cuts from a standard animal that is cut up and retailed in a standard way.32
This concept is perhaps best understood when considering the conversion of a live steer into retail
meat products. The retail value for “beef” is the weighted average price per pound of all the cuts
that an animal produces less the value of by-products.33 For example, a 1,000-pound steer
produces 417 pounds of retail meat cuts, 110 pounds of edible fat, 38 pounds of variety meats, 80
pounds of hide, 40 pounds of blood, 175 pounds of inedible fats, and 140 pounds of liquids lost
during processing (referred to as shrinkage).
As a steer is processed, first into wholesale carcasses or box beef, it loses weight due to the
removal of bone and fat trimming, hides, hair, offal, and the like. Further bone and fat trimming is
removed in converting wholesale cuts to retail cuts. The “retail-weight equivalent” of a live steer
is the amount of live animal it takes to produce 1 pound of retail meat. ERS estimates that 2.4
pounds of live choice steer are needed to yield 1 pound of “standard” retail beef. Formulas also
are used for determining the amount and value of by-product deductions.
Consider a hypothetical example for determining the farm-value share of retail beef. Suppose the
retail price of beef is $3.40 per pound and the live weight is $0.80 per pound. Then the gross farm
value is 2.4 times $0.80 = $1.92. However, an additional $0.20 per pound of by-product value
must be taken into account (for each 2.4 pounds of live animal) by subtracting it from the gross
farm value to give a net farm value of $1.92 - $0.20 = $1.72 per pound. Then the farm-value
share is ($1.72) / ($3.40) = 50.6%. The conversion rates are held constant while the prices may
vary over time, thus producing a different farm-value share.
Similarly, 1.869 pounds of 51%-to-52% lean hog produce a pound of “standard” retail pork.
Consider a hypothetical pork example. Suppose the retail price of pork is $2.60 per pound and the
live weight is $0.40 per pound. Then the gross farm value is 1.869 times $0.40 = $0.748.
However, an additional $0.038 per pound of by-product value must be taken into account by
subtracting it from the gross farm value to give a net farm value of $0.748 - $0.038 = $0.71 per
pound. The resulting farm-value share is ($0.71) / ($2.60) = 27.3%.
31 The market basket data series is available on the ERS website under “Price Spreads from Farm to Consumer: At-
Home Foods by Commodity Group” at http://www.ers.usda.gov/Data/FarmToConsumer/pricespreads.htm.
32 “Meat Price Spreads,” ERS, USDA, at http://www.ers.usda.gov/Data/MeatPriceSpreads/.
33 Beef and Pork Values and Price Spreads Explained by William Hahn, LDP-M-118-01, ERS, USDA, May 2004, p. 4.
Congressional Research Service
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Farm-to-Food Price Dynamics
Author Contact Information
Randy Schnepf
Specialist in Agricultural Policy
rschnepf@crs.loc.gov, 7-4277
Acknowledgments
This report builds upon and replaces CRS Report RS22859, Food Price Inflation: Causes and Impacts, by
Tom Capehart and Joe Richardson; and the earlier, out-of-print CRS Report 88-761, The Cost of Our Food,
by Geoffrey Becker.
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