The following, excerpted from Community Nutrition Institute's Weekly Report, is an examination of the role "marketing margins" -- the middleman's markup -- have played in recent food price increases. CNI is a Washington-based public interest group which monitors nutrition-related activities of the government.
After rising swiftly and steadily for over 12 months, consumer food prices have finally shown signs of easing -- at least temporarily. While the Consumer Food Price index increased at a 17.6 percent annual rate during the first three months of 1979, food price inflation slowed to a 7.5 percent pace in the second quarter. The annualized rate for June was a mere 3 percent.
The technical reason why consumers are not realizing the benefits of lower farm prices is that processor and retailer "marketing margins" have increased sharply. In fact, USDA reports that during the first half of 1979 margins increased at a 22 percent annual rate. For meat and poultry products, further increases in spreads (the difference between what the farmer is paid for his goods and the consumer is charged for them) merely continue a year-long trend. Since June, 1978 marketing margins for meat and poultry have risen 24 and 30 percent, respectively. Spreads for fresh fruits and vegetables have also increased by 24 percent in the last 14 months. As a result, retail meat and produce prices continue to increase even as supplies expand and wholesale prices drop.
Food industry officials usually attribute expanding margins to higher operational costs, but increases in such costs usually parallel those present throughout the economy: They are all aligned along what is known as the "underlying inflation rate." In the first half of this year, moreover, this underlying rate has reached only 7.4 percent, or just one-third of the pace at which food marketing margins are increasing.
What's more, based on data developed throughout 1979, USDA and the Coucil on Wage and Price Stability reported in July that actual "meat marketing costs have not increased at anywhere near" the rate of increase for marketing margins. "Implications are that profits on meat processing and distribution have increased substantially and are a substantial contributor to the high level of food prices being paid by consumers."
Further, a study in late June by USDA's Economics, Statistics and Cooperative Service revealed that, during the spring, meat margins increased so rapidly that by June wholesale-to-retail price spreads for beef and pork were nearly a dime per pound higher than could be justified by cost.
Yet retailers and processors maintain that their costs are increasing faster than the underlying rate and that marketing margins are not unjustified. Officials further maintain that margins will always widen just as farm prices begin to fall because during periods when prices are rising spreads become squeezed. Margins widen initially as farm prices ease so that companies can recoup their earlier losses.
However, examination of industry cost data shows these argumehts to be faulty. Specifically, while marketing spreads increased 9.8 percent between September and May, actual operational costs for the industry (based on USDA data) rose only 7.4 percent. This differential amounts to a $3.4 billion overcharge during those months alone. Furthermore, whereas during earlier rounds of inflation margins were pared while farm prices rose -- justifying a temporary widening of spreads as farm prices began to drop -- such has not been the case in 1978 and 1979.
In fact, the farm-to-retail spread increased by nearly 10 percent in 1978, and at 17.9 percent rate during the first three months of 1979 -- at the same time farm prices were increasing dramatically. With respect to beef prices in particularly, USDA concluded in its June pricing study that "behavior of beef price spreads since fall of 1978 has been atypical. Rather than spreads being squeezed while farm prices were rising rapidly, they actually increased significantly."
Pleadings to the contrary are even less believable in light of recent earnings statements. During 1978, General Foods recorded a 41 percent increase in profits on a 5 percent increase in sales. Quaker Oats reported a 36 percent earnings rise on an 11 percent sales increase. And food retailing giants Safeway and Kroger recorded profit increases in excess of 40 percent over 1977 levels, while aggregate food retailing profits rose 29 percent.
All of this data highlights the structural reason for the disparity between marketing spreads and marketing costs: in many sectors of the food industry there is inadequate competition among firms. For example, a few large conglomerates today dominate U.S. food manufacturing. Whereas in 1950 the 50 largest food firms controlled 41 percent of all industry assets, by 1978 this elite accounted for 64 percent of all assets. Today the top 50 (out of 20,000 firms overall) conduct three-quarters of all media advertising and reap 90 percent of all profits generated in the industry.
The retail sector is concentrated by region or city.For example, in Denver the two largest retailers hold 80 percent of the market; in Washington, two firms make 63 percent of all grocery sales. In Milwaukee the figure for the top two is 61 percent. In fact, in over half of all U.S. cities the dominant four firms account for over 40 percent of all groceries sold in that area.
Russell Parker and John Connor, economists for the Federal Trade Commission (FTC), recently calculated that concentration in the food manufacturing industries costs consumers an extra $15 billion each year in added food costs. A 1977 Congressional Joint Economic Committee study concluded that consumers paid leading food retailers approximately $662 million in overcharges due to market power during 1974 alone. Based on these conclusions, it can be calculated that food industry concentration today cost the average American family of four nearly $300 each year.
This concentration actually encourages periodic bursts of food price inflation for three reasons: First, where competition is minimal, first can command a price for a specific product that exceeds the marginal cost of producing or reselling that product. Second, since firms with great market power can easily pass on increases in input costs they incur, they have no real need to barter for lower costs -- even when their costs are rising rapidly. Third, reciprocal selling, a practice whereby conglomerates buy inputs and products from other conglomerates that return the favor, tends to prolong and accelerate inflationary stimuli throughout the economy because the normal cost-minimizing competitive process is circumvented.
Clearly, consumers hope President Carter's jawboning will bring significantly lower food prices in the near future. But unless the president supplements his talks with industry leaders with some decisive action to rejuvenate competition in the food manufacturing and retailing sectors, none of us should raise our hopes too high.