Farm share of the food dollar– What retail prices of food means for producers
Experts forecast the cost of groceries for the Canadian consumer will continue to rise, but the share of retail prices that farmers receive for every grocery dollar spent is not what the average consumer may think.
WRITTEN BY CASSIDY BOCHEK
Main factors that influence the farm share price: - Services to process commodities into consumer products - Retail fees and marketing costs - Labour and transportation
According to Canada’s Food Price Report, rising food costs in grocery stores are predicted to continue, with research showing an average increase of 3-5% in 2021. While there is a lot of information about how much Canadians spend on groceries, details on how the price of goods in Canada is distributed across the value chain are not as easy to find. By comparison, the Economic Research Service (ERS) in the United States provides research breaking down the distribution of the U.S. food dollar, and insight into how much agricultural producers receive for various products in relation to the end price. When it comes to research regarding the Canadian food dollar, it’s not as comprehensive or up to date in comparison. Consumers are becoming increasingly interested in knowing where their food comes from and how it’s produced. Complete transparency in the value chain is important to understanding food costs, including all steps from farm to retail.
Breaking down the costs
While the price consumers pay for a basket of goods continues to rise, the share that producers receive has not grown at the same rate. In analyzing the prices that producers receive for their goods, researchers use the concept of the farm share price. The farm share is the price that farmers receive for products as a percentage of the price that the good is sold for in retail. Based on research conducted by the United States Department of Agriculture (USDA) and the University of Guelph, the average price that farmers receive as their farm share ranges between $0.14 – $0.17 depending on the product. The remainder of the price goes towards processing, transportation and marketing costs incurred by other players from farm to table along the value chain. Typically, the more off-farm processing and marketing required for a product, the smaller the farm share the producer receives. Different categories of goods have different farm share ratios. Products like milk, dairy products, and eggs are reported to have the highest farm share, followed by vegetables and meat. In Canada, the farm share for fresh fruit and vegetables is slightly higher given the reliance on imported produce during some seasons. The lowest farm share is evident in grain-based products, such as baked goods that require more processing to reach the end product. With farmers receiving on average only $0.143 of the food dollar in 2009, more than 85% of the sale of a product goes toward the processing and retail sectors. Their market share component can include labour costs, processing, packaging, transportation, retail fees and marketing. The amount of value-added processing required to produce a product for retail influences the ratio of farm share that producers receive – when the market share is up, the farm share is down. Dairy products have a higher farm share percentage, roughly 50% for whole milk, as there is less off-farm processing required before the products reach store shelves, as compared to grain-based products such as bread which fetches a farm share of about 7%, based on 2012 food market prices.
U.S Food Market Prices (2012) Whole Milk farm share = 50% Flour farm share = 26% Bread farm share = 7%
Changes in the way we eat
The farm share price has not kept pace with the increased cost of retail goods, with a study out of the University of Guelph showing that the farm share declined 0.20% annually from 1997-2010. Factors such as production and technology, market fluctuations, and lifestyle changes can influence prices. The family unit has changed significantly throughout the last decade, changing trends in spending habits, including food. A decline of the traditional nuclear family and an increase in dual income/working households has changed how many families approach food. Agriculture and Agri-food Canada point to three additional factors that have led to this new outlook: added time pressures, lack of motivation, and lack of knowledge surrounding cooking. A cultural shift towards longer days, whether it be work or recreation, and more options for fast food and take-out, this new standard has arguably increased market demand for convenience foods. With more families interested in foods that cater to their lifestyles, retail has expanded to offer more pre-packaged and prepared meals for the average consumer. An increase in processing and packaging associated with convenience products typically skews the farm share even more, with the added processing costs reducing the share going back to producers. With households having more on their plate, it’s important to encourage the conversation regarding local food and the impact that simplifying the value chain can have on producers.
The average farm share price is reported as $0.143 (USD) out of $1.00 spent CFA reported that 11% of Canadians disposable income was spent on food in 2021, while per capita expenditures on food and beverages reached $4,091
Choosing local food
While household trends have moved towards ready-made options that offer convenience, the COVID pandemic has shed light on the fragility of the production cycle and how important it is to have local food available to all consumers. When food was not available on store shelves because of production disruptions during the last year, consumers began to pay more attention to the fundamentals of food production – producing their own food and looking to local producers to fill the gaps in grocery availability. Supporting local producers allows for more transparency regarding consumer products. It also helps to shift the farm share back to a more favourable ratio for producers and provide revenue that may otherwise go to larger retailers. Another growing concern is over how retail fees charged by retailers to food processors for stocking their product in stores can vary significantly. Processors and farmers have lobbied for a standardized code of conduct that would help to balance the relationship between retailers and their suppliers. With over 80% of the grocery sector in Canada owned and operated by just five grocery retailers, the relationship between retailers and suppliers is uneven. Without bargaining power, suppliers and producers are often hit with extra fees and costs passed down from retailers. When smaller suppliers and producers cannot compete in the marketplace, it often results in less choice and higher prices for products that make it into stores.
Drought Implications
The drought that much of Western Canada is experiencing this year will impact the supply and demand of consumer products. With yields across Saskatchewan much lower than average and livestock producers running out of feed and water, producers will face tough decisions regarding their operations. Commodity prices may be high; however, farm inputs and operating costs are increasing at a steady rate, offsetting the gains that higher prices often bring to producers. With the disruptions to the production chain that Canada has experienced in the last year adding to the strain on supply, a struggling food manufacturing sector could lead to more imported goods into Canada. In this case, suppliers and consumers could face higher prices because retailers need to offset their increased costs. Understanding the impacts that complex production cycles and market influences have on the price of retail goods and how those prices are distributed help to inform consumers about buying options and where their dollars end up.
