Why is food so expensive in the supermarket at the same time as farmers are saying their businesses can’t survive on the prices they are receiving?
This is a question being asked globally, not just in New Zealand.
Reasons cited include wage increases, global trade issues, the pandemic, animal and plant disease outbreaks, war, bank interest rates, and paperwork (also called red tape and bureaucracy by some).
At the bottom of the value chain is the farmer - the price taker, being told by processors how much they will be paid.
At the other end, the supermarkets offer loss leaders (goods at very low prices) to attract shoppers in their direction, with dollars spent on advertising to assist with the enticing.
In the middle are the processors and manufacturers, trying to make a return on investment – as are the farmers and supermarkets.
In the midst of all the wailing, food prices increased 0.7% in the year to March, the smallest increase in three years.
Vegetables and fruit actually reduced in price – a year ago the effects of Cyclone Gabrielle were having a huge impact; this year the weather was less disruptive (though the impact of the cyclone continues in some areas).
But overall, food costs more than it did, so why aren’t the farmers happier?
The simple answer is that the cost of production has risen more steeply than the prices paid for the product.
Growth in wages on-farm has been highlighted in the latest Federated Farmers Rabobank remuneration survey.
StatsNZ reported last week that wage cost inflation in New Zealand, as measured by the labour cost index, was 4.1% to the year to March.
Incomes went up more than the price of food, but the farmers, trucking companies, and, indeed, the supermarkets, were paying higher wages to produce that food and transport it to where it was purchased.
Also last week, Jeremy Clarkson of Diddly Squat Farm in the UK said: “Farming is nuts”.
He had calculated that farmers are paid 25p for a kilogram of wheat, which is enough for a loaf of bread.
“We get 25p, you pay £1.40 in the supermarket - what is happening here? We are the ones spending a fortune, working throughout the night, praying the weather does not misbehave and that it is milling quality otherwise it is just animal feed.”
Listen to Jamie Mackay interview Dr Jacqueline Rowarth on The Country below:
Jeremy is not the only person doing the calculation.
Last year, Marketwatch explained that the American farmer receives only 14% of the supermarket dollar.
“The biggest chunks of a food consumer’s dollar go toward the food-processing industry (24.6c), retailers (19.9c) and wholesalers (14.7c).”
Another 5c goes to the agribusiness sector for seeds and agrichemicals (including nutrients), 4c to packaging and 2.6c vanishes in advertising.
Energy, insurance and finance swallow the rest.
That is on average.
The closer the consumer is to the basic product, the more the farmer receives.
In developing countries, for instance, the amount to the farmer can be nearer 40%.
In developed countries, the proportion decreases rapidly with every step along the value chain – and as more food is consumed out of home or in ‘ready-meal’ packaging, the less the farmer receives.
In New Zealand, food purchased in restaurants and ready-to-eat meals increased by 6.4% in the year to March.
At every stage from farm to fork, people are trying to make a living for themselves and their families. Salaries and wages increase to cover cost-of-living increases and prices increase to cover the salary and wage bill.
And people at both ends of the food value chain are feeling short-changed.
A new analysis is needed.
What are the returns on investment at each stage?
Last year Professor Jeffrey Dorfman, state fiscal economist for Georgia suggested that we should examine returns per hectare rather than farmers’ share.
“The farmers’ share of the food dollar tells us a lot about how and where we spend our food budgets but nothing about whether farmers are being fairly compensated for their important work,” he said.
“As long as we are prepared to pay somebody at the supermarket to cut up our fruit, cook our rotisserie chicken, bake our bread, or peel our shrimp, the farmers’ share of the food dollar will stay small.”
The Commerce Commission has the responsibility of monitoring and regulating the grocery sector under the Grocery Industry Competition Bill (June 2023), but that is only one part of the value chain.
The Dairy Companies Association has tried to show the value of the dairy industry to New Zealand but the report shows large tranches of money circulating (the value to New Zealand of the dairy sector) without indicating whether farmers or processors are thriving.
An evaluation of margins and return on investment on all the steps between soil and saliva (or farm to fork, grass to glass) is needed.
Only then can we assess what is ‘fair’ and answer the questions.
Meanwhile, Jeremy Clarkson has a point about the effort and risk in farming.
The cynic might comment that some of his effort and risk might be more about the camera than good farming, but the analyst would say that his points deserve investigation.
Dr Jacqueline Rowarth, adjunct professor of Lincoln University, has a PhD in soil science (nutrient cycling) and is a director on the board of governance of DairyNZ, Ravensdown and Deer Industry New Zealand.
