William Hahn

Changing consumer preferences drive changes in food selections at the grocery store, and, in turn, changes in the services needed to transform raw agricultural commodities into finished retail food products. As consumers demand more convenience, for example, processing and marketing firms prepare and package their products accordingly. Farm-to-retail price spreads—the difference between the price consumers pay for a retail food product and the value of the farm ingredients used in that product—provide an economic measurement of these adjustments and help to gauge the competitiveness of individual food markets.

ERS’s Food and Rural Economics Division computes price spreads for 9 commodity categories and 40 specific foods. These spreads are calculated for food consumed at home, and calculations are based on the Consumer Price Index. See “Behind the Data,” Amber Waves, February 2004, Volume 2, Issue 1.

The Market and Trade Economics Division calculates meat price spreads for beef and pork. Unlike food price spreads, meat price spreads are based on a set of fixed retail products. These price spreads measure price changes—between farm and wholesale and wholesale and retail—and do not reflect changes in the kinds of products that consumers demand.

• Calculation of meat price spreads begins with a standard animal and an assumption that it is cut up in a fixed way at the packing plant and distributed in a standard way at the grocery store. In this way, the total value of the animal at the farm can be compared with the total value of the animal at wholesale and retail.
• Starting with the retail values of meat (obtained from the Bureau of Labor Statistics), the gross farm values of the animals are calculated by applying conversion factors to the retail values of the meat. It takes 2.40 pounds of the standard steer to produce a pound of retail beef. For hogs, 1.869 pounds of the live animal translate to a pound of retail pork.
• In addition to their meat, cattle and hogs yield byproducts when they are slaughtered, such as organs, bones, and hides/skins. The byproduct allowance is the estimated wholesale value of the byproducts. The byproduct value is subtracted from the gross farm value of the animal to measure the net farm value of an animal’s meat, but it is not included in the retail price.

Food price spreads calculated by ERS are highly variable, affected by changes in both food prices and the amount and kind of services that consumers buy with their foods. Even with fixed farm and retail prices, marketing margins or spreads will increase if consumers shift toward more processed products. Spreads can also increase if costs of food marketing increase, either due to more expensive inputs or declining productivity in food marketing. Total grocery store productivity has declined over time, and this decline explains part of the widening price spreads for beef, pork, and chicken.