MARKETING CHANNEL MARKETING CHANNEL MARKETING CHANNEL. Marketing Margin: Marketing Margin: Value added by the food and fiber system, 2001

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1 Value added by the food and fiber system, 2001 Farming Input industries Manufacturing Food processing Nonfoods Distribution Transportation Wholesaling and retailing Food service Total food and fiber system Value added to GDP ($ billion) ,244.6 Share of GDP (%) Marketing Margin: Difference between price paid by final consumer and price received by primary producer Marketing Margin: Difference between price paid by final consumer and price received by primary producer Also called farm-retail price spread 1

2 Marketing Margin: Difference between price paid by final consumer and price received by primary producer Also called farm-retail price spread Must be measured in equivalent units: Example: For steers, 2.4 lbs of live weight yield 1 lb of retail beef cuts 2000 retail beef price = $3.06/lb average all cuts 2000 steer price = $0.654/lb live weight 2000 farm-retail price spread = $1.57/lb retail cut (= $3.06/lb 2.4 x $0.654/lb) Marketing Bill: Difference between total consumer expenditures and what farmers receive for equivalent farm products P Farmers Market 2

3 P Expenditures = Farmers Market P Expenditures = P retail Farmers Market Typical Market Channel P Expenditures = P retail Marketing Bill Cons. Expend. Farmers Market Typical Market Channel 3

4 P retail P Expenditures = Farmers Market Typical Market Channel P retail P Expenditures = Marketing Bill Cons. Expend. Farmers Market Typical Market Channel Components of consumer expenditures for domestically produced farm foods, % $132.5 billion Marketing Bill $576.9 billion 81% 4

5 Marketing bill and farm value components of consumer expenditures for domestically produced farm foods (Current $ billion) 800 Expenditures, Marketing Bill, and (Current $ billion) Expenditures Marketing Bill Expenditures, Marketing Bill, and (Constant 2002 $ billion) Marketing bill and farm value components of consumer expenditures for domestically produced farm foods (Constant 2002 $ billion) Expenditures Marketing Bill Marketing bill and farm value as percentages of consumer expenditures for domestically produced farm foods Marketing Bill and (% of consumer expenditures ) 100% 80% 60% 40% 20% 0% Marketing Bill

6 Is a large farm-retail price spread necessarily bad? Is a large farm-retail price spread necessarily bad? P retail Small Is a large farm-retail price spread necessarily bad? P retail P retail Marketing Bill Small Large 6

7 Is a large farm-retail price spread necessarily bad? P retail P retail Surplus Producer Surplus Small Large Is a large farm-retail price spread necessarily bad? P retail Surplus Producer Surplus P retail Surplus Producer Surplus Small Large Is a large farm-retail price spread necessarily bad? Retail ($/lb retail) Marketing Margin ($/lb retail) Farm Value ($/lb retail) Farmer Share (%) Fresh Potatoes Frozen French Fried Potatoes (Source: USDA, 2002) 7

8 Components of the marketing bill for domestically produced farm foods, 2002 Corporate profits before taxes 6% Packaging materials 10% Labor 48% Intercity rail and truck transportation Net rent 5% 5% Advertising 5% Fuels and electricity 4% Depreciation 4% Net interest 3% Other 4% Taxes 4% Repairs 2% Components of the marketing bill for domestically produced farm foods 100% Other Components of the Marketing Bill 80% 60% 40% 20% 0% Advertising Intercity rail and truck transportation Net rent Corporate profits before taxes Packaging materials Labor Is U.S. marketing bill excessive? Are wages in the marketing sector too high? 8

9 Average hourly earnings of nonsupervisory employees Average Hourly Earnings ($/hour) Food Processing All Manufacturing Average hourly earnings of nonsupervisory employees Average Hourly Earnings ($/hour) Food Wholesalers All Wholesalers Average hourly earnings of nonsupervisory employees Average Hourly Earnings ($/hour) Food Retailers All Retailers

10 Is U.S. marketing bill excessive? Are wages in the marketing sector too high? Do processors, wholesalers, or retailers exercising market power to reap excess profits? Average percent return on stockholder equity (after taxes) 20% Average Return on Stockholder Equity 18% 16% 14% 12% 10% 8% 6% 4% 2% Food Manufacturing All Manufacturing 0% Average percent return on stockholder equity (after taxes) 20% Average Return on Stockholder Equity 18% 16% 14% 12% 10% 8% 6% 4% 2% Food Retailers All Retailers 0%

11 Is U.S. marketing bill excessive? Are wages in the marketing sector too high? Do processors, wholesalers, or retailers exercising market power to reap excess profits? Are regulations too costly (e.g., food safety, food labeling)? Is U.S. marketing bill excessive? Are wages in the marketing sector too high? Do processors, wholesalers, or retailers exercising market power to reap excess profits? Are regulations too costly (e.g., food safety, food labeling)? Are there inefficiencies in the marketing sector (e.g., low capacity utilization, untapped economies of scale)? 11

12 Full production capacity utilization rates Full Capacity Utilization Rates 100% 80% 60% 40% 20% 0% All manufacturing Nondurable goods industries processing industries Food manufacturing Is U.S. marketing bill excessive? Are wages in the marketing sector too high? Do processors, wholesalers, or retailers exercising market power to reap excess profits? Are regulations too costly (e.g., food safety, food labeling)? Are there inefficiencies in the marketing sector (e.g., low capacity utilization, untapped economies of scale)? Are input costs too high? Approaches to measure farmer s share of consumer s food dollar: 1. Marketing Bill Farm value of all domestically produced farm foods divided by consumers food expenditures Includes foods eaten at home and away from home Captures changes in price relationships and consumption patterns 12

13 Approaches to measure farmer s share of consumer s food dollar: 1. Marketing Bill Farm value of all domestically produced farm foods divided by consumers food expenditures Includes foods eaten at home and away from home Captures changes in price relationships and consumption patterns 2. Market Basket Farm value of a constant basket of domestically produced farm foods divided by its retail value Uses only grocery store prices Doesn t allow substitution Alternative measures of the farmer's share of the consumer's food dollar 50% 45% 40% Farm er's Share of the 's Food Dollar 35% 30% 25% 20% M arket Basket Approach M arketing Bill Approach 15 % 10 % 5% 0% spreads differ across goods Degree of processing Perishability Seasonality Transportation Bulkiness 13

14 Farm value share for selected animal products, 2002 Cheese, natural cheddar Pork Milk Chicken, broiler Beef, choice Eggs, Grade A large 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Farm value share for selected fresh fruits and vegetables, 2002 Lettuce Grapefruit Oranges, California Potatoes Apples, red delicious Lemons 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Farm value share for selected crop products, 2002 Rice, long grain Margarine Shortening Flour, wheat Sugar 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 14

15 Farm value share for selected prepared foods, 2002 Corn syrup Oatmeal regular Corn flakes Bread Potatoes, french fried, frozen Chicken dinner, fried, frozen Potato chips, regular Pork and beans Peanut butter 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Beef s at Different Stages of the Marketing Channel ($/lb retail) Retail Wholesale Farm Beef s at Different Stages of the Marketing Channel ($/lb retail) Retail-Wholesale Wholesale-Farm 15

16 Farmers' Share of Retail Beef 80% 70% 60% Farmers' Share 50% 40% 30% 20% 10% 0% Pork s at Different Stages of the Marketing Channel 2.50 ($/lb retail) Retail Wholesale Farm 1.75 Pork s at Different Stages of the Marketing Channel ($/lb retail) Retail-Wholesale Wholesale-Farm 16

17 Farmers' Share of Retail Pork 80% 70% 60% Farmers' Share 50% 40% 30% 20% 10% 0%