Food Industry Studies

INTRODUCTION

When the Select Committee on Nutrition and Human Needs early in 1975 to focus on the issue of rapidly rising food price came obvious that a comprehensive inquiry into the reliability ent data bases, as well as price factors themselves would be r The staff was brought to this conclusion first, by the admitted de of the United States Department of Agriculture Spread Serie in the area of beef, for example, consistently yielded the in "missing dime"-ten cents of every consumer dollar spent which cannot be assigned to any specific cost or cause; and sec the unavailability of independently audited and evaluated i data which might make it possible to correct the deficiencie Spread Series.

This situation has led to claims, counterclaims and blame about higher food prices. Industry uses data, or cites factors rising energy costs, to explain price increases; but there are erally available and accepted means to evaluate such explana sufficient context.

Industry further complains that the Spread Series leaves a ing impression that spreads and profit margins are identic industry offers little more than vague explanations of the di Several USDA proposals to improve the Series through vo provision of additional data have been rejected by the food i Similarly, subpenas issued by the Federal Trade Commission "Six City Retail Food Investigation" have been resisted and c by a number of companies.

Therefore, the staff of the Select Committee drafted i questionnaires on the wholesaling and retailing of beef. These intended to be the first of a series of questionnaires about products, were distributed for comment.

It was believed that the questionnaire approach could resul significant advantages: Specific breakdowns of data, and a picture of the practices of market leaders within specific markets as distinct from industry averages in general. The sp of the information requested, while greater than that of any study, was the minimum necessary to assess adequately the revenue components of industry margins. The justification series of questions in the meat packing section of the quest. was stated in an attached appendix. (Similar appendices we developed for all questionnaires.) Each question, though spec detailed, related to the other questions in a "building block" The sum total of data collected through these questionnaire have provided greater accuracy in measuring cost componer the current aggregative approach. The staff of the Select Co had hoped that aspects of the draft questionnairies, such as th

of survey periods, could be worked out through a series of meetings with industry representatives. Thus, the drafts printed here are necessarily vague in certain respects.

By requesting data from the largest firms, rather than the entire industry, the questionnaire also sought to highlight the major components of market structure and organization, since the dominant. firms often act as models for the entire industry. If any market imperfections or barriers to introduction of new products exist, they would have been most apparent in a study of the industry's most significant firms.

The committee staff emphasized that this was not an attempt to expose individual firms or groups of firms, or to find and chastise "villains." The committee and its staff recognized that such tactics were incompatible with the factual and objective nature of the questionnaire approach, and in any case would impede industry, consumer, and Government cooperation to identify and cope with the causes of rising food prices.

Nonetheless industry officials in general proved as resistant to the Select Committee's questionnaire as to other Government attempts to elicit information. Discussions with them led to several staff proposals to protect the confidentiality of proprietary information, including the use of a private third-party accounting firm. Industry, however, continued to offer only aggregate information, which would not and cannot provide an adequate basis for assigning cost factors. Alternately, industry sources responded that sufficient records of costs were not kept, or that assembling and transmitting them would be expensive.

In light of this resistance, and the almost certainly protracted process of issuing and enforcing subpenas, it was obvious that the completion of the questionnaire approach required a substantial commitment of resources and staff. This proved to be impossible, due to the Rules Committee's restriction of all Senate committees' budgets. In addition to the questionnaire developed by the staff of the Select Committee, this print includes a questionnaire prepared by the Special Commission Relative to the Pricing and Marketing Procedures of Grocery Store Chains in the Commonwealth of Massachusetts. This questionnaire was similar in purpose to the committee's and was sent to all grocery store chains operating in Massachusetts. Industry officials, however, successfully resisted this questionnaire also. Commission members attempted to obtain subpena power from the General Court, but were unable to do so. Thus, this questionnaire is also printed without the requested data.

Along with the rise in individual food item costs. there has obviously been an increase in the annual market basket cost. In 1972, USDA estimated that an annual market basket for a family of four would cost $1,310.82. By 1974, however, this figure had increased over 33 percent, to $1,749.56.

This dramatic increase of market basket costs has been accompanied by a major increase in the "spread," or difference between the prices which farmers received and the prices paid by consumers at the retail level. The USDA "Spread Series" attempts to explain the increased costs and profits at the processing, wholesaling, and retailing levels.

These spreads have in many cases, increased even more drastical have retail food prices. In 1973, for example, the "spread on an market basket rose from $786.68 to $837.43, an increase of 6.5 p But, in 1974, the "spread" on an annual market basket rose to $1 a startling increase of 27.9 percent.

Using a somewhat different analysis, the following chart monthly changes in the retail cost, the farm value and the fa retail spread of a market basket of food for the period Januar to March 1975. While the farm values decreased from 185.7 t (based on an index number of 100 for the year 1967), retail c creased from 155.5 to 168.5, and the "spread" increased from 167.3.

It is apparent that a major shift has occurred in recent tim respect to the size of the "spread figures." Specific cost increase as those for energy, labor and packaging, have had a significa pact in the food processing and retailing industries. Theref order to evaluate the origins of these spread increases, it is ne to examine more detailed data on specific products. It is in this a that more complex problems arise.

THE MARKET BASKET OF FARM FOOD: RETAIL COST, FARM VALUE, FARM-RETAIL SPREAD, A FARMER'S SHARE OF THE RETAIL COST 1

1 The market basket contains the average quantities of domestic, farm originated food products purchas per household in 1960 and 1961 by wage earners and clerical worker families and workers living alone. Its r calculated from retail prices published by the Bureau of Labor Statistics. The farm value is the gross return for the farm products equivalent to foods in the market basket. The farm-retail spread-difference betwee cost and farm value is an estimate of the total gross margin received by marketing firms for assembling, transporting, and distributing the products in the market basket. Quarterly and monthly data are annual rates historical data are published in "Farm-Retail Spreads for Food Products", miscellaneous publication 741, Ja 2 Preliminary.

Source: "Marketing and Transportation Situation", Economic Research Service (MTS-197), U.S. of Agriculture, May 1975.

USDA has attempted to make more precise estimates on spreads and cost components for a variety of individual products. These estimates, however, are in many cases based on methodologies which prove to be little better than educated guesses. Section II of this report contains an analysis of the cost components of six food product groups. This review helps to illustrate some of the difficulties inherent in accumulating and evaluating specific data.

Section III of this print focuses on concentration in the beef industry. The study which was conducted compares the relationship between price and slaughter in two wholesale beef markets during specifically selected time periods. The first period chosen was January 1970 to mid-1971. and the second was the calendar year 1974. Each time period chosen reflects certain market conditions; the relationships compared include the relationship between live price and slaughter, and between carcass price and slaughter.

Analysis of the data collected was complicated by statistical aberrations (discussed at length within this report). Although the inconsistencies have not been completely eliminated, the staff was able to draw some conclusions from the analysis. Also included is an analysis of the effect of grain prices on live cattle prices, and a comparison of market relationships in rising and falling markets.

Changes in the price of bread, a staple item in most homes, have an especially large impact on the food budget of the average consumer. The increase in the retail price of a loaf of white bread alone was 40. percent in the 3-year period 1971-74. During the first 4 months of 1975, the price of bread rose 4.4 times faster than the average for all foods.

It was because of this, in addition to rising production costs and the increased export of our Nation's grain crons, that the members of the Select Committee requested an analysis of bread production. Section IV of this print examines certain aspects of the economic structure and level of competition within the two main processing stages of bread production: flour milling and bread baking.

The final chapter of the bread and milling section focuses on anticompetitive behavior in the baking industry, as well as gives a detailed view of the effects of the antitrust laws and the regulatory process upon those firms which have been found in violation of Federal laws. This record, alone, suggests that new laws, based on a clearer understanding of the nature of this industry, must be enacted.

I believe that the analyses contained in this committee print underscore the need for, and problems associated with, developing a new data base relative to food costs. Yet without more reliable figures we cannot expect a clearer picture of the varying nature of each segment of the food industry, nor can we expect a greater understanding of the responsibility for and justification of rising food costs. It is the hope of the members of the Select Committee on Nutrition and Human Needs that this report will serve as the basis for a commitment to action in solving the mystery surrounding rising food prices. GEORGE MCGOVERN,

Chairman.

January 1976.

CONTENTS

Introduction

Section I.-A questionnaire approach to determine food price factors:

Chapter 1.-Federal questionnaire__.

Part A.-Meat packing--

1. Procurement

2. Sales

3. Fabrication facility.

4. Slaughtering facility.

5. Transportation