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SECTION II.-A PRELIMINARY EVALUATION OF USDA'S FARM TO RETAIL PRICE SPREAD SERIES

CHAPTER 1

BEEF AND PORK

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Spreads and margins on beef and pork have been of particular concern to American farmers and consumers, and have been the subject of a continuing controversy between USDA and the processing and, more particularly, the retailing industry.

In mid-1973, live beef prices reached an all-time high. Partly in anticipation of the lifting of the freeze on beef prices in mid-September and partly in response to high grain prices, feeders and farmers withheld their steers and heifers from slaughter in record numbers. As a result, supply was curtailed so drastically that many meat packers were forced to close their facilities.

Retailers, in many cases were compelled to engage in "custom slaughtering" (i.e. contracting directly for the purchase of livestock and paying specific fees to meat packers for slaughtering). Beginning in mid-fall, however, the price of live cattle began to fall as feeders and farmers began to liquidate the excess stock which they had withheld from slaughter during the summer. During 1974, the farm value of meat products in the average annual market basket fell from $331.29 to $299.22-a decline of -32.07 percent. During the same period retail cost of these same products rose slightly from $523.35 to $532.71, or an increase of 1.8 percent. Thus, the spread on meat products increased a very substantial 21.6 percent. The greatest growth in the 1974 spread appears to have been in the wholesaling and retailing sectors.

According to USDA, the meat packer's share of a retail pound of beef dropped slightly during 1974, from 11.8 cents in the first quarter to 10.9 cents in the final quarter. Simultaneously the wholesale/retail share rose from 41.2 cents to 44.3 cents. But these quarterly figures may be slightly misleading in that they do not reflect a steep, if short lived, rise in prices which peaked in mid-August. As a result of that peak, the wholesale/retail share fell to 38.9 cents in the third quarter of 1974 while the meat packer's share dipped to 10.8 cents. Similarly, during the second quarter of 1975, when live prices increased to record levels, the wholesale/retail share declined to 33.1 cents a pound while the net farm value rose to $101.30 per hundredweight. It would thus appear that wholesale/retail margins shrank most dramatically on a rising market while they tended to expand on a falling market. By July, however, the wholesale/retail spread had returned to the relatively high level of 41.2 cents per pound.

A difficult question to answer is: Exactly how are these price increases and decreases absorbed? Retailers dispute the size of the margin assigned to them by USDA spread data, and on a variety of occasions have challenged the validity of spread allocations published in USDA's November Marketing and Transportation report.

1 "Developments in Marketing Spreads for Agricultural Products,” Agriculture Report No. 261, Economic Research Service, U.S. Department of Agriculture, 1974.

The Agriculture Department attempted for the first time in 1972 to create a cost component breakdown similar to that undertaken by the National Commission on Food Marketing in 1965. The spread figures described above are a reasonable estimate of price changes over time, however, there are numerous difficulties inherent in a breakdown approach due to the relative specificity of the cost breakdown and the fact that studies are made only on a yearly basis. Each marketing function of the cost component breakdown will be analyzed independently.

A. ASSEMBLY

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This marketing function is not the same for beef and pork as it is for the processing of other foods such as fruits and vegetables. Here, only transportation costs of the live animal to the packing plant and miscellaneous marketing charges are included. Marketing charges are calculated from an average of U.S. data which is computerized by the Packers and Stockyards Administration.

Second, transportation charges from farm-to-market were estimated. Under the assumption that the vast majority of livestock now travels less than 100 miles to the point of sale, a sample of the largest livestock haulers was contacted to determine their freight charges for such distances. The best composite judgment of this example-combined with the marketing charges previously estimated resulted in a 1.5 cents assembly charge for beef, and 1.8 cents for pork. This figure is unallocated into specific cost components due to a complete lack of appropriate data.

B. PROCESSING After subtracting the assembly charge from the farm-to-carcass spread, the remainder represents the processing margin. In 1972, the breakdown of this margin into specific cost components was a relatively useless enterprise, except as a demonstration of the derth of data available. The only sources were Moody's Industrial's, American Meat Institute's Financial Facts, and a survey form completed by a total of three packing firms. Although various secondary sources and the 1965 N.C.F.M. study were used as guidelines, that data actually compiled from 1972 sources is obviously extremely sketchy and certainly subject to question.

An improvement was made in the cost breakdown for 1973, largely due to the completion of a packing plant study by Food Management, Inc. The study represents an examination, by region, of the specific cost components by size of plant. This data was combined with surveys conducted by the Animal and Plant Health Inspection Service (of USDA) indicating the number and size of plants by region. The composite of these surveys yields a fairly reliable estimate of the average U.S. cost for each specific category.

Two caveats must be made, however, concerning the accuracy of this data. First, all of the surveys undertaken by Food Management, Inc., were on a strictly voluntary basis, thus leading to the possibility that some data important to the protection of trade secrets may have been withheld. Second, the report' suggests ranges for each specific

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