components as the baking and wholesaling functions. The 1972 retail spread figures were based on direct data collection in two metropolitan areas, by a Cost Component Task Force established by USDA. The task force also incorporated the findings of a Cornell University retailing cost study. The 1972 figures were updated by means of the BLS change indices to produce the 1973 estimates. Finally, it must be noted that in retailing, profit is a residual and not a reported figure. A critical weakness in the retail spread methodology is the reliance on ABA figures. Since ABA figures omit any data on vertically integrated retail chain bakeries, they provide no guidance with respect to a major share of the bread market. In conclusion, the above discussion makes it abundantly clear that all the bread spread data are arrived at through the use of outdated methodologies (e.g. the NCFM technical studies), irrelevant reports (e.g. one ABA study for all bread and bread type rolls), biased information (e.g. The American Bakers Association has a direct interest in the results used by USDA especially profit level information), and the arbitrary manipulation of numbers when the figures don't total. The need for a new, comprehensive and thorough data base is manifestly clear. CHAPTER 3 Spread components of fresh apples are going to be deleted from the 1975 component data which will be computed in 1976. The Fruits, Vegetables, Ornamentals and Sweeteners program personnel assert, that the deletion is necessary due to the limited resources and a heavy workload. Apples consist of numerous varieties, grades, and sizes with a wide geographic dispersion of production and a number of common shipping containers. A thorough analysis of apples would require the deletion of other items, such as fresh potatoes. A. PACKING The most recent apple cost study, "Cost of Harvesting, Packing and Storing Apples for the fresh Market with Regional Seasonal Comparison," 11 provides clear illustrations tending not only to support such a judgment, but also casting doubt upon the usefulness of aggregated apple statistics published in 1973 and 1974. For instance, the "picking-supervision" for a bushel of Red Delicious apples costs 9 cents in the Northeast, and 47 cents in the Northwest. The reasons for such variance are no mystery to USDA: percent of migrant labor versus local labor, percent of dwarf trees versus semi-dwarf versus standard and other clear regional differences account for varying harvesting costs. Similarly, at the processing level, overhead (to mention just one processing cost) varies by region. In 1972-73, overhead was greater than 50 cents per carton in the Northwest, around 25 cents per carton in the Northeast and Appalachia, and less than 10 cents per carton in the Great Lakes States. Finally, the variety of apples effects the packing cost substantially, even within a region. In 1972-73, it cost 72 cents to "tray-pack" a carton of Delicious apples in the Northeast, while it was only 60 cents for a "bag carton." (N.B., The component chart for apples deals only with bags of apples; one can appreciate the statistical challenge of trying to keep data on apples destined exclusively for bags rather than trays.) The draft component chart for 1972-73 apples provides some supplemental information concerning methodology-the f.o.b. price at the wholesale door was obtained by averaging "Market News Service weekly regional apple prices" and by weighting these prices according to "fresh apples unload origin statistics" for 41 cities. These prices were then weighted by regional varital "packout" figures to obtain the U.S. average fresh apple f.o.b. prices.' 12 11 "The Fruit Situation," Economic Research Service (ERS-562), U.S. Department of Agriculture, July 1974. 12 Draft spread chart for 1972-73, provided by the U.S. Department of Agriculture (unpublished). TABLE 3.-APPLES: COMPONENTS OF MARGINS PER 3 LB BAG AT RETAIL, 1972-73 SEASON. 1 Derived from the SRS U.S. fresh apple price per pound quoted at packer's door or point of 1st purchase minus the transportation cost from grower to processor. 2 Regional regular (RA) and controlled atmosphere (CA) storage charges were weighted by regional RA and CA storage statistics to obtain a United States storage cost. This figure was then adjusted by the proportion of the United States fresh pack entering storage. 3 Average of BLS monthly retail prices for the crop year weighted by fresh apple unloads (truck and rail) in New York Atlanta, Washington, D.C., Chicago, Dallas, Los Angeles, and Seattle. 4 Includes costs for the master carton, trays, bags, wrappers, liners, glue, and staples. Cost for hauling apples from orchard to packinghouse or storage facility. This service could be handled by grower packer, or 3rd party. 6 Intercity transportation costs were weighted by fresh apple unloads by most common carriers (truck or rail) in New York, Atlanta, Washington, D.C., Chicago, Dallas, Los Angeles, and Seattle. 7 Less than 0.1 cent. Includes office, selling, inspection fees, insurance, waxing and fungicide supplies, and other miscellaneous expenses not otherwise specified. • Profit is a residual derived from the f.o.b. price minus packing and storage costs and the farm value of apples. 10 Residual derived by subtracting farm value and other marketing costs from the retail price. Source: "Developments in Marketing Spreads for Agricultural Products in 1973", Economic Research Service, U.S. Department of Agriculture, March 1974. TABLE 4.-APPLES, COMPONENTS OF MARGINS PER 3 LB BAG AT RETAIL, 1973 1 Derived from SRS United States fresh apple prices minus the transportation cost from grower to packer. 2 Regular (RA) and controlled atmosphere (CA) storage charges weighted by regional RA and CA storage statistics, adjusted by the proportion of the fresh pack entering storage. Average of BLS monthly prices weighted by unloads in 41 cities. 4 Includes costs for the master carton, trays, bags, wrappers, liners, glue, and staples. • Hauling from orchard to packinghouse or storage facility. •Weighted average from production areas to 7 major cities. 7 Less than 0.1 cent. * Includes office; selling, inspection fees, insurance, waxing and fungicide supplies. • Residual. Source: "Marketing and Transportation Situation," Economic Research Service (MTS-195), U.S. Department of Agriculture, November 1974. The wholesale transportation cost is based on truck and rail rates which were "secured from published rates and numerous primary and secondary sources." 13 The 1.9 cent profit figure listed under the packing sector was a result of subtracting farm value and packing and storage costs from the price of a 3-pound bag of apples as it left the packer. According to ERS, the profit figure is not an accounting derived figure, it is a residual, or an educated guess. In this vein, it is important to remember that the packing cost study cited earlier was based only on information provided by firms which had been cooperative in previous studies. No attempt has been made to get cost (much less profit) information from firms not willing to provide it. B. WHOLESALING Apple wholesale spread component data is open to many of the same questions which arise later in the discussion on potatoes. No study of apple wholesaling costs has been done. There is every indication that large retail chains have been integrating vertically into the wholesale sector. There is no indication on the component chart, however, as to the trend toward such vertical integration or the unreliability of the wholesale component data. C. RETAILING Retail components are based on size, volume, and margin figures which are computed annually for an "average store." For instance, to get an average gross margin, a survey is made of 50 chains. The total gross margin of all the chains is divided by the number of stores (about 5,500) and the result is an average gross margin for an average store. Contribution costs represent overhead which is not productspecific. These costs are sensitive to volume changes. On the component chart, this accounts for approximately 20 percent of the costs. Contribution costs are largely labor, include all interest, some of the packaging costs and all "other" costs. Space-related costs are based on shelving and counterspace allocations. They are not sensitive to volume changes over the short run. The following component categories are considered space-related costs: depreciation, rent, energy and repairs. All business taxes unrelated to the payroll are also included in this category. Fifty percent of total costs are space-related. Direct costs are based on volume. This category included 30 percent of total costs. Direct costs are largely labor, business taxes accountable to labor expense and packaging. Advertising is considered a separate entity and is allocated on the basis of a straight percentage of sales. Profit is computed by subtracting a product's direct and spacerelated costs from the product's gross margin in the average store. The result is the product's contribution to overhead and profit. The product's share of contribution cost is multiplied by the total profit of the average store, and the result is the product's profit contribution. In other words, profit is not an independently arrived at figure, but a residual, allocated to products based on their volumes. 13 Draft spread chart for 1972-73, provided by the U.S. Department of Agriculture (unpublished). |