APPENDIX V

WHITE BREAD: COST COMPONENTS BY FUNCTION, FARM-WHOLESALE, 1972

[J. C. Eiland, CED, September 25, 1973]

Estimated cost components for each function performed in production and marketing bread are based on several underlying premises, which are stated for documentation and understanding of these data. ERS computed estimates for relevant prices and price spreads are used to determine the magnitude of total marketing costs and as a guide for developing cost component figures for each function. This carries the implicit assumption that these price spreads present a good U.S. average and they cover all costs including a positive profit.

Prices and price spreads for 1972 were computed and rounded to the nearest tenth cent. Consequently, total costs (spreads for certain functions) are shown rounded to the nearest tenth of a cent, when in reality spreads may not work out that neatly. If unrounded price and price spread data had been readily available, some accuracy of significance at four decimal places may have been added to cost component estimates.

Price spreads developed from concurrent price data (differences between prices at two stages in the marketing process for an instant in time) include no storage spread or cost. Rather the cost of storage is included in prices. This is true for farm prices as well as primary market prices or at the processor's door. Mill-door price of wheat in January minus farm price of wheat in January equals price spread, and since incurred storage costs presumably are reflected in each price, storage in farm price subtracted from storage in mill-door price leaves no storage in the price spread or marketing margin. Hence, in the concept embraced by concurrent price spreads there is no cost of storage provided for in the price spread.

Costs of storage could be developed but they would not be deductible from price spreads-but from prices. If we developed storage costs, to the extent the farmer stored or held in public storage the raw farm products before he sold them, these storage costs would be deducted from his price received for them. Likewise, to the extent entrepreneurs in the marketing channels held title to the products in storage, storage costs would be deductible from prices received for them. In other words, some costs of storage may be borne by farmers (outside the marketing process as defined by our marketing price spreads framework) and some storage costs may be borne by market entrepreneurs (inside the marketing process after the raw products are sold by the farmer).

.0085

None

2065

.2150

None

None

.0009

None

.0991

.1000

None

None

.0054

None

.0600

.0654

None

None

(9)

0156

None

.7599

.7755

None

None

0029

0024

None

.0165

.0218

1 Shown to begin the 1st step in building the retail price. Based on wheat prices received by farmers
at country elevator less imputed value of byproducts. Includes the marketing certificate.

2 This averaged 31.8 cents per bushel of wheat (87 percent to flour) based on the 0.4 cent price
spread between the farm price and f.o.b. mill cost of wheat in a 1 pound loaf of bread. This spread
was divided 23.1 cents to transportation and 8.7 cents to merchandising with none to storage (see
discussion of torage). Merchandising was determined by assuming (1) that wheat was merchandised
on the average once by the country elevator and once by a terminal elevator, (2) that the merchandis-
ing margin was equal to costs of handling in and out of each of these elevators once and the "cost"
item profit amounted 10 percent of such total costs (costs based on ERS-513).

3 Spread between f.o.b. mill sales value of flour (0.6329 lb) used per 1 pound loaf of bread and the
f.o.b. mill cost of 0.01445 bushel of wheat less imputed cost to millfeeds. Flour prices are based on
monthly sales of bread-type flour reported by a sample of 20 large milling firms. Wheat cost to miller
is based on transaction prices of bread-type wheat in 5 major markets used to adjust the U.S. average
price derived from latest Census of Manufac' ures data. Cost components are based on costs de-
veloped by National Commission of Food Ma keting as reported in Technical Study No. 5. Inasmuch
as the flour millers' spread has changed ver/ little since that study was made, the cost components
have not changed much either.

4 The price of flour received by the mille deducted from the cost of flour to the baker represents transportation between the 2 points. Flor is sold basis delivery point from which millers deduct transportation charges in deriving the f.c.b. mill price as reported to us in the survey mentioned in

footnote 3. Flour is sold by mills to bakers and shipped directly with no storage involved. Brokerage
and other selling costs are bourne by the flour mills and comes out of his price spread.

5 Spread between the estimated price received by bakers for bread delivered to store shelf and the
estimated cost of flour to the baker. This deviates from marketing spreads received by baker-whole-
salers for bread as we normally report, because this spread includes in the "other" cost of processing
category 2.2 cents for the cost to the baker of nonflour ingredients. Cost components are based on
division of costs derived from "National Commission on Food Marketing" data reported in Technical
Study No. 5, from "American Baker's Association Cost Survey" data for 380 plants in 1972, and
profits to sales from SEC-FTC data reported quarterly for the baking industry and adapted to ERS
estimated price spreads data.

6 Cost components added for each stage to retailer's shelf (not to include his price spread) to
represent costs up to the retail function. These cost items at this level plus the farm value of wheat
in col. 1 of 2.8 cents add down to the ERS estimated wholesale price of a 1 pound loaf of white bread
in 1972.
7 Retail spread estimated and reported by ERS for 1972. Estimated retail price less estimated
wholesale price in 1972.

10 Transportation charges between points of marketing and or processing. Not included in any price spread as measured by ERS estimates.

398

Some blanks exist in cost component estimates because of lack of necessary available information. Sometimes this is because that cost component may not be applicable, sometimes it may be zero but applicable, and sometimes it may be a positive figure. Since we do not have the necessary information to judge which case is the situation, we have chosen to say in the footnotes that information is "not available," in which event the component would include this item as well as those items covered in the description.

The table does not cover all costs by functions for a loaf of bread marketed in retail food stores. The marketing spreads (costs) on nonflour ingredients incurred prior to receipt by the baker are not developed. For bread this includes the farm ingredients lard, shortening, sugar, and nonfat dry milk and such nonfarm items as salt, calcium propionate, yeast, yeast food, malt extract, etc. The cost of these ingredients in the form received by the baker is carried in other costs under baker-wholesaler costs of processing as footnoted.

The farm value of these items amounted to 1.0 cent for a 1-pound loaf of bread in 1972. The cost to the baker of all nonflour ingredients was 2.2 cents, of which the farm-produced items cost the baker about 1.7 cents per loaf. The handling, processing, transportation and merchandising between the farmer and the baker's door amounted to about 0.7 cent (1.7 cent minus 1.0 cent) per loaf of bread on these four nonflour farm produced ingredients.