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cost component. This involves some degree of judgment, since firms with widely divergent cost figures are excluded on the basis of reasoned judgment, rather than being excluded because data was simply not available (as is the case for certain other product spreads).
The most notable flaw in this analysis of the processing margins lies in the estimation of the profit component. Profit figures are not included in the Food Management study, thus leaving profit data unchanged since 1972. Profits are estimated from a best-judgment combination of Moody's Industrials and AMI's Financial Facts. The use of either source raises serious questions concerning both methodology and the inclusion of the most profitable firms. It should be emphasized again that no independent study has ever been made to determine the extent of meatpacker profits for beef and pork.
Given the fact that the profit estimates for the 2 years were consistent, some interesting trends are apparent; for example, packer profits for pork declined 18 percent, while profits for choice beef increased by 25 percent.
This indicates either dramatic year-to-year profit changes in the industry, or else the relative unreliability of the profit data.
There are two components of the wholesaling function for beef and pork: Intercity transportation and a large "unallocated” segment The intercity transportation figure represents the average U.Š. cost of transporting beef or pork from the packing plant to the metropolitan area where it is consumed. The estimate is derived by a threestep process. Initially, freight rate estimates are obtained from the Interstate Commerce Commission, the American Trucking Association, and field reporters for the Agricultural Marketing Service. Heavy reliance is placed upon the estimates of AMS field reporters, on the assumption that their knowledge of local freight rates for livestock is most accurate.
The second stage consists largely of a map-drawing exercise to determine transportation differentials for each metropolitan area. Very minor differentials are assumed for the West Coast since the location of production is quite near the large markets. For the remainder of the country, distance circles are drawn from Chicago. This procedure may result in some distortion since some percentage of beef and pork is produced and transported from many different localities.
The third step consists of weighting the transportation differentials from Chicago by both production and consumption figures for beef and pork. Once these weighted differentials are combined into a composite U.S. average, this average is subtracted from the carcass-retail spread. In 1973 this transportation composite amounted to 1.1 cents for both beef and pork.
The "unallocated” segment of wholesaling costs for beef and pork is arrived at in an entirely different manner. After the intercity transportation figure is subtracted from the carcass-retail spread, the procedures used to estimate the retail breakdown are employed. The gross retail margin is then subtracted from the remainder of the carcass-retail spread to obtain the "unallocated” wholesaling figure. According to USDA economists, this residual figure is composed pri
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marily of two elements: Intracity transportation and fabrication costs, with the latter probably accounting for a majority of the “unallocated" figure. The fact that fabrication costs are derived from a residual figure and are grouped with other miscellaneous data poses serious problems for the reliability of the entire cost breakdown. Fabrication, whether performed by the packer or the retailer, has quickly become a highly profitable venture: A study by the Agricultural Marketing Service shows that the most profitable method of marketing beef includes fabrication into less than carcass portions. It is misleading, however, to place this function in the "wholesaling" category without qualification. Most fabrication is performed by either the large packers or the large retail chains. Only a small portion of total fabrication is performed by independent "wholesalers.” If independent wholesale data is not available, an in-depth study is certainly warranted. This is especially true given that the "unallocated" figure increased 11 percent for pork and 20 percent for beef between 1972 and 1973.
The demonstrated unreliability of these composition figures led USDA to issue a publication entitled “Price Spreads and Industry Margins Not the Same”? The publication is most confusing. The logical conclusion to be drawn from its message is that USDA spread data is relatively worthless insofar as it purports to allocate costs to particular segments of the beef processing and merchandising industry.
USDA is, of course, extremely sensitive to industry criticism of its data analysis and methodology. In an attempt to improve its reliability and acceptability, ERS economists met with numerous industry spokesmen. In particular, in April 1975, a meeting was held and attended by a number of representatives of the retail food industry. Proposals for new data collection methods were offered. More specifically, it was suggested that four specific research projects be undertaken.
The first proposal would update current procedures used to calculate the price spread series for beef and pork. While improving the accuracy of the spread series data, this proposal would not eliminate the need for additional data on margins.
The second proposal would provide a retailer margin series for meat based on margin data supplied by cooperating retail firms. This would provide some margin information (although not by specie and only at the retail level) and improve the spread series. Rather than asking for data from which USDA could calculate margins, margin data would be solicited from firms, meaning less work for USĎA, but also less confidence in the accuracy of this retailer margin series.
The calculation of both retail and packer margins for all beef and all pork was the third proposal. These margins would be calculated from price and volume data supplied by samples of cooperating firms selected on a probability basis. The composite retail prices estimated as part of these margin calculations would also serve to improve the reliability of the retail price used in the price spread series advocated in proposal No. 1. Proposal 3 would improve the spread series and add packer/retail margin series for both beef and pork.
2 See Appendix II, p. 386.
The final proposal would involve collection of cost, price and quantity data from all segments of the industry which would be useful in constructing a complete cost and revenue series from livestock production to consumption. This is an ambitious endeavor, as well as impractical because of the lack of available data and the high cost of generating this information. If it were feasible, this proposal would provide the complete and ideal margins series, as well as provide the information necessary to improve the spread series (see Appendix II).
Industry representatives, however, rejected all but the first of these proposals. Moreover, they hinted that any attempt to pursue the more detailed alternatives would meet with widespread hostility in the retailing sector. Thus, at a time when public interest in food prices is particularly high, when Congressional curiosity with respect to the causes of food sector inflation is particularly keen, the private sector is in the unique position of persuading USDA to repudiate its own data while refusing to provide the basis for a more accurate and rigorous analysis.
In light of the continuing controversy over the merits of grain exports, the composition of bread spreads is of particular interest and relevance. While it is generally accepted that wheat costs are a minor part of the price of bread, such rising grain prices are occasionally used to justify increases in bread prices. In January 1974, for example, one spokesman for the baking industry asserted that the American people should prepare themselves for $1 per loaf of bread. Using the 1974 data, the farm value of wheat in a 1-pound loaf of bread actually fell from 6.5 cents in the first quarter) to 5.7 cents (in the last quarter). In the first two quarters of 1975 wheat value actually fell further to 4 cents. During the same period the retail price of bread rose from 32.8 cents a pound to 36.2 cents a pound.
In order for the price of bread to increase to a $1 per 1-pound loaf, as an exclusive result of increased grain prices the value of wheat would have to increase 63.8 cents, to a total of approximately 65-70 cents per loaf. This would mean that a bushel of wheat would be selling for $50–55. It is obvious that rising wheat prices are only a small factor in the rising price of bread.
The USDA spread series is equally inadequate in terms of explaining past increases or projecting rising costs in processing and retailing for the future. As with beef, there has been an unfortunate tendency by USDA to resort to increasing the "other" component to explain rising costs.
The basic methodology utilized in determining spread data for bread begins with ascertaining the farm value of wheat. The farm value is defined as "wheat prices received by farmers at country elevators less the imputed value of by-products”? The farm value data is compiled quarterly by the Commodity Economics Division (CED) of the U.S. Department of Agriculture, and is transmitted to those preparing the spread data.
There is a real question as to whether the spread series is based on unrevised CED data or CED data which was revised on the basis of the 1972 Census of Manufactures. USDA economists insist that unrevised CED statistics were used after discrepancies were discovered between revised CED farm value statistics and the farm value stated in the component charts for 1972 and 1973. Yet, there are discrepancies between the component charts and the unrevised CED farm value figures, also.
3 Marketing and Transportation Situation, Economic Research Service (MTS–195), p. 43, U.S. Department of Agriculture, November 1974.
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