If you see red when you look at the producer's share of the retail beef dollar, you're not alone. It's a common assumption that if producers are getting less money for their livestock and retail prices aren't falling, someone else along the production line is getting a bigger cut of what the consumer spends for beef.

Congressional hearings, task forces and commissions have addressed price spreads since the 1970s. Last year, fed cattle prices, which have rebounded from last summer's low-$60s/cwt. levels, averaged 10-13% lower than in 2001. Feeder calves and slaughter cow prices dropped an average of 17% and 20%, respectively, from 2001 levels, says USDA's Economic Research Service (ERS).

Compare this to the meat side, where ERS reports July 2002 wholesale Choice boxed beef prices were off 8% from 2001 and aggregate retail beef prices backed down only 5% from 2001's record prices.

This paints a clear, but gloomy, picture for producers. When the ink is dry on ERS's 2002 statistics, the producer's share of retail beef value will be in the 42-43% range — down from the 45.8% level pegged at the end of 2001.

This follows a trend dating back to the 1980s (see Figure 1). Meanwhile, retailer and packer shares of beef's retail value have steadily increased (see Figures 2 and 3).

As we look for solutions to what many call a marketing crisis, we must ask ourselves: What do widening price spreads mean to producers?

One Of Many Factors

Erica Rosa, a Livestock Marketing Information Center analyst in Denver, CO, believes changing price spreads are only one of many indicators of producer profitability.

“There's certainly more to the profitability issue than price spreads,” she says. “We have a shrinking industry right now with declining beef numbers, but one that has seen dramatically increasing weights.

“Therefore,” Rosa explains, “prices are not rebounding as we'd expect at the producer level to make up the difference in the price spreads.”

Cattle prices don't always reflect what's going on in the retail market. That's partly because other players exist in the system between the producer and the retailer, Rosa says. “Also, beef products are changing in terms of quality, type and the ways they're merchandised,” she adds.

She says each producer must look at what he or she produces and where it fits in the pricing structure. Is your product a better fit in the commodity market or a specification market?

“Changing price spreads can mean something entirely different to each individual,” Rosa points out.

She warns though, that gross margins have little meaning unless information is also available about the cost structure for each sector, and net receipts are available for comparison.

Wayne Purcell, professor of agricultural and applied economics at Virginia Tech in Blacksburg, is even more critical of using price spreads as a benchmark of profitability.

“We can presume almost nothing from price spreads — it's an empty bag,” he says. “That's because price spreads include both costs and profits, and you absolutely need to look at whether or not the middleman's costs have increased over time due to price inflation and new responsibilities.”

Purcell is reluctant to accuse packers of taking advantage of producers. After all, he says, packers have been mandated to make huge investments into things like food safety, environmental protection and, more recently, mandatory price reporting.

“That's very expensive stuff they have to do,” explains Purcell. “Let's at least recognize that these are cost increases that they can't avoid.”

There's a direct relationship between packer profitability and the capital investments they make, he points out.

“That's perfectly predictable and logical,” he says. “They have to make a profit so they can afford to improve on what they do and invest in much-needed new products.”

Or Sign Of Market Power?

As buyers of livestock, packers exercise their market power and force down prices on the farm. That fact is reflected in the increasing producer/packer price spreads, says Peter Carstensen, law professor at University of Wisconsin-Madison.

Carstensen specializes in antitrust law and competition policy issues. He's also a former antitrust attorney for the U.S. Department of Justice.

He believes the ERS beef price spread data is fairly reliable and can be used to measure the health within the various beef segments. This data should be used to formulate ways to regulate the markets so the “transactional world” is as fair and as transparent as possible, he says.

Carstensen concedes that some price spreads might be influenced by increased middleman costs, but he doesn't buy the argument that “cost-increasing elements” are the sole cause of widening price spreads.

“I'm very skeptical that unit costs have gone up as substantially as the spreads have gone up,” says Carstensen.

“Most data suggests wages have gone down in packing plants — and many plants are increasingly mechanized in ways that are intended to lower costs, not increase costs,” he says. “This indicates a failure of our marketing system to reflect back to the producer the revenue potential of the livestock.”

Pointing To The Retailer

Purcell and Carstensen agree that, whether or not it's reflected in price spreads, there appears to be some degree of exploitation in the retail marketplace.

“Retailers have negotiating power,” Purcell says. “They are increasingly telling packers what to do — we've seen this coming for a long time.”

Retailers mandate to packers how they want meat cut, packaged, labeled and bar-coded. They stipulate assurances on “safety” and, to top it off, they want packers to maintain and manage their inventory.

“If retailers are pulling $500-$600/head out of a $1,200/head retail value — as it appears they are — I wonder why it is that they need so much of the share?” Purcell asks. “Of all the players along the beef supply chain, the retailers do the least to add value to the product.”

But Purcell admits he might not be seeing everything that's “there” with regard to retail profitability.

“I might be guilty of not fully understanding what the retailers are facing — just like I'm suggesting some people do not fully understand what the packer is facing,” he says.

Carstensen explains that there's limited competition upstream at retail, where prices are not falling in sync with falling farm prices. “That would be one reason for the increase in retail spreads we're seeing,” he says.

Grocery chains with as little as a 5% national market share have enormous buyer power, he says. “So, the retailers can put the screws to their suppliers, and those suppliers put the screws to their suppliers — and on down the line,” says Carstensen. “It all comes to rest at the farm gate, though, especially in the beef sector where there's no government-subsidized price protection.”

Critical To The Debate

Gary Brester, professor of agricultural economics at Montana State University-Bozeman, says discussions surrounding the producer's declining share of the retail dollar will be critical to pending marketing policy debates.

“It's an important issue that needs to be addressed, and addressed objectively,” he says. Points that must be considered as the debate proceeds, he says, include:

  • We have different products today, even though retail prices have been measured at about the same level throughout the processing chain over the past several years.

  • Reported live cattle prices are lower than what many producers receive for cattle due to alliances, cooperatives and grids.

  • Technological change in the cattle production sector has lowered costs per unit. Lower costs generate profits and encourage entry into the industry, which largely manifested in increased production. Increased production forced live cattle prices down.

ERS economist Kenneth Mathews Jr. says the producer's share of the wholesale dollar has been more stable than the producer's share of the retail dollar. He's co-author of a landmark “white paper” on cattle cycles, price spreads and packer concentration published in 1999.

“Most of the attention has been directed at the packers,” Mathews says. “But the largest part of the spread between farm and retail occurs between the packer and retailer.”

He believes this spread is growing due to costs of added services and new products in the packing sector.

Purcell is anxious that all the attention on price spreads will be used as a lever to push for widespread marketing regulations like the Johnson amendment. Proposed as part of last year's farm bill, it sought to limit packer livestock ownership.

“People see the price spread numbers and conclude that packers are exploiting and profiteering at the producer's expense,” he says. “The producer segment needs to be careful in putting such strident regulations on packers and processors that they stop making investments into new product forms and improving productivity.”

Mathews acknowledges the potential for exercising market power does exist, and that both packer and retailer margins bear watching.

“Packers don't appear to be exercising market power,” he says. But he admits that when concentration in any segment reaches the 80% range, the potential for market power exists.

“We need to continue monitoring this issue,” concludes Mathews. “And we need better ways to measure the use of market power and its interaction with price spreads and concentration.”

Retail Data

One of the criticisms of USDA price spreads is that only Choice boxed beef and USDA Choice retail price have been used in the calculation, says Erica Rosa. “Another issue often raised is that retail price specials or ‘feature’ prices are not taken into account.”

The Livestock Marketing Information Center analyst has been comparing the old Bureau of Labor Statistics (BLS) and ERS retail price data with the new ERS retail meat scanner data released October 2002.

The old retail price data reported by BLS used the category “All Beef — All Grades.” Then a new series — “All Fresh Retail Beef” — revised the retail price category.

The new retail data being reported from ERS uses retail prices from scanner data on a larger number of specific beef cuts.

“The problem with the prior data was that it didn't always specify the retail price of a specific cut of beef nor take into consideration price features,” Rosa explains.

“As producers and/or the beef industry introduce new cuts of beef and/or further develop new beef products, the margin should narrow as these parties capture the gains from the new products,” she says.

Regardless of which price series is used, she says other analysis shows that the trends toward decreasing producer shares of the retail value of beef and increasing packer and retailer shares would still prevail.

“However, the magnitude of the change in spreads would be smaller,” she says.

In 2000, U.S. consumers spent $661.1 billion on food, excluding imports and seafood. USDA's estimated marketing costs for domestic farm foods in 2000 totaled $537.8 billion, or 81% of consumer expenditures.

Labor costs of manufacturers, wholesalers, retailers and eating places totaled $253 billion in 2000 and accounted for nearly 40% of total consumer food expenditures.

From 1990 to 2000, consumer expenditures for farm foods rose $211.3 billion. In the same period, marketing costs rose 57% and accounted for most of the 47% rise in consumer spending.