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RELATIVE CHANGES IN FARM, PROCESSOR, AND RETAILER PRICES

AND MARGINS

The counterpart to the matter of the extent of price increases at retail is the question of the extent to which these increases have been shared by the various factors in the market. In the case of bread this is a question of whether the increases have flowed to the farmers producing the wheat, the millers producing the flour, other producers of bread ingredients, the bread bakers, or the retailers. In respect to milk there is the question of whether farmers, processors, or retailers have been responsible for the price increases.

As shown in figure 2, over the two decades which have elapsed since World War II the greatest part of the increase in bread prices can be attributed to bread bakers. Their spread, which is the difference between their selling prices and ingredient costs, represents one-half the cost of bread at retail. The baker's spread rose from a 1947-49 average of 5.7 cents per pound to 12.2 cents a pound in August 1966. This increase is equal to 65 percent of the average increase in the retail price of bread over the period. Had it not been for this increase in baker spreads, the price of bread would have increased slightly less than the average of all food prices. Selling and distribution expenses have been the major cause of baker cost increases.

Farm ingredient prices, on the other hand, have risen very little in absolute terms. They held at around 3.2 cents per pound of bread over the entire period from 1947-49 to 1965. As recently as January 1965, the farm value of all ingredients used in making 1 pound of white bread was 3.5 cents per pound. This figure rose by 0.5 cent per pound between January and August 1966. Expressed as a percentage of the consumer dollar, the farm value of ingredients used in making white bread fell from 26 percent in 1947–49 to 17.5 percent in August 1966. Prices of processors of farm ingredients (especially flour, milk, and sugar) going into bread have risen somewhat, but their share decreased from 14.2 to 11 percent. Also, the retailer's spread increased, from 15 percent in 1947-49 to 18 percent of the retail price in August 1966 (fig. 2).

The price of raw milk received by farmers declined after reaching a postwar high in 1952. The recent increases in raw milk prices represented a partial recovery of these previous losses.

The farmer's share of the consumer's dollar spent on fluid milk declined rather steadily after 1952. Although the recent increases stopped the downward trend, the farmer still received a smaller share than in earlier years (fig. 3).

The division between processors and retailers of the spread between the raw milk and the retail price cannot be determined through 1965 from available data. However, on the basis of the data collected by the Commission for a number of cities, in August 1966 the farmer's share of the consumer's dollar was 51 cents, processor's share was 30.5 cents, and the retailer's margin was 18.5 cents. During

1 Whereas at the end of World War II selling and distribution were 21 percent of wholesale baker total costs, in 1965 they were about 35 percent. Increases in selling and distribution expenses therefore explain about two-thirds of the bakers' spread increases over the period and nearly half of the average retail price increases of bread. Had it not been for the increase in selling and distribution costs pushing up the price of bread, the postwar bread price increases would have been less than the increase in the consumer price index, all other things assumed equal. “Report of the Federal Trade Commission on Wholesale Baking Industry, 1946," table 2, p. 23; and "Organization and Competition in the Milling and Baking Industries, Technical Study No. 5 of the National Commission on Food Marketing, 1966, table 3-49, p. 106.

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the January-August interval, the farmer's share held steady, the processor's share declined, and the retailer's share rose.

The increase in gross margins of food retailers has not been confined to bread and milk. (Gross profit margins are the difference between the cost of merchandise purchased by a retailer and the price at which the merchandise is sold.) Although gross margins of food retailers have risen continuously over the past decade, the greatest increases occurred among large food chains. Whereas in 1955 large food chains had gross profit margins of 18.1 percent, by 1964 their margins had grown to 22.8 percent (fig. 4). This is in sharp contrast to medium and small food chains, whose margins increased very little over the period.

Several factors contributed to increased gross margins. This matter was studied in depth by the National Commission on Food Marketing during the past 2 years. The final report of that body concluded as follows with respect to the causes of increased margins:

Higher margins for retailers, in general, reflect the cost of trading stamps and other promotions, higher costs of renting or owning store facilities, increased labor costs and advances in other expenses. More services offered by retail stores add to the job to be done and account for some of the increase in costs.?

The Food Commission found that increased advertising and promotion (including trading stamps) alone accounted for 40.9 percent of the increase in margins of food chains between 1955 and 1964.3

The Food Commission further found that higher promotional expenditures had become reflected in higher retail prices. On this point the Food Commission concluded:

When stamps were first introduced, retailers giving them frequently attained sufficient additional volume to more than pay for the stamps. Consumers, therefore, did not have to pay higher prices for food but benefited from the stamps

“Food From Farmer to Consumer,” Report of the National Commission on Food Marketing, 1966, 3 Ibid, p. 78.

p. 78.

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