The Discrepancy Between Farmers & Consumers

Posted in Blog, Farming on Tuesday, July 11, 2023

The Discrepancy Between Farmers & Consumers

Food prices have been on the rise in recent years, influenced by various factors such as geopolitical events, supply-chain disruptions, labor costs and inflation. According to the USDA, prices of groceries experienced an 11.4% increase in 2022 compared with the previous year. This upward trend is accompanied by a 2% average annual inflation rate over the past two decades, directly impacting the value of consumers' food purchases. While inflation is slowing, the cost of food production is expected to rise by 4.1% in 2023, placing additional financial strain on farmers. However, it is crucial to recognize that farmers do not determine food prices; they are merely price takers in the larger food system.

Farmers as Price Takers

Farmers play a vital role in food production, but they have limited control over the prices they receive for their products. The Economic Research Service (ERS) states that retail food prices are influenced by farm-level commodity prices, but other factors such as packaging, processing, transportation and marketing costs have a more significant impact on the prices consumers encounter at supermarkets and restaurants. This means that the prices consumers pay for their groceries are determined by a complex interplay of various elements, with farmers receiving only a fraction of the final price.

Disparity in Pricing: Raw Products vs. Processed Foods

When farmers sell their products as raw, unprocessed goods—such as fresh raspberries, raw potatoes or dried garbanzo beans—they tend to receive a larger share of the end price. In contrast, selling commodities for processing or inclusion in highly processed convenience foods reduces the portion that farmers receive. In 2021, according to the American Enterprise Institute, “Farmers received a record-low 14.5 cents for every dollar Americans spent on food.” This discrepancy is driven by “increasing consumer preferences for convenience foods and dining out, which require more processing.”

Let's take a closer look at a Washington raspberry grower's experience. In 2023, when they sell their berries directly to the fresh market, including U-pick farms, farmers markets or large suppliers and grocery stores, they can receive up to 30% of the consumer price. However, if those raspberries are sold for processing, to be frozen or used in various food products like juices, jams or desserts, farmers may only receive up to 17% of the final consumer price. (These figures were derived by comparing 2023 USDA raspberry values to 2016 USDA raspberry prices.) The remaining 83% of the consumer price is divided among suppliers, processors and marketers, underscoring the significant impact of value added during the processing and marketing stages on the distribution of the final price.

The Decision-Makers: Suppliers, Processors and Retailers

Although farmers are instrumental in food production, they do not have a significant say in determining food prices. Once a commodity is sold to a supplier or processor, these entities collaborate with grocery stores and other sellers to establish competitive prices for their products. Multiple factors come into play during these negotiations, including commodity pricing, processing fees, industry trends and benchmarks set by marketing executives to maximize profits. This complex process illustrates that pricing decisions are influenced by various stakeholders throughout the supply chain.

Understanding the Farmers' Plight

In the modern food system, farmers historically receive a smaller portion of the money spent on American food. It is crucial for consumers to comprehend that farmers are not responsible for setting prices; they are subject to market forces just like consumers. While farmers face mounting costs of production and increasing financial pressure, it is important to support sustainable farming practices and advocate for fair pricing mechanisms that benefit all stakeholders.