On the commodity share of retail food prices

A professor of biological sciences emails:
I would like to follow up on your observation that "Raw commodities make up such a tiny share of retail food prices we would hardly notice a 10-fold increase in corn prices. The price of a quarter-pound hamburger (produced from corn-fed beef) would probably go up by less than a dollar."

Could you direct me to the analysis or more general treatments of the supply chain costs? At the moment, I'm very interested in supply costs and retail costs for soybean-based products. I'm a molecular scientist and not an economist, so I appologise if my request is very basic!
I knew someone would ask that question...

In case others are interested, here's my reply:

I believe the general principle is well known.  The numbers in the quote came from my own back-of-the-envelope calculations.  There are about 6 lbs. of corn used to produce each lb. of beef.  Corn sells for about $3.70/bushel.  A bushel is 56 lbs.  So I figured the value of corn in a pound of beef was about 40 cents, or 10 cents in a quarter pound hamburger.  If corn went up to $37.00, a lot of people in poor countries would starve to death.  But the price of a burger would go up just 90 cents.

A few key economic concepts to keep in mind:  Markets for raw commodities are extremely competitive, meaning that individual buyers and sellers really don't have any control over the prices they pay or receive.  Things are different at later stages in the process from raw commodities to retail. Some buyers (like Walmart) have a lot of market power.  Also, usually an individual store can adjust retail prices up without losing all their customers or adjust prices down without instantly selling everything they have.  These basic ideas suggest that retail food prices would probably go up less than the change in commodity value contained in the retail food. 

Also, empirically, retail prices tend vary less than wholesale prices in absolute terms.  In other words, I was being conservative--a pound of beef would probably go up a lot less than 90 cents.

USDA ERS (Economic Research Service) has a few studies looking at prices at different steps along the retail path.

Authors doing recent research in this area include Ephraim Leibtag and Emi Nakamura.  If you google those names and "pass through" you should find some interesting stuff.


Popular posts from this blog

Renewable energy not as costly as some think

Answering Matthew Kahn's questions about climate adaptation

Paul Krugman on Food Economics