MEAT MARKETING MARGINS IN BRITAIN

2

MEAT MARK= MARGINS IN BRITAIN. BY GEORGE HOUSTON

University of GLasgow

INTRODUCTION Topicality is a quality which academic economists rarely seek (or

admit to seeking) for their own products, but when I first did some work on meat margins (in the autumn of 1959) current trends in the lamb market were the main cause of my interest; moreover, when I was asked a year alp to read this paper in July, 1961, I re lied that I would prefer to leave it till

denied-our subject is highly fashionable. The course of fatstock and retail prices during 1961 has focussed even

television cameras on an old problem-the behaviour of margins in a period of price fluctuations. This point will be discussed at some length. but the scope of the paper is a little wider. Our purpose has been t o examine data on meat prices and margins (Section I) to reveal any trends or short-term fluctuations that have taken place (Section 11) and to consider related analytical problems (Section 111). As we shall be concerned to some extent with the level of margins as well as with changes in margins, it may be wise to insert a cautionary comment a t t h i s stage.

A common complaint of the agncultwal community is that the cost of marketing and distributing meat products 1 is too high. There may be little ambiguity about such a criticism in the context of 1961 markets, but, as a general rule. the p h “too high” is meaningless in itself. Is it being argued that profits and/or wages in distribution are higher than elsewhere? Is it that capital and labour are inefficiently used? Is there any implication that restrictive practices or monopolistic intluences are keeping costs up, or are there other r-ns why more efficient methods are not used? Even a brief consideration of these questions would reveal how difficult it is to apply objective economic criteria in judging whether, over a period of years, distribution costs are too high, too low, or just right. The onus of proof tends to rest on the critic; current prices and margins really exist, they are the consequence of the interaction of various market and institutional factors. To prove they are too high ultimately involves showing that a change in the organisation of the market would bring about a reduction. In this paper no attempt is made to describe or defend alternative methods of marketing meat in Britain, the closest we come to policy problems is in a consideration of guaranteed price arrangements in the light of our discussion of margins.

One further introductory point may be helpful. The absence of reliable data on prices and margins of individual products is well-known and there is no need to elaborate the point a t this s t a g o i t will become obvious later! One of the recommendations of the food statistics sub-committee of the Inter-

December. Whatever the motives P or that delay, the consequence cannot be

‘Mthagh. strictly spuking, the term8 marketing 8nd distribution refer to different s a g a in the process of taking a product from a farm to the consumer. it is often convenient to use them as synonyma to desaibe the process as a whole; thia practice is generally followed here, except where the context clearly indicates otharwise.

Meat Marketing Margins in Britain 3

departmental Committee on Social and Economic Research was the calculation and publication of an official series of farm, wholesale and retail prices for a number of food products.* No one who has worked in this field would seek to dismiss the technical difficulties involved; nevertheless, the U.S. Department of Agriculture has for some time published information on the marketing margins for various foods, including beef, pork and lamb.' There are signs that a lot of money may soon be spent on research on marketing in Britain; a small part of this might usefully be devoted to the official collection, a d - and publication of more adequate statistics on food pricw and margins.*

This paper deals only with meat, especially beef, mutton and lamb.' Consumers' expenditure on meat and bacon products is now about 41.400 million, or over a quarter of total food expenditure; to British farmers, fatstock and poultry meat bring gross receipts of over LSOO million a year, or one-third of their total receipts. There is no doubt that we are dealing with an important group of products and one which is not likely to lose its significance in the next few decades.

I

CURRENT MARKETING MARGINS ON MEAT There are three ways of trying to estimate the marketing margin on

meat, that is, the margin between the farmers' price and the equivalent retail' value of fatstock. First is by the use of accounting records, secondly with the help of comparative prices, and thirdly by the national expenditure approach. In so far as all these methods are txymg to discover the same things from the same field of economic activity, there is much in common in their problems and difficulties. Even the sources of the data used are not always as independent as one would wish but it is still useful to distinguish between the three a p proaches.

a. ACCOUNTING RECORDS The most reliable way to calculate margins at any stage in marketing

would be from the trading records of the wholesale, retail and other firms involved.' The differences between the value of purchases and value of sales of a product would give an accurate gross margin for the firm concerned. As it is exceptional if not unknown for individual firms to keep accurate records of the takings from the sale of one commodity, such a method can

'(Third) Report of the Inlrrdepartnralol Cmmittu m Social a d E m m u Resorch (1956) H.M.S.O.. pp. 26-28.

* c j . U.S.D.A.. Marketing Research Report No. 418. Marhetissg Costs and Marpus for Livestock and Meats (1980).

'In a comparative study of meat margins in O.E.E.C. countries, published in 1959. the United Kingdom wan omitted. apparently because adequate officd data were no available, cf. O.E.E.C.. Documentation in Food and Agriculture. 1959 series. No. I5 Marheting and Dtstnbutim M m p u for Livesloch a d Meal in O.E.E.C. c o m b s . The Canadians have recently had a royal commission on the subject. c f . Repor; of the Royal Cornmisston m Priu Splcads of Food Producls. 3 volumes (1959, 60). the Queen's Printer. Ottawa.

'The nature of the data prevents the use of one clearly-defined commodity group throughout, 'By-products. such as hides and skins. have to be valued a t first-hand or wholesale prices. 'The marketing and distribution of meat covers more than the activities of wholesale and

retail firms; it includes transport and insurance. auction mart costs, dealers' margina, and so on. In what follows, total marketing margin is taken to mean the difference between the pnce received by the farmer and the price paid by the housewife. with allowance for by-products; by retail margin is meant the Merence between tha price paid by the butcher in the wholesale market and the price p d by the houm wife.

4 G. Howton

only be used if special co-operation is obtained from firms, or if there is a commodity group such as carcase meat which makes up a high proportion of the turnover of certain types of firms, for example, butchers' shops.

During the war the Ministry of Food collected information on margins from various commercial firms, including butchers. In some cases detailed investigations were made; in others only gross income and expenditure were collected. The Ministry obtained thls information on the understanding that it would not be disclosed to anyone else, including other government depart- ments. This is taken to apply even to aggregate figures and to research workers 20 years after the event. Data have been published in various places, including the Thirtcmth Report o j the Select Commitlee on Estimates, and it would seem that in 1948 the gross retail margin on meat was about 27 per cent on retail sales; as the gross wholesale margin was around 7 per cent the total distribution maren came to roughly 34 per cent. In 1950, when the meat ration was increased the retail margin apparently dropped to 21 per cent.

More recently, the reports of the Census of Distribution have included average retail gross margins (turnover less purchases) for various trading groups, based on returns from participating firms. In 1957 retail butchers' gross margins in these census returns averaged 20.0 per cent of retail sales; in the previous census in 1950, when controls were still on, the figure was 20.8 per cent. There are a number of reasons why the census returns may under- state the actual retail margins on carcase meat.1 but the extent of any adjustment which should be made on the 1957 figure of 20 per cent can only be guessed; my own view is that retail meat margins in recent years have averaged at least 23 per cent.

b. COMP.4R.4TIVE PRICES

This method involves comparing farm and retail prices for an individual farm commodity which is associated with an identifiable retail product or products. In the case of fatstock the farm commodity is divided up into several products, some of whch (e.g. hides and skins) go into the manufacture of non-food products; there are also differences in the way carcases are cut up for retail sale and in the relative prices adopted in different parts of the country. To use the method for the country as a whole it is essential to have more adequate retail price data than are published in Britain.

At present the Ministry of Labour collects information on the retail prices of defined individual products at the shop level. These are used to constitute quarterly retail price indexes for various food groups, but no further breakdown by commodities is permitted' except that October retail prices (from seven towns) of selected individual food products (including cuts of meat) are made available to the I.L.O. and published in the statistical supple- ment to I d e r n a t i d Labour Review (usually in July). I t is possible that the Ministry of Agriculture, Fisheries and Food may also collect retail prices a t the shop level but, if so, none are published; the National Food Survey obtains information on household consumption and expenditure from which average

'Three points may be made: (a) Butchers were asked to include in the value of purchases the cost of transport to the shop; @) any meat taken for their own use was assumed to be included in their sales at retail value; (c) the data used would presumably be the same aa in amounts prepared for the tax authonties.

'Before the war. more detailed information. including. for example, the retail prices of cuts of meat. were published in the Miristr?, o/ Lobwr Coreffe. The cumnt official view, apparently bassd on a recommendation of the Cost of Living Advisory Com- mittee. is that ublished figures should be confined to broad groups and sub-groups and that no otier information. such as indexes for individual products, should be published.

Meat Marketing Margins in Britain 5 retail prices are calculated but here again the commodity breakdown is often not detailed enough for comparison with the prices of individual farm products. Various other organisations, including some of the marketing boards, also collect retail price data.‘

An individual research worker, who has not the facilities of a government department or national institute, cannot hope to use comparative prices to provide estimates of current meat margins of general validity for Britain. But it is not impossible to discover what kind of information is necessary, nor is it too difficult even for an individual to get this information reasonably representative of one area at least.

Tables I and I1 provide a straightforward list of costs and receipts typical of a Scotch fat bullock sold live in an auction market in the autumns of 1960 and 1961 and retailed in the Glasgow area. In the former year (likely to be more typical) the retail margin was about L3 a live cwt., or 29 per cent of the retail value of the carcase; the total marketing margin was about L4 a live cwt. or 35 per cent of the total retail value of the carcase (including by-products). A similar break-down for lamb in Scotland in the autumn of 1959 has been published elsewhere.* .4t that time the retail margin worked out a t about 1s. 7d. a lb. d.c.w. or 50 per cent of the retail value of the carcase. The total margin was 2s. a lb. d.c.w. or roughly 55 per cent of the total value. In the early months of 1960 retail margins on lamb were severely reduced and may have dropped to around 20 per cent for a limited period. Ry the autumn of 1960 they had risen again to nearer 40 per cent and this last autumn they have approached the 1959 level.

The value of this kind of exercise obviously depends on whether the data are reliable and representative. I t would be tedious to describe in detail how the various figures were obtained and the qualifications which need to be noted; the main point is that the data in the tables are believed to be broadly representative of a certain class of beef in one area in the autumns of two particular years.3 On the basis of these tables it would be absurd to draw conclusions about average margins on meat in Britain as a whole but the exercise is basically so simple that its replication over Britain at different times of the year in accordance with a statistically-determined procedure would not seem to be highly impracticable.

c. N . 4 ~ 1 o x . 4 ~ EXPENDITURE APPRO.ICH An alternative method of trying to obtain a breakdown of con-

sumers’ expenditure on a product or group of products is to use national estimates of expenditure, of farmers’ receipts, and of imports.’ In the annual Blue Book on the National Income estimates are published of household expenditure on “meat and bacon”, which includes all fresh carcase meat, beef, veal, mutton. lamb, pork, poultry. all bacon and ham, and various other meat items. By measuring the value of imports and farmers’ receipts for the products used in this group. one can obtain, by difference, an estimate of the proportion of consumers’ expenditure on meat and bacon which is used

’The Potato Marketing Board publishes retail prices in its annual reports. 2Form:ng News. 23th November. 1959. ’In Scotland percentage m q n s appear to be greater in the autumn than at other times

of the year. One would therefore expect the distributors’ average shares over the year to be lower than the figures quoted above.

‘The method IS only an alternative to an individual researcher; in calculating consumers’ expenditure on a given product or group of products use is made of retail prices revealed by the National Food Survey. See Central Statistical Office .Vaftonal Income Sfafrsttcs. Sources and Methods (1956). p.107.

6 G. Houston

TABLZ I BEEF: RETAIL CUTS AND PRICES: AUTUMN 1960 .4ND 1961

300 LB. SIDE (BULLOCK I N CLASGOW)

Rump (70 lb) Rump steak (bonelam) ... Hough (boneleas) . . . . . . Lean Trimmings . . . . . .

‘s ryr (30 Ib.) pF rying steak (boneless) ...

Toil end (boneleas) . . . . . .

Rwrl (60 lb.) Rib maat (boneless) ... Kidney . . . . . . . . .

FhnA (35 lb.) Boiling beef (with bone) ...

Lean trimmings . . . . . .

F a r l q (105 lb.) Shoulder steak (boneleas)

Briaket (boneless) . . . . . . Hough (boneleas) . . . . . . Lean trimmings . . . . . .

Wholesale cost a t 216

...

...

...

...

...

...

1 . .

...

...

...

...

...

...

Ib. 45

5

4

I5

5

40

I

20

5

57

10

5

5

!171b -

1960

42 t i do 17 6

I4 0

5 0 0

1 0 0

12 0 0

5 6

I 10 0

17 6

13 6 0

2 6 8

17 6

I7 6

52 7 2 37 10 0

Retail margin Ll4 I7 2 Percentage of retail price . . . . 28 per cent

1961

42 ‘7 (!i IS 0

12 0

4 IS 0

17 6

I I 3 4

s o

I 3 4

IS 0

12 7 0

2 3 4

15 0

IS 0

49 4 0 3 0 0 0

Ll9 4 0 39 per cent

NO&: Out of 300 Ib. drensed currse weight a generous deduction of 83 lb. (28 per cent) hu bean made to cover bone. suet. fat. shrinkage. cutting l o u e l and low prices for “unsold“ rneat tent to the manufacturn. The U.S.D.A. u r n an allowance of 20 per cent for choice

e u l d be appreciated that although the cuts and avenge p r i m used M believed to be broadly repreMntative of d1 but the cheapest shop in the Clasgow area. there is DO implication that dl butchers’ shops acted in the same way. and no claim ia made that the figures provide an average in a strict statistical am.

op. cil., p. 49.

up in processing and distributing these products. This has been attempted for food expenditure as a whole in unpublished work at the Agricultural Economics Research Institute at Oxford and the National Institute of Economic and Social Research.

16. In 1959 household expenditure on meat and bacon was L1.153 million; adjustments to this figure must be made to include non-household expenditure

IIrm 1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

Meat Marketing Margins in Britain

TABLE I1

DISTRIBUTION COSTS AND MARGINS FOR 9 CWT. BULLOCK. SEPTEMBER 1960 A N D 1961

(k.0. percentage 57 per cent)

Value of animal to producer (item 3 leu item 2) . . . . . . costr up to h t sale (transport, insurance. auctioneer’s com-

mission) . . . . . . . . . . . . . . . . . . . . . Value of animal sold at mart... . . . . . . . . . . . .

Costs between auction a d dead meat market (tran insurance. portenge. drover’s charge, feeding. s l a u ~ ~ ~ house and meat market dues) . . . . . . . . .

Value of animal after slaughtering (items 3+1) ...

Value of animal sold at wholesale market (items 7+Y)

Value of caruse (item 8x574)

Price per Ib. dead weight a t wholesale I960=2/6

Value of by-productc (hide. offal)

. . . . . . . . . ...

1961=2/- ... . . . . . . . . .

Meat wholesaler’s mugin (item 6 lw item 5) ... Vdue of nuat a t retail level (item 12 x574) ... Weighted comumer pricer (ue Table I) 1960=3)6 ...

RetPiler’r margin (item I 1 less item 7) . . . . . . . . . Value of total a n i d sold (items 1 I +9)

1961==3/3 ...

. . . . . .

...

...

...

...

...

...

...

...

...

...

...

...

... Total marketing and distribution margin (item I4 less item I)

Retail w i n aa a percentage of retail value . . . . . . Total mugin Y a percentage of total value (excluding rub-

sidy) . . . . . . . . . . . . . . . . . . . . . . . . Total margin as a percentage of total value (including sub-

sidy) . . . . . . . . . . . . . . . . . . . . . . . .

1960 L s.

69 IS

2 5

72 0

2 0

74 0

77 IS

71 15

6 0

3 IS

loo 9

28 I4

106 9

36 I4

28.6

34 *5

34.3

1961 L s. 55 0

2 0

57 0

2 0

59 0

6 3 3

57 8

5 15

4 3

93 5

35 17

9 9 0

44 0

7

38.4

44.4

37.8

No&: In the table the value to the producer ( ibm I ) excludes deficiency payments. The calculations of the total margins aa a percentage of total values (includi are byed on a deficiency payment of I/- a live cwt. in late September. l&TU,”,”B 4I/- in 1961. I t will be seen that although the producers’ returns. including submidim. in thh example rose by L3 5s.. the cost to consumers and taxpayers fosc by LlO 1 Is.

and the value of fatstock subsidies, which are part of the nation’s expenditure on meat though not spent directly by consumers. The final total is t1,343 million (see Table 111). The share of this total actually received by home producers is based on farmers’ receipts (including price subsidies) for the sale of fatstock and poultry; several adjustments are necessuy, most of them detailed in the footnote to Table 111. Our estimate works out at t512 million for 1959.

8 G. Houston

1958

503

317

490

1,310

37.5

TABLE 111

ESTIMATED BREAK-DOWN OF NATIONAL EXPENDITURE ON MEAT AND BACON. 1953--1960

1959 1960

510 520

321 359

512 541

1.343 1.430

38.1 38.1

( I ) Home producers’ receipts Lm

(2) Imports c.i.f. t m

distribution t m (3) Procening and

(4) National E nditure

(5) Percentage Margin: :&

on Meat a n d z o n Lm

(3) as percentage of (4)

1953

387

269

w

91 1

28.0

-

-

1954 - 438

363

337 - 1.028

31.8

1955

443

304

380

1.126

33.7

1956 I 1957 I

N o h : Home producers,’ receipts are calculated from Table 314 in the Annual Abstract o/ Stcrlistirs, 1960. Adjustments have been made for the value of hides and skins, the output of poultry and pig-meat from hollngs of leu than one acre, the exports of live animals (fat) and the meat content of exports of meat preparations. No deductions were made for the value of store animals imported. Calendar year totalr were calculated by adding ap ropriate h s of output yean, ending Ma Imports (c.i.f.) are calculated from Table &4 in the Annual Abstract of Sktis t ics , I&, and the Trading Accourls. All meat and meat preparations have been included as well as fat animalr imported. Other live animals imported are excluded as they will appear as part of the value of home producers’ nceiptcl. The national expenditure on meat and bacon is derived from Table 18, National Incomr and Exjwnditurr 1961. with adjustments for the value of fatstock subsidica and a h e of ”other personal expenditure” which is not allocated between food group in the table. The percentage margin ir obviously an approximate figure and only changes of, say, 2 points or more are likely to be significant.

The share received by overseas suppliers (i321 million) was obtained directly from the value of imports, c.i.f., of meat and bacon, again subject to minor adjustments.1

There are a number of obvious problems in making these estimates, including possible stock changes, but after solving as many as the data will allow, our conclusion by this method is that in 1959 processing and distribution took up 38 per cent of consumers’ expenditure (including subsidies) on all meat and bacon products. The share of this going to processing may be roughly estimated from Part 10 of The Rep& on ;he Census of Producfion, 1958, which deals with the bacon curing, meat and fish products industry. The net output of the whole industry is given as €55.6 million but for our purposes various

‘It should be noted that in these calculatima the full value of imported store stock is included in the home producers’ receipts. not in the d u e of imports; as the value added principle could not be a plied generally it seemed unwise to use it for imported store stock. In any case. tRe main purpose of the exercise waa to calculate by difference the share of consumers’ expenditure going in marketing, processing and lstribution.

Meat Marketing Margins in Britain 9 adjustments have to be made to this figure’ and our estimate of the processing share in 1959 is L65-70 million, bringing the total marketing and distribution margin on all meat and bacon products to around 33 per cent. I t is quite likely that the margin on home-produced carcase meat was higher than this but no further breakdown is possible using the national expenditure approach.

SUMMARY In the writer’s opinion the total margin on all meat and bacon pro-

ducts has probably been about 37 to .% per cent in recent years, made up of 5 per cent for processing, 23 to 24 per cent for retailing and 9 per cent for marketing and wholesale distribution. I t is unlikely that the farm-to-retail margin on home-produced carcase meat has averaged less than 32 to 33 per cent and it may well have been two or three points higher.’

I1

TRENDS AND FLUCTCTATIONS IN MARGINS TRENDS

Pre-war marketing reports by the Linlithgow Committee* and in the “orange book” series contained examples of the costs and returns to retailers arising from individual animals. In addition the Linlithgow Committee sent out 8,000 questionnaires to the retail butcher trade to try to ascertain gross margins and net profit, but received only 115 returns from private firms and 97 returns from co-operative societies. The data received suggested gross margins in private firms of about 16 per cent of sales and in cooperative societies of about 22 per cent. The Committee considered it improbable that such a disparity existed throughout the trade but all the other evidence it produced tended to suggest that gross m-ns in private retail firms then averaged around 16 or 17 per cent; data for pre-war (1912. 1913) showed similar gross margins, but lower net profits.

The “orange book” reports on cattle and beef‘ and sheep, mutton and lamb’ are of very limited help in discovering long-term trends in margins. In the beef report reference to retail margins is confined to livestock in June- December, 1927, and insufficient details are given to enable a proper appraisal of the data; two points which do emerge are the lag in the fall of retail prices in the autumn and the wider difference between the price of cheap and dear cuts in 1927 compared with 1922. The report on mutton and lamb is also unsatisfactory in its dscussion of margins but confirms that the retail price lag (up and down) and an increasing differential for dear cuts were also a feature of the trade in mutton and lamb.

‘\Vhat we want is the difference in the value of the industry’s p u r c h s of meat and pig- meat and the value of bacon and meat products sold; not only has a deduction from net output to be made for fish products but an addition must be made for the value of fuel and transport (see note on net output on page ii of the report). An allowance must also be made for the contribution of establishments classified to other industries but producing meat products.

‘If the value of subsidies were excluded, the percentage margin woiild be wider. (Ser Table 11).

’Departmental Committee on Distribution and Prices of Agricultural Produce, Inter im Report on Mcat , Poultry and Eggs (1923).

‘Ministry of Agriculture and Fisheries, Econ. Series So. 90. Report on the MarRctang 01 Cntillc and Beef in England amd W o k s (1929).

’Econ. Series No. 29. Report on thc Marhrt ing of Shccp. Mutton aiid Lamb in England a d Wales (1931).

Cmd. 1927.

10 G. H o w l o r , For 1938 there are estimates in Jeffelery's valuable work1 of the margins

on home-killed and imported meat, as well as bacon and ham. Total distribution costs for home-killed meat in 1938 were estimated at 29-33 per cent of retail sales, for imported meat at 25-29 per cent. Although Jeffery did not provide an estimate for all meat and bacon products similar to that given at the top of page 8, it is clear that this would not work out at more than 27 or 28 per cent, as against our estimate of about 33 per cent for 1959. The evidence so far suggests a tendency over the last 30 or 40 years for costs of distribution to rise as a share of consumers' expenditure on meat, but there are no grounds for claiming that the increase has been dramatic.

Margins during the period of controls (1939-1954) have already been mentioned; only intermittent data have been published from the information collected and it seems likely that many changes in percentage margins within this period were associated with variations in the meat ration. I t is probably of more immediate interest to study developments since decontrol in July, 1954.

Using the national expenditure method there is strong evidence that the farm-to-retail margin on meat and bacon has widened (see Table III), although the release of stocks after decontrol might account for some of the increase after 1953. The levelling off after 1956 is worth noting, as is the jump in that year when the farm auction price (excluding subsidies) of beef was very low. Data for 1961 are not yet available, although one naturally expects a widening will be revealed for this year.

We have already indicated the difficulties of using the comparative prices method in Britain, but in 50 far as it can be applied, the results also suggest a widening margin since decontrol.' Table IV shows the relativr:

~~ ~

Index of FumPricea

of Fat Sheep

TABU IV

OCTOBER 1951--OCTOBER. 1960 FARhl ASD RETAIL PRICES OF HOME-KILLED MEAT.

Index of RetrilF'ricua (estimated)

Date.

Index of Farm Prica

of Fat Gttle

October, 19% ... October. 1955 ... October, 1936 ...

October. 1957 ._.

October. 1958 ...

October. 1959 ... October. 1980 ...

Index of Retail Ricer (estimated)

Beef I Muttonand h u b

100

I10

a? 93

116

I17

111

100

I I5

109

114

134

I35

135

100

92

m 87

79

49

77

100

109

107

I12

I IS

93

112

Sourcea: Morthly mgrst c/ S t a t i d u s . In&mdonal Labour Rm'm. and other retail prim data.

Nok: The retail price indexa are baaed on very much less saotirtactory material than the farm price indexa. which exclude subsidies.

'J. B. Jeffery, The Disfributim of C o r s u w Goods (1950). 'As =me of the retail price &ta used M also an essential part of the national expenditure

See footnote on p.4. method, this approach d m not provide a satisfactory check.


movements of farm and retail prices of home beef and lamb in mid-October in each year since 1954. The contrasting trends are striking although they do not necessarily indicate average annual price movements. An attempt to do this has been made in 6 g u - e ~ I IA and IIB which show the estimated changes in farm/import and retail prices of lamb and beef since the last quarter of 1954.'

The evidence so far certainly suggests that margins widened after decontrol. According to the Census of Distribution, however, the average gross margins of retail butchers declined from 21 per cent in 1950 to 20 per cent in 1957. Unless one assumes that retail margins fell significantly between 1950 and 1953 (for which I have found no evidence) this is difficult to reconcile with the view that the total marketing margin widened. One possible explanation is that elements in the farm-retail price spread other than retail m a r p s have become more important or more costly. There has certainly been an addition to consumer services in the processing, packing and merchandising of meat but mainly in the last few years, whereas the big increase in percentage margins appears to have occurred between 1953 and 1956. A second point is that the Census of Distribution figures apply to only two years, 1950 and 1957, in both of which special circumstances' influenced the data. But these circumstances merely suggest that margins in 1950 and 1957 were probably lower than average, they do not explain away the relative fall from 21 to 20 per cent. A third possibility is that the Census of Distribution figures are misleading; I can think of several reasons why the data on margins rmght be suspected, but no convincing grounds for rejecting the assumption that any e m r s of under- estimation in 1957 were also made in 1950.

Despite the Census figures the writer's inclination is to accept the evidence of a widening overall margin since 19%;' if this is wrong, then there must be a powerful case for improving the methods of calculating farm and retail prices and consumers' expenditure.

FLUCTUATIONS A marketing margin may be expressed as a percentage of the retail

price or as a unit cost of so much per Ib.; the former will be called a percentage margin, the latter a unit margin. In discussing short-run variations in price spreads it is necessary to distinguish between these two ways of measuring margins. If there is a fall in fatstock prices then retail price may (a) remain the same or decline slightly so that percentage and unit margins have both increased, (b) decline sufficiently to lower unit margins while still leaving the percentage margin wider, or (c) fall proportionately to keep the percentage margin the same.'

'Fum/import prices are a weighted average of home auction and imported prices; available annual average retail prices (in the National Food Survey reports) do not difhrentkte between home and imported meat for the whole period under consideration.

'Tbn was a sudden drop in mugins in 1950 when the meat ration went up while in 1957 farm prim wen rising following the low level of I956 and retail marginr in 1957 might well have been squeezed.

'This may be stretching the evidence too far. so it hardly seems justlded to attempt to estimate changes in processing, wholesale or retail mugins acpaxately.

'This may be illustrated by a very simple example. .baume a product whom retail rice is 1OOd. per unit and the equivalent fum price Wd.; the unit margin is SW. anxthe percentage margin 50 per cent. If the farm price drop to Jod. and the retail price falb to 91d. plw. then the unit margm has risen to Sld. plus and the percentage margin to 56 per cent lus if the retail price falls to between 81d. and 89d. the unit mPrIpn has dropped to pesa &an 5Od. but the rcentage nurgin h~ still risen above 50 per cent: if the retail price drop to d t h e percentage margin is constant. It is most unlikely that percentage margins will drop aa prices drop.

12 G. Houston

Pre-war data, mentioned earlier, suggested a lag in the movement of retail meat prices following changes in fat cattle prices. Figure I which brings together farm and retail price indices for home beef, averaged over the years 195859, shows how percentage! margins widened in the late summer and autumn when prices were low. Trade opinion confirms the available statistics, and there is little doubt that percentage margins vary inversely to price movements and that, consequently, fann prices fluctuate more than retail prices.

8o 1 80-

60

a 1

J a n . July Dec. J a n . July Dec.

FIGURE I Seasonal changes in home-killed beef prices a t farm and retail level

Nvolr: The avenge of farm prices (excluding subnidies) has been (average of 1958/9).

taken a 65 per cent of the average of retail prices.

Unit margins are more dfficult to generalise about, but it seems that on occasion, these also can vary inversely to price movements. Many butchers state that under normal supply conditions they tend to keep their selling prices fairly constant over the year, although buying prices are usually higher in the spring than in the summer.' Of even greater interest, perhaps, is their attitude when farm prices drop sharply, as happened to beef in 1956, lamb in 1959, and beef and lamb in 1961.

In the months 1st September-3Oth November, 1956, fat cattle prices were about 25 per cent lower than prices in the similar period of the previous year; in the autumn of 1959 fat sheep prices were nearly 40 per cent lower than the previous year, and in 1961 fat cattle in the summer and early autumn and sheep in the autumn dropped some 30 per cent lower than 1960. For unit

'Price data for recent years resently available to the writer do not justifv the ap ro riate s t a t i a t i d analysis. fn his paper to the society in December. 19!Xi, J. A. 8. grown showed that, over 1954-7, retail prices of beef. mutton and lainb followed a seasonal pattern in which minimum prices were around 6 or 7 per cent below maximum p r i m U.A.E.. Vol. XIII. p. 234). .4 similar analysis of home fann prices would not be strictly comparable. This is a problem that might be tackled at a later date except that I am inclined to heed Heraclitus' warning. as quoted by U. J. Yoroney. that it is never possible to step twice into the same river.

Mtat .ifarketing Margins in Britain 13

I955 I956 I957 I958 1959 I I I I I

I 1 -I

FIGURES 1 I . i A N D 116

Beef prices (IIa-top dla ram) and mutton and lamb prices (11s-lower diagram)

Nokt Farm/import prices are a weighed average of farm prices, excluding subsidies.

Sources for Figs I. I I A and 116: Monihly Dig& o/Sfai:si:cs. Domesiic Food Consumpiion

from end of 1954 till 19& (annual average of 1955 prices = 100).

and Smithheld prices for imported meat.

and Expendiiure. reports for 1954-9. and F..-I.O. Monihly Bulleirn.

14 G. Howton

margins to decrease average retail prices should have dropped by more than 15 per cent in the relevant period of 1956, more than 24 per cent in 1959 and more than 18 per cent in 1961.’

The maximum reductions that could be claimed from a study of the available data would be a fallof 5 to 7 per cent in beef retail prices in 1956 and a decline of 15 to !20 per cent in lamb prim in 1959, and I doubt if the record will show a reduction of as much as 18 per cent in the relevant months of 1961. When meat prices drop to an abnormally low level unit margins as -11 as percentage margins are likely to widen.’

I11 ANALYTICAL PROBLEMS

A variety of questions are prompted by a descriptive study of margins. Does an increased share going to distributors reflect real changes in demand conditions, slower improvements in marketing efficiency, or higher profits for middlemen? Why does the meat trade vary its percentage margins over the season? Why and how does it increase its unit margm when prices fall? Does the guaranteed price system influence the behaviour of margins? How does all this affect the market for farm products?

As Sidney Hoos pointed out a long time ago,’ there is a need to bring descriptive work on margins closer to economic analysis; there is a further need -to bring both to the point where they help in policy-making. That is a challenge that we can only go a very small way to meet in this paper; a start will be made by considering how farm-gate demand is affected by the behaviour of margins, the size and stability of which have frequently been shown to determine the relationship between retail and farm price elasticity.’ In most of what follows we shall be concerned with the stability rather than the size of margins.

_________ ~~

‘Based on the assumption that farm prices are roughly 60 per cent of the corresponding retail p r i c e t a slightly lower percentage than estimated earlier. On such an assumption retail prices have to drop by a percentage which is more than 3/5 of the percentage drop in farm prices before the unit margin is decreased. This simple formula may be g e n d i r d as follows:

let there be two numben a, and b, at time, let a, - b, - k (constant)

let - = x (known)

a t time t + l let 4.1 = y (known)

what must by simple substitution

b, ;r,

b1 equal to keep 4+1 - \+I = k?

= a, (xy+l - x) which means we can estimate the change in the retail price index which is needed to keep the unit margin constant. provided we know (a) the farmen’ share of the old retail price and (b) the percentage change in farm prices that has taken place.

‘According to the National Food Survey the avera e prices paid for beef and veal in the 3rd and 4th quarters of 1956 were 42.2d. and f2.ld. a Ib. respectively. compared with 42.76 and 424d. in the corresponding uarters of 1955. In the 3rd and 4th quarters of 1959 mutton and lamb prices were 3%*7d. and 36-6d. a Ib., compared with 42-2d. and 4 1.M. in 1958. For a number of reasons theme figures may under state the extent of the retail rice fall; other data available to the writer suggest that the limit estimates in tge text may lpve a fairer picture.

‘In an article on “The Behaviour of Marketing Margins on Citrus Fruits.” journal of Farm Eccmomics, Volume 34. 1952. p. 915.

G. S . Shepherd, Agricultural P r w Analysis (3rd edition). pp. 63-65. G. R. Allen. Agri- cdtural Marheling Policies, pp. I 13-1. and a recent paper. On t k Nature of Marheiing Marpus by D. G . Dalrymple. Department of Agricultural Economics, Mihgan State Univmity.

Meat Marketing Margms in Britain 15 firnand for a product a t the farm-gate is a derived demand; formally

spaking, its elasticity is determined by the elasticity of demand for the corresponding product(s) at the retail level, the conditions and elasticity of demand for the services added to the product between the farm and retail sale, and the conditions and elasticity of supply of these services. If one ssumes a homogeneous product at the retail level, corresponding to a given homogeneous product at the farm level (that is, consumers cannot choose between Merent services added to the farm product) then the conditions and elasticity of demand for these sewices are no longer independent variables; the elasticity of demand for the farm product is a function of the retail demand elasticity and the conditions and elasticity of supply of the services added.’ Meat (or beef or lamb) are not homogeneous products in themselves (consisting of a variety of cuts of different qualities), but, for many consumers, the services purchased when buying carcase meat are inseparable Irom the product and are very similar in many transactions. There will be some consumers, however, who can choose between delivery and direct purchase, between pre-packed joints and cuts off the bone and who are influenced by the price of these and other services as reflected in the total price of the commodity. In the long run this “market” in services must be taken into account, but in the short run and especially when considering price fluctuations it seems reasonable to asume a homogeneous retail product corresponding to any farm product (“meat”, “beef” or “lamb”) which is being treated as a single commodity with one priceelasticity of demand.

On this assumption the stability of the margin will be determined by the conditions and elasticity of the supply of the marketing services added and the supply of these service can only be measured in terms of the total quantity of the product sold. As a general rule, distributors may be prepared to handle a larger quantity of a product for a lower margin per unit of the product; but it is highly plausible that distributors will not knowingly handle larger quan- tities of a product unless they expect that their total gross margin for that product (quantity sold x unit margin) will be increased.’ The gross revenue attributed to the sale of services associated with one product will thus rise as the quantity handled increases and will fall as the quantity goes down. Con- sumers, correspondingly, will be obliged to increase their total expenditure on services as the quantity bought goes up; the “demand elasticity” for these services, determined, on our assumption, solely by their conditions of supply, is greater than unity.

If the retail demand for the product is inelastic (the normal case with farm commodities) then the total (retail) expenditure on it will go down as the quantity sold goes up. Since the distributors’ share of this total expenditure has risen absolutely, it has a fortiori risen relatively. The producers’ returns will have been correspondingly reduced. Economic laws which are not dis- guised tautologies, are sometimes highly treacherous guides, but the long-held view that farm demand is more inelastic than retail demand seems a very

1Although. from our assumption of a homogeneous retail product, the demand for services cannot be separated from the demand for the retail product. the supplv of service% IS independent of the total farm supply of the products; distributors are not ob!igrd to handle all the products offered in any marketing period.

Qne exception wdl be when the product is a loss-leader. priced low to bring customers into the sho to increase total turnover; but this is an exception which helps to prove the Wle -aE products cannot be loss-leaders. Another possible exception is when the total costs of handling a larger quantity are less than for a smaller quantity: no doubt this may occasionally happen but its significance is unlikely to be great over the whole market within any short period. We are not, of course. considerinR long-term changes to more efficient marketing based on lower margins and costs.

16 G. Houston

reliable law of the market. In our opinion, it follows, in the short-run at least, not so much from a relatively high priceelasticity of demand for services as expressed in a market by consumers, but from the conditions under which such services are supplied by distributors. AS long as the total costs of supplying these services rises as physical turnover rises, then the “law” will operate for all products whose retail priceelasticity is less than unity. In the case of carcase meat, however, published estimates suggest elasticities above unity.’ which means that the “law” is not so rigorous for meat and its validity will depend on whether retail priceelasticity is sufficiently above unity to offset the effects of rising (or falling) total costs of services.

So far no mention has been made of competition between distributors; this is deliberate for it is the priceelasticity of demand and the nature of marketing costs which provide the basic explanation of why farm-gate demand is less elastic than retail demand. But the extent of the divergence between the two elasticities will be affected by the degree of competition in this sector. If unit margins are kept wider and more stable by formal or informal agreements then farm demand will be much more inelastic. The suspicion that average margins on meat are affected by rings or tacit price agreements among butchers is widespread in the farming community. I doubt if this view can be put to an objective test and it may be wiser to look more widely for any institutional or other factors that help to explain the behaviour of margins.

Two different kinds of price fluctuations should be noted. First is the normal seasonal variation, high in the spring, low in the autumn, which is associated with the difference in the cost of hishing fatstock in the winter or summer. Instead of following these seasonal price changes closely at the retail level many butchers have traditionally maintained fairly level prices over the year, making up in the autumn what they lose in the spring. On the face of i t , this seems an irrational practice and it may be worthwhile listing the various explanations offered to the writer by butchers and others in the meat trade.

(a) Consumers prefer level prices to varying prices; they do not object when prices are lowered but if the corollary is that prices go up at other times then level prices are favoured. Butchers thus claim that by taking a variable margin they are performing a service to consumers who think in terms of spending a given amount of money on meat each week and would prefer that this purchased much the same quantity of meat. (b) Level prices have important administrative advantages for retail firms. (c) If a uniform mark-up principle were adopted then butchers consider that in times of higher prices consumers would switch to other products and the trade would find it difficult to win back all this custom when prices fell-i.e. the substitution effect on the demand side is greater when meat prices rise than when they fall. (d) Butchers fear a price war in the meat trade and are unwilling to adopt policies which might increase the likelihood of this developing.

I have no doubt that for each of these reasons some evidence could be called in support. But the main issue is whether from the point of view of individual butchers, the trade as a whole, or the community, they are sufficient to explain and justiQ the apparent divergence between real cost and price.

An individual butcher would no doubt be prepared to vary his prices below and above the average of his competitors if he felt this would increase his profits. He would, however, have to anticipate that h ~ s own trade would be much more seasonal than if he followed the general custom. If he could

‘For beef and veal in 1958 and 1959 estimates of -1.42 and -1.54 (0.22). for mutton and lamb-0-92 and -1.22 (0.15). DormstIc Food Consumption and Expcnditure: 1958. p. 34, 19SQ report, p. 136.


r e d l y alter his costs the net effect might be favourable, but he might well hesitate to plan, for instance, for an expansion and contraction of his labour force in the year. It is also open to him to lower his prices more than the average without ever raising them above the average, but this would still involve a very large increase in physical turnover in the low price period.’ The structure of their costs, plus the view that it is difficult to win a large increase in custom by price competition, undoubtedly make many butchers reluctant to break away from the general practice, even without any pressure from retail associations.

From the viewpoint of the trade as a whole, the argument that meat would lose to other products should prices fluctuate could be decisive-if it were true. It is a familiar point which is often made about certain food products; I would be more convinced of its validty if I ever heard of the competing products whose price-elasticity is much higher when prices fall (relatively) than when they rise. My own view is that a major cause of the general accep ance of level-pricing over the season is the trade’s fear of a price war. In Clas- gow in 1938, for example, stamp trading provoked much bitterness, culminating in the registration of the butchers’ association as a trade union and the organisation of a boycott of wholesalers selling to stamp traders.’ Feeling that the market should be “shared” appears to be widespread in the trade (at least in Scotland), and even firms with expansionist aims are often very cautious about using price competition to achieve them.

From the community’s point of view the arguments against level- pricing over the season are two-fold. On welfare grounds variable prices may theoretically be preferable, if they are needed to enable the poorest customers to buy some meat in periods of low prices. But I am not proposing to get involved in a discussion of inter-personal comparisons of utility, and i t may well be that in the case of a commodity like meat, some of which is probably bought at all times by all income groups in Britain, a level consumption of a small amount throughout the year is preferable, on nutritional grounds, to a variable consumption. The second argument against level-pricing is that it prevents the interaction of supply and demand on each other. If it costs more to produce meat from winter-fed than from summer-fed livestock, then, according to this argument, consumers should be charged a higher price for the highercost product. Demand for winter-fed stock would presumably fall off in favour of grass-fed beasts, and a new equilibrium would be reached, which, given certain assumptions, would be associated with a lower unit cost for meat over the year. My own view is that level-pricing over the season probably results in the mis-allocation of resources but the aggregate effect (which is difficult to measure) must be balanced against the higher costs of distribution which might be involved in variable pricing as the trade is presently organised. The wider adoption of variable pricing, however, could help to speed up changes in the retail trade, as well as in storage and other branches of meat distribution.

So far we have discussed “normal” seasonal fluctuations in margins. But over the last five years there have been abnormal price changes, and the behaviour of margins in these periods is worth discussing as a separate issue.

We do not propose to draw the distinction between a normal seasonal fluctuation and an abnormal fall or rise in prices in precise statistical terms.

~

*This di5culty is much greater for the traditional butcher’s shop than for a business in which meat iz only a small proportion of total sales; it is also more acute in a small than in a big business.

There is a useful account of this period in a thesis by R. T. Buchanan (University of Edinburgh), S o w Economtc Prohlcms o/ L i w s t o c k .Warkctinb with part cular rejercnce lo Scotland (1957).

18 G. Houston

The kind of market changes we have in mind is exemplified by the three price falls already mentioned-fat cattle in 1956, fat sheep in 1959, and cattle and sheep this year. The lag in retail prices in these three periods was such that unit margins almost certainly increased, at least for a significant period. Far- mers did not suffer severely, thanks to deficiency payments, but one of the questions we wish to consider is whether the nature of this price support had any influence on the behaviour of prices and margins.

A major attraction of a deficiency payments scheme is that it would seem to allow the forces of supply and demand to determine the market prices of farm products at their competitive level. On this assumption, any payments made to farmers to bring th is level up to the guaranteed price fixed by the government are revealed as subsidies to the producers and a high level of subsidisation for a product provides a prim facie argument for cutting the guaranteed price of that product at subsequent price reviews.

It is thus of some practical importance to decide whether the operation of a deficiency payment scheme does allow market prices to reach their competitive level. In the case of fatstock this will be broadly true when auction prices are about or above standard prices fixed by the government. But when the market prices drop below the guaranteed prices a new situation emerges.

As the fatstock deficiency scheme now operates, producers going to the market know what the provisional rate of payment is for that week. They also know that this rate will be adjusted if it is later shown to be insufficient (or too great) to bring producers’ total return (market prices plus subsidy) within a predetermined range. Once market prices drop below the guaranteed level the individual producer will no longer be seriously influenced by the prospect of average market prices dropping still further. Unless he anticipates a future substantial rise in market prices for which he is in a position to wait, a continuing decline in “free” market prices will not persuade him to reduce his supply of fatstock to the market. As the mart prices fall lower and lower and supplies continue to come forward at a higher and higher rate, the deficiency payment will increase so that the actual return per lb. to producers will remain fairly constant. In the lamb market in the autumn of 1959, for example, large numbers of animals kept coming through the auction rings, market prices fell drastically but producers’ returns remained almost stationary (between 3s. and 3s. Id. for 13 weeks).

Under such circumstances auction market prices have little immediate effect on producers; indeed very low prices and a high subsidy1 can even increase the numbers going through the rings for it is well-knom that some farmers sell their fatstock’ and receive the deficiency payments, then, by agreement with the buyer, take the animals back to their farms for two or three months and split any difference in prices actually realised. This is a legal if rather irregular way of bending the supply m e backward.

What about the reaction of the meat traders? Their attitude in a period of glut and falling prices obviously affects the extent of the decline in market prices and hence the level of deficiency payments. They are in a powerful position to benefit from the situation and the pressure of market opinion will impose certain attitudes on the trade, even if there are no formal buyers’ agreements. Ideally, traders will hope to increase both their physical turnover and their unit margin, but there will obviously be limits to what they can achieve. An increase in retail turnover will depend at least to some extent on a

‘Some auctioneers hold the opinion that high subsidies ur SI bring out more animals, but

‘We know this took place in autumn 1959 but it may not have k e n 50 common in 1 9 6 1 . this is a point which is impossible to prove and &cult to believe.

Discussion m MI. George Houston’s P o w 19 relative reduction of retail prices; if consumers respond to this reduction thm one would normally ex ct that traders, anxious to increase their turnover

auction market, thus preventing producers’ prices from falling any more. But if increasing supplies keep coming on to the market the traders soon realise that producers’ prices can drop lower and lower without their own supplies being affected, and the unit mprgin can widen. Competition between traders for available supplies will be weak as long as prices are falling and supplies are plentiful.

An important element in this situation was brought out by D. Witney in a paper to this society in 1938.1 Purchase prices are easily the most important variable in determining butchers’ profits. Once supplies look like building up and the market begins to slip traders look forward to a more profitable period; when they realise that supplies will be unaffected by a further drop in mart prices the prospects must seem even brighter. I t is true that the reaction, once it sets in, may be sharp and a subsequent price rise rapid, but the intervening period may be long enough to saddle the exchequer with a high subsidy bill. Ths year (1961/2) the fatstock subsidies may well approach LlOO million.’ I t is absurd to look upon this solely as a subsidy to agriculture, i.e. a transfer of income from the rest of the community to those engaged in farming. In my view, a large part of it might well be debited to the distributive trade.

The basic weakness in the present system of guarantees is that we have what is virtually a support price system for fatbtock without an essential element of such a scheme-a buyer of last resort. One cannot talk of a “free” market when, for institutional reasons, supplies are virtually unaffected by price falls below a certain level. This brings us to the threshold of policy con- siderations; I don’t propose to cross it in this paper which has been mainly designed to discuss only one aspect of the general problem of meat marketing in Britain-the behaviour of margins.

(at ]east to the limit o r their resources) will bid against one another in the

DISCUSSION ON MR. HOUSTON’S PAPER E . M. H. Lloyd:

iculu I should like to back up what he said about the inadequacy of our statistia a g t ’ prices. If the Agricultural Economics Society had a collective voice, I should like i t to pass a strong resolution on this question.

The original data are collected by the Ministry of Labour through labour exchange managers for the cost of living index and the Ministry supply this information about actual prices once a year to the International Labour Office for purposes of intunational comparison. This is quite inadequate for purposes of agricultural economics research and organised marketing. Somethng much more elaborate than that is wanted as Mr. Houston has pointed out. In the United States they can show comparative movements of retaii margins for carcases as a whole. I t is no good taking some particular cut of meat as representative.

In 1921 a Royal Commission on Food Pnca was set up. The Chairman was Sir Auckland Gedda and it dealt with two problems agitating public opinion at that time. One was the cost of the loaf and the profits of bakers and millers. and the other was the high price of meat and the alleged high profits of butchers which were said to be much higher than before the 1914-18 war.

F. Grant from the Ministry and myself tackled this quation of butchers’ profits. We obtained Inland Revenue data about the percentage profit on turnover of the meat tradca and we got a lot of representative costings such as Mr. Houston has got for Clasgow. That sort of t h n g ought to be kept up to date. Why not have a study of retail margins year by year? It might show that there are some deficiencies in our deficiency payments system.

We shall all wish to congratulate Mr. Houston on his paper. In

ID. Witney, “A Reta11 Butcher’s Business”. P.A.E.S . . December. 1938. ‘The official estimate published in December, 1961. was L123 million.

20 Discussion on MI. George Houston's Papcr Indeed I think then may be a chance of getting some improvement as a MUk of the d i n t e n t of C O I W U I I ~ C ~ , farmen and Membcra of Parliament with the present situation.

AIKIYII) EWM: One point I would like to make b that the emphasis is always on "livestock" and not

on "meat". Evan in Mr. Houston's paper we find that we have gone bock to livertack mPgi~. I t IIM been approached from the livatock. as oppmed to the meat, end in Tables I and 2.

Than we have to consider the definition of Marketing. I have cut out a little advertkc- ment from the Economist where it sa there is a substantlol difference between making a product available and making a sale. r s u g g a t that that is one of the t h i n e m n g with the

The margins may seem unreasonable but on the other hand they may be only just uate for the job and what n d l y may be wrong b that the return is too low due to

i a c r c n t methods; I would su est a failure to merchandiK e5ciently and m k u x of trading power. In c o m t i o n witf!by-products (Table 2) I scouted round Smithfield before coming up here and they have all ban t e b g me that by-products ought to be one fifth of the return; there figures h e n of L6 and LS 1 9 . 0 6 am very much challenged by friends of mine in Smithfield who say they ought to be nearer t l 0 01 LIZ.

This of COUM brings up the uestion of by-product set up and the completely archaic situation a d by legislation w%ch originates from hygiene and the rationabation of slaughterhow during the war and ao on; this has inhibited, and is inhibiting, the integra- tion of the procsaing of by-products; plro I have heard o m or two people saying that the dominnnce of cuh bamact~ 'om in the tTode may be one of the facton that arc uruptis- factory here.

Then we must recognk that in the old dayr the butcher broke up hir animal and had the community around him where he could market the animal complete; now we have opeciality of demand and the animal has got to be broken up away back more or l eu where it k produced. Tbe evidence for th ia is that if you go round the meat market everybody will tell you without exception that them k mom cutting than pre-war. So 1 am wondering whether next time bfr. Houston givm ua a paper he could go into the margins not from the overall point of view but from the cost make up point of view. i.e. the information you can't get unless you can get butchen and tradcm and people like that to disclose it to you. This is the information we want in order that we can compare existing systems with the systems m might desire to have or find in other countries.

IndUStly.

G. R. Allen: 1 want to state a possible case for the butcher. I say a poasible case because it is clear

from what Mr. Houston h a said that we haven't got as much information aa we would like in order to come to a really satisfactory conclusion. I want to do thir partly by considering tho statistics Mr. Houston haa given and partly by a few remarks on the structure of the trade.

Mr. Houston shows the trend of nW1 prices for beef and mutton in the chart on page 13. There b a& a seria of retail meat p n a r quoted in the State of British Agriculture hosed on the recorda of a firm of retailerr--ond relating. I underatand. mainly to beef and mutton. This latter rerim show a much greater variability than Jlr. Houston's though, of coum, it may not k representative.

If one looks at the behaviour of margina in the United States in the last ten yean one bnda t h t while the real price of meat at the farm gate has been falling steadily over that ten yema by perhap 25 per Cent to 30 per cent the red retail margin haa riscn very slightly. Now the American retail meat trade is highly competitive and one should perhap, pause for thought befon trying to infer that them are signs of increasing im rfect competition within the trade. Margins a t the time of decontrol in thia country m y E v e b a n b l o w the required normal profit in the strict cconodc sense. Since then renta and other costs have been going up and t h m may be many r e a s o ~ for thinking that the margins should have risen since then.

In his table on page 7 Mr. Houston treats butchen simp1 as being people who have a job of buying meat and selling i t at the same point of time. [imagine man butchen buy in marta with the intention of holding supplica to a later date, especially if X e can foresee a subsequent & w e : their ~ r ~ y i n g costs in keeping these animals alive ,could k included. not in the margin of the butcher as a butcher. but M a producer M farmer. Item I of Table 11. for example, might have to be increased and the retail margin item 13 might have to be reduced by whatever is the cost of c q n g such stock. This might be an extremely important point.

DiscursiOn on MI. George Howion's Paper 21 Mr. Houston may have given the wrong impression of the way in which the butcher

determines his bidding price. We talk of a margin being d d e d to the buying price. In practice. the retail price must be set to c l u r supplia M deaund and supply h v e got to balance at that stage. Then butchers will t.ke away from that a margin whcb they regard as "reasonable" and then they have got their offer price. If they had been making a lam in the previous period they will take that into account in determining what their offer price shall be in relation to t z c a at which they expect the produce to e l l . I suggest therefore that when they have lcrr than what they regard M their normal necesary profits in some previous period i t is quite likely. M in the last few months, that they would try to increase their own grosa profits at a time when the retail price was falling. The explanation may be 01 Mr. Hourton suggests that they think there is no bottom to the m u k e t and therefore they cm increase their degm of collusion but at the same time there is a considerable amount of competition betareen certain types of business. chain storm. su Lets. etc. It could be conceivable that what has been happening in the last few m o n t ~ m p l y that falling pr ica with no iweaac in supplia have coincided with a time when butchers wanted to recoup their l o g a of the previous period. I don't think t h m is nccusad Y any evidence of incnved collusion between them.

Rather than give priority to collecting more data on prices. we need information to enable us to a d y v the structure of the industry; for example. to see where the 'produce flows and who are the pace makers. Better information on margim may be a blind alley in deciding how competitive the meat trade is.

H'. Colulcy. Fa~mers have been more worried than anybody by recent meat prices-and we've

never known butchers make the loses just referred to!

I would like some figura of the i n c r e w in amount of livestock coming into the market drily a slight increase p u b the butchers in a very easy position. It wbl remarked by many fanners that when the subidy on lamb was Is. 9d. the butchers were bidding Is. 3d.; when it was Is. 3d. the bidding TOM to Is. X. The fanner got the right price-and the butcher got the subsidy!

J . Hammod: Isn't there a point Mr. Chairman, which the speaker has failed to make: that the

retail butchers' trade of multiple shops is one of the moat difficult to control from head- quartm. If you have 100 Ibr. of butter going into a shop, head ofice knows how much it e b to meive and the same applies to a great number of commoditia. If you have 1 D O r o f meat going into a butcher's shop it all depends on the skill of the manager and his ability to penuade some customen that leg of beef is in fact rump steak (which doer ha how much he makes of it. I believe that in the retail butchering trade the multi le have on the whole been very unaucccasful and that one group only continua in 8m trade not because i t gets an adequate return but to sell i t s own products. I believe that the average retail butcher. the small private butcher, knows this and in corwquence he make8 a n exorbitant profit. I think the red profit (gross margin) is nearer 40 to 45 p cent than the figure uoted. I don't mean the profit he shows for Tax, I mean the real profit. I know

not in the least willing. to put up their turnover to LlSO a week to make L25. They are not willing to do the extra work for a very small ex- profit.

One manager of a multiple butchers ran a Rolls Royce; when this was nported to the head of the organisation he said that shop makes the gnatest profit of any in spite of what the manager takes out of it-"I wish all other manager, could buy Rolls Royces".

I+'. E . Cave:

There are three points on which I would like to comment. On page 5 it says the gross profit on lamb is 50 per cent. This prompted me to do some research. TO-day ( k e m k r ) the farmer is receiving 3s. 6d. per Ib. for a 32 lb. Iamb. The subsidy is Is. I(d. (Ll 1611. Od.) and the offal. skin, liver, etc.. is worth 16s. Od. making a net cost of L3 0s. Od. -4t averPge retail prices (3 s h o p in 3 different country towns) the butcher is selling the lamb for t 5 5s. Od giving a grcws margin of 43 per cent. If one calculates back to September, when I believe the retail price was the same but the market price lower and the subsidy higher, the g r a margin w a 46 per cent. I think it intemtinR that my figures should come M close to the f i g u r a given in the paper.

it must be rccognised that there is considerable difficulty in arriving a t the grm margin because. as one speaker mentioned. it depends so much on how the lamb is cut. If a loin is sold whole it is priced at 3s. Ed. per Ib. but i f it is cut into c h o p the price varier from 4s. Od. to 4%. Rd. per Ib.

many butaers ' rhopa with a turnover of between who expect to make t20 net out of this. net profit

22 Dis~ussiorc 01) Mr. George Houston's Paper The m e difficulty arisca in valuing the offal. Early in the season the skin hu little wool

but by Decamber i t ha^ a lot of wool and this can increase the value of the skin by 50 pr cent. Then then ir the breast and scrag end of neck. This i s difficult to value because the butcher frequently cannot sell it at any price.

e 16 when the paper deah with the d o u s reuonr why p r i m are what they arc. I wo%r i f he hor tried to find out if then is any price maintenance organhation? A few y ~ n o I was ' of a Hospital Mnlugement Committee and I was surprised to findxt we w e z n g full retail price less 5 per cent for all our meat. In spite of everything I could do boapital wiu unable to buy wholesale. The Fatstock Markcti Corporation and a we meat w h o l d e r both refermi me to rimpa in the l d i t y . M a s i m i h experience more rccently in another area. so it seeam to me that although them may be no formal resale price maintenance organisation then is in fact a very effective unofficial one.

Thirdly. on page 18 it M ~ S "it is well known that some farmen sell their fatstock and n a i v e the dedciency p e n t . then by agreement with the buyer take the animals back to their farm for a n o g r two or thm month and split any diaerence in price actually received. This is a legal if rather irregular way of bending the supply curve backwards". Is it legal? If i t is I can see no reason why ewe hoggs should not go to the wbt. collect the subsidy, and then go back to the farm for breeding. This may be done but it does got follow that i t is legal.

T. R . L. Fiasrr: In his remarks Mr. Houston referred to the announcement that was made in the House

of Commons on Thursday but I would like to refer to a much more interesting interlude in the House of Lords.

It was a question from a member of this Society. Lord Wzlston. but the question was M put that i t became a debate, rather an interesting debate. His quation was to ask Her Majesty's Government what had been the percentage changes in the monthly average price, of fat cattle since January 1st. 1961. and the percentage changes over the same period in the retail price of beef and further what were the total sums paid to farmen as deficiency payments on fat cattle during that pericd and the corresponding period of 1980.

The reply from the Joint Parliamentary Secretary in the Ministry of Agriculture was very similar to the reply which Mr. Soomes gave in the House of Commons. .Lord Walston then got up and put a supplementary question. In the course of it he pointed out that the p n x n t policy was failing completely in i t s p u p of giving con6dence to the farmer and secondly in the purpose of reducing the price to the consumer. He asked Lord Waldegrave to say what had been the change in prices over the period. Lord Waldegrave then said it waa not possible to g e n d k about retail prices w h c h vory according to the quantity and quality of different cuts of meat in different parts of the country and at different times. That was evading the issue very well. but then he said something which to my mind begged the question completely. "They, that is the retail prices. a h depend to a certain extent on the pricing policy of the individual butchen".

Some other Lords took up the fight. Lord Hawke rose and said. "My M. would my noble friend not agree that i t is about time that we disclosed the retail prices individually when the subsidy is given on an individual item of food"? I think that hits the nail right on the head. Given this policy of deficiency yments. which is suppoud to give the h e n money out of the taxpayer's ket. tc other side of the e uation is that the consumer should have cheaper meat t r n she would otherwise get. 4011 can only judge the succes. of this policy if you have the financial facts for both sides of it. We have the facts for the side concerned with deficiency payments. and these facts are going to be pushed down farmen' throats in the next few months. But we do not have the facts about the other side of the quation. and I frankly feel that if the deficiency payments policy h to be continued, in all fairnesa both to its own pl icy and to the farmm the Government should give us the information with which we can judge this policy.

The recod point I would like to make is to refer to

C. B. Clarke: Mr. Allen distinguished two points in the marketing chain which might usefully be

studied in connection with the problems now under discussion. The h t was the auction mart and the second wiu the retail shop. Reference may be made to ecomomic theory for a "model" reflecting activity in the auction mart and the retail shop to explain the failure of auction and retail prices to maintain a constant relationship in conditions of varying supply. A very simple "model" is available. The elasticity of demand at the auction mart is less than that at the retail point. Under such conditions a n increw in cattle supply will cause auction mart prices to fall more steeply than retail prices and the margin between them to widen. If this very simple model is valid and i t has any lesson to teach, it must surely be this-that we must study the institutional factors which determine elaqticity of

Discussion on M I . George Houston's Paer 23 beef demand at the auction mart and the retail shop to explain why they differ. If the slope of the demand schedule a t both the auction mart and the retail shop could be nude parallel then a small supply change would not produce a greatly altered margin between p r i m a t the two marketing points.

H . J . Shemilt

Could someone say how quickly a retail butcher could be expected to reduce his prices if lie had every intention of doing so?

In Table 1 the 300 Ib. side has 45 lb. of rump steak at 5s. 8d. and 57 lb. of shoulder steak at 4s. Ed. If the butcher knocked 6d. off all cuts, more of his customm would go for rump steak and he would have difficulty in selling the shoulder steak. Das thk not mean that to make any fairly rapid reduction in price it is a critical matter for him to decide the differential prices of the cuts? The drop in price between 1960 and 1961. for example. is more on the cheaper cuts than on the dearer oms. therefore it would Kern particuhly difficult to make any large changes in prices quickly. Perhaps one should recognize that there is a t least a natural reason for butchers to avoid changing retail prices and this is bound to be strengthened when the reasons for adjustment appear to be only temporary.

Colrn Clark: In the first place let me put the record straight about the Mimstry of Labour. They

have persistently declined to reveal the information about actual retail prices. The reason is very simple. They are frightened of the retailers, fearing that if they publuhed the rort of information which we want it might be used t o critickc the retailen. who might then refuse to give further information. Until th. Minister of Labour is more frightened of the consumers and the fanners than he is frightened of the retailers. the present situation will prevail.

Mr. Allen put it to us that the retail butcher has to hx a price which will clear his market. It seems to me. the retail butcher decides his prices in advance, and buys the quantity which he thinks he can sell a t these prices. and knows his trade well enough to buy pretty accurately. The w h o l d e butcher however may be in a different position.

Now what Mr. Clarke said about the difference of elasticities a t wholesale and retail levels was. I think, true; but this is only mathematically equivalent to the statement that there is a certain fixed margin between the two pnces. and the more fixed the margin, the greater the difference between the elasticities must be.

There is one other economic factor for which we have fairly good evidence and which hasn't been brought into the discussion yet. . i s in the Glasgow butchers' language. quoted by Mr. Houston, "if we alter the price we might 1- a customer and i t might take us a long time to get him back again". An economist might a t 6nt quarrel with this. but then occept it in more technical language as a proposition that the consumption of meat is a highly lagged function of rice and consumers' income. Some of the work done by the American Meat Institute in Chcago, a verycareful piece of mathematical andysh.led to the astonish- ing conclusion that the consumer's meat purchases now were still influenced by the prices and incomes of 2 or 3 years ago. In other words, our purchases of meat are very much a matter of habit, to alter which requires not only a marked change of price. but also one sustained over a long period of time. The butcher knows his customers' habits-that fact goes far to explain his conduct.

One curious piece of information which was brought out in an American study.. namely that people over 50 have become so set in their tastes. that they have virtually no price elrsticity of demand for meat. On the other hand, older customers have higher income elasticity. So when we are trying to make price elasticity clear a surplus. as we arc now, we must bear in mind that the older customers may be almost completely fixed in their tastes, and that the voungcr customers may take some time to change.

I think that they very probably would.

P. .4. CICW'

I don't follow why i t is suggested on page 18 that the producers' position is p a t l g different I n a time of rapidly falling prices compared with a time when prices are somewhere around the standard level.

My second point; far be it from me to ask hlr. Houston to make sense of Hansard. but I would like his advice on this figure of L l O million which the Minister allocated to the retail trade. Surely in the comparisons with the previous year butchers' margins should have remained approximately the same, any extra income coming from the larger through- put-the same cut from more bullocks.

Zwrck. RMCW of Economics and Sfafrrfics. November 1957.

24 Discwsior, on MT. George Housfon’s P a w pro/ruor D. K. B d h :

We haw m n bar ths lawn of supply and demand soem to be creaking in this situation. What h u t the frsedom to move into the retail butchen’ trade? Nowuhyr is it just a question of gsttine hold of premirer. or would t h m be collective r e s h t w e to new retail butchsn coming into the business?

n. J . vq~rm: A rper+u who favoured the butchen’ cause thought they must at their own e

kssp attle bought u fat but not dau htered for perhap a month. But he seem toT-2 that these beortr should put on MY 2 fb. weight per day on a good field.

S m l y we uomt the butchers to reduce retoil prices u liveweight prices WI. though the lecturer said, with no explanation, this is what the butcher8 feared.

When last summsr the w e per cwt. at auction fell to about 16 the butchers knew that fume- would continue to sell fat cattle, as the rubidy of L3 per bead then p r e d l i n g bought up the total receipts to @ per cwt. This hu been all right for the f.rmm in 1981. But public opinion is ahadydnging against them for 1962. If im cannot be regulated againat current home rupplia I feel, u a simple land agent, that tgoe?fuuthoritia who work out the support prim from r a k to week will continue powerleu to protect the consumers’ and farmers’ interests M oppoad to those of the butchers.

E . M. H . Uoyd: There hu been little reference to the sire of the increaw in the supply doring this

period of rapidly falling prices. During the four month, June to September. recording to recent figurea publirhed in the Commonwealth Economic Committee’s Bulletin. the tow in- in home produced cucase meat has been of the order of 20 per cent greater than in the previou~ y e a . Wh.t is the main reason for this sudden i n a c u c in supply? I would like Mr. Houston to answer that. Waa i t largely due to an i n a e u c in the supply of fat awe from Ireland. particularly acrm the frontier?

One other point. In our studies in 1924 the evidence tended to show that the meat tnde was one of the more competitive trader. Is there any evidence that there is less competition now th.0 there was then7 Om phenomenon that we uneutbed wsa what 1 d d the ‘‘mx-saw’’ effect. Butchers have a certain optimum turnover. If they M laring customers to a competitor, they will cut their prices in order to attract more cutomera. As won as they have got tho cartornem back, they wi l l start raising their prices again. So competition does to some extent operate in so far as some housewives at least concern

G . Houston: Mr. A m m E w qusrtioued the value for offal given in Table 11. I agree that in

other plrcer it may be higher than d6. But if the value of oth l k greater that 1 estimated for Clasgow. the total marketing margin should be higher. I was anxious to avoid ex- aggerating the situation d i t may be (as &. Hunmond ~uggarta) that I ham under- stated it and that in wme ueu muginr are higher than I have indicated.

I .Ira agree with Mr. E w r that we nced to study marketing catr, not just mugins. As I said at the outbet I do not think that it is any good claiming that the present marketing system is too costly unlar you an? prepared to show how it can be carried out more cheaply.

%fesoor Britton asked if there is any collective mirt.nCe to nuw butchen setting up in business. and Mr. Cave PrLed whether thm is retail price maintenance among butchers. I have M evidence on the fint point but there is some that would suggest i n f d price agreements in a few areas. h d l y I doubt if this is widespread or that the agreements could be referred to the Restrictive Practices Court. Many butchers, I am sure, do not participate in such agreements.

Mr. cave also asked about “buying back” from the butcher. When I fint heard about th ia in connection with l a m b in 1959 I must say that I thought it waa illegal. but I now understand i t is quite legal. I know i t happened in 1959, and I would not be surprised if it has been common throughout the United Kingdom in 1961.

Mr. Shemilt asked whether retail prices could be adjusted speedily. I think it is not a question of immediate price cutting, a beast needs t o be hung for two or three weeltr, and YOU annot expect butchers to cut their prices immediately. But in 1981 cattle market prim were slumping in M. . and up to July and August many butchen Iud made no reduction except in some orthe cheaper cuts. I t ia true that if the price comes down genedly some people m y shift from buying cheaper c u b to buying dearer cuts. and that means that the cheaper cuts have to go to the sausage machina or whatever there ia. But thir assumes that the retail price elasticity for meat is very low. Butchen say this is so.

thmKlves with the prices they pay.

Discrusiol, 011 MI. George Houston's P a w 25 but the evidence for 1961 indicates that a 4 per cent decline in price over all meat and bacon prices c l d an increase of 44 per cent in supplies. i.e., price elasticity for all meat war roughly unity.

two intaxsting points. My argument WM that once the price is abot-e the standard price then fm market conditiom prevail and changes in price from week to week mi ht dect the amount coming on to the market. But this was really the build up for w$t I felt w u the much more important point that once price dropr below the s t a n d a r d price then f y . if they feel it is likely to drop further, are not influenced by price. Supply is inelastic.

bfr. &ry 91.0 aaked about Mr. h a ' estimate of L l O million more to the distributors in 1961 above what they made in 1960. I do not find this figure a t a11 convincing. Mrny of the butchers I have spoken to have never denied that they made a good thing out of the trode this last summa. They argued on the lines of Mr. Allen that they lost money last year. Well that may or may not be true, although it was not explicit in the agricultural subsidy system that it wu to be nscd to help the meat trade. My own view is that the trade benefited by L30 million. although we need more data from the Government to make this estimate accurately.

Mr. Lloyd aaM about the increase in supplies in 1961. Of coune this varied from week to week. I do not have the figures for the exact period he mentioned, but the kind of overall increase I WOI thipLi of in the long run was roughly 10 per cent more beef and 10 per cent more mutton and 1 3 . That MY turn out to be wrong, but that is my rough calculation for home supplies. As I said ePrlier the increw in total supplies (including imports) has been cleared by an avenge over all meat of 4 per cent in retail pricea. What rbould be the cornsponding drop a% e farm auction level to give the butchen the same unit margin? I think i t ia somewhere in the region of 7 per cent and I am certain that in practice the decline haa been much more than that. Over all home and imported meat it is probably 12 per cent for 1961/62 although all the data are not yet available.

The next point is the one taken up by Mr. Allen. Mr. Colin Clark and Mr. G. B. Clarke' Who arc the price makcra? I have k e n trying to get evidence of this and would say that the rice break k g a n at the auction mrrt. After a lag there would be a pricn drop at the whoresale level, may be 2 or 3 weeks later. The price at the mart was undoubtedly due to the increased supplies. Perhaps the best way to loo at this is PI follows. Suppose Mr. Lloyd and I arc butchers in a mart, he usually buys 10. I buy 8. somebody else buys 50 and so on. We k n m re arc going to buy this amount, but if there is more coming in to the market than n ma expect to bring the price lower which will M t d l y increase the profit we can make. the meantime we do not bother about bringing down retail prices-we are making a good thing out of it and iu long as we get our uitcd unount a t a lower price week after week and perhap build up stocks a little we 3 do that. If our stocks begin to build up too much, then we may drop retail prices a little. If we dear the addition at that and prices are still drop ing in the mart then that is fine and our profits are increased. The main point is that t%e set up of the -Let and the subsidy system makes this kind of thing inevitable in a period of glut. I t is not a question of blaming the trade so much as the marketing system. Nobody predicted, nobody could have predicted what happened in 1961. but at l u s t some of UI said back in 1959 that this sort of thing could happen zg.in and that we would get a big deficiency payment. In such a situation the subsidies not only help the fanners (although I do not deny for a minute that the f m e n b v e benefited) ; consumen have also benefited slightly but I would say that the distributors benefited much mom than the Minister implied on 14th December. In a phrase. the nature of the deficiency payments system docs tend to widen the marketing margins and to make the farm-gate demand much more inelastic then the retail dermnd.

Let me finally return to a point that several speakers endomcd. We must have more adequate retail price data and there is really no justification for not publishing the information already a k l a b l e to the government-especially that which relates to products on which subsidies are paid.

Mr. C l q

MEAT MARKETING MARGINS IN BRITAIN

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