Willy Baltussen, Michiel van Galen & Katja...

18

FUNCTIONING OF AGRICULTURAL FOOD MARKETS IN THE NETHERLANDS FOR EIGHT PRODUCTS

Willy Baltussen, Michiel van Galen & Katja Logatcheva

LEI Wageningen UR

Abstract

Market power and the abuse of power is often a topic of public discussion when regarding price

formation in food chains. Supermarkets are often accused of not paying fair prices to farmers. The goal of

this study is to analyse if Dutch markets for food products are competitive, in a way that neither buyers

nor sellers in any of the supply chain stages are able to change purchase or selling prices independently.

This goal is translated in the following research questions: i) are prices along the food chain following

each other?, ii) does a long term price relation exist?, iii) are positive and negative price changes

transmitted to the next stage with the same speed and to the same extent? The study was executed for

eight – mostly unbranded and unprocessed – basic food products in the period 2011-2013 by analysis of

buying and selling prices and costs in each of the stages of the supply chain. We conclude that in general,

markets are competitive. Prices in successive stages in the value chain often have a long term

relationship, asymmetric price adjustment was significant in only 3 out of 17 markets, where the

downstream firm in the transaction has the advantages of the asymmetric price adjustment. However it

should be kept in mind that the value chains differ in length and other characteristics: fresh versus stored

products and processed versus unprocessed products. These characteristics influence price transmission

in the food chain. Net profits per stage in the supply chain per product could not be calculated because of

a lack of data.

1. Introduction

In the EU and the Netherlands there is an ongoing debate about the market power of supermarkets

resulting in low incomes for farmers and less innovation (Vander Stichele, 2009; OECD, 2013; EU, 2014). Is

there still enough competition in the food value chain? The Dutch Ministry of Economic Affairs and

Authority for Consumers & Markets (Dutch Competition Authority) are interested in the good functioning of

Dutch food markets. In the past, several studies have been carried out on their commission providing more

understanding of the functioning of the Dutch food chain (see e.g. Bunte et al., 2003 and 2009). More

recently, in 2014, the Ministry and the Authority wanted to actualise their insights in the development of

prices in different food markets for a selected number of fresh food products at different stages of the value

chain, i.e. starting from producers and ending with supermarkets, which resulted in a study carried out by LEI

Wageningen UR. The main question for the study was if markets for food products face enough

competition. Doing the research we looked at:

Prices received by primary producers, wholesalers, processing industry and supermarkets for

each product;

Developments of gross margins for these value chain participants, where possible differentiated

by product;

Transmission of prices in the food chain, or the relationship between price developments on

every stage of the value chain for each product.

20th International Farm Management Congress, Laval University, Québec City, Québec, Canada

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FUNCTIONING OF AGRICULTURAL FOOD MARKETS IN THE NETHERLANDS FOR EIGHT... 19

This paper describes the method and data, as well as the results of the research. The paper ends with the

main conclusions.

2. Method and data

The research has been executed for the following eight products and their value chains: potatoes, onions,

bread, apples, cucumbers, sweet peppers, eggs, and poultry meat. The period of study covered the years

2011-2013. The main focus was on products of Dutch origin sold by Dutch supermarkets. For a number of

products, to get continuous price development series prices of foreign products were included in the

research for the period that there was no domestic supply (due to seasonality). For example during the

winter period there is hardly any supply of Dutch cucumbers and sweet peppers. The same holds for Dutch

potatoes, onions and apples during the summer period.

In theory for a market to be perfectly competitive, at least four conditions need to be met: a) there are

many suppliers and buyers, b) products are homogenous, c) there are no barriers to entry or exit, d) the

market is transparent. Most of the studied product chains concern unprocessed, unbranded products (except

for indication of product variety or retailer brands) for which there are many suppliers and many buyers.

Barriers to entry are present but not impossibly high. With respect to market transparency, the theoretical

conditions of perfect conditions may not apply in all stages. For these products, potatoes, apples, cucumbers,

sweet peppers, and onions, a priori most of the conditions of perfect competition apply to a large extent. For

processed products like bread and poultry meat, the processing stage of the supply chain is more

concentrated and that would a priori violate the hypothetical conditions of perfect competition.

Primary data of buying prices, selling prices, volumes and costs of goods sold as well as total firm costs

and revenues have been gathered from 44 firms active in the production, processing, wholesale or retail

trade of at least one of the mentioned products (see table 1).

This information was supplemented with secondary data of farm gate prices and financial results of

primary producers from LEI Wageningen UR (http://www.wageningenur.nl/nl/Expertises-

Dienstverlening/Onderzoeksinstituten/LEI/Data-1/Agrarische-prijzen.htm ).

Moreover, we performed16 interviews to get insight in the price formation process between individual

market participants. The interviews were divided as follows: 4 primary producers, 4 wholesalers, 3

processors, 1 service supplier, 4 supermarket organisations.

Table 1 Number of firms where primary data is collected per product

Product Number of participating firms

Potatoes 11

Onions 12

Bread 18

Apples 13

Cucumbers 19

Sweet peppers 17

Eggs 12

Poultry meat 10

All prices per product were on a weekly basis in the period 2011-2013. Information about the total costs

and revenues at firm level and costs of goods sold were gathered on an annual basis. For a good

understanding of the data it is important to identify exactly who is selling to whom in the value chain. The

distinguished stages of the value chain for this research are shown in table 2




http://www.wageningenur.nl/nl/Expertises-Dienstverlening/Onderzoeksinstituten/LEI/Data-1/Agrarische-prijzen.htm



20 WILLY BALTUSSEN, MICHIEL VAN GALEN, KATJA LOGATCHEVA

Table 2 Value chain stages: the product flows from left to right.

Product First stage:

primary

producer

Stage:

wholesale

Stage:

processing

phase1

Stage:

Processing

phase 2

Last stage:

retail

Potatoes Potato Wholesale - - Supermarkets

farms potato

traders

Onions Onion farms Wholesale - - Supermarkets

onion

traders

Bread Grain farms Grain Mills Industrial Supermarkets

traders bakeries

Apple Apple - - - Supermarkets

farms/apple

producing

groups

Cucumbers Cucumber Wholesale - - Supermarkets

farm cucumber

traders

Sweet peppers Sweet Wholesale - - Supermarkets

pepper sweet

farms pepper

traders

Eggs Egg farms Egg packing - - Supermarkets

station

Poultry meat Poultry - Wholesale - Supermarkets

(broiler) trading

farms slaughterhouses

The gathered price data have been analysed with Eviews and JMulti1. Average prices per product per

stage of the supply chain have been calculated by weighting with volumes sold. Two necessary conditions

that indicate (perfect) price competition are defined as follows (see Granger et al., 1984; Ward 1982, Von

Cramon-Taubadel, 1998, 2004):

Prices in two consecutive stages of the supply chain have a long-term relation:

Price transmission is complete: increases and decreases of prices are fully corrected with the

same speed and changes in the buyer prices direct changes in the selling price.

1 Windows compatible statistical packages software for econometric analysis of time series.





3. Results

3.1. Price level developments in food chains

Price levels of potatoes show an annual cyclic pattern for all stages of the value chain with highest

prices just before the new harvest in August. The annual price increase starts at the stage of the wholesalers

because there is no local supply of potatoes and ends in the retail. The peaks of the prices are levelled off by

the retailers: in some weeks the selling prices at wholesale trade level are higher than at retail level. The

average annual price level in a value chain segment is strongly determined by the harvested amount of

potatoes in the Netherlands. During the period of study, primary producers received prices between 4 and 39

euros per 100 kg, wholesalers between 14 and 126 euros per 100 kg and retailers between 41 and 128 euros

per 100 kg.

Prices of onions follow an annual cyclic pattern through the entire value chain with high prices in May

and June. During this period there is no trade between Dutch primary farms and wholesale: most onions are

imported to the Netherlands. It is interesting to see that prices increase at supermarket level first. After, the

price increases are followed by the wholesale and not the other way around. After the harvest of onions

prices go down. The annual average price level on every value chain stage depends strongly on the

harvested amount in the Netherlands. During price peaks in the period 2011-2013, the consumer price was

1.00 to 1.20 euros per kg which is twice as high as the price during the rest of the season: 0.60 euros per kg.

Selling prices of bread of industrial bakeries and the supermarkets show a less volatile development

compared to the selling price of flour from arable farmer to the mill. This can be explained by the fact that

only 15 to 20% of the price of bread consists of costs for flour. Compared with other fresh foods price

movements of bread are small among years and within years. The consumer price per bread of 800 gram

was 1.00 to 1.06 euros in the period 2011-2013. The average consumer price was slowly increasing.

Price levels of apples show an annual cyclic pattern through the entire value chain with highest prices just

before the new harvest in September. Just before the harvest the producer and consumer prices can be twice

as high a just after the harvest. In the Netherlands the producer groups deliver directly to the supermarkets so

no wholesalers of processors are involved in this supply chain. Price increases in the supermarket follow after

the price increases of the producer groups. During the period of study, prices at producer level varied from

0.28 euros to 1.15 euros per kg. At retail level the prices varied from 1.30 euros to 2.89 euros per kg.

Consumer price levels of sweet peppers and cucumbers follow a seasonal pattern with high prices during

the winter period with low or no supply of Dutch domestic products. During the Dutch production season

from March till October prices are relative low. The selling prices of producers, wholesalers and

supermarkets have the same patterns. At supermarket level action periods are visible. In these weeks the

sweet peppers and cucumbers selling prices of supermarkets are relative low compared to the selling price of

the wholesale. Consumer prices vary from 2 to 6 euros per kg of sweet peppers and from 0.90 to 2.35 euros

per kg of cucumber in the period 2011-2013.

The prices of eggs in supermarkets show a less volatile development compared to the rest of the chain.

Supermarkets adapt to each other’s egg price levels and react less to price developments of suppliers. Prices

in supermarkets varied from 13.5 to 15 eurocents per egg in the period 2011-2013. The producers’ selling

prices varied from 3 to 11.5 eurocents per egg in the same period. This has as a consequence that the gross

margins at retail level varied from less than 1 eurocents to 8 eurocents per egg. The margins in egg packing

station were stable. The reason is that in many contracts between the egg packing station and supermarkets

the selling price is determined by the market price at farm gate plus a fixed margin for the egg packing

station.

Prices of broilers have been stable during the period 2011-2013. This also holds for the price of chicken

breast at the level of slaughterhouse and supermarket. However, part of the supermarkets have regular

discount action periods with price reductions of about 25% compared to ‘regular’ weeks. Because not all

supermarkets have discount periods throughout the year, the average price at supermarket level seems less

volatile. Selling prices at producer level, processor level and supermarket level follow each other. Prices for





broilers are around 1 euros per kg live weight, fluctuating only a few eurocents. Prices at the gate of

slaughterhouses are between 4.50 euros and 5 euros per kg of chicken breast (most valuable part of the

broiler). Consumer prices in the retail for a kg package vary between 4.50 and 6 euros per kg of chicken

breast. Price reduction of 25% are common in some supermarket formulas in the Netherlands one week

every month.

3.2. Margins per stage in the food chain

The second goal was to analyse net margins per product, which is selling price minus buying price minus

associated variable and fixed costs. In practice only specialised farms and specialised firms are able to give

insight in the costs per product, for example specialised broiler farms. Many of the firms that were part of this

study produce or distribute a large number of different products with varying prices and associated costs, and

indicated that they are unable to calculate exact net margins at an individual product level. For this reason we

only calculated gross margins defined as selling price minus buying price per product. For the same reason

the profit/loss is not calculated per product but per stage of the supply chain. For non-specialized trading

firms such as multi-product wholesale traders and supermarkets, the profit/loss reflects an average result of

all trading activities, including the trade in other goods.

The gross margins per product expressed as selling price minus buying price divided by the consumer

price.

Gross marginsi,j = (Selling pricei,j- Buying pricei,j)/ Consumer pricej

i = stage in the supply chain; primary producer, wholesale, processor or supermarket. j= product j.

Gross margins fluctuated between 14 and 40% of the consumer price for the primary producers (see

figure 1). The highest percentage gross margin is found for egg producers and the lowest percentage for grain

producers (arable farmers). The gross margins are lower than 25% for producers of grain, onions, cucumber

and poultry meat. The gross margins are higher than 25% for producers of potatoes, apples, sweet peppers

and eggs.

For wholesalers the margin fluctuates from about 1% for grain to 40% for cucumbers. If a product is

processed a relatively large part of the gross margin goes to the processor: 62% in the case of poultry meat

and 55% in the case of bread. The gross margin for the retail varies from 16% for chicken breast (1 kg) to

68% for onions and apples.

Figure 1: Gross margin per stage in the supply chain expressed in % of the consumer price for eight

products.





Two remarks need to be made. First, a high gross margin as a percentage of the consumer price does not

equal high profits. Although we cannot make any reliable calculations about net profits per product, total

profits have been calculated per firm by analysing the annual profit and loss accounts. As stated before, net

margins per product cannot be calculated because information on costs per product was mostly not

available. For all value chain stages after primary production the average net profit margins are less than 3%

of turnover. For primary producers average profits were low or even negative (loss). Second, by presenting

gross margin as a percentage of the consumer price the picture of absolute margin in euros gets lost. 10% of

the consumer price of 1 kg sweet peppers (consumer price 2 to 6 euros per kg) is far more than 10% of the

consumer price of a kg of cucumbers (consumer price 0.90 to 2.2 euros per kg). This may explain part of the

large difference between cucumbers and sweet peppers in terms of wholesale gross margin.

3.3. Price transmission

With the help of econometric modelling the relationship between prices at different stages of the supply

chain has been estimated.

Table 2 Estimated long term price relationships between different stages of the supply chain, the detected

asymmetric price correction and the chain participant that favours from an asymmetric price correction

Product Long term price

relationship between

Markets with asymmetric

price correction

Chain partner that gains from

asymmetric price correction

Potatoes Producer – wholesale

Wholesale- supermarket

Producer & wholesale Wholesale

Onions Producers –wholesale - -

Bread Producers – grain miller

Bakery –supermarket

Grain miller & bakery Bakery

Apples Producer –retail - -

Cucumbers

Sweet peppers

Producer – wholesale

Wholesale -supermarket

- -

Eggs Egg producer- egg

packing station

Egg packing station &

supermarket

Supermarket

Chicken breast Slaughterhouse-

supermarket

- -

We have looked at long term price relationships and asymmetric price adjustment, i.e. selling price

correction for a positive buying price correction takes more or less time than selling price correction for a

negative buying price correction or selling price correction is transmitted only partially. Table 2 summarises

the results.

Table 2 shows that 10 out of the 17 analysed markets, or trade relations, have a long term relationship

with each other. This means that the price developments of the selling price of successive chain participants

follow each other in the period 2011-2013 at a statistical significant level. For 8 analysed value chains and

17 analysed markets only in three markets the price correction was asymmetric. In case of a detected

asymmetric price correction, we found that the downstream party in the value chain benefits.

4. Main Conclusions

In general, markets in the food chains within this research are found to be price competitive. However,

large differences were discovered among the studied supply chains. The composition of the value chains

vary: there are short chains, such as apples (producers delivering directly to supermarkets), and long chains,

such as bread (arable farmer, wholesaler, miller, bakery and supermarket). The length of the supply chain

influences the impact of the producer price in the consumer price. For long chains this impact is notably less





high. Second, there is a difference between the value chain of fresh products like eggs, meat, sweet peppers

and cucumbers and value chains of stock keeping products like potatoes, onions, wheat and apples. For the

last category of products, the harvest or volume available during the year is predictable and the price is less

volatile and follows an annual cyclic pattern. For sweet peppers and cucumbers also annual cycles in prices

can be seen combined with more price volatility. The annual cyclical pattern can be attributed to the fact that

during the winter period almost no Dutch products are produced and imports from especially Spain at higher

prices are on the market. A third difference is the level of processing. For processed products more than

50% of the consumer expenses goes to the processors. For unprocessed products, in all studied cases more

than 60% goes to primary producers and supermarkets combined.

Calculation of profits per product per stage of the supply chain is fairly impossible. Data are not

available and probably unknown to most firms. Only for very much specialized firms such calculations can

be made with reasonable effort. This also holds for developments in profits per product.

It is often suggested that the market power in the food chain is moving towards supermarkets as

concentration at the retail level in the Netherlands is increasing. This study does not offer a clear support for

any increase in market power of supermarkets. For most products like sweet peppers, cucumbers, potatoes

and apples supermarkets follow the price movements in the upstream part of the supply chain. For eggs,

onions and chicken breast the supermarkets follow an own price setting strategy which is more related to the

reaction to price developments of competitors, rather than the price developments in the upstream stages of

the supply chain.

5. References

Bunte, F., J. Bolhuis, C. de Bont, G. Jukema en E. Kuiper, 2009, Prijsvorming van voedingsproducten

(Price formation of food products (in Dutch)), Den Haag, LEI Wageningen UR, Nota 09-074.

Bunte, F., E. Kuiper, M. van Galen en S. Goddijn, 2003, Macht en prijsvorming in agrofoodketens

(Power and price formation in agro food chains (in Dutch)), Den Haag: LEI, 5.03.01.

Granger, C.W.J. en T.H. Lee, 1989, 'Investigation of production, sales and inventory relationships using

multicointegration and non-symmetric error-correction models'. In: Journal of Applied Econometrics,

Vol. 4 (1989), pp. 145-159.

Meyer, J. , von Cramon-Taubadel, S., 2004, Asymmetric price transmission: A survey (Review) Journal

of Agricultural Economics, Volume 55, Issue 3, November 2004, Pages 581-611

Myriam Vander Stichele (SOMO) & Bob Young (Europe Economics), 2009. The Abuse of Supermarket

Buyer Power in the EU Food Retail Sector; Preliminary Survey of Evidence March 2009

The economic impact of choice and innovation in the EU food sector (2014)

http://ec.europa.eu/competition/publications/KD0214955ENN.pdf

OECD, Competition Issues in the Food Chain Industry, (2013)

http://www.oecd.org/daf/competition/CompetitionIssuesintheFoodChainIndustry.pdf

Prices of agricultural products at farm gate in the Netherlands:

http://www.wageningenur.nl/nl/Expertises-Dienstverlening/Onderzoeksinstituten/LEI/Data-

1/Agrarische-prijzen.htm

Von Cramon-Taubadel, S., 1998, 'Estimating asymmetric price transmission with the error correction

representation: An application to the German pork market'. In: European Review of Agricultural

Economics, Vol. 25 (1998), pp. 1-18.

Ward, R.W., 1982, 'Asymmetry in Retail, Wholesale, and Shipping Point Pricing for Fresh Vegetables'.

American Journal of Agricultural Economics, Vol. 64 (May 1982), pp. 205-212.




http://ec.europa.eu/competition/publications/KD0214955ENN.pdf

http://www.oecd.org/daf/competition/CompetitionIssuesintheFoodChainIndustry.pdf




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