Farm production and market prices

Farmers are always complaining about low production prices, and consumers likewise about high retail prices.

Hampshire Down lambs just a few days old, Appuldurcombe Farm, Isle of Wight, 22 Feb 2015.
Hampshire Down lambs just a few days old, Appuldurcombe Farm, Isle of Wight, 22 Feb 2015.

Here are some facts to put prices into context. All figures are for the UK – if you know of comparisons for other countries, particularly in Europe and the US, I would be very interested to see them, please.

Milk

Perhaps the most ‘staple’ food in many Western societies, milk prices have been a central and controversial part of European agricultural policy, thus the subject of extensive manipulation and regulation.

As of January 2015, the average price of milk paid to farmers was 26.30 pence per litre (1). This is not the lowest in recent years: between 2000 and 2006, average prices ranged between 17 and 19 pence per litre, but in 2013-14 they rose to 30 to 31 pence per litre.

However the common belief that prices are driven down by major supermarket chains is not borne out by the facts. Highest prices, of nearly 35 pence per litre, were paid for milk of standard composition for Marks and Spencers, and major supermarkets including Sainsbury and Tesco paid 31 to 32.5 pence per litre for their standard composition milk (2).

Retail supermarket prices of whole milk are around £1 per litre, falling to about 75 pence per litre on special offer.

Of the price that we pay for milk, the farmer is getting 25 to 30 per cent to actually produce it, the processor and supermarket is taking 60 to 75 per cent for collecting, processing, packaging, and selling it.

Wool

In the UK, all wool producers with more than 3 sheep are required to sell their wool to the British Wool Marketing Board (BWMB), a co-operative acting for the producers.

Wool quality varies considerably between breeds, with prices paid ranging from less than 50 to more than 400 pence per kilogram. However typical prices paid for the more common wool-producing sheep are between 110 and 130 pence per kilogram (3). These have risen over the last 15 years or so, when they were roughly half of those current.

Wool has to be processed before it can be used for knitting or weaving. On smaller scales, this is likely to cost £30 to £50 per finished kilogram. However yield is limited: from 20 kg processed fleece, it is likely that only around 12 to 15 kg of yarn is produced (4). Thus the total production cost of a kilogram of knitting yarn in the UK is around £50-£60 per kilogram.

Retail price of knitting wools varies greatly, but typically is of the order of £35-£100 per kilogram (5). Clearly UK wools could only be used for more expensive yarns, for which less than 50% of the retail cost goes to packaging, distribution, and retail, and only around 1% to the farmer.

It is therefore not surprising that many sheep farmers are now using breeds which ‘self shear’ rather than requiring shearing. Thus the wool of an animal which has been bred in part for its wool production is being wasted, largely because of high processing costs.

Observations

Producers – here farmers – are at the bottom of the cost chain and at the mercy of processors, distributors, wholesalers, and retailers above them. The costs added by those above them in the chain appear high, at least in respect of milk and wool. This also seems to be the case for finished garments manufactured overseas and sold in High Street fashion stores, although direct price comparisons are there more difficult.

It is hard to see how these high processing and distribution costs reflect added value, and easy to question whether they reflect what the market will tolerate. In a free market these appear puzzling, particularly as in both these examples the controlled part of the market is that of the farmers.

It is tempting to conclude that high retail prices reflect the power of intermediaries in the chain, and that both farmers and consumers are correct in their complaints.

References

1. DairyCo figures from DEFRA et al., 5 March 2015.
2. DairyCo figures, 5 March 2015.
3. BWMB figures for 2013 and 2014.
4. The Natural Fibre Company, information, 17 March 2015.
5. Deramores wool knitting yarn prices, 17 March 2015.