Consumer Expectations Influence Response to Producer Price Movements

The current debate over farmgate prices draws out a bigger discussion on whether consumers value food fairly and whether fluctuations in farmgate prices are reflected in retail price movements, according to Stuart Ashworth, QMS Head of Economics Services.

“The latest official consumer price information published by the Office of National Statistics (ONS) shows that food represents around 10% of total consumer spending and meat accounts for around 23% of food spending,” said Mr Ashworth. 

“Indeed, the data suggests that consumers spend as much when they go out to eat as they do in the home, with 10% of all consumer spending being spent in restaurants, cafes and canteens.”

Across the EU, as a whole, food represents around 14% of consumer spending with Romania having the highest spend at 29%, the UK having the second lowest spend and Luxembourg the lowest.

Food consumed in the home accounts for around 9% of consumer spending in the USA and 20% in Japan.

“Compared to twenty years ago, the importance of food spending has fallen from around 13% of all spending to 10%,” commented Mr Ashworth.  “Europe, similarly, has seen food spend as a proportion of total consumer spend fall over the past two decades by three percentage points

“This doesn’t necessarily mean consumers are spending less cash on food, it’s just that as a proportion of total available cash, they are spending less on food,” said Mr Ashworth. 

“This can be achieved by buying less food, by price movements on food not being as rapid as price movements on other consumables, by wages rising at a faster rate than food prices allowing more surplus cash to be spent on other items, or as a combination all these factors.”

In the most recent ONS consumer price release, the retail price of meat has fallen 2.6% over the year to July 2015 and is unchanged between June and July. 

Meanwhile, the general level of inflation is broadly unchanged on the year, resulting in food becoming less expensive, in relative terms, and allowing people to spend less of their total income on food, however, still buying the same volumes of food. 

Within the overall food spend, beef is 1.6% cheaper than a year ago, while pork is 2.8% cheaper, bacon 2% cheaper and poultry 6.7% cheaper - only lamb is reported to have increased in price at retail level.

“Producers will quickly notice that these retail price movements bear little resemblance to producer price movements which in July saw cattle prices 7.5% higher than a year earlier, while lamb and pig prices were 17% lower,” said Mr Ashworth.

“This illustrates the challenge of a consumer-facing retailer who is striving to manage consumer expectation, among which, volatility in retail price is not something the consumer likes.

“Consumers may be happy to take rapid falls in retail price, however, they are less likely to accept rapid increases in price.  Instead they will adjust the volume of product they purchase, switching to more competitive proteins or in extreme cases resorting to political unrest.”

The slow pace of retail price movements may shelter a consumer from rising farmgate prices, but equally it slows the response to farmgate price falls.  Indeed, observed Mr Ashworth, both retailers and producers would welcome price stability as it provides both business groups with a degree of certainty from which to plan their business activities. 

“The conundrum for the supply chain is how to achieve this where the production of the raw material, cattle sheep and pigs, is influenced by, among other things, the unpredictability of a biological production process extending over several months or even years,” commented Mr Ashworth.