Monday, October 15, 2012

The price of a cereal box

Original photo by Dr. Roy Winkelman from ClippixETC

The giants of the food industry (Nestlé, Kellogg, Kraft, General Foods, etc.) are the ones imposing rules on the food market. On the one hand, they can decide which price is paid to farmers for raw materials. On the other, they put pressure on retailers to favour their company products and get a larger profit margin. They can even have a saying on the advertising campaigns in supermarkets.  
In order to understand who rules the roost in the food sector, we should take a look at the benefit percentage of each actor playing a role in the whole manufacturing and sale process. We took the data from a cereal box, which can be easily extrapolated in most countries. 

The farmer gets about 7% of the final price. Taking an average cereal box costing 3.5 €, this means that the farmer gets 25 cents. Only a little tiny part of these 25 cents are real benefits for the farmer, because he has to cover the expenses of seeds, machinery, fertilisers, plot rental…
73% of the final price of a cereal box is for the processing company, which includes 29% for processing and packaging and 44% as real benefits. The processing company is, by far, the one who gets the best deal.
And finally, the retailer gets about 20%. This percentage is different if the retailer is a large supermarket, with more power to negotiate, or a grocer’s shop. This percentage includes all possible benefits.

The journalist Paul Roberts, who is specialised on this issue, summarises the whole idea: «The ability to generate such huge margins is why food companies have moved steadily and inexorably toward higher and higher levels of processing: the more a company processes a raw material and the closer that commodity comes to being a finished consumer product, the more the company can charge. In 1950, about half the retail price of a food product went to pay the farmer or other producer of raw materials, while half went to adding value. By 2000 this farm share had fallen below 20%. What this means is that even as farmers and other producers earned steadily less on their products, food processors and manufacturers were able to maintain their own revenues by steadily adding more value.»

Sources:
  1. Data are taken from this book: John Connor et al. The Food Manufacturing Industries: Structure, Strategies, Performance and Polices. Lexington Books, page 66: http://trove.nla.gov.au/work/22263342?selectedversion=NBD3245057
  2. These data are also mentioned in Paul Roberts’ book The End of Food: http://www.theendoffood.com/
    
     
     
     

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