INFORMATION
Developing Alternative Farm Margins with Improved Data: A Weighted
REPORT
Price Approach
Hyunok Lee, Department of Agricultural and Resource Economics, University of California
This information report is developed from the project, “Measuring and Understanding the Pattern of Margins
between Farm and Retail Prices for California Specialty Crops to Increase Grower Returns,” which was
supported by the CDFA Specialty Crop Block Grant.
MARKETING
MARGINS
The
marketing
margin
represents
the farm to
retail price
spread, and
is the
difference
between
farm value
and the
retail price.
Retail prices of specialty crops have risen more rapidly than other food prices over
recent decades, while farm prices have not kept pace with the retail price climb.
According to the price indices published by the Bureau of Labor Statistics, Retail
prices for fresh fruits and vegetables have tripled, while retail prices for other food
have doubled in nominal terms. Farm prices have risen by 70% for fresh
vegetables and by 20% for fresh fruits (in nominal terms). The decline in the farm
share means growers have not benefited from rising retail prices. Rising retail
prices and falling grower shares have the potential to stifle both consumer demand
and farm supply. The declining farm share among fresh produce, especially for
fresh fruits, has been more pronounced. The widening price divergence between
retail and grower prices has caused concern among farm observers and analysts.
Understanding the facts and causes is the first step in addressing the problem. The
project objective is to detail the pattern of retail, wholesale and farm price
movements for California specialty crops, analyze the patterns of margins, and
provide vital information to growers and groups in a form that allows successful
and effective marketing programs to be developed based on objective data and
analysis.
Previous research on marketing margins suggests some critical factors of the determinants of farm
margins in vertically related food marketing systems. One approach concerns data construction
methods. On the data construction methods, there are two following important observations.
Discounted prices offered by mega grocery stores are not adequately represented in retail price
calculations performed by public data collecting agencies such as the Bureau of Labor Statistics (BLS).
This causes retail prices published by public data institutes to be higher than otherwise, which is in
turn translated into lower farm margins. Another argument is that BLS’s calculation methods of
aggregate price indices contribute to lowering the farm margins. Specifically, BLS does not update the
definition of constant fruit “basket” which is used in aggregate fruit indices, when consumers’
preference and fruit diversity in the marketplace change. In light of these two broad directions of
previous approaches, this study investigates and calculates farm margins using alternative, improved
price data.
Improved Data: Data improvements include how information is aggregated and how retail data are
constructed so that they are compatible to the farm price in the calculation of farm margins. Our
analysis starts with the least aggregated data available. BLS usually uses a simple average across
weeks and months to construct annual data, rather than use prices weighted for quantity sold in each
time period. USDA uses both weighted average and simple average methods in the construction of
annual grower-received prices. The implication of this mismatch is that the simple average of prices
over the year does not represent what consumers actually pay or what farmers actually receive. As a
consequence, farm margin calculations using these inconsistent prices are misleading.
Shipment Weighted Prices: In general, to produce some representative data, three layers of
aggregations are performed including aggregations over time, over commodities, and over geographic
areas. To arrive at least aggregated data, we adopted the least aggregated levels available associated
with the data in terms of data interval, commodity, and location. We considered the weekly and
monthly levels for data interval, a specific fruit variety (such as red delicious for apples, Thompson
seedless grapes or Navel oranges) for commodity, and specific U.S. regions (such as western urban or
specific wholesale market) for location. To generate shipment weighted price data, we first defined the
season of the product in question corresponding to the domestic harvest time. We then obtained
shipment data from the Agricultural Marketing Service (AMS) of USDA. Then, the prices are weighted
using the shipment data to generate shipment weighted annual price series.
Farm Margin Calculation
Value share of selected fruits in total fruit
receipt
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Using shipment weighted prices, we calculated
the farm margin as a share of farm price out of
retail value. For this exercise, we selected five
representative fresh fruits including fresh
apples, table grapes, fresh peaches, fresh
strawberries and Navel oranges. They are the
major fruits produced in California, accounting
for 70 percent of all fresh fruits in value.
Oranges
Apples
Grapes
Peaches
Strawberries
Source: Fruit and tree nut yearbook 2011 ERS, USDA
Apples
1.5
Grower price share in retail price of apples
Weighted and unweighted retail and
grower prices of apples in real value
40
30
1.0
weighted retail $/lb
weighted grower $/lb
unweighted retail $/lb
unweighted grower $/lb
0.5
20
Share using weighted price
10
Share using unweighted price
0
0.0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
198019821984198619881990199219941996199820002002200420062008
Fresh Peaches
Weighted and unweighted retail and grower
prices of peaches in real value
2.0
weighted retail $/lb
weighted grower $/lb
unweighted retail $/lb
unweighted grower $/lb
40
Grower price share in retail price of fresh
peaches
20
Share using weighted price
0.0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Share using unweighted price
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Strawberries
5.0
Weighted and unweighted retail and grower
prices of strawberries in real value
100
Grower price share in retail price of
strawberries
weighted retail $/lb
weighted grower $/lb
50
Share using weighted price
Share using unweighted price
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0.0
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Table grapes
2.0
Weighted and unweighted retail and grower
prices of grapes in real value
Grower price share in retail price of table grapes
40
30
weighted retail $/lb
weighted grower $/lb
20
10
Share using weighted price
Share using unweighted price
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.0
Oranges
2.00
weighted retail $/lb
weighted grower $/lb
unweighted retail $/lb
unweighted grower $/lb
1.00
0.00
Data sources and data detail:
Grower price share in retail price of fresh
oranges
60
Share using weighted price
Share using unweighted price
40
20
0
1980/81
1981/82
1982/83
1983/84
1984/85
1985/86
1986/87
1987/88
1988/89
1989/90
1990/91
1991/92
1992/93
1993/94
1994/95
1995/96
1996/97
1997/98
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
Weighted and unweighted retail and grower
prices of oranges in real value
Monthly retail prices are obtained from BLS, and they are all U.S. city average unit (lb) prices. Monthly grower prices are obtained from
ERS/USDA and monthly shipment data are obtained from AMS/USDA.
o Apples: Apples are the red delicious variety
o Fresh peaches: peaches are “yellow flesh. USDA defines the fresh peach marketing season as May 1 to October 31, U.S. fresh
peach production and sales volumes are concentrated during the months of June to September (for the years we considered,
about 85% of total volume is traded during this period). The domestic season in our study includes June through September,
and their respective monthly shipment shares are 24.4%, 31.2%, 28.1%, and 16.3%.
o Strawberries: Grower prices are available for all 12 months, but retail prices are available from April through September.
About 80% of total annual volume is traded during April through September.
o Grapes: Grapes are Thompson seedless grapes. The season includes July though November and their monthly respective
shipment shares are 17%, 25%, 23%, 20% and 15%.
o Oranges: grower prices are monthly equivalent on-tree returns received by growers, California. The season includes
Novembers though June next year and their monthly respective shipment shares starting from November are 10%, 9.8%,
13.2%, 12.8%, 16.1%, 18.1%, 12.4%, and 7.6%.
Implications: From the investigation of five fruits, some common implications emerge. Among the
fruits we examined, real retail prices have gone up for all fruits, except apples. Real grower prices
have been relatively constant over time. For all fruits except apples, weighted grower and retail prices
are lower. That is, annual prices calculated using the share of quantity actually sold each month as to
determine annual averages are lower than simple annual average prices. With an exception of apples,
grower shares of retail revenues have been falling for both weighted and unweighted averages. The
differences between the weighted and unweighted annual average prices are more pronounced for
grower prices than retail prices. Among the fruits considered, the widest divergence between
weighted and unweighted grower prices was found for strawberries. Grower shares were generally
lower under the weighted prices. The quantity-weighted price is a better representation of farmerreceived price than the simple average price. Hence, our results imply that the actual farm shares are
likely lower than what have been reported.