From farm to retail : costs and margins of selected food industries in South Africa

Abstract

This dissertation highlights the need for a formal methodology to be developed in order to unpack complicated supply chains and to publish information that explains how the farm value or farm to retail price spread of certain products can be calculated and how these results are to be analysed. It is for this reason that the study reviews and applies the methodology used for the calculation of price spreads and farm values. It applies the methodology to five food supply chains of maize, fresh milk, beef, poultry and sugar. The analysis of farm values and spread has already been developed in an international context but it has not of yet been applied in the South African context. It is therefore the aim of this dissertation to illustrate how this methodology can be applied here and how this can be done on a continuous basis. The main objectives of the study are: <ul> <li>To review and apply the methodology used for the calculation of price spreads and farm value, as well as to analyse trends of five agricultural commodities in the food sector.</li> <li>To understand not so much on what is behind the previous rise in food prices, but rather on why; when the farm or producer prices fall, do retail prices on certain goods not fall by the same margin? The question that needs to be asked is who or what is responsible for this? A detailed analysis of the supply chain of various products could prove invaluable in the process of understanding price movements.</li> <li>To investigate the degree of transparency of information in the South African food sector is investigated by looking at the market share that the various supermarket chains hold. Since competition and concentration of role players within this sector of the economy plays such a vital role in the determination of the market’s fairness, it is important that the size and the percentage of market share that the retailers hold in the market is researched and understood. A special section focuses on the market share that some retailers hold as a percentage share of the entire supermarket retail sector.</li> <li>To discuss the estimation of the specific cost incurred, at various levels,within the maize-to-maize meal and beef-to-beef products supply chains, in detail. This involves designing a framework for the continuous analysis of food prices and costs contained within these two supply chains and understanding the costs incurred by the different role players.</li> </ul> In applying the methodology to estimate farm value and farm to retail price spread it is determined some of the commodities such as beef, milk and sugar experienced a slight widening of the farm to retail price spread, while the opposite occurred with the price spread of maize meal and broiler meat. A widening farm to retail price spread shows that farmers’ share in terms of the retail price is declining and as a result their share of the final product has become less. Farmers in the beef, milk and sugar sectors experienced this while maize and chicken farmers experienced the opposite, in other words a narrowing spread and as a result they are earning more of the final product. In applying the various econometric tests in order to test for asymmetric price behaviour in the various supply chains it was found that in four of the five supply chains the transmission of increases in producer prices where not smoothly and timely transmitted to the retail price. The models that fared worst in the analyses were those of the sugar, beef, fresh milk and a part of the maize supply chain. The inabilities of the models to show any form of significance, even when tested economic theory is applied indicate that something is amiss within the supply chains. Asymmetric price transmissions, a lack of accurate data or unjust market behaviour by role players within the supply are some of the factors that could be responsible for this. The analysis in chapter 5 is based on these findings. A proposed framework for an in depth analysis of such a supply chain is documented there. The detailed analysis of costs and margins in the maize to maize meal and beef supply chains, have shown that there are many stages along the supply chain, where various costs and profits can have severe influences. In chapter 5 a detailed analysis has been done on this with the objective of developing a framework that can be applied to an industry. This chapter lends specific detail as to where the influences of such costs can be the greatest. The results point out that, of the five supply chains, only two of them, namely chicken and maize (from farm gate to miller), adhered to some form of economic theory, whereas the other three either suffered from insignificant/unrepresentative data or actual price transmission asymmetry. On the basis of this, the supply chains of both super maize meal and the five selected beef cuts were unpacked with the profit margin and the role player’s cost of formation at the different levels within the value chains. A conclusion can be made that parts of the maize supply chain (milldoor to retailer), the beef supply chain, the sugar supply chain and the dairy supply chain all suffer from asymmetric price transmissions or alternatively, a data discrepancy. This conclusion is drawn from the fact that the Error Correction Models ECMs for these specific industries failed most of the diagnostic tests and contained some insignificant variables. The diagnostic tests did not only test for misspecification but included a standard procedure, using the Jarque Bera test for normality, the ARCH LM test for heteroscedasticity, the White test for heteroscedasticity as well as the Breusch Godfrey test for serial correlation. The fact that the ECMs of these supply chains had these problems does give rise to a concern as to the transmission of prices within some of the supply chains within the South African food industry. The applied methodology used in unpacking of the supply chains, was applied with the aim of developing a framework that can be adapted and used for similar analyses in future. The aim of this methodology was solely on developing and applying a methodology to two of the five supply chains, partly based on the results in chapter 4 but also on the importance of the commodities in the South African food industry, and to illustrate, by using real data, how this framework can benefit future research.