Farmers have a lot to prove to reap benefits of price rise
'Supermarkets should pay farmers realistic prices for their produce,' headlines shouted earlier this month.
On the surface this looks like a reasonable comment. The difficulty is that, by inference, the suggestion is that the supermarkets do not, at present, pay realistic prices.
In turn that begs further questions about how realistic prices can be determined and by whom. Is there a form of market collusion that allows supermarkets to keep down the prices paid to producers? Also, how is this complaint to be analysed since usually supermarkets buy from processors, not directly from farmers?
This type of debate is not new. Essentially it represents an effort to manipulate the ebb and flow of the market place to try to obtain an answer that market forces do not deliver. Whatever the motivation, essentially it points to some forms of price control whether direct price controls or market intervention prices.
At root, the complaint is based on a judgment that off-farm prices for produce are too low. Too low might mean so low that farmers will withdraw, over time, from the supply of a commodity or, alternatively, that the profit margin on production (or return above marginal costs) is inadequate.
There are answers to these complaints: two will serve to illustrate the tensions.
First, if local farmers find production earns unacceptably low prices possibly because cheaper supplies are available as imports whether from neighbouring countries or further afield (including New Zealand), then there is a strong case to allow processors or supermarkets to buy, on behalf of consumers, from markets with the lower comparative costs.
Farmers do not expect to have a protected local market for Mediterranean vegetables. The same general principle should be tested for Argentinian beef or New Zealand butter.
Second, and in anticipation of arguments that there are local factors to acknowledge which merit offering local farmers some preference, the local farming sector must realise that there is already a large subvention to farmers which underpins their incomes: the Single Farm Payments allocated through the Common Agriculture Policy of the EU (CAP).
Of a total gross value-added by farming activity of £378m in 2010 there were further payments to farmers of £271m as Single Farm Payments (SFP).
In actuality, when labour costs, and interest are deducted from net value added, the net income from farming was only £3m higher than the SFP.
In short, the CAP ensures that farming earns income levels well above what is determined by selling produce through the market place. Additionally to ask (even if it was practical), that supermarkets, or food processors, should pay higher realistic prices, invites a very cynical response.
The irony of the juxtaposition of a plea for realistic prices alongside, on the same day, headlines which point to a 25% rise in total net farm income does little to earn a sympathetic response.
In 2010, the best estimates from the Department of Agriculture are that net farm incomes at £274m were the highest of recent years. At first examination, the lean years of the middle of the last decade seem to have given way to more acceptable results.
Of course, there are factors eroding the level of farm income. For the cattle and intensive livestock sectors, feed prices have been rising significantly. Also the costs of some other inputs such as fuel prices and the costs of equipment are rising faster than the inflation of output prices.
Those price increases are accepted but must be seen in the context of better prices from the sale of many products.
The official indices of producer prices in 2010 improved for the main cattle, sheep and milk prices. Admittedly, realised prices for pigs and eggs fell.
In 2010, the overall price of inputs rose by 3%; the overall producer prices index rose by 8%. That does not make 2010 a year from which to make a strong complaint.
Perhaps there are, in the early part of 2011, some signs that farm incomes are now doing less well. For example, milk prices through the regular auction process have fallen.
Feedstuff prices have risen strongly affected by exchange rates and international trade.
However, a plea for better or more realistic off-farm prices needs better evidence.