The High-Priced Spread

By most conventional signs, the prices of food to the U.S. consumer should now be coming down after two years of dizzying and painful rises. Prices received by farmers for some key items --wheat, corn, cattle, hogs--dropped sharply last spring, record harvests are anticipated and the surge in agricultural exports that did much to boost U.S. food prices last year is now waning (TIME, July 1). Yet only a few grocery prices --for poultry, eggs, dairy goods and some cuts of beef and pork--have come down significantly. On average, retail food prices rose .9% in May, a month during which wholesale food prices dropped .6%. During the first quarter of 1974, the prices that farmers got for all the ingredients going into white bread fell 32%--but the store price for the finished loaves scooted up 5.5%.

Why? Part of the answer is a lag in prices from farm to supermarket. For example, Arnold Bakers, a New York breadmaker, until recently was paying $13.50 per 100 lbs. for flour under contracts signed last winter and spring --though the immediate-delivery price for flour fell as low as $9.60, reflecting declines in wheat. Also, some agricultural prices have kept on rising: sugar recently hit a record 26-c- per lb., boosting prices of goods ranging from Life Savers to Kool-Aid soft drinks. But the biggest reason is that "middlemen" (a term covering bakeries, canners, meat packers, supermarket chains and trucking firms) are not passing along to housewives much of the decline in farm prices.

Instead, they are keeping their own prices high, or even raising them further, to cover inflated operating costs that they must pay, and to refatten profits that were squeezed thin during the period of price controls and freezes (farm prices were never under any sort of control). Supermarkets are also trying to recover losses suffered early last year as a result of a recently ended price war launched by A. & P. that kept retail prices from soaring even higher.

Share Dips. As a result, the spread between what housewives pay for food and what farmers get for the same goods has widened markedly (see chart). Last August farmers were getting an unusually high 52-c- of every dollar that the housewife spent for food; in May their share was down to 40-c-. The remaining 60-c- went to the middlemen.

Middlemen are quick to argue that they are merely regaining their traditional share of the retail food dollar --but in doing so at a time when farm costs are still high by historic standards, they are adding substantially to food prices. Food processors and retailers assert that they need the money to pay steadily rising bills of their own. Atlanta-based Colonial Stores, for example, reports that its wage costs have risen 10% to 12% in the past year. Gasoline and electric costs have shot up as much as 50% in the past eight months; and for some food processors, the price of tin-plated steel used to make cans has leaped 30%. Los Angeles Wholesaler Randolph Price asserts: "There is not much chance for retail prices to diminish. There are too many elements that must be added to the cost of the product by the time it gets to the store."

Less Capital. But there is also some suspicion that middlemen, especially grocery chains, have been adding un-warrantedly to their profits. Last week Secretary of Agriculture Earl Butz set a panel of experts to studying why retail meat prices remain high despite drops at the farm level, and the Federal Trade Commission launched a study to determine how the size and market share of major store chains affect competition and prices. Supermarket chiefs insist their profits are still low. The chains are earning only 9-c- profit on each $10 of sales, v. 7-c- last year. "Food retailers of this country have for the most part done an admirable job of serving customers at a modest profit," declares A. & P. Chairman William Kane.

Profits as a percentage of sales can be misleading, however. One of the characteristics of the supermarket business is that it takes far less capital to build a chain of groceries than to start an oil refinery or steel mill, and the stores get much more sales for each dollar invested --so that a paper-thin profit margin on sales can yield a satisfactory return on investment. In any case, supermarket profits have been rising dramatically recently. A. & P. earned $10.3 million in the first quarter of its current fiscal year, almost as much as the $12.2 million it earned in all of fiscal 1973 (when its profits were held down both by controls and by the price war that it had initiated). Colonial's profits per share in the first half of 1974 leaped 34% over the same period last year.

Any chance that retail food prices will drop has been dimmed further in the past few weeks. The price of wheat on the Chicago Board of Trade has risen from $3.56 per bu. a month ago to $4.36 last week--still below the record $6.45 last February. One reason: farmers have been holding crops back from the market. The price of live cattle has risen from $37 per 100 lbs. two weeks ago to $44.57 last week, and hogs in the last month have gone from $25 to $38.57 --still below their peaks last August. In response to farm-belt complaints that prices previously had dropped so low as to threaten bankruptcies among some animal raisers and feedlot operators, the Government is buying up $100 million of "excess" beef and pork for use in its school-lunch program, and has asked Australia and New Zealand to "voluntarily" restrain meat exports to the U.S.

Bumper crops of many farm products could still drive down some retail food prices this year--but in view of the widening spread between farm costs and retail food prices, the consumer would be wise not to count on it.

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