Markets

Abstract

Markets are important for agriculture and for the supply and processing industries in the entire food sector. Efficient markets are necessary to reduce transaction costs, avoid bottlenecks, optimize specialization in value chains, ensure effective competition, etc. At the same time, markets develop and change continuously. The importance of international trade markets is increasing, but the trend is much stronger for industrial goods than it is for agricultural products. The agricultural and food markets are characterized by some specific conditions compared to other markets. One characteristic is that prices generally and in the slightly longer term rise at a slower rate than inflation, i.e., there is a real price fall. Studies also find an increasing price spread (from farm-to-fork) and a decline in farmers’ terms of trade and in real food retail prices.

7.1 Introduction

Markets are important for agriculture and for the supply and processing links in the entire food sector. Efficient markets are necessary to reduce transaction costs, avoid bottlenecks, optimize specialization in value chains, ensure effective competition, etc. At the same time, markets develop continuously, driven by several factors, e.g., technology.

The significance of markets is increasing due to:

• Fewer state-controlled economies and planned economies and more market economies

• Less subsistence farming, more market-oriented agriculture.

• Less agricultural support, more market-based agriculture.

• An increase in the importance of controlling markets and the value chain through, e.g., “from farm-to-fork”, traceability and vertical integration.

• More global and less domestic trade, until now.

• Stronger division of labor between the links in the value chain.

Inefficient markets and a lack of market access are important barriers to the development of the agricultural and food sector in many parts of the world.

The importance and position of the markets in a megatrend perspective can have many dimensions and related topics, including for example:

• The importance of markets and market access in agricultural development.

• Position and significance of markets in value chains.

• The development and significance of food demand—and impact on the markets.

• Market and bargaining power.

• Domestic or international marketing and globalization.

• Exploitation of international markets: Sales or production? Entry modes?

Markets are, directly or indirectly, a common element in all the chapters of this book. Markets are prerequisites for value chains, the food industry, consumers, trade policy, etc. However, the first four bullet points above are discussed in different other chapters, while the trends in national or international sales and globalization are explained in more detail in this chapter.

7.2 International Trade with Agricultural and Food Products

In general, trade with agricultural and food products across borders is relatively small compared with trade on the domestic markets.

The limited importance of the world market is one result of agricultural and trade policy, although other factors also play a role. In general, the modest global trade is due to the following factors:

• The short shelf life of the produce, which makes long distance transportation difficult and expensive.

• All countries have the necessary resources to produce agricultural products. A certain degree of domestic production is always possible without significant waste of economic resources, which limits the need for imports.

• The political goal of achieving a certain level of self-sufficiency through import barriers limits the potential for trade. Many countries do not want to be too dependent on food imports as it reduces food security and increases risk in politically unstable situations.

• Fixed resources and general low adaptability in agriculture. Countries with weak comparative advantages in agricultural production cannot—or will not—reallocate resources to other industries at the necessary speed to ensure optimal resource utilization. Agricultural resources may be locked in the agricultural industry.

Even though political and economic obstacles limit the internationalization of agricultural markets, significant growth in international trade in agricultural products has occurred. International trade as a percentage of total production has increased significantly for most of the important agricultural products, cf. Figure 7.1.

Fig. 7.1

Source Own calculations based on statistical data from FAO)

International trade as a percentage of the world’s total production, 1965–2021 (Note Average for 12 major agricultural products.

For all included agricultural products, the importance of international trade is increasing—albeit from a low level. International trade as a percentage of total production has increased significantly for most of the important agricultural products, and a weighted average for several agricultural products exhibits a steadily increasing trend during the entire period.

Increasing internationalization appears to be relatively unaffected by external and internal factors such as financial crises and food crises.

A picture of the long-term development of the world’s agricultural production and international trade is provided in Fig. 7.2.

Fig. 7.2

(Source Own calculations and presentation based on WTO (2022) and statistical data from FAO)

The development in world trade and production of agricultural products, 1950–2022

Figure 7.2 illustrates a very clear long-term trend: The world’s total international trade in agricultural goods is growing significantly faster than the world’s total agricultural production.

The trend toward increasing trade in agricultural and food is clear. It is, however, worth noting that the development in international specialization has so far been relatively weak regarding agricultural products. As shown in Fig. 7.3, international specialization, calculated in terms of the development in international trade and production, has been much more significant regarding products as a whole than agricultural products in the past few decades.

Fig. 7.3

(Source Own calculations and presentation based on WTO [2022])

The development in international specialization of agricultural products and all products 1950–2022

The figure illustrates the development in international trade and total global production. As can be seen, in general, international trade has increased by more than production, although the trend is much stronger for industrial goods than it is for agricultural products. This illustrates the fact that there is an apparent limit regarding the extent to which imports can displace local products on domestic markets. Local production will still be preferred on the domestic market and the market will not suddenly become fully internationally oriented.

Increasing globalization does not just develop over time—internationalization is also a function of economic development.

Therefore, one of the features of most developing countries is that they have a very small net export or net import of agricultural products. However, these countries increasingly become either net exporters or net importers in line with economic development. Thus, international specialization increases as countries adapt to a division of labor which is in line with their comparative advantage.

The increasing international trade and specialization in agriculture in line with economic development is illustrated by Fig. 7.4, which shows the countries’ total international food trade per capita.

Fig. 7.4

(Source Author’s calculations based on statistical data from FAO and World Bank)

Total international food (excluding fish) trade per capita as a function of per capita GDP in selected countries (2020)

The very clear correlation between economic development and international trade, as shown in Fig. 7.4, suggests that economic development is a prerequisite for participation in international trade and specialization.

International trade is one element of globalization which is very decisive for the future development of agriculture and the food industry and markets. If other driving forces and megatrends within trade liberalization, technological development, etc., continue, this increase in international trade and specialization will probably also continue.

Whether international trade and globalization together can also be expected to be a persistent and continuing megatrend of significance for agriculture, the food industry and food markets is discussed in more detail in Chapter 11.2.

7.3 Foreign Direct Investments

As discussed in Sect. 7.2, international trade has been increasing steadily for several decades. Chapter 3.6 made the point that global M&As represented a megatrend within the manufacturing industry and the food industry. These megatrends illustrate that international trade is only one way of expanding internationally; the ways in which companies become more international and global have changed.

The internationalization of companies may occur in several ways, but two ways are particularly important: by exports from the home country or by investing and producing abroad. The choice between the two different entry modes depends on several conditions both internally in the companies and externally on the markets, cf. Hansen (2013). The driving forces that support or strengthen one of the two entry modes include:

• Trade barriers, which can stimulate foreign investments and production.

• Restricted capital markets, which can reduce foreign investments.

• Economic and political risks which will favor reversible and low-risk entry modes, i.e., direct export.

• Weak infrastructure, which can limit transportation over long distances and thus also exports.

• Preference for domestic production, which will discourage export.

• Internal factors such as ownership and access to capital, which may be important prerequisites.

There is a clear increasing trend for both international trade and foreign (international) investments. However, foreign investments have increased significantly in recent decades, thereby building a foundation for increasing foreign activities and foreign sales, cf. Figure 7.5.

Fig. 7.5

Foreign direct investment, net inflows (percent of GDP) (Note Foreign direct investments (FDI) include those made by a company or government in a foreign company, but it does not include, e.g., stock investments. Source Own presentation based on statistical data from World Bank)

The figure illustrates the world’s total foreign direct investments measured in percent of GDP. For the entire period, there is a significant positive trend, but foreign direct investments are very sensitive to economic cycles. International recession, financial crises, pandemics, economic growth and turbulence in stock markets have a major impact on foreign direct investments. Since 2000, the trend has been negative, but net inflow has been positive each year.

Foreign direct investments are used to finance foreign mergers and acquisitions, foreign greenfield operations, growth in foreign subsidiaries, affiliates, etc. These foreign direct investments create sales that are far greater than the “traditional” exports, i.e., actual exports of goods from the home country. Sales of foreign affiliates are a greater source of globalization than exports, see Fig. 7.6.

Fig. 7.6

Sales of foreign affiliates and exports: World total (Note Sales of foreign affiliates: Data for 1990, 2005–2007, 2018–2020; Source Own presentation based on UNCTAD [2022] and statistical data from FAO)

The figure illustrates significant growth in sales through foreign affiliates, while internationalization through exports increased less rapidly. The figure thus also illustrates the importance of foreign direct investments for globalization.

The megatrend toward increasing foreign investments is also visible in the food industry. Food companies are also making more investments in foreign countries, cf. Figure 7.7.

Fig. 7.7

Foreign direct investments, inflows to food, beverages and tobacco industry, 2015 prices (Note Including countries with available data: Austria, Denmark, France, Germany, Iceland, Italy, Japan, Thailand, the UK, the USA and Korea. Source Own presentation based on statistical data from FAO)

Based on selected countries with available data, the figure illustrates foreign direct investment (inflows) in the food, beverages and tobacco industry, calculated in fixed 2015 prices. As can be seen, the same pattern for the food industry as for the entire economy emerges: a decline after the financial crisis, and a decline during the Covid-19 pandemic, but an increasing trend for the entire period.

A number of studies confirm that foreign direct investments are playing an increasingly important role in the food industry:

According to Punthakey (2020), FDI in the agriculture and food sectors remains small compared to industry and services. However, FDI plays an important role in driving participation in agro-food GVCs and increasing global FDI activity in the agriculture and food sectors have been created by a number of drivers including lower transportation costs and reductions in barriers to trade and investment.

Doğan (2022) confirms that FDI is quite low in agriculture compared to other economic sectors. However, after 2007 FDI inflows to developing country agriculture rose significantly. FDI is considered an essential way to attract capital, and to increase food production and agricultural productivity. The study concludes that FDI in agriculture has an inverse effect on food security in the host country, which is also an important observation.

7.4 Regionalization of International Agricultural and Food Trade

The regionalization of international trade means that trade increasingly takes place between countries in the same region. A region may be a geographical area, and it is clear that countries that are undergoing a process of internationalization initially trade with their neighboring countries, cf. Johanson and Vahlne (1977). A region may also be a political or commercial area in the form of a regional trade agreement (RTAs), free trade area, common market, customs union, etc.

Therefore, regionalization may become visible and develop in two ways based on the following two different drivers:

Purely geographical regionalization is the result of, among others, reshoring and nearshoring, which is increasingly taking place (Chapter 3.8). Some drivers indicate that trade in goods and services will increasingly take place between countries in the same geographical region. This development is due to uncertainty about the future in the context of global pandemics, trade conflicts and geopolitical tension. The uncertainty may cause companies to shorten their supply chains in order to increase supplier security. Technological developments, including robotics, support this trend with shorter value chains.

Political or commercial regionalization occurs as a consequence of, among others, RTAs, etc., which are also discussed in Chapter 6.4. RTAs include several types of cooperation one of which exists in a free trade area where there is, in principle, the free movement of goods across borders. In relation to third countries, countries in free trade areas can maintain their individual trade barriers. In a customs union, economic integration is greater as a common external tariff with the rest of the world is maintained.

The different forms of RTAs, their degree of integration, complexity, etc., are discussed in Hansen (2013).

In recent years, RTAs have become increasingly important, and the number of RTAs is increasing cf. Figure 7.8.

Fig. 7.8

Source Own presentation based on statistical data from WTO)

Cumulative number of regional trade agreements (RTAs) in force 1950–2023 (Note First RTA was ratified in 1958.

The multilateral trade negotiations in the WTO have not had much momentum for several years. The negotiations in the Doha Round failed in 2011 after a decade of negotiations, and with this deadlock in multilateral trade negotiations, RTAs have gained far greater importance as a real alternative. The majority of world trade now occurs between pairs of countries that have established a reciprocal trade agreement (Legge & Lukaszuk, 2021).

For all types of RTAs, the internal trade between the countries included in the agreement is given special preference. The preference for internal trade may be greater or lesser, product groups may be omitted, and there may be special conditions attached to the preference. However, increasing internal trade is in any case to be expected.

The question is whether RTAs really create more regionalization in world trade: Does trade between countries in an RTA grow more rapidly than other trade—compared to a situation without an RTA? This question is based on a counterfactual scenario, which means it is difficult to answer: Many factors affect trade between countries. Sometimes agricultural and food products are subject to special conditions in RTAs, and agreements on foreign direct investment may also be included and may affect trade.

Legge and Lukaszuk (2021) investigate whether predictions about regionalization are supported by the data. They conclude “that you could see regionalization everywhere, except in the data”. Altman and Bastian (2022) note that while there was a clear trend toward less regionalized trade between 2003 and 2012, no consistent trend appears in more recent years. They also conclude that “trade flows have actually stretched out over longer distances since 2004, albeit with a pause between 2012 and 2018”.

According to FAO (2022), globalization and regionalization have generally developed in parallel, but the regionalization of trade in food and agriculture increased in importance between 1995 and 2019. As globalization weakened after the financial crisis in 2008, countries apparently traded more within their regions.

The EU is a good example of an RTA: There is a complete internal market with no excluded products. Calculated in terms of the degree and scope of integration, the EU is probably the most significant example. The number of member states has increased several times, and therefore it is possible to see the consequences of participation in RFTs.

The EU was enlarged in 2004 by ten countries and by two countries in 2007, and in both cases, the new member states’ trade with the EU was significantly affected, cf. Figure 7.9.

Fig. 7.9

Source Own presentation based on statistical data from Eurostat)

New member countries’ intra-EU food export and import before and after their entry into the EU (Note New member countries as of 1 May 2004: Cyprus, Czechia, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. New member countries as of 1 January 2007: Bulgaria and Romania. Import and export of food, drinks and tobacco.

The figure illustrates that new member countries’ import and export countries change when they become members of an RTA—in this case an economic and political union. As can be seen from the figure, a significant change occurred around 2004, when 10 new countries became members of the EU. The new member states increased their exports to the EU, but their imports from the EU also increased. The enlargement in 2007—with Bulgaria and Romania—also brought major changes: the two new member states’ imports from the EU increased from approx. 55 percent to 80 percent of total imports, while their exports to the EU did not change significantly, instead exhibiting a slightly longer-term downward trend.

In conclusion, several factors promote increased regional international trade, but it is difficult to demonstrate any empirical trend. Other changes in markets including FDIs and a general increase in international trade, are likely to dilute a possible regionalization trend. Furthermore, regionalization through various forms of RTAs promotes internal trade, and several examples can document this empirically.

In one scenario, regionalization in international trade will increase:

• The many RTAs that have been concluded will probably gradually result in increasing internal trade.

• The increasing trend toward reshoring and nearshoring will also lead to increased geographical regionalization.

• Climate policy and a focus on the carbon footprint will likely limit long distance trade and transportation, which will encourage geographical regionalization.

In another scenario, globalization will increase at a faster rate than regionalization in international trade:

• Freight costs and container shipping costs will probably exhibit a long-term declining trend due to logistical technologies and further economies of scale.

• The emerging economies will probably obtain an increasing share of global trade. As they tend to trade over longer distances, regionalization will decrease.

• Full utilization of the comparative advantages and international specialization necessitates trade between countries with different factor endowments. The factor endowments may vary widely between continents when it comes to agriculture and food, which may be a driver for long distance trade.

7.5 Trends in Farm Gate Real Prices

The agricultural and food markets are characterized by some specific conditions compared to other markets. One characteristic is that prices generally and in the slightly longer term rise at a slower rate than inflation, i.e., there is a real price fall. Agricultural commodity prices will often be quite volatile, which means that short-term periods of even large real price increases can occur, but the long-term trend toward real price falls is relatively clear.

Long price series with the most important agricultural commodities thus show a downward trend in real prices. Figures 7.10 and 7.11 provide examples of this change.

Fig. 7.10

(Source Own calculations and presentations based on statistical data from USDA and U.S. Bureau of Labor Statistics)

Average monthly wheat price in the USA in nominal and real terms (1908 prices) 1950–2023

Fig. 7.11

Source Own calculation and presentation based on statistical data from Danish Agriculture & Food Council, Statistics Denmark, and Davidjacks.org)

Change in the real price for pork 1900–2022 in the USA and Denmark (Notes Denmark: Price per kg carcass weight paid to farmers; USA: Wholesale Price.

Wheat, which is one of the most common crops in the world, is used as an example in Fig. 7.10. As the figure shows, both significant price volatility and a clear decline in the real price characterize the development.

There are also clear examples of a decline in real prices in livestock production, cf. Figure 7.11.

The figure illustrates that the long-term trend is almost identical in the two countries. Denmark became a member of the EU in 1973, which contributed to a small short-term increase in producer prices. In the subsequent years, the two curves exhibit almost identical courses.

Note that the figure presents the price change from the year 1900, and that nothing can be concluded about the price level in or between the two countries.

Declining real prices apply to most agricultural products. According to Jacks (2019), from 1900 to 2020, there were significant declines in real prices for most important agricultural products. The size of the real price declines varies between products, but the tendency is for products with the highest productivity increases to also exhibit the largest declines in real price.

The declining real prices are no coincidence. The development can be largely explained by several underlying driving forces:

• Relatively large increases in productivity in agricultural production.

• Relatively homogeneous products (commodities or bulk products). With relatively uniform products, price competition will be stronger, which will suppress the price.

• Moderate or limited demand growth. Food can be considered a basic good, which means that demand does not increase in line with rising income.

• Agricultural products can be produced almost anywhere in the world, and rising prices will relatively quickly lead to increased supply, which will in turn reduce prices.

These underlying driving forces are relatively robust, so it is likely that the trend toward decreasing real prices for agricultural commodities will continue. In a perfect market, these declines in real prices will be transmitted downstream in the value chain, so that the ultimate result is cheaper food at the consumer level.

Declining real prices in the long term is a decisive element in the agricultural treadmill, which is discussed in more detail in Chapter 9.6.

7.6 Farmers’ Terms of Trade

As discussed in the previous section, farmers’ selling prices for agricultural goods increase at a slower rate than inflation, so there is a decline in the real price. It also turns out that farmers’ selling prices increase at a slower rate than the prices of the inputs used in agriculture. This price relationship between output and input prices, which is called farmers’ terms of trade, deteriorates in the long run. It is a general phenomenon in agriculture, and it is also a megatrend.

Given the volatile prices of agricultural commodities, farmers’ terms of trade can also vary over time. Food crises can, e.g., improve price relations in the short term and thus also farmers’ terms of trade. In the slightly longer term, the trend is both explainable and clear.

Farmers’ terms of trade may develop differently internally in agriculture: Higher prices for grain will improve the terms of trade for crop farmers but result in deteriorating terms of trade for livestock farmers, including especially poultry and pig farmers for whom grain is an important input.

The way the farmers’ terms of trade develop is explainable and is a consequence of both changes in productivity and the treadmill: Increasing productivity, low growth in demand for food and fixed assets means that the price of both agricultural and food products increases at a slower rate than inflation in the long term, so the terms of trade will deteriorate.

Despite fluctuations over time, and despite differences between production branches within agriculture, the general picture is that deteriorating terms of trade occurs in agriculture in almost all countries. As can be seen in Fig. 7.12, deteriorating agricultural terms of trade occur in countries as diverse as the USA, Australia and Denmark.

Fig. 7.12

(Source Author’s calculations based on Dansk Landbrug [several issues], USDA [several issues a], USDA [several issues b], Zammit and Howden [2020], and statistical data from Statistics Denmark, and Australian Bureau of Agricultural and Resource Economics and Sciences [ABARES])

The change in farmers’ terms of trade in Australia, the USA and Denmark

The figure illustrates very uniform trends throughout the period—despite the fact that the countries have different agricultural policy systems, structures and branches of agricultural production.

The deteriorating terms of trade over time is a phenomenon that is particularly true for agriculture, and it will probably continue in the future. As long as the underlying drivers behind inter alia the agriculture’s treadmill are consistent and persistent, farmers’ terms of trade will continue to deteriorate, although short-term fluctuations may occur as a consequence of volatile prices.

7.7 Price Volatility

The food crises that have occurred since 2005 have resulted in significant attention on food markets and their stability worldwide. The large price increases and subsequent price decreases caused considerable turbulence, and many sectors that were directly or indirectly dependent on agriculture and the food industry were affected. Price volatility was found to have several disadvantages for consumers, finances and businesses.

Unstable or changing prices are not necessarily a disadvantage. Price changes may be a consequence of changes in demand, and the new prices are a signal to the suppliers to alter production.

Also, in other cases, fluctuating prices may also be an advantage. If the supply is low due to, e.g., a bad harvest, the prices will (cf. the cobweb theory) in the relatively short term adapt. Therefore, the gross income, i.e., supply multiplied by price, stabilizes.

Unstable markets and prices as well as food safety have been highly political topics on the agenda in the UN and at the G8 and G20 meetings. Initiatives to ensure a stabler and better functioning food market have been discussed in many fora.

The high, unstable and less predictable agricultural and food prices have led to a debate about whether market conditions are about to change decisively, and whether the development will continue in the future. If major price instability continues in the future, the risk management of both farmers and companies will face major challenges. The international food supply will also come under increased pressure.

Box 7.1 Volatility, variation and instability

The instability of markets and prices is often determined by calculating their so-called volatility, which can, in principle, be performed in two ways:

Historical (realized) volatility is calculated on the basis of observed (realized) data from a historical period. Historical volatility thus provides a picture of the past price and market conditions. The changes in price can be examined from day to day, month to month, year to year, etc., which can be decisive in terms of the results and how they are interpreted.

Implied volatility is used to predict future prices based on market expectations. It provides a picture of the expected change in future prices as market participants perceive the situation. Implied volatility can be calculated on the basis of future prices, which are determined continuously on the commodity markets.

Agriculture and agricultural production are characterized by a significant degree of market instability and variations over time compared to other businesses. Price volatility is more evident in agriculture than in other economic sectors due to a variety of economic, natural and political factors (Díaz-Bonilla, 2016).

The level of agricultural production in any given year is influenced by many factors that farmers cannot fully control such as the climate, pests and livestock diseases, which results in large annual fluctuations in production—primarily in crop production.

Although, e.g., droughts rarely occur in all agricultural countries in the same year, instability in total world production is significant.

In addition, supply often reacts more slowly than demand. Therefore, changes in supply will cause major price changes. Furthermore, the demand for food is rather price inelastic and with relatively few or no substitutable products, which can further create price volatility: If the supply of food declines, the demand will not decline correspondingly because food is a necessity, which means that prices rise.

As a consequence, price volatility is a fundamental condition that is likely to persist. This prediction is supported by the fact that price volatility in the international grain market is not a new phenomenon but has been present at least since the beginning of the twentieth century, cf. Figure 7.13.

Fig. 7.13

Source Own calculations based on statistical data from USDA)

Calculated wheat price volatility on the Chicago Board of Trade 1910–2023 (Note Price volatility is calculated as the standard deviation over 12 months using LN (Price $_{t}$/Price $_{t-12}$)$_{,}$ where t = month. Also 10-year average and trendline.

The figure presents one way of illustrating the price volatility of a specific agricultural product over a long time period. The figure shows that, in the period, volatility has been decreasing slightly. Volatility was high in the 1930s and during the recent food crises.

Several analyses of both the short- and long-term price volatility of agricultural products have been carried out. Since methods, data and periods vary, no clear picture can be drawn.

In an analysis by the European Commission (2009), the historical volatility of several agricultural commodities on the Chicago Board of Trade was examined. The study goes back to 1980, and increasing price volatility from the 1990s onward was observed.

The European Parliamentary Research Service concludes that global price volatility has been on the increase since 2005 and is likely to remain a major concern for farmers in the coming decades (Tropea, 2016).

FAO and OECD (2011) conclude that there is little or no evidence that volatility in international agricultural commodity prices, calculated on the basis of standard statistical measures, is increasing in the long term.

In Díaz-Bonilla (2016), different methods and models are discussed and used to analyze price volatility. Some significant results are presented in Table 7.1.

Table 7.1 Food price volatility in nominal and real terms, in US dollars and SDRs using several indicators of volatility

The results in Table 7.1 are almost identical to those presented in Fig. 7.10: High volatility in the 1970s, low volatility in the 1980s followed by increasing volatility. The table also reveals almost uniform trends regardless of the methods or models used.

The conclusion regarding the historical price volatility is not entirely clear since the choice of method, time period, product, etc., has an influence on the calculated result. Over a one-hundred-year period, the price volatility of wheat on the world market is slightly decreasing. However, when examining the time since the beginning of the 1960s, it has been increasing slightly.

A prediction of future price volatility should be based on the future drivers that are expected to create volatility:

Several sources have tried to explain the reasons and driving forces behind price fluctuations in agriculture, cf., e.g. Balcombe (2009), Tangermann (2011), FAO (2010). Since price volatility often refers to price fluctuations that cannot be explained, identifying and calculating the result of all the drivers behind price volatility is inherently difficult.

When it comes to price volatility on the world market, which is generally more volatile than national markets, specific conditions must be taken into account.

For many years, the world market for agricultural products was affected by dumping, import restrictions, export subsidies, etc. The consequence was that price formation was not optimal and the importance of the world market was very limited. This disruption also created major price fluctuations from year to year. However, recent years’ liberalization and increased free trade have contributed to increased price stability on the world market—ceteris paribus.

Conversely, the volatility of many national markets has increased. The liberalization of agricultural policy has, in some cases, been a driving force behind—and explanation for—increasing price volatility. An important aspect is that, in the past, the aim of agricultural policy was often to ensure farmers stable—and previously also high—sales prices. In line with liberalization and a reduction in support, the safety net on the domestic markets has been removed. Since then, in general, domestic prices follow the prices on the world market, where volatility has typically been higher.

An example of this liberalization and subsequent increasing price volatility occurred inter alia in the EU: In the 1980s and up to the implementation of the reforms of the EU’s agricultural policy at the beginning of the 1990s, the EU’s internal market prices were stabilized by means of trade regulations and interventions. Internal prices were relatively stable, and seasonal variations, which are relatively easy to predict, were the most significant contributors to the overall variation. Subsequently, both the price level and price volatility in the EU have largely followed the world market, which is completely in line with the consequences of trade liberalization.

The change in the price of wheat in both the EU and the world market since 1980 is presented in Fig. 7.14.

Fig. 7.14

Wheat prices in the EU and on the world market and price volatility in the EU (Note EU prices = The Danish prices are farmers’ selling prices. The world market price is the price of the Chicago Board of Trade. Price volatility is calculated as the standard deviation over 12 months using LN (Price $_{t}$/Price $_{t-12}$), where t = month. Source Own calculations and presentation based on statistical data from USDA, Statistics Denmark, and Danish Agriculture & Food Council)

As the figure illustrates, fluctuations in world wheat prices in the 1980s were significant. However, these fluctuations did not immediately have any significant impact on market prices in the EU, which were shielded by trade barriers. In the latter part of the period, price volatility on the world market had a significant effect on EU wheat prices.

Both price increases and decreases during the food crises of 2007–2008, 2011–2012 and again from 2020 led to increasing price volatility.

The liberalization of agricultural policy including, in particular, the removal of trade-distorting measures, has come a long way, cf. also Chapter 6. Therefore, agricultural policy is not expected to increase price volatility to the same extent in the future.

Food crises will also create price volatility. The likelihood that food crises will occur in the future is assessed in more detail in Chapter 10.5. Factors such as the size of grain stocks, bioenergy, the price of oil, demand growth, etc., will thus be decisive in terms of both the emergence of food crises and price volatility.

Several factors point to high price volatility in the future:

• Climate change and more extreme weather events will lead to more unstable and variable plant production around the world. This will also cause greater price fluctuations.

• Increasing demand for agricultural products for food, feed and energy purposes will in itself mean increasing pressure on the market, which may lead to situations of undersupply and thus price fluctuations. The increasing demand pressure will also lead to the use of more marginal agricultural resources, but this will also reduce production security and subsequently also price stability.

• Water resources are becoming increasingly scarce, which increases the risk of stunted growth due to drought and limits the agricultural area that can be irrigated. This situation may also lead to lower yields and major variations in annual production.

Several additional factors suggest low-price volatility in the future:

An increasing focus on plant breeding, more efficient dissemination of knowledge, improved infrastructure, reduced food loss and increasing international trade may contribute to increasing price stability.

Finally, the degree of political attention on the problem—and the specific political measures—will also contribute to limiting price volatility in the future.

Based on the studies and sources presented, no clear trends for the future can be predicted. However, price volatility will probably also be significant in the future and more evident in agriculture than in other economic sectors.

7.8 Price Spread

The price spread refers to the difference between the farm price and the retail price of food for corresponding commodities. This price spread involves costs incurred by various intermediaries and their margins, and it reflects charges for processing, shipping, and retailing farm goods. Therefore, the farm-to-retail price spread includes payments for value-added services beyond the farm gate that are needed to transform a raw product into a retail product.

Movements in price spread are important because an increase in the price spread may signal a change in the level of competition in one or more sectors of a food supply chain (ABARES, n.d.). However, and as discussed below, analyses of such price structures have limitations as many factors may lead to an increase in the price spread.

When farmers’ sales prices for raw materials are to be compared with consumer prices, which are often highly processed and complex, the data base is important. Furthermore, very long time series over several decades must be used when assessing the long-term trends. This also means that care must be taken when interpreting and comparing the results.

Several factors explain the increasing price spread, cf. for example Zammit and Howden (2020), ABARES (n.d.), and Hahn (2004):

• An increase in farm-to-retail price spread may indicate that productivity in the farm sector is increasing at a faster rate than it is in the processing or retailing sectors.

• A change in consumer preferences that requires more value to be added by processors or retailers will increase the price spread. As the processing function increases the price spread of agricultural commodities, the price spread will vary widely between products depending on the degree of processing.

• An increase in the price of inputs in the processing or retailing sectors such as energy or labor costs will increase the total cost and thereby sales prices and the price spread.

• An increase in processors’ or retailers’ bargaining power over farmers may increase the price spread. In general, imperfect markets or a change in the level of competition in one or more sectors of a food supply chain may result in changes in the price spread.

• Short-term changes in the price spread may be a result of imperfect price transmission.

• Changes in agricultural policy, including shifting from market price support to direct payments, will reduce farmer prices. Therefore, the price spread may increase in the short term.

• Levies and taxes on food at the retail level may affect the price spread. Normally, corrections for such levies and taxes must be made to obtain an accurate picture of the development.

Considering the range of factors that can influence the long-run farm-to-retail price spread, it is difficult to determine the precise contribution of any particular factor to any change in the farm-to-retail price spread (Nguyen et al., 2016).

As indicated above, the extent of the farm-to-retail price spread and how it changes varies between products and between cases. At the same time, limited access to—or availability of—data means that results from several studies from different countries and segments must be presented.

Figure 7.15 presents the price spread for two identical products in two different countries over a 50-year period, cf. Figure 7.15.

Fig. 7.15

Source Own calculations based on statistical data from Statistics Denmark, USDA, and U.S. Bureau of Labor Statistics)

Farmer and retail real pork prices in the USA and Denmark (Note USA: 12-month moving average. Denmark: Annual data.

The figure shows farmer and retail real (deflated) prices for pork in the USA and Denmark. In both cases, increasing price spreads are seen in the period. For 1970–2020, where comparable data is available, farmer pork prices have exhibited almost the same trend in the two countries.

Since the mid-1990s, US real retail prices have remained almost constant, thereby increasing the price spread, while there has been a continuous decline in real retail prices in Denmark. However, increased processing in the USA may explain this difference. In any case, the increasing price spread is apparent in both countries.

A longer-term case study finds a similar trend, i.e., an increasing price spread, albeit with significant turbulence and divergent directions in periods of political tension, war and market restrictions, cf. Figure 7.16.

Fig. 7.16

Long-term change in farm and retail prices (deflated) in Denmark (Sources Own calculations based on statistical data from Statistics Denmark)

The figures illustrate a very long time series for two relatively raw material-based and non-processed products: Whole milk and eggs (fresh and unprocessed eggs) do not change significantly from farmer to retailer, apart from packaging, etc., which means that comparability is high and price spreads are not significantly affected by additional costs in the value chain after the agricultural link.

The figures reveal a fairly clear development from the middle of the twentieth century—after the Second World War—until today. During this period, the real price of milk in agriculture has fallen by approx. 55 percent, while the price in the retail sector has fallen by approx. 25 percent. The real (deflated) price of eggs in agriculture has fallen by 80 percent, while the retail price has also fallen, but not as significantly. In recent years, the development has been more stable, which may be due to both diminishing productivity increases and more differentiated egg products with a higher value (organic, free-range, etc.).

An increasing price spread can also be identified in plant production. Potatoes, which are fairly homogeneous products, and which are also marketed as unprocessed products, are produced and sold on a market that can be used as a case to illustrate the long-term price change, cf. Figure 7.17.

Fig. 7.17

Potatoes: Long-term change in farm and retail prices (nominal and deflated prices) in Denmark (Sources Own calculations based on statistical data from Statistics Denmark)

Prices are from Denmark due to the availability and reliability of the data. However, Denmark is considered to be fairly representative of many other countries.

Firstly, the figure shows that retail and farmer prices exhibit similar fluctuations: rising farmer prices lead to rising retail prices without any visible lags.

Secondly, large annual price fluctuations—mostly due to changes in supply as a consequence of production conditions—are reduced using a 10-year moving average, and prices are deflated with the consumer price index. The figure shows that the price spread emerged and grew in the 1970s. Subsequently, farmer prices have almost halved in real prices.

In general, the decreasing farmer prices and the increasing price spread is a rather clear phenomenon, which cannot be explained by increasing processing in the value chain. On the contrary, the relatively large increases in productivity in egg, milk and potato production in agriculture—as discussed in other chapters—are realistic and significant explanations.

As previously mentioned, eggs, milk and potatoes remain almost unchanged throughout the value chain as they do not undergo much processing, which means a clearer picture of the price spread can be drawn. When more processed goods, food service, restaurants, cafeterias, takeaways, etc., are included, the relatively cheap agricultural raw materials account for a decreasing share of the consumer price, while labor costs in particular, which is an increasingly expensive input, account for a larger share of the retail price. On this basis, food prices (including the price of increasingly processed foods) can be expected to rise more than the price of agricultural raw materials, and the price spread will thus increase to a relatively large extent.

An aggregate case study that includes a farmer’s total sales price index and a total food consumer price index confirms this expectation, cf. Figure 7.18.

Fig. 7.18

Agricultural and food products: Change in farmer and retail real price (Denmark) (Sources Own calculations based on statistical data from Statistics Denmark)

The figure illustrates a significant increase in agricultural sales prices at the beginning of the 1970s, which was primarily due to the fact that Denmark became a member of the EC and, therefore, obtained the benefits of the Common Agricultural Policy from 1973. Subsequently, there was a significant decline in sales prices, which was due to the reforms to the EU’s agricultural policy, associated price reductions, and significant increases in productivity in agriculture.

While the retail price remained at an almost constant level, farmer prices declined by 60 percent—both in real terms. The price spread increased considerably during the relatively long period presented in the figure.

7.9 Consumer Food Prices

In the previous section, statistical long-term trends showed that consumer food prices tend to decrease when analyzing standard products such as eggs and milk over a long period.

The product group “food” changes character during economic growth as food products become increasingly processed. Increasing cost for labor, marketing, transportation, innovation, etc., is included in food prices, as the farmers’ share of the food retail value is decreasing (Chapter 4.11), so cheap agricultural inputs will account for a decreasing share of the production value, while more expensive inputs like labor costs will account for an increasing share. Overall, the price per unit increases—sometimes by more than inflation—as unit labor costs will usually increase by more than inflation.

The price change is sometimes obscured by the fact that food accounts for a decreasing share of total consumption as the demand for food is relatively income elastic. Also, increased processing means that calculating the real change in prices is complex.

By focusing on a few food products that are very similar over a long period, the decline in real food retail prices can be illustrated, cf. Figure 7.19.

Fig. 7.19

Long-term change in retail prices (deflated) in Denmark (Note Prices are from Denmark due to the availability and reliability of the data. Linear trendlines included. Sources Own calculations based on statistical data from Statistics Denmark)

The figure illustrates rather uniform price trends for the two product groups. The two world wars led to significant price increases, and the food crises of 2007–2008, 2011–2012 and 2020–2023 also led to higher retail prices, albeit with different consequences for the two products.