Standard economic theory suggests an increase in price for goods will cause demand to fall and supply to increase, while the opposite is mooted to occur for price falls and when it comes to the EU Green Deal, this can lead to new quotas and more cost.
This core economic doctrine has had to be modified when it comes to assessing agriculture and food supply and prices.
In reality, agricultural supply is relatively inelastic while demand remains highly elastic and volatile.
Also in reality, the price of fresh food i.e. meat, dairy, vegetables and fruit, has been kept artificially low through a dominant retail pricing policy that uses fresh food as ‘loss leaders’.
Supply elasticity – policy responses
This inelasticity of supply means that the food-producing sector has no control over supply and hence no selling power.
Once a cereal or vegetable is planted, or a cow is in-calf, the cost of the supply part of the agricultural equation is pretty much predetermined.
In the beef and dairy sectors, this supply elasticity is arguably more acute because it is longer term: A three to five-year cycle.
This different economic reality in the agri-food sector, caused by lack of supply control and exposure to demand volatility, combined with ever increasing regulatory costs, used to be universally recognised and understood.
It was the rationale for the intervention system under the Mansholt Common Agricultural Policy (CAP) of the 1970s and 1980s – intervening by taking product off the market when supply was higher than planned for, to stabilise the price of grain, beef or milk at the intervention / market price.
A supported market price also created the conditions for supply quotas such as those applied to the EU dairy sector from 1984 to 2015.
Beef mountains
Intervention fell out of favour in the 1990s because with green currency movements, the intervention price was inflated to become much higher than the market price, creating beef and butter mountains.
It also dwindled because of a market-driven ideology that insisted that price volatility was a natural outcome of well-functioning markets.
Volatility and supply inelasticity conditions remain for fresh food producers and processors and the main support through CAP is now by direct payments.
While direct payments were introduced as price /income supports, they are increasingly morphing into environmental compliance payments.
While there are still intervention supports, they are limited in quantity, and price levels are much reduced e.g. 1,660 for SMP but only 2,200 euro for butter.
The beef intervention price is €2.20kg – a catastrophically low level and essentially non-effective.
Abolition of dairy quotas
Dairy farmers were offered some brief respite from the dilution of market supports by the elimination of milk quotas in 2015.
Without quotas, Irish dairy production grew from a fixed five billion litres annually up to 2015, to 8.3 billion litres in 2020, to meet increasing global demand and also create increased dairy farmer income.
Climate action regulation in Ireland and in the EU will see an ability to increase milk supply greatly constrained, without any compensating measure on price.
So unfortunately, and most damningly in my view, despite the dilution of measures to counteract supply inelasticity, there is no sign of any real political will to challenge retail dominance with its everyday low pricing of natural fresh food products.
Template for EU Green Deal?
To add insult to this new supply constraint, and the injury inflicted by 20 years of low-priced loss leading, the dominant retail sector is promoting dairy and meat substitutes at a price premium of three to four times the natural product, while continuing to sell fresh dairy meat and vegetables below cost.
This is particularly perverse and damaging given that we were told that fresh food has been low priced for the past 20 years because consumers wont tolerate higher prices.
In reality, dominant retailers can and do decide on a pricing policy that extracts a premium from consumers for perceived ‘climate friendly’ products which have low or little food nutrition and no certifiable environmental sustainability validation, because they control and dominate the route to market.
On the other hand, 20 years of chronic low pricing combined with increasing compliance costs and a new quota system, very clearly exposes the (Irish / EU) traditional natural food producing sector to a relentless price and income squeeze.
This catastrophic ‘vision’ of the future of EU agriculture, which incorporates the EU Green Deal, most resembles a perverse version of the global outsourcing model of the 2000s.
Pseudo competition by dominant retailers promotes ‘value’ in the natural food category through low prices, but consumers can only experience lower and lower prices (and quality), because production is increasingly outsourced to low cost countries where labour costs (and unfortunately, environmental compliance and safety standards) are much lower than in the EU.
This is a recipe for higher global emissions from food production. Hardly a template for an EU Green Deal, never mind access to healthy food nutrition and sustainable food production.
Fresh natural food pricing needs a 21st century rethink.