Ciaran Fitzgerald: Food pricing and farm incomes must be reconnected

In his speech to the Irish Farmers Association (IFA) annual general meeting (AGM) last week, Taoiseach Micheál Martin stated that “the truth is that agriculture is entering a decade of change”.

The core of this change will be increased regulatory cost relating to greater environmental compliance.

A further key element, particularly for the dairy sector, is likely to be a regulatory-based restriction on livestock numbers.

While the Taoiseach’s speech and a range of recent policy statements have, in fairness, outlined a commitment to providing income support to farmers in recognition of some of the cost of change, the thorny issue of the price of food remains one key element of this change that, as yet remains, if not unspoken, certainly undelivered.

Sustainability in pricing

To be very clear – if Irish agriculture, both from a domestic and EU perspective, is to become renewable and sustainable, as has happened to the energy sector for example over the last decade or so, then elements of renewable and sustainable pricing must form part of this evolution.

As the review of food pricing below shows, the reality of negative price inflation food pricing, in Ireland and across the EU, has seen a constant squeeze on farm incomes, processing margins and ultimately the ability of the sector to invest in innovation and sustainability.

So food pricing policies must change as part of the decade of change.

Changes in food prices in Ireland, on a monthly and yearly basis, are measured by the Central Statistics Office (CSO). As the table below from CSO shows, food prices fell by 1.4% in 2020 and have fallen cumulatively by 6.1% since 2016.

Indeed an examination of past records shows that food prices have been falling every year since 2011.

Prices of clothing and footwear have fallen also over the period, as have household furnishings.

Source: CSO Ireland

In contrast to the downward pressure of food and other retail categories, prices in the housing, education and health categories have risen by an average of 10% in the period since 2016.

Household spend

Perhaps the most dramatic impact of long-term downward price pressure on food prices is the fact that food now accounts for just over 9% of total household income spend by Irish households, compared to 22% of household spending in the 1970s.

Moreover this pattern of falling retail food prices is repeated across the EU, with some exceptions such as in countries that ban below-cost selling like Germany, or in France where there are very strict rules on the expansion of large scale retailers.

When farmers and other spokespersons in Ireland declare that low and falling food prices and, in particular below-cost selling / loss-leading of food products is continually squeezing farm incomes and processing margins, the broad response from economic commentators and consumer champions is that this demand for ever-falling prices is ‘consumer driven’… And that food retailers make very little or no margin on many food items.

This is dreadful nonsense!

Who sets food prices?

Firstly and factually, the consumer does not set food prices – food retailers including supermarkets and discounters do.

So it is the dominant food retailers / discounters, not consumers, who decide to sell below-cost or loss-lead with key items like fresh meat, liquid milk or seasonal items.

While this pricing policy by the retailer may indeed mean low margin on the specific food items, overall retailer margin is recovered across an average shop of around 100 items.

If anybody needs evidence of this diverse pricing policy, a walk around any food retailer will show that many high priority consumer products, such as personal care items or mobile phones and medicines, are sold at premium price levels and are never – I repeat never – sold as ‘buy one get one free’ or in any way discounted; notwithstanding how much the consumer might wish to see them discounted.

Furthermore in addition to the mixed pricing policy of the food retailer, a significant number of these items cannot be sold below cost either by law or by licence agreements with the manufacturers.

No food retailer, no matter how large or internationally connected, can sell an iPhone below the price that Apple sets for this phone. Yet there are no signs of large-scale consumer outrage at this non-discount pricing situation.

Perhaps the consumers recognise that if this version of the iPhone is discounted or given away, there won’t be another one with superior technology or improved consumer interface to follow.

Pricing is not ‘consumer-driven’

This ‘invisible hand’ of consumer demand does not exist; pricing is a combination of food retailer policy and regulatory decisions.

So again, to be very clear, for food pricing to reflect the new normal – that Irish food must become sustainable and renewable – both food retail pricing policy and government regulation can and must change.

Retailers can find other products to loss-lead if they wish to continue price bundling or they can reflect real consumer demand for sustainable food production in their pricing.

Regulators can insist, as they do with renewable energy and with medicines, that fresh food products cannot be sold below cost.

Everybody in the food chain needs to embrace change!