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New French Farm-to-Plate Pricing Analysis

by 5m Editor
21 August 2009, at 12:00am

The French trading standards agency DGCCRF* and France Agrimer* have jointly published a price analysis of the farm to plate supply chain for loin roasts, pork chops and ham, writes Peter Crosskey for ThePigSite. Other product categories may follow, but since loins generate about 90 per cent of the fresh pig meat sold by multiple retailers, according to TNS data, there is no urgency.

The methodology strives to manage the process as even-handedly as available data allows but the process is fraught. The starting point is clear and unambiguous for the producer: the national kilo price for the carcass of a class E charcuterie pig with a 56 per cent lean meat conformation.

The process then goes on to analyse who earns what proportion of the retail price. While all the production data is gathered within the French industry, the presence of imported pig meat within the retail circuit and in the manufacture of hams dilutes the objective of isolating French pig industry costs.

The data, much of it compiled by the French pig institute, IFIP, does come with a caveat that the calculations include aggregated data supplied by an industry panel. The researchers warn that the data's precision is "illusory" since it cannot be based on exhaustive sampling from identifiable businesses.

The study estimates that between January 2008 and March 2009, producers grossed an average of €1.43 per kilo for a carcass, within which the loins were valued at €2.23 per kilo. Many producers would dispute the headline carcass figure as overstated.

Further down the supply chain, the study estimates that the slaughterer and cutter sells a loin on for €2.91 per kilo (gross), which the retailer sells for €6.27 per kilo. Of this, €5.11 per kilo stays in the retailer's business, €0.83 per kilo is written off in reduced yield (trimming) and the remaining €0.33 per kilo goes to the state in value-added tax (VAT) levied at 5.5 per cent.

These are necessarily gross figures at industry level. Operational costs vary widely from business to business and are not normally in the public domain.

The study plots a surge in long series pig meat prices around 2001 due to high demand for pork and poultry at the time of the BSE scare. However, true to the ratchet effect of retail pricing, retail margins have not declined in the same way as producer margins have done since.

The trade prices used come from the wholesale market in the Paris dormitory town of Rungis. These are national benchmarks, rather than national averages: the study acknowledges that Rungis pricing** is higher than any reliable national average that might ever be devised.

A national average would have to include confidential data that is simply not available. Retailer own-label business is a case in point, since the real prices paid by retailers are significantly lower than those posted at Rungis.

The producer is paid a flat rate across the carcass. The study first calculates a national carcass value by taking the average carcass weight and multiplying it by the national class E pig price.

This national carcass value is then divided by the sum of the component primals, based on Rungis data, adjusted to reflect their weight in a carcass. The resulting figure is applied to the Rungis loin price to represent the cost of producing a loin at the slaughter and primary cutting stage.

For the subsequent stage, the researchers adjust the Rungis prices to strip out delivery costs to the next user as well as allowing for any previously agreed rebates, based on aggregated figures compiled by an industry panel. There is also a bone-in slaughter tax of €0.00085 per kilo, which is not included in the initial calculation.

In the case of loins, IFIP downstream data apportions 70 to 75 per cent of retail sales to direct deliveries made to retailers, who carry out the secondary butchery needed for retail products. The rest goes to secondary processors who cut and pack retail prepacks. This ratio can be expected to change in coming years, since the study notes a decline in in-store butchery, particularly at hypermarkets.

The researchers also add that, according to TNS data, loins generate 90 per cent of fresh pork sales in multiple retailers. In fact, all the retail data quoted in the study derives from TNS and is based on multiple retailers, but excludes discounters.

Unlike the production figures, which are based exclusively on French industry data, the retail data includes imports. These will be cheaper than domestically produced loins, as well as having differing yields, assuming that in-store butchery is required.

This diversity of origins dilutes the average retail price for French product. So, too, do special offers and multiple buys, which are effectively funded by suppliers. The industry estimates make an allowance for these volumes, but there can be no certainty that these estimates will cover the full extent of such commercial generosity.

In a percentage analysis of retail prices for total loins (roasting joints + pork chops), the study apportions 35.5 per cent to producers, 10.9 per cent to primary processors, 35.1 per cent for retailer's margin and 18.5 per cent retail wastage, including VAT at 5.5 per cent.

On reflection, the retail waste allowance appears to be generous, averaging 18 per cent across the loins as delivered. Pork chops are sold bone-in, with trimming losses of around 12 per cent, while loin roasts have assumed wastage rates of 24 per cent and include boning-out the loins. A loin roast will be sold without the ribs but these flexible bones are not as dense as the muscle tissue to which they are attached.

Supplementary data from IFIP indicated a butchery yield of 92 per cent by weight for chops and 80 per cent for loin roasts, based on a kilo of loin as delivered to the store. While the VAT at 5.5 per cent makes up the difference in the headline figures, a higher retail margin for loin roast is more likely than a 12 per cent lower yield in the butchery, since both ribs and fat are lighter than lean meat.

The researchers acknowledge that retail specifications have constantly been revised upwards, with ever more compact pork chops, tighter trimming of loin roasts. There is little risk, however, that retail margins will have suffered in any way as a result of improved product specifications. In fact the opposite is possible, depending on how conformation is defined and how compliance is managed in the suppliers' contract.

"Why not record what retailers really pay?" farmers ask

"For the multiple retailers, wholesale prices are about the only thing they get out of Rungis. Their purchases are made directly and they don't need to buy on the open market, even if they track the prices at Rungis," observes Alain Gaignerot, former president spokesperson for the radical family farmers' union, MODEF (MOuvement pour la Défence d'Exploitants Familiaux).

"We would welcome genuine transparency: there is no reason why retailers' purchasing shouldn't be recorded in the same way as a wholesale market," Mr Gaignerot adds. Given that the French government has the power to impose a ceiling on retail margins in time of crisis but has steadfastly refused to even consider the possibility for past two years suggests that it is not going to start doing so now.

The retailer will sell the equivalent of a loin within 28 days, the headline settlement period for perishable agricultural products in France. It is obvious that a business which can gross just over €5 per kilo within the month has a stronger bargaining position than a producer who supposedly earns just under €1.50 per kilo across a carcass over a breeding cycle.

However, the data that would to support such a case is kept under lock and key by the very people who have an interest in keeping such a discussion out of the public domain. "The retailers are publicists par excellence but none can justify some of the margins they make on occasion," explains Mr Gaignerot.

Without the political will to demand a degree of genuine transparency in what the multiples really pay for their products, any other basis for analysing retail margins is at best a fudge and at worst a whitewash.

Notes: *The Direction Générale de la Concurrence, de la Consommation et la Répression des Fraudes is the trading standards agency of the Finance Ministry, while France AgriMer is the executive arm of the Ministry of Food, Farming and Fisheries. The original documents of this study can be downloaded (in French) from the DGCCRF web site at: http://www.dgccrf.bercy.gouv.fr/concurrence/prix/porc_frais_methodes300609.pdf and http://www.dgccrf.bercy.gouv.fr/concurrence/prix/porc_frais_graphiques220709.pdf

** http://www.snm.agriculture.gouv.fr/cgi-bin/cgiaccueil

August 2009