What is the "farm share" of a retail food price, and does it matter? As the raw ingredients for retail food items move along the marketing chain from the farm to a grain elevator or collection terminal, then on to a processor, a wholesaler, and finally to the retail customer, an array of costs is layered on top of the price of the raw agricultural commodity ( Figure 1 ). The farm share of the market price declines as a commodity moves from the farm to the retail outlet and consumer. The farm-value share of consumer food expenditures also has fallen by more than half, from 41% in 1950 to 17.4% in 2013 ( Figure 2 ). The average farm share for eggs was estimated at nearly 58% during 2010-2012. Linking Farm and Retail Prices

Price is the primary mechanism by which various levels of the market system are linked. To estimate a food product's farm-to-retail price spread, the farm share must first be calculated. As a result, the nature of price transmission between the price paid by the consumer for the retail food product and the farm price of the underlying agricultural commodity can be better understood by evaluating two key aspects of any particular food product: (1) the farm share of the retail price, and (2) the competitiveness of markets at each stage of the marketing chain. In direct contrast, the greater the degree and duration of processing and value-added that is accumulated between the farm and the consumers, the smaller will be the effect of a change in farm price on the retail price. Asymmetry in price transmission directly encapsulates the concept of "sticky" retail prices mentioned earlier and addressed later in this report. What Is Known About Price Transmission? However, a broad review of economic analysis on the relationship between farm and retail prices leads to three generalizations:
first, causality usually runs from changes in farm prices to changes in retail prices; second, time lags in retail price response to farm price changes are generally months in length, even for perishables like milk, meat, and fresh fruits and vegetables; and third, retail prices appear to respond asymmetrically, with adjustments to increases in farm prices occurring faster and with greater pass-through than adjustments to decreases in farm prices. The general perception (supported by considerable empirical evidence) is that retail food prices are "sticky"—that is, retail prices follow commodity prices upwards rapidly, but fall back only slowly and partially when commodity prices recede. However, economic theory does not fully explain the observed phenomena. Economists have noted several exceptions to the "retail price competition" paradigm that may limit retail prices from adjusting fully to downward farm price movements, including certain aspects of consumer behavior, as well as store inventory management and retailing strategies. As a result, the presence of asymmetric price transmission alone does not necessarily imply the presence of excessive market power. Several major market-shifting factors have emerged since 2006—including increased demand for corn under strong federal biofuels incentives, a prolonged surge in China's soybean import demand, and the severe U.S. drought of 2012—that resulted in tight U.S. and global grain and oilseed supplies and sharply higher farm and wholesale commodity prices through most of 2013. have increased in importance as a share of retail food prices.
Heightened commodity price volatility since 2008—driven by major market-shifting events, including increased demand for corn under strong federal biofuels incentives, a prolonged surge in China's soybean import demand, and the severe U.S. drought of 2012—has generated many questions about linkages between farm commodity prices and U.S. food price inflation from Members of Congress and their constituents. This report responds to those concerns by addressing the linkage between farm and retail food prices. Retail food price inflation is addressed in CRS Report R40545, Consumers and Food Price Inflation.
Price is the primary mechanism that links raw farm commodities through the various levels of the market system to the retail food product. The nature of price transmission between farm and retail levels depends, in general, on the size of the farm share of the retail price and the degree of market competition at each stage of the marketing chain. For example, the farm share represents nearly 58% of the retail value of a dozen eggs. Similarly, it ranges from 30% to 50% for most fresh meat retail product prices. In contrast, the farm share is only about 8% of cereal and bakery product prices.
An array of costs is layered on top of the price of a raw agricultural commodity at each stage of the marketing chain as it moves to the consumer. As a result, the farm share of a food product's price declines as it moves to the retail outlet. Since 1950, the average farm share has been declining as a share of total consumer food expenditures, falling from about 41% in 1950 to 17.4% in 2013. This has important implications for farm-to-retail price linkages because the smaller the share of farm value in the retail product, the smaller will be the effect of a change in farm price on the retail price.
Economic analysis of farm-to-retail price transmission leads to three generalizations: first, causality usually runs from changes in farm prices to changes in retail prices; second, time lags in retail price response to farm price changes are generally months in length, even for perishables like milk, meat, and fresh fruits and vegetables; and third, retail prices appear to respond asymmetrically, with adjustments to increases in farm prices occurring faster and with greater pass-through than adjustments to decreases in farm prices. This last generalization is often referred to as "sticky" retail food prices—that is, retail prices follow commodity prices upward rapidly, but fall back only slowly and partially when commodity prices recede.
"Sticky" retail price behavior is supported by empirical evidence; however, economic theory does not fully explain the observed phenomenon. Economists have noted that certain aspects of consumer behavior, store inventory management, and retailing strategies may limit retail prices from adjusting fully to downward farm price movements. As a result, the presence of asymmetric price transmission alone does not necessarily imply abnormal or excessive market power.
Comparisons of price data for major food groups confirm that farm-to-retail price transmission behaves slowly, with substantial lags and asymmetry. For example, the rise in farm prices that occurred between 2006 and mid-2008 was substantially larger and occurred about six months earlier than the rise in corresponding retail food product prices. Similarly, the subsequent fall in farm prices from their 2008 peaks preceded the downturn in corresponding retail food prices by several months.