Economics of the farming price war

For years suppliers and farmers have complained that they have been bullied by the big supermarkets. They claim that the massive buying power of the supermarkets has forced them to accept unreasonably low prices and unreasonable terms. The National Farmers Union has been a vocal leader of these protests. Now the government has acted. The Groceries Supply Code of Practice came into force last month. Under the auspices of the Competition Commission, the large supermarkets have agreed to a code of conduct that will regulate their relationships with their suppliers. The farm lobby has achieved a measure of success. The farmers - or those they pay to do their PR - have managed to build a considerable body of public support.
They appear to have gone a long way towards eradicating the once popular image of a "poor" farmer running his farm from a newly registered Range Rover. On the face of it, supermarket shoppers are sufficiently sympathetic with the farmers' plight that they are prepared to pay the higher prices that would follow if the suppliers had their way.

Of course, supermarket shoppers are highly unlikely to willingly pay higher prices when it comes down to it. But then it is most unlikely that they will be asked to pay them, at least not as a result of this new code of practice. Under the terms of the new code, supermarkets will not be able to change supply terms retrospectively. They will have to keep a written record of their negotiations with suppliers and suppliers will not be charged when the supermarket runs a promotion on their products. The Competition Commission also proposes that there should be an ombudsman to "arbitrate on disputes between grocery retailers and suppliers and investigate complaints." After a close look it becomes clear that the new code amounts to very little. There is nothing in the new arrangement that will do anything to prevent the supermarkets exercising their enormous buying power to put downward pressure on agricultural prices as well as prices on non-agricultural goods from small suppliers. And prices are what the dispute between suppliers and supermarkets has always been about. Other issues are largely peripheral.

This outcome is hardly surprising. This is a capitalist market society. Prices are the outcome of the forces of supply and demand. The supermarkets are competing against one another. They are also competing against the many small businesses that continue to survive. To compete successfully supermarkets have to provide food that is of comparable or near comparable quality to that obtainable elsewhere and that is at least as cheap. They will continue to bargain hard with their suppliers. The farmers, for their part, may complain and may say that the prices they are getting are so low they are being driven out of business. The supermarkets however will not be convinced. They will only pay higher prices when they have to. And when they have to is when sufficient farmers have gone out of business to restrict the supply of goods and when the price of farm produce therefore starts to rise. Before we start sympathising with the farmers, there are a couple of considerations.

First, farmers have long been willing participants in a very large market for foodstuffs. They know that the prices of the goods they produce will be subject to supply and demand factors. Most people are unlikely either to be farmers on the one hand or owners of a large supermarket on the other hand. We can indulge in taking a largely detached and dispassionate position. We can observe these two significant sectors of our economy engaging in their competitive market behaviour - the supermarkets trying to buy at the lowest possible price, the farmers trying to sell at the highest possible price. The supermarkets appeal to us, the consumers, by offering low prices for goods on the shelf. The farmers appeal to us claiming they are being bullied out of business by the supermarkets who pay such unfairly low prices. We know that there's no such thing as a "fair" price in capitalist markets. Farmers are victims of a market economy they themselves have long supported because it has, on the whole, been very good to them.

That description of the market would be true but for the awkward fact that the agricultural market is not particularly "free." Under the present Common Agricultural Policy, British farmers receive approximately £3 billion in subsidies from the government. Until 2003 these subsidies were paid to farmers on the basis of guaranteed prices for what was produced. Today only some crops receive specific subsidies and these have been reduced. Instead farmers receive about £230 for each hectare of land they keep in cultivation. In addition they get subsidised for work they may do to enhance the environment. This method of subsidising means that the larger the farmer, the larger the subsidy. The richest farmers get the biggest subsidies. In such circumstances it's difficult to feel too sympathetic towards the farming community. All in all, farmers already receive more state help than any other privately owned sector of the economy - or at least they did until the banking crisis.