"Price
spreads"—the difference between what consumers pay
for food and what the farmer earns for the raw material producing
it—have trended upward but fluctuated widely over the past
10 years. These trends raise suspicions that intermediaries are
taking undue profits at the expense of farmers and consumers. A
recent ERS report analyzes price spreads for beef and pork and their
impacts on livestock prices.
Price spreads fluctuate a great deal from month to month. These
fluctuations are consistent with partial or “dynamic”
price adjustment. In other words, farm prices respond slowly to
changes in supply and demand conditions. Dynamic price adjustment
makes beef and pork prices more stable than they would be if prices
adjusted quickly. But price spreads are less stable as a result,
since farm, wholesale, and retail prices adjust at different rates.
Farm, wholesale, and retail prices for beef and pork also show “asymmetric”
price adjustment—prices adjust more rapidly when they are
increasing than when they are decreasing.
It takes 2 months for the farm price of hogs to fully adjust to
price-increasing changes and 5 months to price-decreasing changes.
Cattle prices adjust more slowly: increases take 18 months and decreases
29 months. The slow rate and asymmetric nature of price adjustment
could be considered evidence of problems in the flow of information
through the markets. Ironically, however, improved information flows
and speedier price adjustment might not help livestock producers.
Because prices adjust more quickly upward than downward, actual
livestock prices tend to be higher than prices would be if they
adjusted more rapidly. The slow and asymmetric adjustment of cattle
prices keeps them about 4 percent higher on average than they would
be under complete adjustment. Hog prices average around 1 percent
higher.
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