Value Added

     I have written about the need to have an increasingly global view regarding the factors impacting U.S. agriculture as well as U.S. agriculture's impact on the world.  While we love to show that on average, the U.S. consumer only spends 9-12% of their disposable income on food, and that due to the huge load of value-added functions, only a small value of commodities are in our final retail food presentions, the truth is a little more complex.

     You may enjoy Pasta Fagiole at your favorite Italian restaurant and pay a premium price for it even though it contains no meat (pasta and beans), but that fashionable dish is the centerpiece of a set of very creative vegetarian meals eaten by the people of southern Italy...that part of Italy below Naples that tourists don't normally see as their tour group wings its way through Milan, Rome and Florence.  Tour groups don't go to the boot of Italy because it is the place where Italy's poor live.  You have to get up north to Bologna before the typical spaghetti sauce has meat in it.

            Pass-through is the economic term for how higher (or lower) prices in a chain wind up effecting prices up-chain, say at retail. All outcomes are possible for a price rise such as we have experienced in the corn market due to the government transfer payments for corn producers. Input price increases can lead to complete pass through up chain, more than complete pass through or something less than complete pass through.

Part of the problem in the meat case at retail is there is so much special pricing, loss leader pricing and the like that it is hard to tell exactly what happens for every input price change down the chain. In addition, price changes at retail for products made from agricultural products tend to be very small compared to the change at the production level. This is due in part to all of the value added as the chain progresses (i.e., a few cents worth of wheat in a $4.00 box of wheat breakfast cereal.) Small changes are sometimes unnoticed by consumers as they are lost in the noise of other price changes, the hassles of shopping and plain inattention.