Supermarket forces: small producers suffering as consumers save

Posted on: 08 October 2010 by Gerald Lewis

The recession has hit UK Farmers and food suppliers hard as pressure from supermarket chains has reduced their margin and pushed many to the brink of bancruptcy. I wondered why this is less an issue in the States and why story is not considered newsworthy accross the pond?

Grocery stall

As Tesco has learned to its cost, the US supermarket industry is the most competitive in the world. So why is it that supermarket chains don’t seem to be causing US farmers the same distress as their British counterparts?

First of all, the UK has a more concentrated population than the US, with 60 million people occupying a total land mass that would fit five times into the state of Texas. This enables four retailers to dominate the entire UK market, because they can serve the whole population with comparatively few stores.

There are far more supermarket chains in the US, each concentrated in an area within reach of their own distribution systems. Each chain has less total US market share than the UK leaders, so the individual chains don’t hold as much power over US food suppliers.

Also, in the US there are some specific measures that protect small farmers, both from predatory retailers and from the huge ‘agribusiness’ companies with which they compete.

The Capper-Volstead Act, passed in the 1920s, allows groups of small farmers to form co-operatives which enable them to compete in the marketplace with the large agribusinesses. The cooperatives buy produce from their farmer members and resell it to retailers and food service providers. They help their members keep costs low by negotiating favourable prices for supplies such as seed, feed, farm equipment and other goods. They also provide credit, financing, and loans to their members.

The US government provides subsidies for farmers which, in 2009, amounted to over $15 billion. These subsidies are controversial, because more money goes to the large agribusinesses than to the small farmers. But they are an important factor in keeping small farmers in business.

The US Department of Agriculture actively promotes exports, which expands the market for US producers.
The growing demand for specialty items, such as lean beef, organic products and unique local cheeses, has caused supermarkets to develop ties to local farmers who produce these items. They then become important and valuable to the supermarkets they serve.

The farm cooperative also has a distinctly American cultural aspect to it, arising out of the “frontier mentality” and rugged individualism that developed as the country was growing and moving westward. The seemingly conflicting notions - of every man for himself and helping out your neighbour - combine in the American psyche in a way that it is difficult for outsiders to understand.

This uniquely American cultural distinction seems to explain how US retailers can pressure their suppliers for lower prices and better terms, while at the same time, recognizing the importance of allowing them to remain viable and profitable.

Perhaps this explains a more subtle aspect of the philosophy behind the most successful US retailers. They understand that they are just a part of the supply chain equally dependant on pleasing their customers and on maintaining the success of their suppliers.

If you want to know how important the latter is, just ask McDonalds. Many of the owners of the tiny companies they worked with to meet the burger chain’s demanding requirements when they were starting out are now billionaires. They still supply only McDonalds and they still work without contracts. They have a truly symbiotic relationship.

This is in stark contrast with the win-at-all-costs price war among the supermarket chains, which is at the root of the problem in the UK.

Understanding why there is no news on the farm front here in the US is key to understanding the differences between us.

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Farming subsidies

UK farmers are under intense pressure from supermarket chains to deliver more produce at cheaper prices. Little wonder the industry is failing to attract a new generation to work the land.

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