Why look at market power?
A recently prohibited merger between Sainsbury’s and ASDA shows that market power held by a handful of firms is deemed to be detrimental to consumer interests (CMA, 2019). Underlying such views is the idea that the concentration of market power is likely to lead to higher prices for consumers. However, our project has a different objective in its sights – namely pursuing a resilient food system, not just one that delivers cheap food. Therefore, what role does market power have to play in creating a resilient food system?
There is little evidence on how market power interacts with food system resilience to external shocks. This is despite the increased market concentration observed at multiple points in the local and global food system. Significant market concentration is prevalent in the global seeds and pesticides market, 70% of which is controlled by four companies (De Carlo, 2018). Similarly, 94% of UK salmon production is controlled by five companies (Mowi, 2019), and 75% of the UK retail market for food is controlled by five companies (KANTAR, 2019).
Who has market power in the UK food system?
While no evidence has been found to indicate systematically higher consumer prices due to anti-competitive alignment between retailers (CMA, 2019; Revoredo-Giha & Renwick, 2012), there is some evidence of coercive power by retailers vis-à-vis their suppliers (Robson & Rawnsley, 2001).
Quantitative evidence in terms of the farm share of final retail values indicates that profits along UK food value chains are unequally distributed. While farm value shares only constitute a small part ranging between 1% for vegetables, below 20% for meat and up to 31% for milk (DEFRA, 2019), the largest value shares (48% in the EU) belong to retailers, wholesalers and consumer services at the downstream end (Eurostat, 2011). Furthermore, time series data suggest that producer price volatilities could be exploited by retailers to generate additional profits (Lloyd et al., 2009; London Economics, 2004). This suggests that UK retailers are in a relatively comfortable economic position with high levels of bargaining power in the food chain.
Is market power related to food system resilience?
Academic literature as well as recent cases from the UK suggest that market power can have an impact on food system resilience, yet the magnitude of the impact is ambiguous. In order to bring clarity into the range of effects, it helps to work with different levels of food system resilience (see earlier blogpost) as well as with different elements of market power.
We consider three elements of market power that can affect food system resilience. Market concentration is a driver for market power and it is its most visible indicator, although not a sufficient proof for it. Influential power (e.g. lobbying power) is often less conspicuous and includes power dynamics outside of the obvious supply chain transactions. Supernormal profit is the ultimate goal of the deployment of market power in the orthodox economic sense. Food system resilience studies typically only consider one or two of these three elements, leading to inconsistent conclusions.
Concentration & food system resilience
A large body of resilience literature points out that homogeneity and industrial food production reduce the resilience of ecosystems and create dependencies for producers, which makes them less resilient to shocks (Hendrickson, 2015; Nyström et al., 2019; Rotz & Fraser, 2015). On the other hand, concentration and size can help to maintain food supply in times of crisis and to divert sourcing when a specific production region incurs yield shortage, thereby reducing a shock’s impact on consumers. Already in normal times, global conglomerates help to ensure the logistics of critical commodities by managing contracts and providing infrastructure (DEFRA, 2010). Concentration may benefit consumer resilience, while undermining producer and ecosystem resilience, when it implies homogeneity.
Influential power & food system resilience
While the recent North Sea cod crisis has shown that retailers’ undisrupted supply of cod has promoted consumer unawareness about the depletion of the fishery (Crona et al., 2016), influential power can also constitute an enabling factor to leverage practices that increase food system resilience. Powerful actors can advocate, nudge, facilitate and coerce consumers and producers into any direction, thus they can act as positive as well as negative change makers (Folke et al., 2019; Macfadyen et al., 2015).
Supernormal profits & food system resilience
When consumer beef prices dropped during the UK BSE crisis in 1996, retailers paid an even lower price for beef to producers and yielded profits due to the increased producer-consumer price spread (Lloyd et al., 2003). This is an example for retailers using their buyer power to exploit producers, who were badly affected by the crisis already. A different example is the vegetable crisis in winter 2017, where a weather-induced shortage of European vegetables led UK retailers and packers to airfreight lettuce from the U.S., thereby incurring losses to maintain supply to UK consumers (BBC Radio 4, 2018). In this case, supernormal profits arguably enabled retailers to offset a part of the consumer impact.
When it comes to factors driving a powerful actor’s propensity to absorb shock-induced losses of suppliers or price spikes for consumers, evidence suggests that cooperative contracts in the supply chain are conducive. This was shown during the snowy winter in 2018, where the farmer cooperative ARLA continued to pay farmers for milk produced, even though this milk had to be discarded because the weather conditions made it impossible to transport it to retailers (Perrett, 2018; Yates, 2018).
What does this mean for policy?
Two preliminary conclusions can be drawn from this. First, there is no systematic evidence that market power alone necessarily impairs food system resilience. Institutional factors governing incentives for powerful actors to promote or to undermine resilience are probably more important. These factors include (but are not limited to) ownership and accountability. While market power can even be an enabling factor to absorb shocks to food systems, institutional factors influence powerful actors’ commitment to do so.
Second, the investigation on effects of concentration and size highlights a conflict between short term consumer resilience and producer/ecological resilience, which feed back into consumer resilience in the medium term. This indicates that market power investigations with an exclusive focus on consumer prices may fall short in terms of accounting for important structural relationships.
