The European Commission wants to increase market transparency in food supply chains in an effort to tackle two issues: (1) to support actors in making better decisions and in better addressing price volatility and (2) to develop tools to combat market power and possible collusion. The question is whether improving market transparency will be enough to deliver all these benefits, particularly for farmers.

The questions about what is transparency, why it matters and how it should be implemented were discussed in an expert workshop organised by DG AGRI and the JRC in May 2018. Expert contributions ranged from the theoretical benefits of market transparency to the practical problems of implementation, but also included several experiences already running, such as the mandatory reporting in the US livestock sector and the French Food Price and Margin Observatory. The conclusions of the workshop are not clear cut: the additional data collection and particularly data analysis are cumbersome and costly, while there is a fear that more transparency may actually reinforce market power rather than lowering it. Mainly two issues were raised.

The first issue is the accuracy of the market prices currently observed. With increasing contractualisation, spot markets become thinner and thinner and thus less representative for the market at large. This may create two problems. First, if prices do not accurately reflect the market situation, actors may take wrong decisions, leading to overcapacity or waste. Second, as contracts are often linked in some way to spot market prices, also price discovery in contracts may be distorted. These problems warrant the collection of prices under different institutional arrangements, including contracts, as done since 1999 in the US livestock sector.

The second issue is that concentration in processing and retail may lead to market power and thus to unfair distribution of value added throughout the supply chain. To solve this problem observing prices at all chain levels is insufficient, as also costs need to be taken into account. The French Observatory has thus come up with some remarkable results (calculations for 2016). For instance, in the beef sector, profit margins were -3.6% for farmers, 1.8% for processors and -3.4% for retailers. However, in the pork sector, profit margins for cooked ham were 2.8%, 2.4% and 8.5% respectively. But what does these results tell us about market power? And what about the input sector (feed, fertilizer, chemicals, machinery, etc.)?

I would like to add to this discussion three considerations that I found either missing or underrepresented.

  1. It’s the future, stupid!

When making production or purchasing plans, ideally one would know how prices will be in the future. In that respect, we always observe what happened in the past, and it is not very likely that past prices are a good predictor for future prices. This is where futures markets come in. They are not only a valuable tool for risk management, but also for price discovery. But to make futures markets operational, transparency is needed about acreage planted, weather forecasts, stocks, etc. This requires data collection beyond just noting down prices. Of course, futures markets only apply to commodities, not to intermediate and final goods, but also not for differentiated products.

  1. Where is the action?

More transparency does not automatically lead to less volatility. In fact, volatility in futures markets may even increase, but then one needs volatility for operational futures markets. The problem here is that more information does not automatically lead to the appropriate answer, mainly because of asset specificity and adjustment costs. Simplifying, agriculture can be split into two types of output. A first, relatively flexible category involves crops sown annually, such as vegetables, cereals and potatoes. Farmers can adapt their production plan annually, relatively easily following price changes. This is less the case in the second category involving multi-annual crops (fruits) and livestock and dairy products. It is therefore particularly in these sectors that asset specificity is high and that contractualisation increases and where the demand for transparency is particularly high.

  1. An apple here is not the same as an apple there

An apple at the farm or at the auction or wholesale market is not the same as an apple in the supermarket. It may be the same apple physically, but important place and time utilities have been added: the consumer only has to go to one place to do her shopping, which she can do pretty much at the time she wants. Buying at farm level does not provide the same place and time utilities and thus represents a considerable cost for the consumer and in fact also for the producer. However, the costs for generating these time and place utilities are often only partially recognized (e.g., dedicated personnel handling meat), thus providing an incomplete picture of the real cost at processor or retail level.

To conclude, increasing market transparency is not a silver bullet and comes at a considerable cost. Still, efforts increasing transparency may increase insight into the cost structures at all levels of the supply chain, enhancing dialogue between supply chain actors. Transparency is also needed to develop futures markets or other mechanisms for managing price risk.