Grocer Pricing vs. Source Pricing

Question:

I have run into situations where getting goods from the source (i.e., the farm itself) costs substantially more than what a grocer is asking for for the same product. My understanding is that the grocer would often price up the item to make overhead, so what situations would lead to the source of a product asking for more than the grocer (reseller)?

Answer:

A few reasons livestock producers may be interested in selling locally include having:

  - an available market

  - potential to capture premium prices

  - a direct connection with consumers

  - recognition for their production practices and products

Premiums can differ greatly by product. Beef comes in fixed proportions. Individual cuts come from seven primals — rib, chuck, round, loin, brisket, short plate and flank. Garnering local premiums for high-end cuts such as steaks may be easy — less so for low-end cuts. The producer and retailer, if there is one, need to sell the whole carcass. Some lower-priced products, like ground beef, are often in high demand, and local premiums appear to consistently exist.

On the other hand, paying an extra few dollars for locally produced high-end products may not be attractive for some consumers.

Even though buying local may eliminate the cost of a middleman, local food still often creates sticker-shock for some consumers because local food can be either the same price or more expensive than non-local foods in a grocery store.

Small-scale producers or those selling locally may have higher production and marketing costs, which translates to pricier products for consumers. Larger producers and supply chains have the structure to run more efficient operations and can generally afford to externalize costs that a smaller, local supply chain may not.

On the revenue side, large processors can earn more for byproducts helping to offset costs. They refine different parts into usable products and sell in large enough volumes to access international markets.

Also see https://www.farmprogress.com/livestock/local-meat-sales-gain-traction

Answered by
  • Associate Professor
Last updated on
October 3, 2023

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