Based on the information I’ve had the chance to review, French President Macron is proposing to stop food price wars in supermarkets by rebalancing contracts between farms and distributors with prices being “based on the cost of production”.
There are several factors that need to be taken into consideration when talking about “the cost of production”. The cost of production is easier to calculate in relation to some crops than in others, and in any case it is very much subject to the level of productivity in each crop. Only when productivity has been established can we then calculate what the cost of producing a crop has been.
The danger of setting minimum price levels based on the cost of production is that an incorrect, or even misleading value may be agreed upon, which may be true only during isolated times during a normal season. If there are short-term shortages caused by temporary weather conditions, the cost of production and harvesting dramatically increases, and ultimately we need the market to regulate demand through pricing. The opposite is also true, as when there is a glut of fruit (e.g. melons), the cost of harvesting and handling is lowered by the increased productivity, and again we need pricing to regulate demand, in this case incentivising consumption through promotional activity.
What would happen if minimum prices were set, regulated by a government decree seeking to defend the interest of farmers? Supposedly it would reverse the balance of power between producers, processors and farmers so the farmers can set their own prices.
But in reality, it would discourage promotional activity, and a price that is too high in the eyes of the consumer could severely stifle consumption during times when producers need to commercialise as much of the crop as possible. We need to remember that for a crop to be viable, what counts is the total income derived from commercialising what has been produced, not merely the price per kg that you are able to achieve for some of the crop. A blanket rule that stipulates minimum levels could be damaging in two different ways: firstly, it could be a barrier that would impede excess volumes being sold for the benefit of consumers and producers alike. And secondly, it could give a false impression about the true cost of a product at times when the cost of producing, harvesting, handling and packing is much higher due to exceptional circumstances (unfortunately, these exceptional circumstances are lately becoming the rule rather than the exception).
What producers would benefit from the most would be a government-imposed system whereby the relationship between producers/suppliers and supermarket chains was routinely monitored and any concerns brought to the attention of a regulator (e.g. GSCoP). This way, the interest of producers and suppliers would still be protected, while ensuring the existence of competition in the market and a fair deal for consumers.
