Where Does the Money Go?
Most of what we spend on food – in fact nearly all of it – goes to non-farmers. It is estimated that UK farmers receive only 9p of every £1 spent on food by consumers.  There is plenty of money moving through the global food economy, but less and less of it is getting back to farmers. Most of the money in the food system is going into the pockets of companies in the processing and retailing sectors, which are dominated by huge multinational food corporations like Unilever, Nestle and Altria (Kraft Foods) and the big supermarkets like Asda/Wal-Mart, Carrefour and Tesco (see tables on page 27).
Where does the money go in the UK food system?
UK food processing, manufacture and retailing sector (2002) £37 billion
UK farming sector (2002) £6.68 billion
Top six UK supermarkets (2002) £2,781 million
All UK farms combined (2002) £2,356 million
Profits as % return on capital (2000) 
UK farmers 0.54%
Terry Leahy (CEO of Tesco) pre-tax salary (2002) (equivalent to the combined income of 243 UK farm households) £2.46 million 
UK average net farm income (pre-tax) (2002) £10,100 
A study comparing the five year return on equity (a measure of current profitability) for Canadian farmers with that of a number of multinational food corporations found that farmers had a five year return on equity of only 0.7%, whereas the giant food corporations were many times higher: Nestle 21.5%, Philip Morris (now Altria) 39.1%, Kellogg 41.6%. The average return on capital (a measure of future profitability) for the UK’s big supermarkets is around 10-15% and for farmers approximately 0.5%.
Maximising profits, minimising competition
Food production in the UK and globally is increasingly controlled by a small number of multinational corporations. The food system has been described as an hourglass, with thousands of farmers selling their produce to millions of consumers via a small number of corporate food processors and retailers. As the number of corporations in every sector of the food system has fallen, competition between them has diminished and the market power of the survivors has increased, enabling them to extract ever larger profits from the food system. According to the principles of competitive economics, markets are most effective when there is strong competition between a number of businesses. But the small number of corporations that now dominate each stage of the food system have created an oligopoly/oligopsony which distorts market prices.
These firms can exert significantly more upward pressure on their selling prices and more downward pressure on their buying prices than would be the case in a truly competitive market, especially when they enter into transactions with players several orders of magnitude smaller, such as farmers or consumers. It is no surprise, given the market power imbalance between food corporations and the farmers who must do business with them, that farmers do not get a fair price for their produce.
Top 10 global food retailers
Company Sales 2002 (US$ million)
Wal-Mart (US) 246,525
Carrefour (France) 64,979
Royal Ahold (Netherlands) 59,455
Kroger (US) 51,759
Metro (Germany) 48,714
Tesco (UK) 40,387
Costco (US) 38,762
Albertson’s (US) 35,916
Safeway (US-no link to Safeway UK) 34,799
Ito-Yokado (Japan) 27,606
Top 10 global food and drink companies
Company Sales 2002 (US$ million)
Kraft Foods 29,723
Archer Daniels Midland 23,454
Tyson Foods 23,367
In order to survive in the global food system corporations need to increase their market share. There has been a frenzy of corporate mergers and acquisitions, especially over the past ten years, which has led to the concentration of market power at every level in the food and agriculture industry. Control of each sector from seeds, fertilisers and machinery to processing, transportation and retailing, is now in the hands of just a few multinational corporations.
As horizontal integration takes place, competition within each sector is reduced and the surviving corporations increase their market power and their ability to protect their profits. A study of US corporations in the food processing industry confirms that when mergers and acquisitions occur competition within the sector tends to be reduced and prices increase.
Global grain trader, Cargill Inc, is the largest privately owned company(i.e. not listed on any stock exchange) in the world.
It dominates the distribution and primary processing of commodity crops such as soya and maize and has a global infrastructure with feed mills, port and storage facilities in 59 countries and operations in 130 others. In most of the sectors in which it operates Cargill controls at least 25% of the market and is either the largest or second largest player (also see box ‘Cargill’s involvement at every link in the food supply chain’).
Concentration in the food and agriculture industry
Ten corporations control 80% of the global agrochemical market, ten companies control 31% of the seed market and four agribusinesses (Syngenta, Du Pont, Monsanto and Bayer) control almost 100% of the transgenic (GM) seed market.[151 & 152]
Three companies (Cargill, Archer Daniels Midland (ADM) and Zen Noh) control 65% of US soybean exports and 81% of corn exports, four companies (Cargill, ADM, Cenex (now in a joint venture with Cargill) and General Mills) control 60% of US grain handling facilities and four companies (Cargill, ADM, Bunge and Ag Processing Inc) control 80% of US soybean crushing facilities.
In the US, four beef processors slaughter 81% of the cattle and four companies control 50% of broiler chicken production.  The biggest beef processors in the US are also the dominant processors in Canada and Australia.
Six processors (Arla/Express, Dairy Crest, Robert Wiseman, Glanbia, Associated Co-operative Creameries and Nestle) control 93% of UK dairy processing.
Four supermarkets (Tesco, Asda/Wal-mart, Sainsbury and Somerfield) control 75% of UK food retailing.
Vertical Integration and ‘food chain clusters’
To consolidate their power further the biggest food corporations (e.g. Cargill, Con Agra and Archer Daniels Midland) are vertically integrating and making links both formal and informal at every stage in the food supply system. Where they don’t own the companies in a particular sector, corporations have made strategic alliances to create what have been termed food chain ‘clusters’.
Cargill’s involvement at every link in the food supply chain 
created a joint venture with Monsanto-Renessen to develop genetically engineered soya for animal feed 
supplies seed and fertiliser to farmers
gives loans to farmers through Cargill-owned Bank of Ellsworth
makes production contracts with farmers to grow grain
collects, transports, processes and exports grain
manufactures animal feed
makes production contracts with farmers to rear cattle and pigs
processes and packages beef and pork products
supplies beef, under a long-term agreement, to Kroger Supermarkets (one of the biggest US supermarket chains)
These vertically integrated companies control the food system virtually from ‘field to fork’: the same companies buy, ship and mill grain, feed it to livestock and then supply the supermarkets with meat products creating a production system where price is internal to the company’s operation. There is no longer a marketplace and so there is no ‘price discovery’ at the different stages of production, competition is reduced and profits increase for the corporations. 
The agribusiness and food corporations controlling these vertically integrated ‘clusters’ have also gained control over decision- making throughout the food system; how much food is produced, what is produced, how it is produced and for whom. It is company profits, of course, that determine the outcome of these decisions, not the well being of farmers or the welfare of the public. Companies like Cargill are working to build a food system that is primarily self serving. It has economic power over both suppliers and customers as well as political power over governments, especially the US government, which mean that it can successfully shape global trade policies in its own interests.
Since agribusiness and small farmers have opposing interests, the success of the corporations necessarily comes at the expense of small farmers. Farmers need to be able to keep their production costs low and to maximise the price at which they sell their produce. Agribusiness with its more diversified interests is looking for market share, high volume sales and low commodity prices. For a business such as Cargill, high grain prices only make it more expensive to feed cattle and pigs or to make flour, eating into the company’s profits overall.
Contract farming in the US – hired hands on their own land
Like their counterparts in the UK, US farmers are in financial trouble and are finding it difficult to gain market access because of corporate concentration in the food processing industry. To be sure of a market for their produce many farmers, particularly in the pork and poultry sectors, have turned to contract farming for the big agribusiness corporations. The proportion of US agriculture carried out under contract has increased from 10 to 35% in the last two decades.
While agribusiness corporations are involved in most aspects of the food system they have not involved themselves in direct farm production.
The risks of farming – weather, pests disease etc – are too high, so instead agribusiness corporations such as Cargill and ConAgra aim to externalise these risks by making production contracts with farmers. With so much power in the food system and with farmers in such a precarious financial position, the corporations can make ‘take it or leave it’ contracts in which the company takes control over all management decisions on the farm. Contracted farmers no longer own their own animals, and feed and veterinary supplies are provided by the company. The company decides the feed ration, the timing of the production schedule and the weight of the animals at slaughter. It even tells farmers what type of chicken sheds or hog buildings they must invest in in order to win the contract.
When the animals are ready for slaughter they are transported to the company’s processing plant and the farmer is paid what is left after deduction of all the company’s charges.
Essentially the corporation bears none of the risks of food production but passes them all on to the farmer. Many US farmers say they have effectively become ‘hired hands’ to the corporations. Beef farmers argued that production contracts and other ‘captive supply’ techniques that don’t require open-market bidding had systematically depressed prices and were hurting farmers. Fed up with the rough deal they were getting from the big corporations they successfully sued Tyson Foods, the largest meat company in the US.
Is contract farming for big corporations the future for UK farmers as well?
The power of the UK supermarkets
‘Humanity is born free but everywhere is in supermarket chains buying 14.7cm long carrots stripped of dirt, geography, effort, labour stripped of content, context, joy and flavour buying 14.7cm long carrots stripped of carrothood’
Steven Hancock ‘All power to the allotment’, in Between Poems, Pig and Ink Books 2000
The impact of corporate concentration on most UK farmers comes not from agribusiness corporations or food processors but primarily from the highly concentrated supermarket sector which wields an enormous amount of power over farmers.
This power is weilded not only on price but through demands for consistency of supply and compliance with stringent ‘quality’ standards, which allow for more efficient processing and marketing of food, but are more difficult for small farmers to comply with.
Over the past 40 years food sales have dramatically shifted from small independent shops to huge supermarket chains.
Supermarkets began to gain ground in the 1960s aided initially by the abolition of retail price maintenance and increasing post war affluence and consumption and more recently by changing lifestyles (the decline of the traditional family, more women working outside the home and the demand for one-stop shopping and cheap convenience foods). In 1960 small independent retailers had a 60% share of the food retail market. By 2000, their share was reduced to 6% while the multiples’ share increased to 88%. Andrew Simms of the New Economics Foundation says that we are witnessing the death of small and independent retailers and a new retail feudalism is emerging as a handful of brands take over our shopping.
With the recently announced takeover of Safeway by Morrisons, the UK grocery retailing sector has become even more concentrated. Four supermarkets now control 75% of food sales (Tesco 25.8%, Sainsbury 17.2%, Asda-Walmart 16.6%, Morrisons 15.8%). This concentration of the grocery retailing sector has produced a situation in which a small number of large supermarket chains ruthlessly exploit their substantial buying power. Farmers are in an extremely weak negotiating position and are frequently paid less than the costs of production (see section ‘Producing more, but earning less’ on page 8).
Farmers used to have some bargaining power on the basis of seasonality, but imports and glasshouses have destroyed this advantage. With the globalisation of the trade in food, supermarkets shop around the globe looking for the best price. They employ researchers to discover what the average cost of production is for a particular crop world wide, they then conduct ‘blind’ auctions over the internet. Farmers do not not know what price has been tendered by other producers and this forces them to offer their produce at a low price to ensure a sale. Producers of perishable foods are especially vulnerable. Supermarkets dictate not only how much they will pay, but also how the produce will be packaged, stored and delivered.
Only multinational food corporations and companies with successful brands have any leverage with the big retailers. Supermarkets have farmers over a barrel. They either accept the supermarkets prices and terms or they don’t trade. Even Tony Blair has admitted that supermarkets have farmers in an ‘armlock’.
Dedicated supermarket supply chains
Supermarkets have brought their buying power to bear on producers not only with respect to prices, but also through supply chain management – their systematic control of the whole food supply chain. Highly sophisticated systems of contracts and specifications and tight managerial control monitor the supply chain, including direct contracts with selected farmers rather than traditional competitive markets, the use of ‘favoured’ slaughterhouses, processing and packing companies and the development of retailer ‘own brand’ foods produced under contract by big food processors.
Tesco was the first supermarket to bypass live auction markets, buying cattle and sheep direct from farmers, but all the big supermarkets now favour buying directly from a small number of selected farmers. These closed contract production systems have become such a large part of the livestock and produce industries that the traditional methods of selling farm produce through wholesalers and livestock markets are in serious decline. While some farmers appear to be benefiting from these dedicated supermarket supply chains, the majority of farmers have been marginalised by the consequent collapse in the wholesale market and a lack of alternative markets for their produce.
Selling through live auction markets was still dominant in the 1960s and over 800 markets operated in the UK, but by March 2001 only 170 remained. A survey by the Meat and Livestock Commission in 2002 suggests that less than 20% of cattle are now sold through cattle markets and only 35% of lambs. The closure of livestock markets is also destroying the viability of market towns and further isolating farmers, from their communities as they no longer come into town every week to the market.
While many may applaud the closure of livestock markets on the grounds of cruelty and their replacement by alternatives such as electronic selling, there has also been a decline in the number of slaughterhouses which means that animals must often travel long distances by truck to be slaughtered. In 1967 there were over 3,000 slaughterhouses in the UK, but by March 2001 only 520 were still in operation.
This is partly the result of increased competition and rising hygiene standards following Britain’s membership of the EU but also because the big supermarkets have forced farmers into direct supply contracts via favoured slaughterhouses, such as Tesco associated slaughterhouse St Merryn Meats. The decline in the number of slaughterhouses is also making it difficult for farmers to trade locally.
Who has the power in the UK bread sector?
The level of corporate concentration and vertical integration in the UK bread and flour industry is extremely high. A handful of grain merchants; Allied Grains (part of Associated British Foods (ABF)), Grain Farmers, Dalgety, Banks- Cargill and Glencore control wheat purchasing from UK farmers (there are 63,000 cereals farmers in the UK) and sell on to the flour millers. Just two companies Rank Hovis (part of RHM) and Archer Daniels Midland Milling account for more than 50% of bread flour milled in the UK.
The factory (‘plant bread’) industry produces 81% of the bread eaten in the UK. This sector is controlled by two companies: Allied Bakeries (part of ABF) and British Bakeries (part of RHM) who have 55% of the total bread market by value, producing bread under their own brands and for supermarket own-labels.
The big supermarkets are the major retailers of bread and account for about 70% of UK bread sales of which 50% is own-label bread, produced by the big plant bakeries and 18% is produced by in-store bakeries. To increase their share of the retail grocery market, the big supermarkets have sold bread as a ‘loss leader’, i.e. at below cost, for a number of years. Bread prices have fallen by 28% in real terms since 1995.
Although the level of corporate concentration and vertical integration in the bread chain is very high, no one seems to be making a large profit from it. Certainly farmers are not: they have considerably less bargaining power than the big corporations and as a consequence the farmgate price for bread wheat is well below the cost of production.
Supermarkets, with their large share of bread sales, are controlling the sector by maintaining very low bread retail prices. To retain their profit margins the supermarkets put the squeeze on suppliers and ultimately farmers. Unwilling to increase retail bread prices because of fierce competition for retail market share, the price of bread in the supermarkets has become disconnected from the price of the raw materials and production costs. According to the Scottish Association of Master Bakers in their submission to the Competition Commission on Supermarkets, the supermarkets blatantly abuse their power over suppliers, expecting them to absorb overheads so that the supermarkets can maintain their profits. The combination of retailer power and persistent below-cost selling policies is blamed for devaluing the bread sector and forcing down factory gate (and farmgate) prices.
Supermarket exploitation of farmers
The superior bargaining power of the supermarkets means that they frequently fail to enter into fair contracts with suppliers who are at the whim of constantly changing packaging and quality demands. Many farmers have stories to tell of their exploitation at the hands of the supermarkets but for fear of being blacklisted, most are unwilling to speak out publicly about their plight. For example, an anonymous farmer selling cauliflowers to a supermarket had his entire crop rejected due to excessive quality standards. He had a problem with caterpillars and the supermarket told him he couldn’t use pesticides to eliminate them but that he could use a bio-pest control, the Encarsia wasp. This caused no damage to the cauliflowers, but the occasional dead wasp was left on them. The supermarket rejected the whole batch of cauliflowers (because of the wasps) as not up to their quality standards.
In 2000, the Competition Commission examined the many anonymous complaints from farmers that they were being subjected to excessive or unreasonable demands from supermarkets.
In its report the Commission cited 30 ways in which supermarkets exploited their power over producers. These included ‘requests’ for ‘over-riders’ and retrospective discounts, ‘requests’ for promotion expenses, making changes to contractual arrangements without adequate notice, late payment of invoices and unreasonably transferring risks from the supermarket to the supplier. Despite these findings the Commission failed to impose any sanctions on supermarkets.
They did however propose the setting up of a code of practice between the supermarkets and their suppliers. However, according to farmers and small processors, the voluntary code agreed between the Office of Fair Trading and the big four supermarkets has failed to curb the power of the supermarkets. A long-awaited review of the code by the Office of Fair Trading is due out in spring 2004.
For further information see the Corporate Watch publication ‘What’s Wrong With Supermarkets?'
Who has the power in the UK dairy sector?
The small number of companies dominating both dairy processing (currently six processors control 93% of the industry) and retailing (six supermarkets control 65% of liquid milk and 70-85% of dairy produce sales) means that there is a significant imbalance of market power in the UK dairy sector. The dairy processors and supermarkets are able to exert considerable pressure on the 29,000 comparatively much smaller dairy farm businesses, consistently forcing the farmgate milk price below the cost of production.
Supermarkets have brought their buying power to bear not only on dairy farmers but also on the dairy processors through consolidation of the retail sector (horizontal integration) and through their increasing control of the dairy supply chain (vertical integration). The biggest supermarkets have increased their power in the dairy sector by becoming directly involved in milk processing through the development of ownbrand milk and milk products in association with the big milk processors.
The six largest supermarkets are all supplied with own brand milk by just three big milk processors (Arla/Express, Dairy Crest and Robert Wiseman). Supermarket purchasing power is putting increasing pressure on dairy processors’ profit margins and the big processors are falling over themselves to get an even bigger share of the market supplying own-brand dairy products to the supermarkets. While processors are powerful in relation to farmers, the processor must take the price offered by the supermarket or the buyer will simply go elsewhere. The big processors have a perishable product to sell and currently have excess liquid milk processing capacity; competition to fill that capacity plays into the hands of the supermarkets.  The supermarkets essentially have a small but interchangeable pool of milk suppliers and are in a strong position to dictate the terms of supply and to switch between suppliers.
The farmgate price of fresh milk has declined since 1995. Despite the falling price for raw milk, both supermarkets and processors have maintained their selling prices and increased their respective profit margins at the expense of both farmers and consumers over the same period (see table below).
In 2002, Tesco and Asda, under pressure from dairy farmers, announced that the farmgate price for milk should be increased by 2ppl. Dairy processors came under pressure from the supermarkets to pass on this 2ppl price increase directly to farmers. However neither supermarkets nor processors were willing to cut into their profits to support dairy farmers. In the end it was consumers who were forced to pay; the retail price of fresh milk was raised by 2ppl.
Overall the power in the UK dairy sector resides primarily with the big supermarkets and to a lesser extent with the big dairy processors; dairy farmers and consumers are the clear losers.
Milk Price Indices at the Farmgate, Factory Gate and Retail Checkout (1995=100) 
Farm Gate Factory Gate Retail Checkout
1995 100 100 100
1996 101.6 101.6 99.56
1997 89.7 102.6 97.07
1998 78.71 102.6 94.46
1999 74.78 95.0 94.71
2000 69.11 94.5 94.93
2001 80.67 99.9 101.39Source