Price formation and margin behaviour in the Finnish food markets

This paper presents a basic analysis of price spread data and explores the characteristics of price margin behaviour in the light of fundamental changes which have occurred in the structure of both the food processing industry and retail sector. More specifically, this paper examines the development of marketing margins in the Finnish food markets over the period of 1996 to 2010. The marketing margin represents all the processing, transporting, and retailing cost added to the producer price. The data reveal considerable increase in the marketing margins over the recent years. As a result, producers are receiving a declining share of the total revenue obtained from the food market. The reasons for the widening gap between the retail and producer prices of food are 1) increased degree of processing, 2) better food hygiene, 3) productivity growth differences across sectors, 4) agricultural policy, and 5) imperfect competition.