An Economical Study of Food Supply Chain

An economical study of Food supply chain

--A case study of UK Milk supply chain

Introduction

As the basic element of human live hood and society, with the development of global economy, food supply system has attracted more concern than ever before. People buy food and consume them in their daily life, but as normal consumers, perhaps, no one have a serous consideration about how food have been produced and supplied before at the checkout. In economy term, the only thing that normal consumers have more concern with is the price. However, for those economist and governors the food supply chain itself and issues related to it are very important in several area- economic, social, and politic and etc. The aim of this paper is by using a case study which has been settled on UK milk supply chain, to show how economic analysis can help to inform policy makers and others regarding important issues affecting the food supply chain.

In order to make a clearly understanding of food supply chain in detail, the following figure will apply:

(Source: 321energy, by Norman Church April 2nd, 2005)

Basically, the figure described the four stages which make the food supply chain as a whole; from primary producer level to final consumers, the value has been added to the products through each stage, but also produced waste. This is the basic principle of the food supply chain.

UK Food Supply Chain

Before we get on with the detailed and specialised UK milk supply chain case study, we can have a look on the broader environment, In the UK, food supply chain plays a key role to countryЎЇs economy, and the following data have proofed this fact:

 UK food retailing market was worth £103,800 million in 2001.

 Food manufacturing is the single largest manufacturing industry in the UK.

 Food supply chain employs 12.5% of the entire workforce in the UK.

 Food supply chain contributes 8% to the UK economy.

 Food and drink accounts for 21% of weekly household expenditure.

(Source: BRASS Research Centre, SDRN Annual Sustainable Development Research Conference, London, 14 September 2004)

However, apart from those positive factors, some negative effects also exist:

 Food supply chain is the largest energy user in the UK

 Food production and distribution contributes up to 22% of the UKЎЇs total greenhouse emissions.

 Food travels further than any other product - 129 km compared to the average product travel of 94 km

 Wages in the food industry are notoriously low compared to other sectors

 Nearly 30% of household waste is food waste

(Source: same as above)

There are many factors affecting the food supply chain, mainly with five elements which have been known as ÐŽoTREESÐŽ±- Technology, Regulation, Environment, Economy and Society. The impact of these five elements might vary through the supply chain. The relationship between these elements under economic term can be described as interrelated and interdependent, for instant, a regulation of junk food banned in school is linked to demand for healthy food.

UK Milk Supply Chain

The UK is the 7th largest milk producer in the world and the 3rd largest in Europe. Milk production in the UK is limited by milk quotas. There are 130 milk purchasers in the UK approved by the Rural Payments Agency, There are more than 100 dairy processors in cross the country. The largest processors in the UK milk market are Dairy Crest, Arla Foods, Wisemans and Milk Link. (Data Source: DEFRA) The UK market for milk and dairy product grew by 9.3% between 2000 and 2004, to reach a value of £7.72bn. (Data Source: Key Note Publications Ltd), the following figure briefly shows the UK domestic milk supply chain:

However, the recent situation of UK milk supply chain seems to unbalanced. Based on research, over the past ten years, retailer margins on liquid milk have increased significantly, and at the middle level processors/manufacturer margins have almost remain constant, but farmgate prices farmers received and farm margins have continued to fall (Figure 3). With the Strike action taken by dairy farmers recently, the problem appears severer, as some of the farmers are planning to withdraw from the industry.

In fact, the price that milk purchasers pay to farmers is not under the government's control. It is a matter of marketing, and in economic term, the price can be influenced by many other factors, such as world prices, home demand and the Euro/Sterling exchange rate. As the matter occurred, the ways to find solution become important. By using economic analysis would give some advice to the policy maker and the governors.

In this case, some economical analysis has been proofed as useful ways to solve the problem:

As a subsidy is a negative tax, the analysis of the positive effect of a subsidy is similar to that for a tax. The subsidy causes sales to increase and both consumer surplus and producer surplus to rise. In this case, we will not consider the deadweight loss occurred.

Subsidy-

In this figure, if the government gives consumers a subsidy of S, the equilibrium in the milk market shift from e1 to e2, the amount producers receive rises from p2 to p3, the amount consumers pay falls from p2 to p1, and the number of litre milk sold per year increases from q1 to q2. Thus in this case the producer surplus will be B+C+D+E with subsidy. The extra benefit of B+C will be received.

Price Floor

In some market, the government sets a price floor, or minimum price, which is the lowest price a consumer can pay legally for the good.

We can see from the figure, without