At-Home Foods by Commodity Group: Documentation
Methodology Behind Market Basket Statistics
The process of generating market basket statistics has two steps. First, it is necessary to construct a market basket of foods that is representative of what U.S. households buy for at-home consumption. Second, once that basket is determined, estimates of farm share and the farm-to-retail price spread can be calculated using annual information on consumer and farm prices.
Step 1: Identifying a representative market basket 
Estimates of farm share are based on market baskets representative of what U.S. households buy at retail food stores for at-home consumption. The composition of these food baskets is derived from data on the spending patterns of American households as well as on food prices. Separate baskets exist for fresh fruit, fresh vegetables, dairy foods, fats and oils, processed fruits and vegetables, and bakery and cereal products. The following discussion shows how ERS determined the contents of the market basket for fresh vegetables representative of what U.S. households purchased between 1999 and 2003.
The construction of market baskets begins with data from the Consumer Expenditure Survey (CE), administered on behalf of the Bureau of Labor Statistics (BLS). Each year, in the diary section of the survey, about 5,000 households report their food expenditures for 2 weeks. These data are then used by BLS to calculate expenditure weights for the Consumer Price Index (CPI). In 1999, households spent $148.51, on average, for fresh vegetables, including $18.92 for lettuce, $26.91 for tomatoes, $28.35 for potatoes, and $74.33 for "other fresh vegetables."
Because the CE contains only information on household expenditures, data supplied by AC Neilsen were used for their information on prices paid and quantities purchased.
ERS used both sets of data to determine the quantities of fresh vegetables to include in the market basket. For example, it is estimated that a representative household split its CE expenditures of $18.92 for lettuce into $11.73 for iceberg and $7.19 for romaine. In the AC Neilsen data, head lettuce accounted for about 62 percent of the value of all lettuce purchased, and iceberg lettuce is a proxy for all purchases of head lettuce. Romaine can likewise be used to represent all purchases of leafy lettuce. Based on AC Neilsen national average prices, iceberg lettuce averaged $0.78 per pound, and, thus, it was estimated that a representative household bought about 15 pounds with its $11.73.
The above procedure was repeated to separately create baskets of fresh vegetables and fresh fruit. A final market basket was then constructed by averaging the contents of the baskets from 1999 and 2003.
Step 2: Calculating an annual price series
Once the contents of market baskets have been determined, ERS estimates farm share using annual information on consumer and farm prices. To facilitate the calculation of an annual data series, ERS does not regularly update the contents of these baskets; rather market basket contents are fixed over relatively long periods of time. Estimates of farm share must therefore be interpreted as the proportion of the consumer’s dollar earned by agriculture for a basket of goods representative of what American households bought at a particular period in time.
As noted above, ERS's fresh fruits and fresh vegetables market baskets are based on what households bought at retail between 1999 and 2003. For the other baskets in ERS's data series (currently under review), estimates reference shopping patterns in 1982 and 1984.
The price of a market basket at retail is estimated using (1) the CPI by commodity (for example, the CPI for fresh vegetables), and (2) the value of the market basket at retail in the base year of the data series (for example, $162 for fresh vegetables in 2001). The CPI for fresh vegetables was 230.6 in 2001. To calculate the estimated retail price of the market basket in another year, say 2005: multiply the retail value of the market basket in the base year ($162) by the CPI by commodity for that year (271.1), divided by its 2001 value (230.6). That is, ($162)(271.7 / 230.6) = $190.87.
For each market basket, it is also necessary to determine the quantities of farm products that are required for producing the contents of the market baskets. Farm quantities are calculated by multiplying retail quantities by conversion factors. For fresh fruit and fresh vegetables, these conversion factors inflate the retail quantity by the amount necessary to compensate for waste and shrinkage that occurs as goods are prepared for presentation in retail stores. For example, the market basket for fresh vegetables contains 21.11 pounds of carrots, and ERS estimates that farmers must supply 1.031 pounds of carrots for every 1 pound supplied by marketers at retail. Some carrots may spoil and, perhaps, others may need trimming.
Though relatively straightforward for fresh fruits and fresh vegetables, conversion factors tend to be more complex for more highly processed foods. These calculations may involve more than one agricultural commodity; for example, to manufacture some dairy products, sugar may be added to milk.
Finally, once the contents of the farm baskets have been established, farm share is computed by dividing the value of what farmers supply at the farm gate by the estimated value of the market basket at retail. As noted, for fresh vegetables in 2005, the value of the market basket at retail is estimated to be $190.87. The value of the farm basket in that year can likewise be estimated using prices received by farmers for their commodities. For example, the 21.76 (21.11 x 1.031 = 21.76) pounds of carrots in the farm basket for fresh vegetables were priced at $0.209 per pound in 2005. The total value of all the contents of the fresh vegetables farm basket in 2005 was $48.32, which amounts to about 25 percent of the estimated price of $190.87 for the consumer basket.
Once published, market basket statistics may be updated for a variety of reasons:
- Updated estimates of average prices received by farmers for their commodities are made available as much as a year or two after preliminary figures.
- Conversion factors may need to be adjusted. For example, changes to the supply chain, such as improved efficiency in food packaging and shipping, may reduce waste and spoilage. If so, food marketers could buy a smaller quantity from farmers to provide the same quantity at retail.
A complete report detailing how ERS researchers calculated the market basket statistics for fresh fruits and fresh vegetables is available: How Low Has the Farm Share of Retail Food Prices Really Fallen?
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