In 2023, agricultural profitability increased again compared to a step back in distribution | National and international economics

The business’s margins grew throughout the third quarter of 2023 and managed to recover to pre-Covid-19 health and economic crisis levels. According to the latest data from the Bank of Spain, in the 100-based index, which takes as its basis the fourth quarter of 2019 (just before the outbreak of the pandemic), the overall figure reached around 105 points in September…

The business’s margins grew throughout the third quarter of 2023 and managed to recover to pre-Covid-19 health and economic crisis levels. In the 100-based index, which takes as its basis the fourth quarter of 2019 (just before the outbreak of the pandemic), the overall figure reached around 105 points in September, according to the latest data from the Bank of Spain. While the evolution remains “heterogeneous” across sectors, what stands out in this recovery is the fringes of the agri-food chain, driven upward by agricultural and processing companies. However, this contrasts with falling food distribution margins.

Yesterday, the banking regulator published the latest edition of the Business Margin Observatory, a project it has been working on for several months together with the Ministry of Economy and the Tax Agency. Between July and September last year, movements in energy prices and raw material costs contributed to the overall economy’s sales margins exceeding pre-pandemic levels, the data showed. Only the energy sector, whose results are studied separately, and the financial sector, which is outside the observatory, will be excluded from the overall analysis.

The business profitability indicator shows the ratio of gross operating profit of large companies and their sales. Therefore, it is important to remember that an increase does not necessarily mean an increasing trend in profits recorded by organizations.

The indicator is useful for analyzing other variables and, for example, determining whether an increase is due to the company optimizing resources; external factors such as rising interest rates; or to passing on increases in production costs to goods and services. Previous editions of the Observatory, as well as data published by the Internal Revenue Service itself, indicate that there has been a cost shift to final selling prices. In such situations, where there are processes of elasticity and price fixing, one would expect the trend to reverse as soon as the situation changes, that is, when the inflation crisis ends. In fact, this argument is used by both the government and trade unions to demand higher wages.

To begin with, the evolution of margins is uneven depending on the sectors studied. According to the updated data, the ratio of operating activities to sales would have been mixed among energy companies, recovering in the third quarter in the case of refining and wholesale fuel trading and stabilizing in the case of electricity and gas supplies. In particular, the return on sales in the refining subsector increased in the third quarter of 2023 after a sharp decline observed in the second quarter of 2022. On the other hand, sales margins in the gas and electricity supply sector would stabilize in the summer, maintaining cumulative growth throughout the second half of 2022 and the first half of 2023.

In the agri-food chain as a whole, the indicator continued to recover overall. By sector, agriculture would already be at a level well above what it was before the pandemic (about 125 points), and the agri-food industry, which includes manufacturing, processing and canning companies, would gradually recover and approach the 90 point mark. A controversial note will be the margin in the food trade, where supermarkets and large retail chains are registered. In fact, the subsector experienced a two-quarter decline and its index increased from around 100 to around 90. Distribution, the Bank of Spain says, continues, “without being able to reverse the cuts that occurred during the energy crisis.”

Manufacturing is one of the sectors that has benefited the most from falling commodity prices. Apart from the energy and agri-food industries, their profitability dynamics have been growing since the end of 2022 due to cheaper resources. “The recovery in margins is concentrated in certain subsectors such as transport and capital goods,” the Bank of Spain said.

Services, in turn, are consolidating the post-pandemic recovery, with travel and transport margins remaining stable at around 100.

Financial sector data is the only one missing. The reason for its absence lies in the observatory’s methodology, since its submission uses, among other sources, information collected by the Tax Agency along with VAT returns. Since this sector does not pay this tax, it is not possible to use the same calculation.

Despite this, the sector’s profitability also appears high. Yesterday, Bank of Spain deputy governor Margarita Delgado said 2023 was a “particularly good year” for banking. Although we are waiting for final data, in statements collected by Efe, he assured that the profits will be “remarkable.”

The proposal to create an observatory of this type came from the trade unions of the Central Committee of the OO and VGT almost a year ago. The goal was to obtain data and figures that would enable collective bargaining in those sectors that, due to changes in their benefits, were in a position to face wage revaluation.

Last April, then First Vice President and Economy Minister Nadia Calviño announced the creation of an observatory to maintain effective competition in goods and services markets and achieve “adequate” income distribution. The measure, supported by Labor Party chief Yolanda Diaz, was questioned by employers.

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