What is the “True Cost” of Food?

Climate change, obesity, child labour, plastic pollution, and so on: these are all food-related problems and costs we don't take into account when buying our groceries. How can we include these hidden costs, in order to pay the real price - the true cost - for our food products?

A German supermarket recently made the news with double price tags for a selection of their products: one for the price you need to pay at the cash register for a certain product, and another for the ‘true price’, or the price including the social and ecological impact of the production of that food. The German supermarket asked researchers from the Universities of Augsburg and Greifswald to calculate the true cost of 16 products. The result? Gouda cheese should be 88% more expensive than it is, and a kilo of ground beef at a stunningly 173% increase. The differences are smaller when it comes to fruit and vegetables, with a 19% price difference for bananas, 12% for tomatoes and 8% for apples. For organic products, the difference is smaller as well, but even then, organic meat would have to become 126% more expensive to include all hidden costs^.12

So, how do you calculate the true cost of food? 

It’s not an easy task to calculate the true cost of a product. Because, what exactly do you include in a model? Environmental damage like carbon and nitrogen emissions, the energy used, and the consequences of over-fertilisation? And what about social costs like working conditions and child labour? How do you quantify all those factors? 

When looking at the retail cost versus the true cost of products, we can use two important concepts. The “farm gate price”, which means the price of the product available at the farm, excluding any separately billed transport or delivery charge.³ Then there’s the “external costs” of cultivation, also called the 'true price gap', which means the costs created by economic activities which are not reflected in the farm gate price. External costs can also be classified as environmental costs if they have a direct effect on the environment, and as social costs, if they have a direct effect on the well-being of people.⁴

^{Learn more about the true cost of dairy milk.}

The German researchers are not the first to make these calculations; scientists from various disciplines are looking for ways to provide insight into external costs. The Dutch organisation True Price has been working on calculating the true cost of products since 2012 and is now the world-leading expert in methods and tools to measure and monetise societal impact. Together with the Initiative Sustainable Trade (IDH), True Price published four review studies on the real price of coffee, cocoa, cotton and tea with a clear list of 14 types of external costs divided between environmental and social costs.⁵

The studies are a good example of comprehensively calculating the true cost of food. Each of the four food products scored differently on these 14 aspects: this means that the true costs of certain products are not always driven by the same factors. For example, the true cost of certain foods might be driven by environmental costs, while others could be determined by the social cost of manual labour.

The true cost of cocoa

When taking a closer look at the cocoa from Ivory Coast, the calculated true price of conventional cocoa beans is €7.10/kg cocoa beans. This is the sum of the farm gate price (€1.35/kg cocoa beans) and the external costs of cultivation, or the true price gap (€5.75/kg cocoa beans). The true price gap is more than four times as large as the farm gate price of cocoa beans. This shows that at the farm level, there are substantial hidden costs relative to the market price. 

Social costs account for 84% of the total external costs of cocoa cultivation. Environmental costs are relatively low, mainly due to low pesticide and fertilizer application rates and neither water nor energy use during cultivation. The true cost of coffee from Vietnam is mainly determined by environmental issues, like water use and water pollution. As you can see, understanding how much a product should really cost is a very complex matter, but step-by-step, we can find out how much we should actually pay for a cup of coffee or a bar of chocolate.⁶

Why should we know the true cost of food products? 

Ok, now we have an idea of what the true cost consists of, but why is it important to know what we should be paying for a product? The German supermarket claimed raising awareness for their customers as the reason for showing the true cost next to the market price.⁷ However, according to True Price, this is not the only reason why it’s important to quantify all these extra costs. 

“The aim of calculating a true price is to manage risks, steer innovations and reduce social and environmental costs by improving transparency throughout the entire supply chain of a product.”

So this information is useful not only to consumers but also to businesses. By knowing the external costs, businesses can improve the social and environmental impacts of their operations and their supply chain. They can identify alternative modes of production that are more sustainable and cost-effective.⁸

But in which ways could this information be applied to practically impact food production and consumption?

The case for carbon taxes

Since companies might not make the switch to sustainable production on their own accord, the German researchers advise introducing a carbon tax . This would help allocate costs to make all the stakeholders along the value chain pay up. The companies can then decide whether to pass on the external cost - the true cost of production they now have to pay - to the consumer, or try to eliminate the external costs. A carbon tax would make polluting businesses pay, in turn favouring companies that invest in more environmentally-friendly production.⁹ 

This is what the German study has shown: if we paid the true cost of products, organic produce would actually be cheaper in the long run than conventional farming. The true price gap is smaller because the external costs of organic products are less significant.

The same goes for fair trade products, they tend to cost a bit more but have a much smaller true price gap, because – like organic products – they already include the external costs in the production chain. A study published in 2017 by True Price and the British organisation Trucost on the true price of bananas around the world, shows Fairtrade-bananas have 45% lower external costs than the sector average.¹⁰ That happens because Fair Trade pays farmers a better farm gate price for their produce.

So by applying this sort of tax, dirt cheap products would suddenly become insanely expensive. Of course, a carbon tax wouldn’t be easy to implement in this globalised world. After all, setting a higher bar for everyone would require new international rules.¹¹

How supermarkets are bringing more awareness to true costs

Although changing the food system towards fairer priced products is hard, we see more and more experiments, like the one in the German supermarket, popping up.

A Swedish supermarket was the first in the world to start with a carbon tax to increase consumer awareness of the true impact of their food choices. In their pop-up shop, The Climate Store, the currency is carbon. Customers who shop in the supermarket have a weekly budget of 18.9 kg of carbon dioxide equivalent. Carbon-intensive items, such as animal products, are priced higher than their vegetable counterparts. The company thinks it will be an eye-opener for many to see how certain choices affect their footprint. By giving consumers a carbon footprint budget, they hope to halve the effect of the average shopping basket on the climate.¹² In Denmark, a supermarket presented an app that allows customers to see the estimated carbon impact of their product.¹³ And several brands are announcing on-pack carbon footprint information.¹⁴