The report also indicates that processors are using labour and other resources relatively efficiently in comparison to the rest of the food supply chain, including wholesalers, retailers, and those supplying non-residential catering services.
Productivity, which measures the efficiency at which inputs are converted into outputs, is an underlying indicator of sustainable resource use.
It is a crucial indicator of growth for both policy-makers and industry, and could indicate future plans of the government in relation to the sector.
The Department for Environment, Food and Rural Affairs (Defra) study uses a measure called "Total Factor Productivity" (TFP), which accounts for all the major inputs within the process, such as capital, labour and intermediate purchases.
Defra said it concentrates on TFP measurement, rather than simple labour productivity, because the method offers an indication of the future growth potential of that industry and, from a policy making perspective, can be used as a basis to set targets.
The study found that food manufacturing has a positive rate of TFP growth of 0.68 per cent per annum, which is above the whole economy average of 0.57 per cent.
However the remaining three sectors in the food chain had negative growth rates, which are not sustainable in the long-term, Defra stated. Average growth rates for food wholesaling was negative 0.71 per cent per year, for food retailing negative 0.61 per cent, and for non-residential catering negative 0.10 per cent.
The study found that most sectors of the food chain have positive growth rates in labour and capital productivity. However, input productivity is dampened by a high reliance on intermediate purchases, such as raw materials and energy use.
"Some of this can be negated through greater efficiency of purchasing control mechanisms," Defra stated.
Retail productivity is possibly depressed through the non-market benefits offered by supermarkets, such as longer opening hours, and a greater product mix offered within stores, the study suggests.
"It seems that little can be proposed in terms of targets when growth rates are negative, other than seeking reductions in the rates of negative growth or a growth rate which is at least on parity with the remaining sectors," Defra concludes. "This latter target seems the most appropriate. However, the maturity of the food industry may restrict growth rates compared to newer sectors."
The major cost to the food chain in terms of externalities are the social costs of transport, such as congestion, noise and infrastructure related to food transportation, Defra stated.
The main negative impact is with the use of cars, which has increased substantially from 1998 onward mainly due to the increased distances travelled by consumers to supermarkets for food shopping.
The report calculates external costs at around £8bn, while desirable benefits through added value accrue to £58bn.
Defra calculates that the full downstream food chain adds £58bn in total gross value to the economy and employs about 12 per cent of the UK workforce.