Category: food policy

Who Earns the Food Dollar?

Part 2 on the Farmers’ Share of the Food Dollar (see Part 1 here).

The ag value chain involves a wide array of participants to get food products from ground to grocery store–or increasingly, from research to restaurant. Every dollar spent on food has to be divided between all the different players. As the number of participants grows, and as more value is added at different stages of the value chain, the percentage of food dollar going to any one group is likely to decline.

This is why the farmers’ share of the food dollar has been on the decline for, well, pretty much the past century at least.

Sen. Elizabeth Warren and, more recently, Sen. Bernie Sanders have proposed aggressive antitrust enforcement of “Big Ag” companies—whether farm input companies like Bayer or early-stage processors like JBS or Tyson in the meat industry. The Senators claim that cracking down on these big companies will be beneficial for farmers and increasing farmers’ share of the food dollar. In my previous post, I explained why those arguments are wrong. In fact, those arguments are not even consistent with the data being used to justify the claims.

To really understand why farmers’ share of the food dollar has declined, one has to understand how—and where—value is created in the value chain. More specifically, one has to understand how value is added to the agricultural products that farmers produce. And how existing farm sector institutions work to make farmers’ share lower than it might otherwise be.

A recent (March 2019) McKinsey & Co. article titled “A Winning Growth Formula for Dairy” illustrates this value creation story. The article describes the challenge facing dairy company executives globally, and particularly in the U.S. Dairy farmers have been struggling with low raw milk prices resulting from continued over-production of milk relative to demand for dairy products. You would think large dairy companies would be bathing in profits with the cost of their primary input depressed—even below the cost of production, according to some farmer groups. And yet, return on invested capital in the dairy industry (ROIC; i.e., the economic value generated by their businesses) has been declining because growth in revenue and margins has not kept pace with an increasing cost of capital. The reason? Consumption of milk and dairy products in the U.S. has been on a long-term decline.

The authors go on to explain that dairy executives are faced with the challenge of how to create new value opportunities in the face of more milk being produced than there are uses for currently. New product development. New market development. These are expensive investments with uncertain outcomes. But that is where the value is being created for raw milk—not at the farm gate. In fact, one might argue that the value being created by dairy processors is in spite of having to overcome the value decreasing activities of dairy farms that, collectively, are overproducing.

This problem is not unique to the dairy industry. Whether corn, meat proteins, wheat, or any number of other agricultural commodities, agricultural producers are increasingly reliant on processors and refiners to transform producers’ crops into products consumers are willing (or required) to buy, and in a form consumers desire. It is not at all surprising, therefore, that more and more of the food dollar is being captured by firms beyond the farm gate. That’s where value is being added. That’s where more of the food dollar is being earned.

Why Sen. Warren is Wrong on Trust-busting Big Ag

Several Democratic presidential candidates courted rural voters in Iowa at last weekend’s Heartland Forum. Both Sen. Amy Klobuchar (D-MN) and Sen. Elizabeth Warren (D-MA) decried the plight of farmers, with Warren promising trust-busting policies to break up Big Ag. But Warren’s call for aggressive antitrust is more populist politics than sound economic policy.

Warren claimed that, “A generation ago, 37 cents out of every food dollar went into a farmer’s pocket. Today, it’s 15 cents. And one of the principal reasons for that has been concentration in agribusiness. You’ve got these giant corporations that are making bigger and bigger profits for themselves, for their executives and for their investors, but they’re putting the squeeze on family farms.” But there are several problems with that argument.

First, the farmer’s share of the food dollar is a pretty worthless measure of how well-off farmers are in the food economy. From an economic perspective, it is completely meaningless. In response to the perennial reactions by farmers’ lobbies to the USDA’s “Farm Dollar” report in 2018, Jayson Lusk provided a nice example of how focusing on farmers’ share of the food dollar actually can lead to very poor conclusions. Even more to the point, Gary Brester, John Marsh and Joseph Atwood demonstrate what agricultural economists have long understood:

“[S]ome have argued that decreases in FS (farmer share) statistics…are indicators of anti-competitive behavior in the food processing industry. Agricultural economists have long noted that such relationships cannot be justified on theoretical grounds. … We have empirically demonstrated that FS statistics and, by construction, farm-to-retail marketing margins, are not reliable measures of changes in producer surplus (welfare)… Consequently, these data should not be used for policy purposes.”

Brester, et al., “Evaluating the Farmer’s-Share-of-the-Retail-Dollar Statistic,” 34 Journal of Agricultural and Resource Economics 213 (2009)

Second, even if one could make any reasonable inferences from the farmers’ share numbers, they do not support the story Warren is trying to sell. While farmers’ share of the food dollar has declined over the past 24 years, the decline is not near as big as Warren suggests: from 16% to 12% of the real (2009) dollar value of domestic food sales, as shown in the nearby Table 1. But a closer look at the numbers reveals what is driving the overall decline: when people eat away from home, the share of the dollar that goes to the farmer is much smaller, because more of the dollar is going to the people that add additional value by processing and preparing the food away from home. And eating away from home has become more and more prevalent.

Table 1: Farmer Share of Total Domestic Food Dollar, 1993-2016

Truth be told, the microcosm of food eaten at home or away from home illustrates the larger issue: as consumers choose foods that have been further processed and prepared, more of the dollar goes to the people that add the additional value in the form of preparedness, packaging, convenience, etc., that consumers value. That’s why, over the last century, the farmers’ share of the food dollar has dropped from near 50% to only 12%.

But what about the big bad ag companies that Warren blames for this problem? Doesn’t the consolidation of Big Ag share some of the blame? Warren blames mergers of companies like Bayer-Monsanto on the farm inputs side or large multinationals like JBS on the farm output side for squeezing farmers’ share of the food dollar. What about them?

As it turns out, firms in the farm inputs industry (like Bayer or Corteva (the offspring of Dow-Dupont)) and firms in the food processing industry (like JBS or Tyson) also have seen their share of the food dollar decline, as shown in the nearby Table 2. For farm inputs, the share has dropped over 40%, even more than the farmers’ share; and food processing companies’ share has dropped over 20%, almost as much as farm shares. Not even the banking industry, another of Warren’s favorite regulatory targets, has seen an increase in its share of the food dollar. In fact, the only food industry segments experiencing any appreciable increase in food dollar share are retail sales and food service–again, where more of value-adding convenience and food preparation are being contributed.

Table 2. Share of Domestic Food Dollar by Industry Segment, 1993-2016

Antitrust is currently seeing a lot of renewed interest in political circles because big, bad corporations make easy populist political targets. And it may be true that increased concentration in some industries could stand more antitrust scrutiny, possibly even in agriculture. But broad antitrust enforcement is a very blunt, and potentially dangerous, policy tool that shouldn’t be invoked carelessly. Nor with as little understanding of an industry as Sen. Warren appears to have of the food system.

 

The Labeling Problem, Part 2

In The Labeling Problem, I explained how the presence of a label, whether on a college course or a food item, does more than just identify the product. It actually can influence consumers’ perceptions about the attribute the label identifies. As a result, it can also influence consumers’ perceptions of similar products that don’t have the label.

Consequently, labels have the potential not just to inform consumers, but to misinform them; particularly when the label is for an attribute that consumers do not fully understand. For instance, with genetically modified (GM), or genetically engineered (GE), food products.

There is another dimension of the labeling issue that I promised to return to: what makes economic sense? Remember the Three Simple Rules? What makes economic sense comes down to this: What’s the marginal benefit of providing the additional information? What’s the marginal cost of providing that information? And because we’re talking about a diverse set of consumers with different interests, that leads to the question of “who should pay for it?”

So What’s the Marginal Benefit?

Information is economically valuable only if it will change the outcome of a decision. Consequently, a GM label would create personal (or private) benefit only if the label would change the consumer’s decision to purchase the product. A Pew Foundation study found only 1-in-6 people (16%) “care a great deal about the issue of GM foods.” Another 37% “care some.” But do they care enough that it would make them willing to change their behavior even if it cost them additional money to buy the GMO-free product? Some scholars have attempted to estimate consumers’ willingness-to-pay (WTP) for GMO-free products as a measure of the value of labels (for instance, see here and here). The results tend to show individual consumers, on average, are willing to pay at least a little more for GMO-free products, whether the label denotes the presence–or the absence–of GMOs. Of course, this is also based on the fact that a large percentage of consumers lack knowledge about what GMOs are.

From a public policy perspective, the label only has value if it would lead consumers to make decisions that improve public well-being. The consensus of the scientific community is that there is no substantive nutritional, quality. or health safety difference between food containing GM ingredients and GMO-free foods (see here, here, and here). That suggests that there is no real public benefit to having the information provided.

What’s the Marginal Cost?

A wide range of numbers have been thrown around about the potential cost of mandatory labeling. At the low end, the Consumers Union (a pro-labeling group) commissioned a study that found the cost would be only $2.30 per person (or about $740 million) per year. That estimate is based primarily on the costs of labeling itself. It does not include costs of regulatory enforcement or increased costs in sourcing inputs, keeping the inputs segregated to prevent contamination by GM inputs, and product reformulation. Other studies (funded by anti-labeling groups) have suggested costs on the order of $450 per household (or about $56.7 billion) per year. In addition to including a more systemic view of the costs, these studies also make assumptions about manufacturers shifting more of their products to being GMO-free to avoid the negative stigma of having a “contains GMOS” label.

So while the predicted cost is wide-ranging, one thing is clear: The costs are bigger than zero.

Sound economic decision making (and therefore sound policy) requires the marginal benefits of any action to be at least as big as the marginal costs of the action. From a public perspective, the benefits are arguably zero, while the costs are greater than zero. That suggests a regulation requiring labels would not make economic sense.

Does that mean there should be no labels? Not at all. It simply means it doesn’t make sense to have a law that forces all consumers (many of whom are not concerned about GMOs anyhow) to pay for a regulation that has little or no public benefit in the first place.

But the fact that there are potential private benefits to labeling suggest that voluntary labeling may be desirable. Clearly, the value of labeling information to some consumers is greater than zero. And some of those consumers would both pay for that information and change their consumption decision based on it. Manufacturers who believe they can deliver that value at a low enough cost to make a profit on it have every incentive to make that happen. And in fact, that’s exactly the situation we have now in the US with voluntary “GMO-Free” and/or “Organic” labeling.

One might still object that these voluntary labels may create a negative stigma about non-labeled products. And that’s a fair point. But that also means that industry has an incentive to more proactively educate consumers about the science behind GM-foods, so they won’t be fooled into paying more for something that may not provide the benefits they think.

Cass Sunstein, a Harvard law professor, summarizes the whole point fairly well in the abstract of a recent paper:

Many people favor labeling GM food on the ground that it poses serious risks to human health and the environment, but with certain qualifications, the prevailing scientific judgment is that it does no such thing. In the face of that judgment, some people respond that even in the absence of evidence of harm, people have “a right to know” about the contents of what they are eating. But there is a serious problem with this response: there is a good argument that the benefits of such labels would be lower than the costs.

Consumers would obtain no health benefits from which labels. To the extent that they would be willing to pay for them, the reason (for many though not all) is likely to be erroneous beliefs, which are not a sufficient justification for mandatory labels. Moreover, GMO labels might well lead people to think that the relevant foods are harmful and thus affirmatively mislead them.

 

 

 

The Labeling Problem

(Part 1 of 2)

“Labeling” is a big thing these days. After all, as I hope you have concluded if you’ve read many (any?) of my previous posts, information (or lack thereof) is one of the biggest challenges for an effective market-based economy. But does that mean “labeling” is necessarily a good thing?

I bet you thought I was going to talk about food, didn’t you? A little bit, but first…

The university where I work has a “Writing Intensive” requirement for which students must take at least two courses that are designated as “writing intensive” or WI. WI courses have to be approved as satisfying certain criteria, including a minimum number of pages of revisions and a significant portion of the overall grade being based on students’ writing. It’s largely up to the instructor as to whether to apply for the WI designation in any particular course.

Naturally, not all students are thrilled about taking WI courses that actually require them to write, in real English, with some evidence of proper grammar and structure and all those nasty, time-consuming details. (Like OMG uv got 2 b kidding!)

Some students complained about unwittingly enrolling in courses that were WI. You know, because heaven forbid they end up in a class that requires writing they could have avoided. Professional advisors and administrators concurred, and contrived a labeling scheme to make it clear that a course is approved as WI–because the language in the course description itself was apparently insufficient. (Perhaps the dislike for writing stems from a dislike for reading as well.) Now courses have to be reviewed and approved in time to be listed in the course catalogue for registration the following semester so the course number can be affixed with a W on the end (e.g., ABM 4971W vs ABM 4971).

But this course designator has created a different kind of problem: Students are now upset anytime a course without a W on the number includes any substantive amount of writing.

The presence of a WI label changes students’ expectations and perceptions
about all courses, not just WI courses.

And this is part of the problem in the larger ‘labeling’ debates we face as a society. When we add information on labels, it doesn’t just provide information; it shapes consumers’ perceptions not just of the labeled product, but of all similar products. This is especially true for mandatory labels for attributes that consumers do not fully understand and for which consumers’ personal valuations are more subjective and varied.

Take foods containing genetically modified (GM), or genetically engineered (GE), organisms, for instance. Survey results suggest that a majority of US consumers has little knowledge or understanding about what GM foods are (for instance, see here and here), never mind the fact that a consensus report from the National Academy of Sciences, Engineering and Medicine (p. 2) “found no substantiated evidence that foods from GE crops were less safe than foods from non-GE crops.”

Notwithstanding that lack of knowledge, a large majority of consumers, if asked, will agree with the idea that consumers have a right to know what’s in their food and that GM content should be labeled. Kind of like college kids who object simply to the idea of writing. That said, only a small percentage of consumers (1 in 6) actually care deeply about having that information themselves.

Despite the value of more information, GM labeling runs a couple different risks. First, if food products containing GMOs are required to be labeled as such, most all food would carry the label because most prepared foods contain products derived from soybeans and corn, which are predominantly grown using GM biotechnologies. If everything in a store carries the same ‘warning’ label, the label doesn’t convey any relative information. That is, it doesn’t help distinguish between products. In fact, it would be harder to find the products without the label. Imagine students scrolling through the 90%+ of courses marked “Not WI” in order to find the 10% that are WI. A “GMO-Free” label, on the other hand, would communicate more effectively by standing out relative to other products.

Second, even with a (voluntary) “GMO-Free” label, the label itself implies that GMOs are bad by comparison, just like having WI courses marked “W” seemingly implies courses without “W” don’t involve much writing. In that case, the label actually misinforms consumers, or at least misleads them, relative to the science of GM foods and their safety (or to instructors’ pedagogy, as the case may be).

The presence of a GM label changes consumers’ expectations and perceptions
about all food products, not just the ones labeled.

Having labels that misinform or mislead consumers, whether explicitly or implicitly, defeats the purpose of labeling to begin with, and is therefore an ineffective policy tool. There is also the issue of what is an economically sensible policy for providing information in the market place, even if labeling were to be effective. Stay tuned for a follow-up post on that.

An Overview of US Food and Nutrition Programs

Hilary Hoynes (Berkley) and Diane Whitmore Schanzenbach (Northwestern) have a new NBER piece that provides a very useful overview of the four major food and nutrition programs in the U.S., including their histories, current statistics, potential benefits, and the current research on their effectiveness.  An ungated version of the piece is available here.

This chapter provides an overview of the patchwork of U.S. food and nutrition programs, with detailed discussions of SNAP (formerly the Food Stamp Program), WIC, and the school breakfast and lunch programs. Building on Currie’s (2003) review, we document the history and goals of the programs, and describe the current program rules. We also provide program statistics and how participation and costs have changed over time. The programs vary along how “in-kind” the benefits are, and we describe economic frameworks through which each can be analyzed. We then review the recent research on each program, focusing on studies that employ techniques that can isolate causal impacts. We conclude by highlighting gaps in current knowledge and promising areas for future research.

Food Access and Food Policy

Ploeg, Dutko and Breneman have a new paper coming out in Applied Economic Perspectives & Policy taking to task the way food access and “food desserts” are measured and the implications of those challenges for policy design.

They provide a good description of the ways in which food access is measured and some of the data sources used for developing those measures. Most of these have to do with measuring things like income, distance to stores, availability of transportation, etc.; measuring retail food availability versus healthy food availability; a tendency to focus only on low-income neighborhoods; and defining what is means to say access is “adequate” or “inadequate” from a policy perspective.

One of the things they do not mention, which I have been thinking about recently as a potential research project, is the extent to which food access measures correlate with health outcomes in a community. This is closely related to work Diogo Souza Monteiro at Newcastle University has begun looking at the kinds of grocery stores in UK neighborhoods and the incidence of various public health outcomes.

Focusing on health outcomes would go well beyond the critique of the tendency to focus on low-income neighborhoods, since even in communities where food access is (relatively) good or where incomes are on average higher, there could be differing health outcomes associated with the types and numbers of food retailers available. Just because a healthy food option is readily available does not mean local health will necessarily be better. And after all, a significant reason for caring about food access is not for the sake of access to food itself, but for the (public) health consequences of limited food access. So the existence of a correlation between health outcomes (or types of health outcomes) and measures of food access and food security would seem a necessary first step in designing any potential policies to address the food access problem.

That said, Ploeg, Dutko and Breneman’s paper seems a good starting point for thinking more clearly about food access and food policy. Unfortunately, I think the paper is gated. The abstract follows.

Policymakers have dedicated increasing attention to whether Americans have access to healthful food. As a result, various methods for measuring food store access at the national level have been developed to identify areas that lack access. However, these methods face definitional, data, and methodological limitations. The focus on neighborhoods instead of individuals underestimates the barriers that some individuals face in accessing healthy food, and overestimates the problem in other neighborhoods. This paper reviews and critiques currently available national-level measures of food access. While multiple measures of food access are needed to understand the problem, we recommend greater attention be paid to individual measures of food store access.