Consumer Valuation of Consumer Valuation of rBST-free and Organic rBST-free and Organic

MilkMilk

Jeremy D. FoltzJeremy D. Foltz

University of WisconsinUniversity of WisconsinDept. of Ag. &Applied EconomicsDept. of Ag. &Applied Economics

Program on Agricultural Technology Program on Agricultural Technology StudiesStudies

OutlineOutline

Introduction: Introduction: The valuation problem of GMO labelsThe valuation problem of GMO labels

Price Premiums and Market Shares for Price Premiums and Market Shares for rBST-Free and Organic MilkrBST-Free and Organic Milk

Determinants of Consumer DemandDeterminants of Consumer Demand Estimates of Consumer ValuationEstimates of Consumer Valuation

ConclusionsConclusions What this means for the industryWhat this means for the industry

Labeling and Product IntroductionLabeling and Product Introduction

Controversies about GMO-free and Controversies about GMO-free and organic labelsorganic labels Recent Monsanto suit against Maine dairyRecent Monsanto suit against Maine dairy USDA organic label rulesUSDA organic label rules

Product introduction in milk market is a Product introduction in milk market is a labeling issuelabeling issue

Do Consumers benefit from the Do Consumers benefit from the introduction of labeled milk?introduction of labeled milk?

Typical Milk Labels Typical Milk Labels

Unlabeled Organic rBST Free

A Different Approach to Consumer A Different Approach to Consumer Valuation StudiesValuation Studies

Previous ResearchPrevious Research Survey dataSurvey data ExperimentsExperiments

Our Approach: Revealed PreferenceOur Approach: Revealed Preference Supermarket data on sales of milk in US by Supermarket data on sales of milk in US by

type (organic, rBST-free, unlabeled)type (organic, rBST-free, unlabeled) 260 weeks of data from 1997-2002: 260 weeks of data from 1997-2002:

Repeat purchases over time as the market Repeat purchases over time as the market changes and matureschanges and matures

Aggregate data from 12 major US citiesAggregate data from 12 major US cities

Average Milk Price by CityAverage Milk Price by City Price

City Code Organic rBST Free Unlabeled

MW_1 6.44 5.32 2.82

MW_2 6.23 6.15 2.51

MW_3 5.86 . 2.68

NE_1 5.57 4.28 2.80

SO_1 5.93 4.92 3.06

SO_2 6.43 5.92 3.02

SO_3 5.74 6.01 2.44

SO_4 5.70 5.30 3.16

WT_1 6.02 4.56 3.10

WT_2 5.98 4.22 2.58

WT_3 5.85 4.80 2.38

WT_4 5.28 3.69 3.01

Average 5.91 4.85 2.80

Average Market Share by CityAverage Market Share by City Market Share

City Code Organic rBST Free Unlabeled

MW_1 0.3735 0.4137 99.2127

MW_2 0.2345 0.0005 99.7650

MW_3 0.2466 - 99.7534

NE_1 0.8742 0.1845 98.9413

SO_1 0.2343 0.4134 99.3523

SO_2 0.0851 0.0044 99.9105

SO_3 0.4347 0.2927 99.2726

SO_4 0.2891 0.1882 99.5227

WT_1 0.8612 1.1344 98.0044

WT_2 0.1293 0.0019 99.8688

WT_3 0.0809 0.0048 99.9143

WT_4 1.0956 2.6918 96.2125

Average 0.4116 0.4846 99.1442

Labeled Milk Prices:Labeled Milk Prices:1997-20021997-2002

Big price increases for both rBST-free and Big price increases for both rBST-free and organic milkorganic milk Organic milk increased 29% Organic milk increased 29% rBST-free milk increased 46%rBST-free milk increased 46%

Prices by YearPrices by Year

2

2.5

3

3.5

4

4.5

5

5.5

6

6.5

7

1996 1997 1998 1999 2000 2001 2002 2003

Pri

ce

pe

r G

allo

n

Organic rBST Free Unlabeled

Labeled Milk Market Shares:Labeled Milk Market Shares:1997-20021997-2002

Market share increasesMarket share increases Five fold increase for organic milkFive fold increase for organic milk 50% increase for rBST-free milk, 50% increase for rBST-free milk, Market for rBST-free peaked in 1998Market for rBST-free peaked in 1998

Market Shares of Specialty Milk

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1997 1998 1999 2000 2001 2002

Year

Per

cen

t o

f M

arke

t

Organic

rBST Free

Consumer Valuation of New Consumer Valuation of New ProductsProducts

Estimate consumer demand with demand Estimate consumer demand with demand systemsystem

Calculate total benefit to consumer from Calculate total benefit to consumer from new product introductions as:new product introductions as: Variety Effect Variety Effect VEVE Competitive Effect Competitive Effect CECE

Variety EffectVariety Effect

Benefits consumers get from having new Benefits consumers get from having new products in the market.products in the market.

Most of benefit goes to consumers of new Most of benefit goes to consumers of new productsproducts

But benefit exists even if you do not But benefit exists even if you do not purchase a good. purchase a good.

““More variety is better than less variety”More variety is better than less variety”

Competitive EffectCompetitive Effect

Competition from new products reduces Competition from new products reduces the prices of existing productsthe prices of existing products

Competitive effect = benefit consumers Competitive effect = benefit consumers derive from lower pricesderive from lower prices

Competitive Effect EstimatesCompetitive Effect Estimates

Prices decreasing withPrices decreasing with number of brands number of brands presence of organic and rbst free brandspresence of organic and rbst free brands

Brand Introduction: an unlabeled brand Brand Introduction: an unlabeled brand drops average price only $0.0012 per drops average price only $0.0012 per gallon.gallon.

Effect of rbst-free and organic brand Effect of rbst-free and organic brand introduction is $0.02 per gallon ( 1introduction is $0.02 per gallon ( 1¢ for ¢ for each)each)

Variety EffectVariety Effect

Total variety effect of labeled milk: Total variety effect of labeled milk:

1717¢ per consumer per week¢ per consumer per week

Ranges from Ranges from A low of 12¢A low of 12¢ To a high of 27¢To a high of 27¢

Variety EffectVariety Effect

Major differences between rBST-free milk Major differences between rBST-free milk and organic milk in the variety effectand organic milk in the variety effectOrganic milk Organic milk very high willingness to pay very high willingness to pay nearly 90% of variety effect)nearly 90% of variety effect)

rBST free milk:rBST free milk: Low willingness to pay moreLow willingness to pay more Estimate that at $1 extra per gallon no Estimate that at $1 extra per gallon no

demand for rBST free milkdemand for rBST free milk

Yearly Value to U.S. Consumers of Yearly Value to U.S. Consumers of rBST-Free & Organic MilkrBST-Free & Organic Milk

Yearly Competitive Effect: Yearly Competitive Effect: $130 million$130 million

Yearly Variety Effect: Yearly Variety Effect: Average estimateAverage estimate $2.5 billion$2.5 billion Minimum estimateMinimum estimate $1.6 billion$1.6 billion

Yearly Estimated Value to ConsumersYearly Estimated Value to Consumers

$ 1.7 – $2.6 billion$ 1.7 – $2.6 billion

More ResultsMore Results

Asymmetric substitution effect between Asymmetric substitution effect between unlabeled milk and both rBST-free and unlabeled milk and both rBST-free and organic milksorganic milks

Once you go organic you don’t go backOnce you go organic you don’t go back

rBST-free “starter” or “gateway” milkrBST-free “starter” or “gateway” milk More likely to go to organic from rBST-freeMore likely to go to organic from rBST-free

ConclusionsConclusions

Most of the valuation of milk labeling is Most of the valuation of milk labeling is from Organic not from rBST-freefrom Organic not from rBST-free GMO free element not most important part of GMO free element not most important part of

consumer valuationconsumer valuation Organic labeling worth a lot in milkOrganic labeling worth a lot in milk

ConclusionsConclusions

Is rBST free labeling worth the cost?Is rBST free labeling worth the cost? To industry?To industry?

Individually?Individually?

Collectively?Collectively? To regulators?To regulators? To consumers?To consumers?

Consumer Valuation of Consumer Valuation of rBST-free and Organic rBST-free and Organic

MilkMilk

Jeremy D. FoltzJeremy D. Foltz

foltz@aae.wisc.edufoltz@aae.wisc.edu