Consumer Valuation Consumer Valuation of rBST-free and of rBST-free and Organic Milk Organic Milk Jeremy D. Foltz Jeremy D. Foltz University of Wisconsin University of Wisconsin Dept. of Ag. &Applied Dept. of Ag. &Applied Economics Economics Program on Agricultural Program on Agricultural Technology Studies Technology Studies
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Consumer Valuation of rBST-free and Organic Milk Jeremy D. Foltz University of Wisconsin Dept. of Ag. &Applied Economics Program on Agricultural Technology.
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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
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%
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
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 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