Consumer Valuation of r. BST-free and Organic Milk Jeremy D. Foltz University of Wisconsin Dept. of Ag. &Applied Economics Program on Agricultural Technology Studies
Outline Introduction: n The valuation problem of GMO labels Price Premiums and Market Shares for r. BST-Free and Organic Milk Determinants of Consumer Demand n Estimates of Consumer Valuation Conclusions n What this means for the industry
Labeling and Product Introduction Controversies about GMO-free and organic labels n n Recent Monsanto suit against Maine dairy USDA organic label rules Product introduction in milk market is a labeling issue Do Consumers benefit from the introduction of labeled milk?
Typical Milk Labels Unlabeled Organic r. BST Free
A Different Approach to Consumer Valuation Studies Previous Research n n Survey data Experiments Our Approach: Revealed Preference n n Supermarket data on sales of milk in US by type (organic, r. BST-free, unlabeled) 260 weeks of data from 1997 -2002: Repeat purchases over time as the market changes and matures n Aggregate data from 12 major US cities
Average Milk Price by City
Average Market Share by City
Labeled Milk Prices: 1997 -2002 Big price increases for both r. BST-free and organic milk n n Organic milk increased 29% r. BST-free milk increased 46%
Prices by Year
Labeled Milk Market Shares: 1997 -2002 Market share increases n n n Five fold increase for organic milk 50% increase for r. BST-free milk, Market for r. BST-free peaked in 1998
Consumer Valuation of New Products Estimate consumer demand with demand system Calculate total benefit to consumer from new product introductions as: n n Variety Effect VE Competitive Effect CE
Variety Effect Benefits consumers get from having new products in the market. Most of benefit goes to consumers of new products But benefit exists even if you do not purchase a good. “More variety is better than less variety”
Competitive Effect Competition from new products reduces the prices of existing products Competitive effect = benefit consumers derive from lower prices
Competitive Effect Estimates Prices decreasing with n n number of brands presence of organic and rbst free brands Brand Introduction: an unlabeled brand drops average price only $0. 0012 per gallon. Effect of rbst-free and organic brand introduction is $0. 02 per gallon ( 1¢ for each)
Variety Effect Total variety effect of labeled milk: 17¢ per consumer per week Ranges from n n A low of 12¢ To a high of 27¢
Variety Effect Major differences between r. BST-free milk and organic milk in the variety effect Organic milk n n very high willingness to pay nearly 90% of variety effect) r. BST free milk: n n Low willingness to pay more Estimate that at $1 extra per gallon no demand for r. BST free milk
Yearly Value to U. S. Consumers of r. BST-Free & Organic Milk Yearly Competitive Effect: Yearly Variety Effect: n Average estimate n Minimum estimate $130 million $2. 5 billion $1. 6 billion Yearly Estimated Value to Consumers $ 1. 7 – $2. 6 billion
More Results Asymmetric substitution effect between unlabeled milk and both r. BST-free and organic milks Once you go organic you don’t go back r. BST-free “starter” or “gateway” milk n More likely to go to organic from r. BST-free
Conclusions Most of the valuation of milk labeling is from Organic not from r. BST-free n n GMO free element not most important part of consumer valuation Organic labeling worth a lot in milk
Conclusions Is r. BST free labeling worth the cost? n To industry? Individually? Collectively? n n To regulators? To consumers?
Consumer Valuation of r. BST-free and Organic Milk Jeremy D. Foltz foltz@aae. wisc. edu
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