How Will Food Companies Respond to Prop 37?

Three recent economic analyses have been released on the potential effects of Prop 37 in California, which would require mandatory labeling of genetically modified foods if passed in November.

Two analyses are by different groups of economists at UC Davis (Alston and Sumner and Carter et al.) and another by a consulting firm.  Each suggest potentially high costs and less consumer choice - exactly the opposite of that predicted by proponents of Prop 37.

The prediction (that Prop 37 will lead to high prices and less choice,) is based on a key assumption made by the analysts.  The assumption is that processors and retailers in California will not actually label foods and will instead substitute toward non-genetically modified ingredients.  The assumption is stated explicitly in the report by the consulting firm:

Based on experience in other parts of the world, review of the literature, and discussions with academic and business experts, we believe the most likely means of compliance for food companies is to substitute other ingredients for GE ingredients in their products. This means that companies would change the way in which they source ingredients or manufacture their products in order to avoid labeling their products with a vague and potentially frightening warning that conveys little meaningful information. 

Thus, most of the cost increase predicted in the studies is projected to come about from retailers and manufacturers choosing to use more expensive ingredients to avoid the label.

Is this what retailers will actually do?  Here are the reasons I’m not so sure:

• Many of the biggest donors supporting Prop 37 are organic and natural food companies.  To fork over millions of dollars in donations supporting the proposition must mean they believe it will help their bottom line, which will only happen if food firms actually label their products as containing genetically modified ingredients.

• Prop 37 would imposes zero-tolerance for accidental presence of biotech in food.  No country in the world (even Europe) imposes a zero-tolerance limit for their mandatory labels of genetically modified food.  Achieving zero-tolerance is practically impossible and extraordinarily costly. Food firms facing the chance of costly lawsuits may very well simply decide to label.

• Part of the reason there are virtually no GMO-labeled products in Europe (even though they are allowed) is because of competition between food companies.  It is a type of prisoner’s dilemma problem.  Even though all firms could make more money using GM ingredients, they choose to avoid GM because they know they’ll lose relative market share to competitors who don’t label.  Thus, they all avoid GM and no one labels.  The situation in California is different because, as mentioned above, the costs of falsely labeling will be much higher due to the zero-tolerance rule.  Moreover, consumer demand for the absence of GMOs in food is lower in California than in Europe, as my research shows.  This means the incentives for the sort of prisoner’s dilemma outcome are lower.  None of this is to mention the differences in markets structure of US and European in food retailing (the use of private labels in Europe is much higher and the retailers there exert much more influence on the entire marketing chain).

I do not think the arguments in favor Prop 37 are particularly strong, but I’m not entirely sure that the assumptions used  to project the costs of Prop 37 will ultimately match what happens if it passes.

Add​endum:  In the post above, I mention a study by Carter et al. in a way that inadvertently implied they argued that passage of Prop 37 would lead to firms avoiding the label by switching to non-GM or organic.  Here's what they actually say in their report:

Prop 37 would result in many products on the food shelf carrying a GM label. It might get to the point where there are so many products with GM labels that most consumers would just ignore the labels because they would be everywhere.

They seem to agree with my point that it will be hard for firms to avoid GE labels given the zero tolerance limit.   

Science vs. Consumer Sovereignty in Food

This from a forthcoming book chapter by Wally Huffman and Jill​ McCluskey:

The scientific consensus is that first-generation GM foods are equivalent to their conventional counterparts. However, on average, consumers want a discount in order to choose first-generation GM products over conventional products. Thus, the public’s perception of risks, rather than scientifically proven risks, that directly affect markets. This brings up the issue of scientific versus consumer sovereignty (Roberts, 1999). Although the scientific consensus is that GM foods are completely safe for consumption aside from potential allergens, it may still be the case that a majority of the population in a given country prefers to avoid GM foods. We find that information provision affect valuation and the source of information matters.

When people are informed about the science of biotechnology, they can become more accepting of GMOs in food.  Yet, this is hardly the only (or even the most persuasive) information confronting the food consumer.

Source: Huffman, W.E. and J.J. McCluskey. “Labeling of Genetically Modified Foods.” In P.W.B. Philips, S. Smyth and D. Castle, eds., Handbook on Agriculture, Biotechnology and Development. Northampton, MA: Edward Elgar Publishing, forthcoming. 

The Cost of Mandatory GMO Labeling

Not five minutes after posting on the potential effects of mandatory labeling genetically modified foods in California, I came across this release summarizing the recent work of Dan Sumner and Julian Alston, both agricultural economists at UC Davis. 

The bottom line: they estimate that Prop 37, if passed, would cost Californian farmers and food processors $1.2 billion. 

Although I understand the appeal of the “right to know” argument to the average consumer, what is less clear to me is why labeling of genetically modified food should, on economic grounds, be mandatory.  If the information is valuable to consumers, firms and farmers can profit by providing it.  And they have! 

There are already many voluntary labeling programs consumers can use if they wish to avoid biotechnology including organic and certified non-GMO labels.  Of course, these products are more expensive than conventional products – but that’s because they are more costly to produce.  But, it simply isn’t true that Californians do not have a choice to buy GMO or non-GMO foods.

Unintended Consequences of Mandatory Labeling of Genetically Modified Food

​This November when Californians go to the polls to vote for Romney or Obama, they will also vote on Prop 37.  If passed, the proposition will require mandatory labeling of genetically modified food.

Proponents of Prop 37 argue that Californians have a right to know what’s in their food, that it would be essentially costless for agribusinesses and food retailers to simply add a label, and that it would send a message to multinational agribusiness firms.  I’ll address the first two issues in future posts, but for now I’ll simply say that the presumption that labeling will somehow help small farmers and food processors is probably mistaken.  Increased regulation often increases the power of large incumbent firms (who can employ teams of lawyers and strategists) - much to the surprise and dismay of regulation supporters.

Here is what Dan Murphy at Drovers recently had to say about the issue:

If GMO labeling becomes a hot-button problem, the executives decided, it will hit heavier on smaller companies—just like nutritional labeling and HACCP and every other regulatory initiative put in place over the last several decades. All that does is thin out the competition for shelf space, since the added costs are more easily passed along to the end user by the category leaders, as opposed to manufacturers struggling to hold onto market share.