Monsanto, Lawsuits, and Economics

​It appears that a Monsanto lawsuit (Bowman v. Monsanto) will be making its way to the Supreme Court sometime this summer (HT: Tyler Cowen).  At issue is a case brought by Monsanto against a farmer who (presumably and unwittingly) planted seed with Monsanto's protected biotechnology.  The key issue appears to hinge on whether Monsanto owns the progeny (i.e., the "kids")  of the original seed it sells, and whether farmers can replant the progeny of seed originally bought from Monsanto without paying a technology fee.    

Much has been said about the potential impacts of the lawsuit.  I don't know whether the suit has any merit.  I'm not a lawyer.  But I am an economist, and much of what has been said about the impacts if Monsanto loses are just plain wrong.    ​

The Business Week story on the issue quotes a professor at Washington State University’s Center for Sustaining Agriculture and Natural Resources who says.

If it’s overturned, it will have cataclysmic repercussions for the business model in the seed biotech industry,” Benbrook said by telephone. “It would basically end the agricultural biotech industry as we know it, certainly for soybeans.

Hardly.  ​As my colleague Bailey Norwood rightly pointed out to me after reading the story: What do you think will happen to the price of the first generation seed if farmers are able to freely replant the progeny?  

As Steven Landsburg points out in his wonderful (and recently re-released) book The Arm Chair Economist the indifference principle must always be at work.  The principle suggests that at current prices, (the marginal) farmers must be indifferent to buying Monsanto seed given that he cannot replant the progeny and must buy seed again next year.  However, if the Supreme Court rules that Monsanto does NOT own the progeny, then the value of the seed to farmers rises since they can re-use the seed.  The marginal farmer is no longer indifferent.   For the indifference principle to hold (i.e., for equilibrium to be restored), the price must rise.  Monsanto will charge more for it's initial offerings if farmers can freely replant.      

As an analogy, consider the market for textbooks.  Bailey and I wrote an undergrad textbook on Agricultural Marketing and Price Analysis a few years ago (in which we somewhat ironically discuss the indifference principle).  Buying a new copy of the book is pricey (Amazon.com has the current price of a new copy at $97.41).  What do you think would happen to the price of the initial offering of the textbook (i.e., the price of a new copy) if Bailey and I (and the publishers who actually sets the price) could receive royalties when the used textbook is resold in bookstores after the semester?  The initial price for a new book would almost certainly fall.  

The Monsanto case is simply this example working in reverse.  

Agricultural Marketing and Price Analysis

$97.41

By Bailey Norwood, Jayson Lusk

Buy on Amazon

What are Voters Willing to Pay for Food Labels?

Several months ago, I published a study in the journal Food Policy entitled The Political Ideology of Food.  The results, which suggested most people want more food regulation, were picked up in a variety of outlets such as the Food Navigator and Reason.com.

In responding to media inquiries about the study, I consistently told reporters something along the lines of the following: I’ve done lots of surveys like this over the years and one of the things I routinely find is that people appear much more favorable of regulation and labels in hypothetical surveys as compared to when real money is in the line.  In fact, I indicated at the end of the paper:

One important factor that our survey did not address is whether public support for
food and agricultural policies will remain high when people are made more aware of the specific costs of government action in this area. Many economists, including myself, have been critical of many of the policies this sample of consumers found so favorable, in part because it does not appear the benefits outweigh the costs. Only time will tell whether economic analysis on these matters will have any influence on the public’s ideologies with respect to food.

This insight is particularly relevant to the study we released earlier this week on Californian’s desire for mandatory labeling of genetically engineered foods.   In that study, we found a whopping 76.8% of likely voters said they intended to vote in favor of Prop 37 and the mandatory labeling policy.  Yet, when we followed up and asked people if they would still be in favor if food prices increased as a result of the policy, a different story emerged. 

Below is a graph of the percentage of the percentage of Californians projected to vote yes as the costs of the policy increase.  Citizen’s support for regulation is indeed price sensitive.  As the graph shows, at a food price increase of more than 11.9%, in fact, Prop 37 looses majority support.

Our research has been covered in a varied of blogs and media outlets (e.g.,here, here, and here).  And a few stories, such as the one over at Take Part, argue that the actual cost of Prop 37 will be far less than the 11.9% “break even” point.  As a result the author posits that:

But perhaps the most important detail—one that the survey didn't discuss and likely many voters don't know—is that the cost of food prices will be much smaller than 25 percent, much closer to a number which is almost negligible. 

Could be.  But it is it is important not to confuse cost with demand.  We were not measuring the costs of Prop 37.  We were measuring the price point at which people would be indifferent.  Those are two different things.  Though, the author is correct to say that if you analyze the demand for Prop 37 at the low price they assume (about 0.1%), then yes you’d still project strong support.  The costs have be highly debated and it isn’t particularly constructive to rehash those arguments here.

One thing I will point out in relation to the survey results is that economic research on how people respond to surveys suggests that the tend to over-estimate how much they are willing to pay for policies.  One widely cited review study, for example, showed that the amount people said they were willing to pay in hypothetical surveys was about three times what they were actually willing to pay when money was on the line.  Applying that insight to our analysis reveals that the “true” break-even price is probably something closer to 11.9%/3 = 3.97%. 

That said, we also have to remember that people don’t actually have to pay the price of the policies they support at the poll like they do when they’re shopping.  The result is that the costs of policies often get overlooked when people vote.

Will All Consumers Avoid GE Foods?

Since releasing the results of our survey yesterday​ on how Californians intend to vote on Prop 37 regarding mandatory labeling of genetically engineered food, I've received several questions from reporters regarding how consumers will respond to GE labels if retailers choose to continue using GE ingredients.  I've previously written here and here on the difficulty in projecting how retailers  and food manufacturers will respond if Prop 37 passes.  

Relevant to the debate are actual research articles on how consumers respond to GE food labels.  Here are a few abstracts from academic papers on the topic. ​

I'll start with a paper by your's truly in Economics Letters in 2005​:

Non-hypothetical valuations obtained from experimental auctions in three United States and two European locations were used to calculate welfare effects of introducing and labeling of genetically modified food. Under certain assumptions, we find that introduction of genetically modified food has been welfare enhancing, on average, for United States consumers but not so for Europeans and while mandatory labeling has been beneficial for European consumers, such a policy would be detrimental in the United States.

I'll note that one of the places we collected data for that study was in Long Beach, California.  ​

Here's a paper​ in the journal Food Policy in 2011:

In 2005, the Swiss expressed their negative attitude towards genetic engineering in agriculture by voting in favor of a ban to use genetically modified (GM) crops in domestic agriculture. At the same time, certain GM food products remain approved but are not on offer since retailers assume that consumers would shun labeled GM food. In our study we tested this claim by conducting a large-scale field study with Swiss consumers. In our experimental design, three clearly labeled types of corn bread were offered at five different market stands across the French and German-speaking part of Switzerland: one made with organic, one made with conventional, and one made with genetically modified (GM) corn. In addition, we tested the consistency between purchasing decision at the market stand and the previous voting decision on GMOs in 2005 by means of an ex-post questionnaire. The results of our discrete choice analysis show that Swiss consumers treat GM foods just like any other type of novel food. We conclude from our findings that consumers tend to appreciate transparency and freedom of choice even if one of the offered product types is labeled as containing a genetically modified ingredient. Retailers should allow consumers to make their own choice and accept the fact that not all people appear to be afraid of GM food.

Here is a paper in the journal Economics Letters in 2002​

We conducted an experiment to study the discrepancy between European public opinion and consumer purchase behavior with regard to genetically modified organisms in the food supply. We found that consumers are typically unaware of the labeling indicating GMO content.

the paper also concluded:​

This paper uses experimental economic methods to present evidence that the absence of a negative effect on demand in reaction to products containing GMOs is in large measure due to the fact that customers do not notice the labeling. Consumers appear not to note labels that they are not looking for in the first place.

​The same authors had a paper in the Economic Journal in 2003:

We elicit willingness-to-pay information for similar food products that differ only in their content of genetically modified organisms (GMOs). Participants in the experiment are a demographically representative sample of French consumers. 35% of participants are unwilling to purchase products made with GMOs, 23% are indifferent or value the presence of GMOs, and 42% are willing to purchase them if they are sufficiently inexpensive. The results contrast with surveys that indicate overwhelming opposition to GM foods. There is a surplus to be gained from the segregation of the market for food products into a GMO-free segment and a segment allowing GMOs.

How do Californians Plan to Vote on Prop 37?

​That is the question many in the food and agricultural community have been asking.  Because of a recent survey that Brandon McFadden and I just conducted, we now have a much more definitive answer.  

Here is the executive summary from our report, which we just released today.​  I will have more to say about the findings in future posts.

A new poll was conducted during September 20-27, 2012 among 1,003 Californians, 822 of whom were considered likely voters in the November 2012 election.  Respondents were asked about their knowledge, likely vote, and reasons for voting on Proposition 37 related to mandatory labeling of genetically engineered (GE) foods.  We also studied how respondents reacted to either a “vote YES” or “vote NO” commercial on Prop 37. 

A large majority of likely voters, 76.8%, indicated an intention to vote yes on Proposition 37.        

Among those indicating an intention to vote yes, 71% said the primary reason was because “people have the right to know what is in their food,” followed by 16% who said it was to “make the food supply safer.”  Among those indicating an intention to vote no, 35% said the primary reason was “to avoid higher food costs,” followed by 22% who said it was “because it will impose unneeded costs on farmers” and 17% who said it was “because genetically modified foods are not harmful.”

Despite the large majority of voters planning to vote in favor of Prop 37, several results suggest the potential for erosion of support in the coming month.

A follow-up question asked respondents with an intention to vote yes: “Would you still vote "YES" on Proposition 37 if you knew it would increase food prices by X%,” where the value X was randomly varied from 5% to 25% across respondents.  Upon the prospect of a price increase, 46% of respondents who previously said yes switched their intended vote to no.  Our statistically analysis reveals that Prop 37 will garner majority support at a food price increase lower than 11.9%, but for any price increase greater than 11.9%, more than 50% of likely voters will vote against the proposition. 

Half the sample was randomly assigned to a group shown a “YES Prop 37” commercial and the other half was shown a “NO Prop 37” commercial.  After watching the “YES Prop 37” commercial, the percentage of voters indicating an intention to vote yes was 77%, almost identical to the vote indicated prior to watching the commercial.  However, after watching the “NO Prop 37” commercial, only 59% indicated an intention to vote yes on Prop 37.  Thus, at least among the two commercials we considered, the “NO Prop 37” video was much more effective. 

Overall, California voters were highly uninformed about the use of genetic engineering in general and about Prop 37 in particular.   Only 43% could correctly identify the topic of Prop 37 out of six topics presented.  When asked what percentage of corn, soybean, and wheat acres were planted with GE varieties in the U.S., respondents indicated, on average, 48%, 47%, and 45% respectively (the reality is 88%, 93%, and 0%).  On average, voters thought 47% of products on grocery store shelves had GE ingredients.  When asked if any products sold by Coke/Pespi, Frito Lay, Kashi, and Kellogg contained GE ingredients, only 31%, 45%, 21%, and 41% answered in the affirmative.

Does Prop 37 Impose Zero Tolerance?

​A bit of a debate has heated up in reference to one of the provisions of California's Prop 37, which would require mandatory labeling of GE foods.

Parke Wilde at Tufts put up a post a few days ago​ in which he says:

The editorial, which was widely published in other newspapers, claims that the proposal has a zero-tolerance for accidental GMO content in foods that aren't labeled as containing GMOs. Such a policy would force producers of essentially non-GMO products to use the label "may contain GMOs," simply out of fear of litigation.  But the editorial is mistaken. The initiative rightly allows foods that do not intentionally contain GMOs to carry a "non-GMO" label. 

​The story was picked up by Michele Simon at the Huffington post, who took the opportunity to disparage several top-notch economists at UC Davis.  (in full disclosure, in a previous post, I too made the claim about zero-tolerance in reference to Prop 37).  

There seems to be very little room for reasonable debate here.  Proponents of Prop 37 say there will be trivial costs and no lawsuits.  Opponents of Prop 37 say the opposite.  Proponents point to the literal text of the law.  Opponents tend to point to the dynamic interactions between firms an consumers that may occur as (perhaps unintended) consequences of Prop 37.  Thus, both can claim to be "right" and the public is totally confused.  

I personally​ don't know what will be the ultimate consequences of Prop 37.  But, I think any reasonable person must go beyond a literalist interpretation of the proposition language if they want to understand the potential consequences.  In one of his most well-known books, Thomas Sowell argues that to really understand the economic effects of a policy, you have to move beyond stage-one thinking and ask "and then what happens?"

It is true Prop 37 doesn't literally force processors and retailers to adopt more expensive non-GE products but that may be the ultimate consequence (or it may not - but we have to keep open the possibility).  It is also true that Prop 37 doesn't literally impose zero tolerance but that may well be the ultimate consequence.  

Truth is we don't really know.  But, consider a possible chain of events at some point in the future.  Despite the wording of the law, some individual in CA tests and finds that a non-labeled product contains GE (ANY trace of GE no matter how small).  The manufacturer of the product is then sued.  Then, it would be up to the manufacturer to provide all the sworn statements of unintentional use of GE.  But, then how do you prove “unintentional” or "accidental"? This is especially when every farmer (who provides the sworn statement) knows there is some chance the seed they plant contains at least some small traces of GE.  Even if the manufacturer withstands the legal challenge, non-trivial legal costs must be incurred to prove innocence.  Moreover, if one reads the full text of the law, they can see  that after July 1, 2019, the exception for "unintentional" use disappears - making the tolerance effectively zero at that time, 

It is that sort of reading and reasoning that I think folks are referring to (or at least that I am referring to) when saying that Prop 37 imposes zero-tolerance.