Natural and Organic Craziness: It's not just food

My wife likes to buy cosmetics products from a company called Paula's Choice.  One of the things she likes about the company is that it reports on the scientific testing it does on its own products and that of its competitors. 

In any event, my wife alerted me to an interview with the company's owner, Paula Begoun, which I found fascinating.  It seems the cosmetics world is grappling with many of the same issues as the food world.

Paula was interviewed on radio by another cosmetic's industry insider: Karen Yong.  Here are some excerpts from the transcript when the discussion turned to "natural" and "organic" cosmetic products:

Paula Begoun:. . . On the other side of the coin one of the things many cosmetic companies have to deal with is the fear mongering around the evilness of cosmetic ingredients which I've written about extensively and I know you have opinions on.

How are the cosmetics companies, the Lauders, the Shiseidos dealing with this fear mongering that the organic natural cosmetic world is putting out there.

Karen Young:It's frightening and it's probably the biggest thing that I'm confronted with right now. I'll try to narrow it down a little bit because as you know it's a huge category.

Paula Begoun:Wait, you're not frightened about the ingredients, you're frightened by the influence…

Karen Young:The press.

and

And the other piece of that as you alluded to is the whole natural organic green-washing thing, which is so confusing that even those of us who are supposed to understand what's going on here, it's really, really difficult.

Paula Begoun:I'm often shocked by the women really do believe – I get asked it all the time. “Should I be scared of what I'm using. Is it killing me? And I'm using this natural product.” And I know what those products contain. That's what we do for a living here at Paula's Choice is we review everybody else's products and look at what the formulas are and what they contain and what they can and can't do for skin.

00:20:36And lots of natural ingredients that show up in natural products are bad for skin. And I'm looking at this woman telling me I'm so scared other products are killing me and I'm going, yeah, I know, but you're breaking out, your skin is red. I know what you're using isn't protecting you from aging, or sun damage, and on and on. And they're frightened of everybody else's ingredients except the company that is dong the fear mongering.

00:21:00Of course, they never tell you what problem ingredients their products contain, but, yeah, it's an insane – so, how are the Lauders and the Shiseidos, I mean, Lauder is not going to give up. They're not going to go all natural. They know that all natural isn't going to fly for skin. And lord knows an elegant product without silicone is almost impossible. And there's nothing wrong with those ingredients. What are they doing about this aside from I know that the industry went away from parabens.

and

Paula Begoun:Actually, you know, it's interesting, because one of the things that happens when you start making “all natural products” is you increase the need for higher levels of preservatives.

Karen Young:Preservatives!

Paula Begoun:And there aren't any so-called natural, although even the natural preservatives when you have to increase it that much, then you're getting irritation. Preservatives kill things. That's what they do.

Karen Young:Absolutely.

00:24:37You're getting irritation and possibly you're making it more difficult to stabilize the formula.

Paula Begoun:You know, we're just reviewing a product line that, you know, we haven't run into this in a long time. A lot of the natural product lines, while the formulas may have issues in terms of irritating ingredients and jar packaging and fragrance, and I'm going to ask you about jar packaging in just a second, but one of the things that we haven't run into in a very long time is a company claiming that it's all natural but it actually isn't, it actually uses synthetic ingredients.

00:25:15This is one of the first times in a while I would say in the past, I don't know, three, four years that we actually ran into a company that is lying through their teeth. Their products are about as natural as polyester. Do you see that – do you run into that in your research?

Karen Young:Yes.

Paula Begoun:Yeah, you see that, too.

Karen Young:Because as you know there is no definition for natural. It's completely arbitrary. You can use the word anyway you like. And consumers, as you mentioned earlier, consumers are incredibly confused about what does natural mean and what does organic mean. I mean, that theoretically is defined by the FDA and consumers really don't understand that either.

Real-world effect of soda taxes

A new study in the journal Health Economics by Jason Fletcher and coauthors examines whether variation in soda tax policies across states leads to differences in weight and obesity.  

First, the authors note previous work on the issue:

studies using data on individual-level consumption and within-state variation in actual tax rates have found no net measureable effects on population weight. For example, Fletcher et al. (2010a) find that increases in soft drink tax rates decrease soda consumption among children, but do not influence total caloric intake, as children increase their consumption of other high-calorie beverages. This finding is consistent with a similar lack of effects for adults (Fletcher et al., 2010b). Other research taking this approach finds mixed results, demonstrating that average weight in some high risk populations may be more susceptible to soda taxes (Sturm et al., 2010).

Then, they point out a potential problem with this line of research: the variation in tax rates across locations isn't large enough to tell us what will happen if a state passed a "large" soda tax - or whether there are "non-linear" effects:

one concern with the ability of the results from some previous studies to predict the consumption response to large taxes, such as the 18% tax proposed in New York in 2008, and a potential reason for the differences in the results from the various strands of literature is that the existing soda tax rates are too low to be meaningful to most consumers because the average tax rate in 2006 was approximately 5% (Sturm et al., 2010; Todd and Zhen, 2010). Implicit in this argument is that substitution effects would also exhibit a threshold effect, where at high enough soda tax rates, individuals would substitute towards no beverages or low-calorie alternatives (e.g., water).

What did they find?

First, we examine whether there is any evidence of non-linear effects of current soda tax rates, with the idea that if very large taxes could have relatively larger effects, then we should see evidence consistent with this hypothesis based on the larger tax rates in our data, which reach 12%. However, using a variety of specifications, we find no evidence of effects on use or weight for a nationally representative sample of adults.

Our second approach uses a new comparative case-study method that leverages the sudden and large tax increase found in Ohio in the early 1990s. This method creates a ‘synthetic Ohio’ based on a weighted average of states that are most similar to Ohio’s population BMI before the tax was raised. Outside of simulation methods, this is the most informative approach to understanding the potential impact of recently proposed taxes, and it suggests very little evidence that the large tax imposed in Ohio had any detectable effect on population weight. Together, our results cast serious doubt on the assumptions that proponents of large soda taxes make on its likely impacts on population weight.

March 2014 Food Demand Survey (FooDS)

The March 2014 release of FooDS is now out.

A few highlights:

• Willingness-to-pay for chicken (particularly chicken wings) was down and willingness-to-pay for pork was up in March relative to February.
• Consumers anticipate buying less beef, pork, and chicken in March than was the case in February.
• For the first time in the nearly year long period we've been running FooDS, GMOs became the issue consumers reported hearing the most about in the news.  Still, consumers were more concerned about issue like Salmonella, E. Coli, and growth hormones than GMOs.  

In March, we asked several questions related to consumers' price knowledge. Results reveal significant dispersion in the prices ($/lb) consumers report expecting to see charged for ground beef, chicken breasts, and pork chops.  

Only 13% of consumers reported shopping for groceries in only one store during the past month, suggesting some degree of cross-store price comparisons; however, almost 50% reporting using loyalty cards most of the time when grocery shopping.

What would Coase say about obesity externalities?

On my favorite podcast, EconTalk, Russ Roberts recently had an engaging discussion with Robert Frank about Ronald Coase's writings on externalities.  Having recently published a paper about externalities in food production, I couldn't help but apply some of their discussion to the topic of obesity.

The usual claim is that obesity creates an externality because of public health care costs (e.g., Medicare, Medicaid).  My health problem imposes costs on you because your taxes pay for my health problems.  There are good reasons for arguing that this sort of externality is not the type that gets economists up in arms: these are simply zero-sum transfers from the healthy to the sick that don't shrink the size of the pie.  When I try to explain that to people, I normally hear crickets chirp and see eyes glaze over.  That this is not an efficiency-reducing externality is true.  But, it is apparently utterly unconvincing.

Back to Econtalk.  Roberts and Frank discussed Coase's observation that externalities cause reciprocal harm, and many times it is tough to really know who is the offender.  If I play drums loud at night do I cause an externality on my neighbor?  Or did my neighbor create the externality by choosing to live next to me?  Coase's answer to this conundrum, it seems, was: "who cares"?

It doesn't matter who is to blame.  The key question is: what is the lowest cost way to alleviate the externality? It could be making my neighbor move.  It could be outlawing my drum set.  It could be requiring that my neighbor construct a sound-proof barrier.  Or, if we could negotiate, it might be me making side payments to my neighbor to let me play (or him paying me not to play).  By avoiding the offender/offendee mindset, a wide range of possible solutions emerge, many of which are likely lower cost than solutions that might initially come to mind.      

In discussions of obesity-related externalities, the implicit assumption is that the obese are the offender causing harm to the taxpayer (or more cynically, that food companies are causing harm to people who become obese, who in turn cause harm to taxpayers).  Coase's insights, however, suggest that taxpayers are also responsible for harm because they've put themselves in the way of the obese.  The externality wouldn't be there to begin with if taxpayers weren't picking up the tab.  

One really low cost way of resolving this externality is to have taxpayers refrain from picking up the tab for the obese (or at least make the obese pay some significant share of their cost).  Many people would find that solution reprehensible: how dare we get rid of Medicare/Medicaid?  Fair enough, but most private insurance plans impose at least some cost via the use of deductibles to avoid the problems of moral hazard (i.e., people behaving in a riskier way because they know they're insured), and yet by fully insulating people from costs, it seems we've moved in exactly the opposite direction with our public health care.  What about "progressive" public health care deductibles that vary with income?

Coase is perhaps best known for his argument that negotiation can resolve the externality dilemma.  This holds if transactions costs are low.  Frank argued in the podcast that when transactions costs are high, and it is unlikely the affected parties can negotiate, the best public policy solution is to try imagine what would happen if people were able to negotiate.  What would this negotiation look like for obesity externalities?  

One party, "the government" might say: "Tell you what, I'll pay your health care costs if you'll just eat the way I tell you, and if you don't, I'll increase the price of many of the foods you like to eat until you eat the way I want you to."  Some people might take that deal.  Others, I suspect, would respond: "just leave me alone."  

Another conversation.  "The obese" might say:  "Tell you what, I'll promise to eat the way you want me to and I won't complain about public policies affecting my tab at the grocery store if you'll just pay my health care costs."  Some tax payers might say "ok."  Other taxpayers, I suspect, would respond: "just leave me alone."

Why are beef prices so high?

If you've been down the meat aisle in the grocery store recently, you might have noticed that beef is getting pricey.  Indeed, cattle prices have recently been near historically high levels in recent months.  For some perspective, here are inflation-adjusted retail meat prices since January 2000 (these are monthly USDA data compiled by the Livestock Marketing Information Center and the USDA-ERS; final data point is January, 2014).  

As you can see, real beef and pork prices are higher now than they've been in at least 15 years (and that means they're substantially higher in nominal terms).

As the graph reveals, starting in about 2010, beef and pork prices began to rise, although the rate of increase has been faster for beef than for pork.  Over the same time period, chicken prices have remained relatively constant, and are actually slightly lower in real terms today than in the early 2000s.  

The graph above masks what has been happening in the last few weeks and months.  On that issue, here is a graph from the Livestock Marketing Information Center showing wholesale boneless beef prices (fresh, 90% lean - mainly used in ground beef) in recent weeks.  As you can see, 2013 prices were above the 2008-2012 average, and 2014 prices are much higher still.

What is happening that has caused the run-up in beef prices?  

The answer to that question is a dissertation topic unto itself, but here are a few rough thoughts:

• I don't think the answer is primarily on the demand side.  Despite all the negative publicity for meat products (from media coverage of food safety, animal welfare, global warming, health, water use, etc. etc.), estimates from our Food Demand Survey and from the demand indices compiled by Glynn Tonsor at Kansas State suggests relatively stable to slightly increasing demand.  Higher demand will tend to pull up prices, but I don't think the demand changes are anywhere near large enough to explain the price rises.
  • Increased demand for meat products from other countries might tell part of the story, and although there has been a general rise in beef exports in recent years, it also doesn't seem big enough to explain the trend.
• That leaves supply-side issues.  Cattle inventories are at their lowest level since the 1950s. Because of technological advancement, we don't need as many cattle today today to produce the same amount of beef as we did in 60 years ago.  Still, fewer cattle numbers means less beef, and less beef supplied means higher prices.  Contraction in cattle supplies can be explained by a number of factors, such as drought in the plains states that limited the amount of grass and hay available and higher feed (mainly corn) prices due to drought, ethanol policy, etc., which pushed pushed more cattle to slaughter several years ago, leading to smaller inventories today.  Feed prices have now come down off their highs but cattle prices are still rising, partially because producers are holding back breeding stock to rebuild inventory.  Still, if high feed prices were THE answer, I would have expected chicken prices to rise in tandem with beef and pork (at least over part of the period), but as the above graph reveals, they didn't.
• It is also worth noting that on the supply side, the beef industry has stopped using technologies that previously generated more meat from each animal.  
  • The industry largely moved away from using lean fine textured beef (LFTB - aka "pink slime") in March 2012.  It has been estimated that not using LFBT is akin to reducing the cattle supply by about 1 to 1.5 head million annually.  So, removal of LFTB had an effect of further reducing supply on top of the other aforementioned factors.  One study suggests that removal of LFTB increased ground beef prices by about 3.5%.  Here is a recent TV news story about the role of LFTB and beef prices (I was happy to see they interviewed Kate Brooks from University of Nebraska - one of my former students).
  • The industry also moved away from using the beta-agonist, Zillmax.  According the the product's manufacturer, Zilmax added 24-33 lbs of additional hot carcass weight.  Multiply that by millions of head of cattle, and that's millions of pounds of beef that are now "missing" relative to a year or two ago.  
• On the pork side of the equation, there is a lot of concern about the porcine epidemic diarrhea virus (PED), which is kills young pigs.  It is yet unclear what effects it may be having, but speculation suggests it might be tightening supplies and pushing up pork prices.  This is a relatively recent phenomenon and can't explain the 2010-2011 increases.

Addendum:

Scott Irwin sent me a note with a couple links to posts at farmdocdaily, which touch on these same issues.  First, he noted (in a post almost four years ago!) that the corn/soy prices then were likely to lead to much higher livestock prices.  So what we are seeing now may be the fruition of this longer-term adjustment.  Second, Chris Hurt posted on March 3 about PED, and it does appear to be a big deal - hog futures are at record levels.  Chris concluded:

At the farm level, current futures markets are suggesting a live price for 2014 at a record high of $73 per hundredweight compared to $64 last year. This will provide record high industry revenues and the highest profit per head since 2005.

Who is going to pay for these record high pork producer revenues? Unfortunately, the consumers of pork are expected to be large net losers from PED-V as they will have to pay record high retail pork prices and also have less pork availability.