Breakfast Cereal Economics 101

Yesterday evening I happened to be in the gym while the NBC nightly news was playing on a  screen above my treadmill.  A video of the segment is embedded below.

The premise of the story is that the price of breakfast cereal is on the rise.  As the reporter put it, "sticker shock in the cereal aisle.  The morning staple is getting more expensive."

The story reported that over the past five years, the price of a pound of cereal has increased $0.20 to $3.09.  That doesn't seem like an enormous increase to me.  That works out to a 6.9% price increase over 5 years - or just a 1.4% increase per year (if the price of cereal rose at the same pace as the overall rate of inflation, we'd expect it to have risen by roughly the same amount as it actually has over the past five years).  But, let's leave that aside for now.  I want to focus on the economic arguments made in the piece.

The story says that consumption is down 7% over the same time period.  So far so good.  Prices rise, consumption falls, showing the demand curve is downward sloping.  In econ-speak, we'd say there was a movement along the demand curve.

Where the story runs off the rails is when trying to discuss the causes of the price "spike".  They say "shoppers are looking for healthier and faster food.  They've gone to Greek yogurt, they've gone to power bars, . . ."  The story talks about cereal brands trying to become healthier by adding fiber and cutting sugar.  Then the key phrase at the 1:33 mark:

“As the demand for cereal falls . . . ”

Here's the problem: as we teach in Econ 101, if the demand curve falls (or shifts inward) because of health concerns or change in the price of substitutes then the price will also fall.  But, the whole NBC story was motivated by the fact that cereal prices are rising not falling.

Unless something is happening on the supply-side, falling demand cannot occur at the same time as rising prices.  Either NBC got the facts wrong (cereal prices aren't falling in real terms) or they got the explanation wrong (cereal demand isn't falling but rather the supply curve was shifting).  I suspect the they also did what a lot of students in our intro classes do: they confused a movement along the demand curve for a shift in the demand curve.   

Consider this a friendly lesson in cereal economics 101.

End of Doom

Ronald Bailey has an excellent piece in the October print edition of Reason Magazine entitled, "The End of Doom" and a recently released book with the same title.  It's a nice counterweight to the oft-heard refrain that the world is going to hell.  

Here are a a few quotes I found particularly interesting.  In critiquing Rachel Carson's Silent Spring:

“At its heart is this belief: Nature is beneficent, stable, and even a source of moral good; humanity is arrogant, heedless, and often the source of moral evil. Carson, more than any other person, is responsible for the politicization of science that afflicts our contemporary public policy debates.”

In discussing our out-sized fears of cancers from synthetic chemicals and of biotechnology:

“It should always be borne in mind that environmentalist organizations raise money to support themselves by scaring people. More generally, Bonny observes, “For some people, especially many activists, biotechnology also symbolizes the negative aspects of globalization and economic liberalism.” She adds, “Since the collapse of the communist ideal has made direct opposition to capitalism more difficult today, it seems to have found new forms of expression including, in particular, criticism of globalization, certain aspects of consumption, technical developments, etc.””

He ends with some choice words about the precautionary principle.  

“Why does it matter if the population at large believes these dire predictions about humanity’s future? The primary danger is they may fuel a kind of pathological conservatism that could actually become a self-fulfilling prophecy.”

and

“The precautionary principle is the opposite of the scientific process of trial and error that is the modern engine of knowledge and prosperity. The precautionary principle impossibly demands trials without errors, successes without failures.

...

”An indirect implication of trial without error is that if trying new things is made more costly, there will be fewer departures from past practice; this very lack of change may itself be dangerous in forgoing chances to reduce existing hazards.” ”

Glutton free

One of my friends and colleagues was recently traveling through northern California and stopped to eat in a restaurant that presented the following menu:

Back in the 14th century you could buy indulgences from the Catholic church.  I'm amazed that assuaging the sin of gluttony has fallen to an all time low of just $0.75.

History of US Wine Industry

This article by Clare Malone offers a fascinating look at the history of the U.S. wine industry.  Here's one tidbit about Teresa Carrara an Italian immigrant who married a man named Franzia and who was mother-in-law to Ernest Gallo.  Seems she's  responsible for a huge chunk of today's U.S. wine production.

““She provided the seed money for Gallo, which probably does 40 percent of the wine business in the US; for our company, which does about 15 percent of the wine business in the US; and then her grandsons—yes, grandsons: Fred and Joe and John—started the Bronco Winery, which probably does another five percent of the business in the US,” Arthur Ciocca, former CEO of the Wine Group, remarked in a 1999 oral history project on the California wine industry for the University of California at Berkeley. “[She’s responsible for] more than half of the wine business [in the US].””

And there's this, and much more

“Towards the end of Prohibition, California winemakers began to advocate for certain changes in regulation that would drastically alter their business structure and possibly put their lives at risk—they wanted to ship juice.

In 1929 they got their wish when the federal government overrode stipulations in the Volstead Act—the era’s defining policy—that outlawed selling grape juice concentrate. This was good news for California farmers, but bad news for the Chicago mob. One key ingredient to bootlegged wine was the syrupy juice derived from grapes—grapes that Capone’s network had, until the law was overturned, controlled.

The gangster was enraged and issued death threats again certain growers and shippers. The problem was big enough that the FBI decided to investigate, and Joe Gallo was on a list of grape shippers to be interviewed by authorities”

Food Demand Survey (FooDS) - September 2015

The September 2015 edition of the Food Demand Survey (FooDS) is now out.

Compared to last month, consumer willingness-to-pay (WTP) fell for all the products (meat and non-meat alike) on our survey.  Among meat products, WTP for deli ham witnessed the highest percentage decrease of approximately 21%.  Steak only saw a slight decrease from last month at approximately -2.5%.  

These reductions in WTP might seem problematic for meat industry participants but it is useful to put these in a longer context.  WTP for steak, chicken breast, deli ham, and chicken wing are all higher relative to this time last year. Here is a graph of the WTP values since the beginning of FooDS.  While there are ups and downs, the overall trends are positive for each of the meat cuts shown below, and in fact, last month was the highest WTP observed for several meat products since we started the survey over two years ago.   

We observed a noticeable uptick in consumer awareness of Salmonella in the news this month - likely a result of widely publicized Salmonella outbreaks.  Interestingly, however, concern for Salmonella did not increase this month compared to last.  Concern for GMOs was down a bit this month.  

Several new ad hoc questions were added to the survey this month.

One set of questions related to food waste.  These will be reported separately at a later date.

Another set of questions dealt with consumers’ satisfaction with farmers and agriculture, and the survey was designed to see how the framing affected satisfaction.  The questions came about after a conversation with Mary Ahearn at USDA-ERS. 

Respondents were randomly allocated to one of three conditions.   In the 1st condition, participants were asked: “How satisfied are you with the decisions and manage practices of farmers these days?" Respondents in the 2nd condition were asked the same question but the words “of farmers” were replaced with “of agricultural producers”.  Respondents randomly allocated to the 3rd condition were asked the same question but the words “of farmers” were replaced with “in agriculture”.  

All responses were on a 1 to 10 slider scale where 1 was “completely dissatisfied” and 10 was “completely satisfied.”

Overall, respondents were more satisfied than dissatisfied with farmers, producers, and agriculture, with means higher than 5 our of 10 for all three.  However, respondents were affected by framing.   On average (on the 1 to 10 scale), there was greater satisfaction with “farmers” at 6.63 than for “producers” at 6.29 and than for “agriculture” at 5.93.  

Whereas almost 10% expressed 10=completely satisfied for “farmers”, only 5.8% said the same of “agricultural producers”, and only 5.5% of “agriculture.”  Here's the entire distribution of responses.