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It’s Election Season – For Food Too. California Prop 12 Edition

At this point, you’ve probably seen enough campaign ads that you don’t need me to tell you that elections are around the corner. 

Among several food and agricultural issues up for vote this year across the country is Proposition 12 in California.  The official California voter guide has the following information on the initiative:

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If this feels like deja vu, you’re right. California votes passed a similar law in 2008 (Prop 2).  The new bill (Prop 12) goes further by explicitly specifying a minimum amount of space per farm animal and by requiring cage free production systems for egg laying hens by 2022.

Allison Van Eenennaam, animal scientist at UC Davis, has weighed in with her (critical) thoughts on Prop 12, and she pointed out the irony that the main donor against Prop 12 is an animal advocacy organization that would like the conversion to cage free to happen sooner than is required in this proposition.

I’ve received a few calls from reporters asking my thoughts on potential market impacts of Prop 12. I’ll share them here.

  • I’ve co-authored two papers on market impacts of the previous Prop 2 and the associated state legislation that went into effect in 2015 (see this paper with Conner Mallally and this one with Trey Malone). The paper with Conner showed a roughly 30% price impact of Prop 2 immediately after it went into place, an effect which fell to about 10% about a year and a half later.

  • There are reasons to expect Prop 12 to have smaller or larger effects than what we measured for Prop 2.

    • Why smaller? An increasing share of egg production, nationwide, is coming from cage free production systems (see data here), and if pledges by food retailers to go cage free are upheld, more than three quarters of the industry will be cage free by 2025. Moreover, a number of other states have passed laws to go cage free. Given these apparent trends toward increasing cage free, the effects of Prop 12 per se may be small. That’s not to say that egg prices won’t rise (they will), but that Prop 12 may not be the ultimate proximate cause.

    • Why larger? Well, retailer pledges may not be upheld and industry conversion to cage free has slowed. Cage free and organic combined are only around 17% of the total laying flock at present. Moreover, our previously estimated price impacts of Prop 2 occurred in a situation where producers did not have to undertake large capital investments. Producers could comply with the space requirements that resulted from Prop 2 by removing a hen or two from a cage. By contrast, Prop 12 will require entirely new housing systems, resulting in significantly higher conversion costs than did Prop 2.

  • If I was forced to make a guess about the effect size coming from a future study of the impacts of Prop 12 (a future study like the ones I conducted with Conner or Trey), I’d guess something around a 15-25% price increase in retail shell egg prices by mid-2022 relative to the counterfactual of no Prop 12.

  • There are other impacts of Prop 12 that are getting less attention but could have big impacts. In particular, Prop 12 would prohibit sales of pork from gestation crate systems. Because California relies on the rest of the U.S. for virtually all it’s pork, I could imagine situations in the short run where retailers have difficulty sourcing enough supplies that comply with the new regulation. If this seems far fetched, remember when Chipotle had to stop selling carnitas, and then, for at time, sold the pork dish with supplies that did not meet it’s guidelines? Another potential consequence, noted by Van Eenennaam is that Prop 12 would prevent “scientific and agricultural” research from studying animal behavior in conditions that don’t comply with Prop 12. It’s hard to quantify the impact of the inability to learn about certain research questions, but the impact isn’t zero.

Happy voting!

Trends in National School Lunch Program

Back in 2010, the U.S. Congress passed the Healthy, Hunger-Free Kids Act. The Act, championed by Michelle Obama, provided funding for free and reduced price school lunches and breakfasts, introduced a variety of new nutritional guidelines, and provided incentives for schools to offer healthier options.

The law went into effect at the beginning of the 2012-2013 academic year. There was a fair amount of initial push back. A video from these Kansas students protesting the calorie restrictions has been viewed more than a million times, and other students took to social media with photos of the new lunches using the hashtag #ThanksMichelleObama. This CNN article from 2017 provides some background and also reports on the efforts of a large school food service industry association to roll back some of the guidelines.

The new guidelines may well have generated some positive health benefits for students who ate school lunches. But, how have these policies potentially affected participation in the National School Lunch Program (NSLP)? Students are not required to eat the school-provided NSLP lunches. Students can bring food from home, go off campus, or find other substitutes at school.

I downloaded some data from the US Department of Agriculture (USDA), Food and Nutrition Service (FNS). These data show that in 2017, 4.89 billion lunches were served under the NSLP, with 73.6% being free or reduced price and the remaining 26.4% of students paying full price. How have these statistics changed over time?

As the figure below shows, there was a nearly linear increase in the number of lunches served each year in the NSLP right up until 2010, after which there was a slowdown and then a slow decline.

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The effects can be seen even more dramatically by converting the data in the above figure to annual percentage changes in the number of NSLP meals served. From 1990 to 2008, the school lunch program grew every year. Since 2011, the program has gotten smaller every year except in 2016. In the six years prior to the law’s enactment in 2010, there was an average annual increase of 1.4% in the number of NSLP meals served, but in the six years since the law’s enactment (from 2012 to 2017), there was an annual average decrease of -1.2% in the number of NSLP meals served.

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The data also suggest another interesting dynamic at play. Below is the percent of NSLP meals that are free or reduced priced. Throughout most of the 2000’s just under 60% of NSLP meals were free or reduced price. Since then, there has been a fairly steady increase in the share of meals that are subsidized. Given that the increase started prior to the enactment of the 2010 Healthy Hunger-Free Kids Act, it is likely that other factors (such as the Great Recession) were playing a role. However, there has continued to be an increase in the share of NSLP meals that are free or reduced price well after the recession ended.

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These data show there are fewer meals being served that fall under the National School Lunch Program umbrella and that students who pay full price have increasingly chose to eat meals not governed by the program.

The figures presented above do not causality prove that the 2010 Healthy, Hungry-Free Kids Act led to the decline in the meals served under the USDA National School Lunch Program, but they are interesting trends about which I was previously unaware.

Market Impacts of GMO Labeling

Readers might recall the result from the study Jane Kolodinsky and I published in Science Advances earlier this year. We found that the provision of mandatory labels in Vermont appears to have reduced opposition to GMOs in that state. However, as I noted at the time,

Our result does NOT suggest people will suddenly support GMOs once mandatory labels are in place.

Indeed, the data suggest consumers will still want to avoid products with GMO labels, which provides incentives for food retailers and manufacturers to find ways to avoid GMO ingredients.

Colin Carter and Aleks Schaefer just published an interesting new study in the American Journal of Agricultural Economics, which powerfully shows that mandatory GMO labels are already having significant market impacts. They found a creative way to explore this issue by focusing on the market for sugar. They provide the following background:

In the United States, sugar is produced from both sugarcane and sugarbeets. Sugarcane stalks are milled to produce raw sugar. Raw cane sugar is then sent to a refining facility to be transformed into refined sugar. Sugbarbeets, in contrast, have no raw stage; they are processed from beet to refined sugar in one continuous process. The U.S. market share for beet (cane) sugar is approximately 58% (42%). Almost all U.S. sugarbeet production is GE, while cane sugar is GE-free. However, sugar derived from beets is chemically identical to sugar derived from cane.

This summary data they provide on prices of sugar from cane and beet sources suggests “something” change around the same time as the Vermont mandatory GMO labeling law.

Source: Carter and Schaefer, American Journal of Agricultural Economics

Source: Carter and Schaefer, American Journal of Agricultural Economics

Here are the main findings.

Our analysis supports the explanation that the divergence in U.S. prices for refined cane and beet sugar was the result of Vermont’s mandatory GE labeling. The divergence occurred on or around July 2016— the month the Vermont Act took effect.

Counterfactual price estimates generated by a regression model suggest that GE food labeling initiatives generated a small premium for cane sugar and a price discount for beet sugar of approximately 13% relative to what prices would have been in the absence of such legislation.

These changes in raw ingredient prices will ultimately have impacts on retail food prices. All this is suggests that mandatory labels aren’t a free lunch.

No, Farm Policy Doesn't Have Much to Do with Obesity

Yesterday, David Ludwig and Kenneth Rogoff, prominent pediatrician and economist respectively, published an article in the New York Times about obesity.  The following is a passage from the piece.  

Farm policies have made low-nutritional commodities exceptionally cheap, providing the food industry with enormous incentive to market processed foods comprised mainly of refined grains and added sugars. In contrast, vegetables, whole fruits, legumes, nuts and high-quality proteins are much more expensive and, in “food deserts,” often unavailable.

The authors have already taken a bit of a beating about this on Twitter from the agriculturally-literate-intelligentsia. Why?  Because these sentences give the incorrect impression that farm policy is a major contributor to obesity.  That's not saying farm policies aren't inefficient, only that they do not have the effects many people claim they do.

Why would farmers support policies that would make commodities "exceptionally cheap" and thus lower their profits?  Yes, there are some policies that likely increase production beyond what would happen in an un-distorted market, but there are other policies that reduce production.  Take corn, for example, which is the largest agricultural crop in the U.S. in terms of value of production.  The existence of subsided crop insurance subsidies and commodity programs might increase the tendency to produce more than would otherwise be the case, but ethanol policies from the EPA re-direct much of that production to fuel rather than food. Moreover, there are countervailing policies such as the Conservation Reserve Program (CRP), which remove land from production.  In addition, sugar policies push the price of sugar up, not down.  

The authors also point to processed food as another big evil, but in so doing they (correctly) undercut the argument that farm policy is a major culprit.  How so?  Well, for every $1 we spend on food, only about $0.15 results because of the cost of the farm product.  The other 85% of the cost is from transportation, processing, packaging, marketing, retailing, etc.  As a result, changes in farm commodity prices have relatively small impacts on retail prices.  

Fruits and vegetables are indeed more expensive than many commodity crops, but that's because of biology not policy (see more on that here and here).  Here's what I wrote in one of those posts:

why do we grow so much corn, soy, and wheat in the U.S.? A primary answer is that these plants are incredibly efficient at converting solar energy and soil nutrients into calories (they’re the best, really the best). Moreover, these calories are packaged in a form (seeds) that are highly storeable and easily transportable - allowing the calories to be relatively easily transported to different times and to different geographic locations. Contrast these crops with directly-human-edible fruits/vegetables like kale, broccoli, or tomatoes. These plants are poor converters of solar energy to plant-stored energy (i.e., they’re not very calorie dense), and they are not easily storeable or transportable without processing (mainly canning or freezing), which requires energy.

If you don't believe me, there is a long literature by agricultural economists on this subject.  See this book by Julian Alston and Abby Okrent or these papers in American Journal of Agricultural Economics or Journal of Health Economics, the later of which was co-authored with Brad Rickard.  Other papers take entirely different approaches but arrive at the same conclusion.  See this paper in Food Policy by Corey Miller and Keith Coble or this one by Alston, Sumner an Vosti, also in Food Policy.

As for the efficacy of the other policies proposed by Ludwig and Rogoff, I'm skeptical of their efficacy in truly affecting obesity.  See this paper I recently published in Applied Economic Perspectives and Policy or my 2013 book, The Food Police.

Farmer's Share of the Retail Dollar - Enough Already

Every so often, the people seem to get excited about the farmer’s share of the retail dollar – particularly when USDA updates the figures or a news article mentions the issue.  A couple months ago, for example, the National Farmer’s Union issued a press release decrying the fact that farmers “only” receive 14.8 cents of every dollar consumers spend on food.  About the same time, the Food Tank put out this tweet.

The widespread implication seems to be that a lower share of the retail dollar is an unambiguous sign that farmers are worse off.  But one has very little to do with the other.  Let me try to illustrate with an example.   

Suppose there are two countries where the farmer’s share of the retail dollar differs dramatically.  In Country A, the share is only 10% and in Country B, the share is 90%.  So, when a consumer spends $1 on food, the farmer in Country A receives 10 cents and the farmer in Country B receives 90 cents.  On a dollar-spent-on-food basis, it thus looks like a farmer would much prefer to live in Country B than Country A.  But, let’s dig a little deeper.

Suppose the farmers in our two countries actually produce the same value of agricultural output.  To make the math easy, let’s say farmers in Country A produce $100 billion worth of ag output and farmers in Country B do the same. 

What are consumers in the two countries spending on food?  By definition, consumers in Country A are spending $100 billion/0.1 = $1,000 billion and consumers in country B are only spending $100 billion/0.9 = $111.11 billion. By definition, for a fixed value of ag output, a smaller value for the farmer's share of the retail dollar implies a larger total food economy. As I'll show in a minute, it matters a lot if you're selling into a $1 trillion market or a $111 billion market.

Why might consumers in Country A spend so much more on food than consumers in Country B despite the same volume of ag output in both countries?  Well, it could be there is more market power with greedy agribusinesses and retailers siphoning off profits in Country A than B (that seems to be the common layman’s interpretation).  But, it could also be that consumers in Country A have the preferences or ability to pay more for better packaging, increased food safety, better working conditions in food processing, more convenience (they pay the processor or a restaurant to do more of the preparation for them), etc.

So, what happens if there is a 10% increase in consumer demand for food in both Country A and Country B?  This could happen, for examples, if the populations increase in each country or if the respective food industries run advertisements or there are post-farm innovations that increase quality. 

Now, let’s construct a very simple economic model (such as the one we use in this paper), where, in both countries, the elasticity of demand is -0.8 and the elasticity of supply is 0.2, and the farm product is supplied to the retail sector in fixed proportions. 

In this situation, a 10% increase in consumer demand in country A (with only a 10% farmer’s share of the retail dollar) will increase farmers' profits by $29 billion.  However, in country B, where farmers “get” a full 90% of the retail dollar, that same 10% increase in consumer demand only increases farmers' profits by $8.8 billion.  So, for the same percentage increase in consumer demand, farmers in country A are more than 3x better off than farmers in country B despite the fact that their share of the retail dollar is only 10% instead of 90%. 

So, here’s a fundamental lesson: a small share of a big number can be much higher than a larger share of a smaller number.

Now, none of this means that one cannot construct scenarios in which producers are worse off when the farmer’s share of the retail dollar falls.  That’s easy to do too.  But, as I’ve shown here, I can easily do the opposite. 

The point?  Changes in the farmer’s share of the retail dollar are meaningless insofar as telling us whether farmers are better or worse off. 

Don't believe me?  Listen to other agricultural economists.  Here is Gary Brester, John Marsh, and Joseph Atwood and colleagues writing in a 2009 journal article:

We have empirically demonstrated that [the farmer’s share of the retail dollar] statistics and, by construction, farm-to-retail marketing margins, are not reliable measures of changes in producer surplus (welfare) given exogenous shocks to various economic factors … In fact, little or no accurate information is conveyed by [farmer’s share of the retail dollar] statistics … Consequently, these data should not be used for policy purposes.