Milk - Differentiation and Substitution

This article in the Wall Street Journal has some interesting data and anecdotes about the rise of Fairlife Milk - an ultrafiltered, branded milk product that has more protein and less sugar than regular milk. Apparently sales of Fairlife are up 30% over the past year, and that’s in spite of some negative publicity about some animal welfare issues over the same time period. What’s interesting about the article is that we are likely to see similar trends in mean animal protein markets in the coming years - the push to differentiate and the rise of unexpected competitors.

As the article makes clear, the rise of Fairlife has been quick and surprising. Fairlife now commands about 3% of the dairy-milk market, just a bit less than Horizon, the largest organic milk brand, which has been on the market for 30 years and has a market share of 3.7%. I suspect not many would have guessed 5 to 10 years ago, that the hottest selling milk brand would make its mark based on a technology-enabled nutritional profile as opposed to sustainability/animal-welfare claims.

As for unexpected competition, I’m heard folks in the dairy industry complain about competition from plant-based sources such as almond milk and soy milk, but according to the article:

“... in the last four years, when milk sales fell by 330 million gallons, plant-based milk sales increased by only 60 million gallons.

The sector lost 270 million gallons elsewhere.

The likely culprit? Water.

“We’re losing over 50% to bottled water,” Mr. Ziemnisky said. “No. 2 is ready-to-drink coffee.” In addition, Americans are eating less breakfast cereal, accounting for about 25% of milk’s decline.”

Consumer beliefs about healthy foods and diets

That’s the title of a new article I just published in the journal PLoS ONE. This is an exploratory/descriptive study with the aim of probing consumer’s perceptions of the term “healthy” in relation to food. The study is motivated by the fact that the FDA regulates the use of the term on food packages, and is in the process of reconsidering the definition. Here are some of the key results:

“Consumers were about evenly split on whether a food can be deemed healthy based solely on the foods’ nutritional content (52.1% believing as such) or whether there were other factors that affect whether a food is healthy (47.9% believing as such). Consumers were also about evenly split on whether an individual food can be considered healthy (believed by 47.9%) or whether this healthiness is instead a characteristic of one’s overall diet (believed by 52.1%). Ratings of individual food products revealed that “healthy” perceptions are comprised of at least three underlying latent dimensions related to animal origin, preservation, and freshness/processing. Focusing on individual macronutrients, perceived healthiness was generally decreasing in a food’s fat, sodium, and carbohydrate content and increasing in protein content. About 40% of consumers thought a healthy label implied they should increase consumption of the type of food bearing the label and about 15% thought the label meant they could eat all they wanted.”

One part of the analysis focuses on parsing out the correlations between the healthiness rating consumers placed on different types of foods . Below are three dimensions of 15 food’s healthiness ratings as determined by factor analysis.

Here’s the portion of the text describing these results:

“The first factor (explaining 54% of the total variance), shown on the vertical axis of the bottom panel of Fig 3 shows all animal products with high values and other non-animal products with lower values, suggesting consumers use animal origin as a primary factor in judging whether a food is healthy. A second factor (explaining 31% of the total variance), illustrated on the horizontal axis of the top panel of Fig 3, has canned and frozen fruits and vegetables with the highest values, bakery and cereal items, candy, and fresh fruits and vegetables with mid-to-low values, and animal products with the lowest values, which seems to suggest consumers use degree of preservation as another dimension of healthiness. Finally, the third factor (explaining 22% of total variance), illustrated on the vertical axis of the top panel and the horizontal axis of the bottom panel of Fig 3, indicates freshness or degree of processing is another dimension to healthiness evaluations. These results indicate that healthiness is not a single unifying construct, but rather consumers evaluate healthiness along a number of different dimensions or factors. A food, such as beef or fish, can be seen as scoring high in some dimensions of healthy but low in another.”

There’s a lot more in the article.

Senate Hearing on Livestock and Poultry Issues

Yesterday I had the opportunity to testify before the U.S. Senate Committee on Agriculture, Nutrition, and Forestry in a hearing about livestock and poultry. A video of the entire hearing is here. My written testimony is also at the link. For convenience, I’ve also reproduced it below.

Chairman Roberts, Ranking Member Stabenow, and Members of the Committee, thank you for inviting me here today.  I serve as Distinguished Professor and Head of the Agricultural Economics Department at Purdue University, and I will focus my remarks on six economic issues currently facing livestock and poultry industries: global protein demand and trade, mandatory price reporting, competition, labor, animal disease, and the need for innovation.

 Population and income are two key drivers affecting demand for meat and poultry. Slow population growth and concerns about an economic slowdown indicate the potential for depressed meat demand in this country.  Health, environment, and animal welfare criticisms, coupled with emerging plant- and lab-based competitive alternatives, are also significant headwinds. 

 These factors suggest that meat demand growth is largely expected to occur outside the United States.  Having access to consumers in other countries has become increasingly important to the livelihood of U.S. livestock and poultry producers. The U.S. exported about 12% of beef, 22% of pork, and 16% of poultry production last year.  It is in this context that trade agreements are important to help open markets for US producers to allow products to flow to consumers who value them most.

 Some U.S. producers have expressed concerns about the competition from imports, but the U.S. is a net exporter of meat and poultry products, and the types and qualities of meat we import tend to differ from what we export. There have been some calls to renew Mandatory Country of Origin Labeling (MCOOL).  Congress repealed MCOOL for beef and pork in 2015 to avoid more than $1 billion in retaliatory tariffs after a protracted legal battle with other countries before the World Trade Organization.  Our survey and experimental research suggests many consumers indicate they are willing to pay premiums for U.S. meat products; however, research also shows few consumers were aware of actual origin labels when grocery shopping, and analysis of grocery store scanner data did not reveal any significant changes in consumer demand for beef or pork after the implementation of MCOOL.  Meat demand indices indicate, if anything, beef and pork demand has increased after the repeal of MCOOL.  Cattle prices fell shortly after the repeal of MCOOL, but this is largely explained by an increase in cattle inventory that happened to coincide with the labeling policy change.  To the extent consumers are truly willing to pay a premium for U.S. labeled meat that exceeds the costs of tracing and labeling, there remain opportunities for private entities to take advantage of this market opportunity.

 The current authority for Livestock Mandatory Reporting (LMR) is set to expire in 2020.  LMR was designed to improve transparency, facilitate market convergence, and reduce information asymmetries.  Despite these laudable goals, academic research on impacts of LMR is mixed.  Shortly after its initial passage in 1999, surveys of cattle producers suggest expectations about the impacts of LMR may have been overly optimistic.  Some concerns have been expressed that LMR might facilitate rather than curtail anticompetitive behavior among packers.  However, evidence indicates LMR helped facilitate integration of regional markets.  It is important for LMR to continue to modernize and be agile in response to the pace of change in the industry.  One challenge is the dwindling share of cattle and hogs sold in negotiated or cash markets, which typically serve as the base price in formula contracts.  There are significant benefits to formula contracts and more producers are voluntarily choosing this method of marketing over the cash market, but questions remain about the volume of transactions needed in the cash market to facilitate price discovery.  A benefit of LMR is the massive amounts of data provided to economists and industry analysts to help understand these and other market dynamics.   

 Last month, price dynamics following a fire at a packing plant in Western Kansas renewed discussion about packer concentration and potential anti-competitive behavior. Concerns about anti-competitive behavior in general must be evaluated on a case-by-case basis, and details about this particular case are still emerging in light of simultaneous market dynamics that were also at play.  Available evidence to date suggests the observed reduction in cattle prices and the increase in wholesale beef prices following the fire are not inconsistent with a model of competitive outcomes. An unexpected reduction in processing capacity reduces demand for cattle, thereby depressing cattle prices. The need to bring in additional labor to increase Saturday processing and temporarily re-purposing cow plants for steers and heifers involves additional costs that pushed up the price of wholesale beef.  These price dynamics are not surprising and are generally what would be expected from the fundamental workings of supply and demand. 

 In general, a lack of availability of labor at processing facilities and in transportation have proved significant hurdles for the sector.  When processors are unable to secure sufficient workforce to operate facilities at capacity, there is the potential to reduce demand for livestock and poultry, which has much the same price effects witnessed after the Kansas fire.  

 I also urge the committee to pay close attention to emerging animal disease issues. African Swine Fever (ASF) in China has had a decimating impact on their hog herd and has increased their pork prices by almost 50%. The significant disruption to the Chinese hog supply has reverberated through global agricultural markets, reducing demand for U.S. soybeans and inducing substitution toward alternative proteins such as beef and poultry. While U.S. hog producers have been able to increase exports to China as a result of ASF, exports are not what they could have been had China not raised tariffs on pork.  It appears that ASF is spreading beyond China.  My calculations suggest that if an outbreak of ASF similar in relative magnitude to the one in China were to occur here, U.S. pork producers could lose about $7 billion/year and U.S. consumer harm would be at least $2.5 billion/year.  ASF is not the only animal disease concern, and an outbreak of foot mouth disease, discovery of bovine spongiform encephalopathy (BSE), or a return of avian influenza or Newcastle disease could have similar devastating impacts.  Thus, there is a need for additional funding for research to combat foreign animal disease. 

 There is also a need for funding to improve the productivity of the livestock and poultry sectors. Productivity growth is the cornerstone of sustainability.  For example, had we not innovated since 1970, about 11 million more feedlot cattle, 30 million more market hogs, and 7 billion more broilers would have been needed to produce the amount of beef, pork, and chicken U.S. consumers actually enjoyed in 2018.  Innovation and technology saved the extra land, water, and feed that these livestock and poultry would have required, as well as the waste and greenhouse gases that they would have emitted.  Investments in research to improve the productivity of livestock and poultry can improve producer profitability, consumer affordability, and the sustainability for food supply chain. 

What Food Policies do Consumers Like and Dislike?

I have a new working paper with Vincenzina Caputo in which we elicit consumers’ preferences for 13 different food policies. Here’s our main motivation (references removed for readability).

“A variety of food policies have been proposed, and in some cases enacted, in an effort to improve public health, environmental outcomes, or food security. Proposed actions include a spectrum of policies ranging from fiscal incentives/disincentives, bans, labelling programs, and passive policies such as subsides and investments in education. What food policy proposals do consumers prefer? While there have been numerous studies aimed at calculating the welfare effects of individual food policies it is difficult to easily ascertain the relative preferability of numerous policy options, even those that have the same objective (e.g., “fat taxes” and nutritional education both aim to improve public health). ”

We conducted a nationwide survey of 1,056 U.S. consumers who were asked to indicate the relative desirability of the following food policies.

Rather than use a traditional approach, where respondents are not required to make trade-offs between policies (e.g., people can approve of all policies or rank all policies as “very important”), we used the “best worst scaling” approach that requires respondents to make trade-offs. The approach requires respondents to answer a series of questions like the one below, where for each question, they have to indicate their most and least preferred policies.

The results are analyzed using a choice model that allows for preference heterogeneity. The main outcomes are below, reported as “preference shares” - i.e., the percent of people predicted to choose each policy as most preferable. Results indicate the highest levels of support for investments in agricultural research and requirements of food and agricultural literacy standards in public education. Fat, calorie, and soda taxes are the least popular. These preference shares provide a measure of intensity of preference in a population. Funding for agricultural research is 14%/8% = 1.75 times more preferable than symbolic nutritional labeling.

While the above results are useful in providing intensity of relative preferences, they do not indicate whether people would actually vote in favor of a policy. The table below shows the results of that question; the results largely align with the best-worse scaling approach. Fewer than one-third of respondents are in favor of these three tax policies.

There are a number of significant demographic correlates with policy preferences. Some are not surprising. For example, Nutrition Assistance (or SNAP) is more desirable to lower income vs. higher income households and Democrats vs. Republicans. As another example, soda taxes are less desirable among lower income households.

Funding for agricultural research was generally supported across all demographic categories except for age: older individuals were more supportive of funding for agricultural research than younger individuals.

The Cost of Slow Growth Chickens

I’ve had a couple previous posts on both the supply of and demand for slower growing chickens. There have been increasing calls for retailers to switch to slower growing breeds (often, older “heritage” breeds), with the presumptive aim to increase animal welfare and taste. The downside is that it is more expensive to produce chicken with these older breeds. The Journal of Agricultural and Resource Economics has now published a paper I co-authored with Nathan Thompson at Purdue University and Shawna Weimer, an assistant professor of poultry science at the University of Maryland on the costs for individual producers switching to slower growing breeds and the market impacts we project would occur if the entire industry did the same. This is an updated and peer-reviewed version of the paper I previously blogged about.

Here is the abstract:

“There has been substantial productivity growth in the broiler industry; however, high growth rates might adversely affect animal welfare, resulting in calls for slow-growth breeds. This research shows production costs are 11%–25% per pound higher for slower-growing breeds than for modern breeds, depending on the target endpoint. Breakeven wholesale price premiums needed equate net returns of slow- to fast-growth broilers range from $0.10/lb to $0.36/lb. Annual costs of an industry-wide conversion to slow growth are $450 million for consumers and $3.1 billion for producers. Consumer willingness-to-pay would need to increase 10.8% to offset the producer losses.”

Don’t like some of our assumptions? We’ve also created an excel-based tool that allows the user to change assumptions about input and output prices, as well as other model parameters, and see how costs and optimal days of feed change for faster and slower growing breeds. The tool dynamically updates figures like the one below. Try it for yourself!