Experimental Auctions - What's New?

It is hard to believe it’s been over a decade since my book with Jason Shogren on experimental auctions was first published. We’ve learned a lot and the field has evolved in the intervening years since this publication. As a result, I’m happy to announce a new review article, just released by the European Review of Agricultural Economics, on experimental auctions with Maurizio Canavari, Andreas Drichoutis, Rudy Nayga, and myself. Maurizio, Andrea, Rudy, and I have been hosting a summer school in various European locations on this topic ever since 2011, and our annual discussions have been very useful in thinking about works well and what doesn’t when conducting an experimental auction.

For readers of this blog who aren’t academic economists, you might be wondering: what, exactly, is an experimental auction and why would you want to conduct one? The motivation for the method comes from the widely known fact that people’s answers on surveys don’t always align with their behavior in a grocery store. A general rule of thumb is that the average willingness-to-pay one finds in a survey can be divided by two if one wants to know know what people will actually pay when money is on the line.

The problem is that we often want to know the value people place on times that aren’t regularly traded in a market, where real economic incentives are at play. An experimental auction solves the non-market problem by creating a market in a lab or online setting. An experimental auction involves people bidding real money to obtain (or exchange) real goods (typically food in my applications) in a type of auction with rules where people have an incentive to truthfully reveal their preferences.

Here’s the abstract:

“In this paper, we review recent advances in experimental auctions and provide practical advice and guidelines for researchers. We focus on issues related to randomisation to treatment and causal identification of treatment effects, design issues such as selection between different elicitation formats, multiple auction groups in a single session and house money effects. We also discuss sample size and power analysis issues in relation to recent trends in experimental research about pre-registration and pre-analysis plans. We position our discussion with respect to how the agricultural economics profession could benefit from practices adopted in the experimental economics community. We then present the pros and cons of moving auction studies from the laboratory to the field and review the recent literature on behavioural factors that have been identified as important for auction outcomes.”

For Ph.D. students, or anyone looking for a new idea to work on, I’ll note that the conclusions section has a slew of ideas for future research.

Time to give thanks for affordable and sustainable turkey

That’s the title of an article I just wrote for The Conversation.

Here’s the whole thing:

Americans will eat about 210 million turkeys this year, amounting to over 16 pounds per person. Much of that will be eaten on Thanksgiving Day.

Over time, our Thanksgiving meal has become considerably more affordable. Turkey will probably average about US$1.40 per pound across the country in November 2019, which is less than half the price consumers were paying for turkey in the 1970s in inflation-adjusted terms.

How has turkey become so much more affordable? It turns out there isn’t a single factor, but rather a web of innovations.

The truth about turkey

It’s worth dispelling a few myths about the turkey industry first.

All farm-raised turkeys are supposed to be hormone-free.

For one thing, turkeys aren’t given any added growth hormones – doing so is illegal. It’s also illegal to sell turkey with antibiotic residues.

Also, all turkeys are raised cage-free in large, open barns.

Why aren’t more turkeys raised free-range, which means they are allowed to move outside with some freedom? It might initially sound great for turkeys to live outdoors – unless it’s snowing or raining or above 100 degrees.

It might also be fine unless there are roaming hawks, coyotes, dogs – or even wild birds. In 2015, the turkey industry was devastated by avian influenza that cost producers $225 million. Many experts believe the outbreak was caused by the introduction and spread of the disease by wild birds.

Bringing turkeys indoors allows farmers to protect the animals from weather, predators and disease, and it also enables farmers to more closely monitor their diets and health.

Spending less, eating more

Due to innovations in housing and genetics, it now takes less time and less feed to grow a turkey to market weight than it used to.

In the 1970s, the U.S. raised an average of about 125 million turkeys per year and produced about 1.9 billion pounds of turkey meat each year, meaning each turkey produced a little over 15 pounds of meat. This year, the country is projected to produce almost 25 pounds per bird.

This has led to increased affordability for Thanksgiving meals, but it has also had important implications for sustainability.

Let’s suppose Americans want to enjoy the amount of turkey we will actually consume as a nation this year – about 5.3 billion pounds – but we wanted to do that using 1970s technology. How many more turkeys would we need today had we not innovated to increase the amount of meat per bird from 15 to 25 pounds?

The answer is 132 million more turkeys.

That’s 132 million more turkeys that would have emitted waste, created greenhouse gas emissions and required water and feed. Growing that extra feed would have required more land, fertilizer and pesticides.

We were able to save those extra 132 million turkeys because we were innovative and used scientific developments and trial and error to figure out how to satisfy the wants of a much larger population using fewer of our natural resources.

That’s something to be thankful for.

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.