Food Processing Dashboards

In my last post, I mentioned the creation of the Center for Food Demand Analysis and Sustainability (CFDAS). As a part of the launch, we are releasing two dashboards to help describe the food processing sector in the United States and to illustrate how the sector has been affected by COVID-19. Thanks to Ahmad Wahdat for his excellent work in creating the dashboards.

The first dashboard (available here) describes the Food and Beverage Industries’ Value Added by U.S. States.

The U.S. food and beverage industries are the connecting link between the agriculture sector and the grocery retail sector. In a nutshell, the U.S. food and beverage industries buy raw inputs from farmers and sell final or intermediate products to both consumers and producers. This dashboard provides information on each industry’s production value, revenue, costs and employment. All such information is presented at the U.S. state level. Select one (or multiple) states or industries for customized information, and click on a state (within the map) to see geographic variation

The second dashboard is modeled off the Purdue Food and Agricultural Vulnerability Index, which we released over a year ago to provide estimates of farm worker illnesses from COVID19. The new dashboard, we’ve title Food and Beverage Industries’ COVID-19 Vulnerability Index by U.S. States and Counties, extends this analysis to the food processing sector.

This dashboard presents the estimated value of vulnerable production in food and beverage industries due to estimated COVID-19 cases among industry workers. Users can find information on estimated vulnerable production in the past 365 days and past 30 days; COVID-19 industry worker cases in the past 365 days and past 30 days; total industry jobs, and total payrolled industry establishments. This dashboard can display information both at the state and county level.

Users can select one (or multiple) industries for customized information. The U.S. map is presented with state-level view. However, users can click on the double down-arrow button to get a county-level view. We calculate the expected industry workers with COVID19 using real-time information on COVID19 cases.

Center for Food Demand Analysis and Sustainability

I’m happy to announce the formation of a new project I’ll be leading, the Center for Food Demand Analysis and Sustainability (CFDAS). The effort has been underway for a while and is made possible by the Purdue Next Moves initiative, in which the University invested in two initiatives, Plant Science 2.0 and the Digital Innovation in Agri-Food Systems Laboratory (DIAL), both of which house the CFDAS.

The purpose of the CFDAS is to create, interpret, and communicate data about consumer preferences and food markets to help consumers, farmers, agribusinesses, and policy makers improve the food system by making more informed decisions.

The investment in the food and food system space is motivated by several factors:

• For every $1 of farm production, consumers spend about $6 food. Thus, there are immense opportunities to add value by better tailoring farm production to consumer demands.

• U.S. consumer incomes have risen over time, and today only 8.6% of disposable incomes are spent on food. Thus, U.S. consumers can afford to demand new attributes from the food system.

• Digital agriculture, coupled with machine learning, AI, and blockchain, are creating the ability for vast amounts of information to be transmitted across the food supply chain. Thus, changes in consumer demand and pressures to adopt sustainability metrics will more quickly and profoundly impact food processing and farming in the future.

• The ability to design, produce, and deliver crops with specific attributes for specific consumer segments is emerging at a fast pace. Thus, understanding which attributes are most important to consumers and how purchase behavior will be influenced by information is critical for success.

• Existing sources of data about consumer demand and food markets are often released with significant delays, in arcane formats, and without context for actionable decisions. Thus, there is an opportunity to create a hub for timely, accessible data and insights about consumer demand, food markets, and sustainability.

CFDAS will create and disseminate information in four primary categories:

• Food Prices

• Food Production and Supply

• Consumer Food Spending

• Consumer Preferences, Attitudes, Knowledge, and Beliefs.

Data in each category will come from 1) existing public sources that are often in formats that are not easily digestible by the general public or media, 2) data that will be created by CFDAS – most notably by the launch of a new monthly consumer tracking survey, and 3) data that will be acquired through purchase or partnership with outside entities. These data will be used to create dynamic, auto-updating web dashboards which will be hosted on the CFDAS web page. These custom dashboards will be complemented with monthly reports disseminating information from the consumer tracking survey and social-media listening efforts. The CFDAS will serve as a resource for sister initiatives in Purdue Plant Sciences 2.0 and the Digital Innovation in Agri-Food Systems Laboratory (DIAL), as well as for external industry partners, and will provide periodic research reports summarizing data collection and analysis commissioned by these groups.

I’ve staffed up the Center and work is now underway. Have ideas or suggestions for us? I’d love to hear them.

Trade and Resilience

Stories continue to emerge about inflation and supply chain disruptions throughout the economy. When talking to reporters about these issues, I’ve routinely been asked questions premised on the idea that our dependence on imports and exposure to international markets and trade are partially at fault for the volatility. The stories about ships being backed up at ports, the increasing prices of containers, and shortages of truck drivers all contribute to this narrative.

However, my view is that a more localized world, less reliant on trade, is one - at least in the realm of food and agriculture - that would generally be more vulnerable to random supply shocks, not less.

Consider an extreme example. Imagine a small community, Isolationville, exists where the citizens eat only what is grown locally within the community. Now imagine an adverse shock. Perhaps Isolationville experiences a drought in the growing season, or a wildfire, or a flood. Or, a tornado wipes out all the greenhouses or food storage. Isolationville no longer has enough food to feed it’s citizens. Food prices will, as a result, spike in Isolationville. Maybe Isolationville can turn to it’s neighbors in it’s time of need. But if the disaster is climate or weather related, their neighbors’ food supplies are also likely to be adversely affected at precisely the same time Isolationville is in need. Moreover, if their neighbors are like Isolationville - only focused on internal needs - they haven’t planned to plant and grow more in anticipation of their neighbors needing help.

Now, imagine a different community, Cosmopolitanville. Citizens of Cosmopolitanville eat some of their food from local sources but also import food from all around the world. Suppose Cosmopolitanville experiences the same adverse shock as Isolationville - the drought, fire, flood, or tornado. What happens to food prices and food availability in Cosmopolitanville relative to Isolationville? Because Cosmopolitanville’s diet is less reliant on local conditions, it is also less prone to local supply shocks, and Cosmopolitanville will have less food price inflation and less food insecurity than Isolationville despite experiencing the exact same shock.

Seen in this way, trade can act as a form of insurance for food consumers against adverse local shocks. The old saying “don’t put all your eggs in one basket” applies here. Relying only on local production is literally putting all your eggs in one local basket. Of course the same problem would arise if Cosmopolitanville only imported food from a single foreign location. A more resilient strategy would entail trading with a large number of partners unlikely to be affected by the same adverse shocks.

One advantage of the agricultural world in which we live is that we have large globally-linked commodity markets for many products like corn, wheat, and pork. A disaster in any one geographic location may have an impact on the global prices of these products (depending on the locations size and production volume), but it will be muted by production in other regions. Moreover, the rising prices in an adversely affected location serve as the profit signal for firms to incur the costs to shift gears and re-direct food and agricultural products to those areas where it is most needed.

My Purdue colleague, Tom Hertel, serves on the Scientific Group of the UN Food Systems Summit 2021, and as a part of that effort he recently co-authored a paper addressing “Building Resilience to Vulnerabilities, Shocks and Stresses.” Here is what they wrote on the subject of trade as it relates to resilience:

“There are important trade-offs between integration into global supply chains and world markets, on the one hand, and the desire for locally sourced products, with shortened supply chains and greater food self-sufficiency, on the other. Better integration into world markets can ensure food security in the face of local drought, flooding and other natural disasters. In pre-colonial India, weather-induced famines were common, resulting in tens of millions of deaths when flooding or drought destroyed local crops. However, with the introduction of railroads in colonial India, Burgess and Donaldson (2010) find a dramatic reduction in the number of deaths associated with comparable extreme weather events, suggesting that improved market integration greatly enhanced food security by allowing for timely food imports. Recent studies of the role of international trade in mitigating adverse impacts of climate change reinforce the benefits of globalization for resilience to adverse climate impacts (Baldos and Hertel 2015; Gouel and Laborde 2018). However, when the source of adverse shocks is the global market, countries may have an incentive to insulate themselves from these developments. The problem with this strategy is that, the more countries insulate themselves from world markets, the more volatile those markets will become, as was found in the context of the food price crises of 2006-2008 and 2010-2011 (Martin and Anderson 2012). This harms those countries – often the poorest – who rely on these markets for critical food imports.”

The Ebbs and Flows of Fashionable Food

A recent article in Forbes ran under the headline “Regenerative Agriculture: The Next Trend In Food Retailing.” It appears regenerative is a trend that is taking a while to get going. Here is my comment on an article in the New York Times from almost exactly one year ago today.

Regenerative is the new sustainable, which was the new local, which was the new organic. It's a halo treadmill. And, a corporatization treadmill. https://t.co/RNDBGBo33U

— Jayson Lusk (@JaysonLusk) August 28, 2020

As shown in the figure below - taken from a presentation I gave about a month ago - Time Magazine had a cover image that said “Forget Organic. Eat Local” back on 2007. We subsequently seemed to move from local to sustainable. Now it’s regenerative. Next, it will be something else.

What causes the rise and fall, or rather the rise and plateau, of various food marketing claims?

None of these movements would have any traction if there wasn’t at least some underlying demand from consumers and investors for lowering the environmental impacts of food production, improving our health, giving farm animals a desirable life, or improving incomes of small farmers. That these base concerns exist provides the context for new movements to make their case for a place on dinner plates. Given that background context, upswings of food movements are driven the following factors.

• Desire for authenticity and trustworthiness,

• Myth making and seeking (“silver bullet” solutions that solve all the food system ills - environment, health, food security, and otherwise - seem particularly persuasive),

• Romanticism of the small and natural,

• Status-seeking (food as fashion), and

• A core of committee devotees who are able to garner institutional support for the movement.

At some point, these movements lose their luster and become blasé. It’s not that the movement “dies” (e.g., organic food still appears to be experiencing strong sales growth), but rather the movements eventually lose their moral force and cultural cache. Why?

Here are a few thoughts.

• As a movement grows, there is a need for standardization. What, exactly, is “local”? Food grown in your same state? Or region? Within 100 miles? Or 50 miles? What is “regenerative”? I still don’t know the answer to the last one. In the case of organic, competing definitions and conflicting standards ultimately led to U.S. federal standards and a certification program in 2002. While certification helps improve transparency and consumer communication, choices made in the process can alienate “true believers.” Consider, for example, the contentious issue of whether hydroponic crops can obtain an organic certification. Whatever decision the USDA made on that question (and countless others) was going to create winners and losers, with some people arguing that the movement has lost it’s way to gain mainstream appeal.

• Corporatization and greenwashing. When these movements are small and growing and attracting consumers, the profits generated attract new entrants and competition, which eventually include “Big Food” and “Big Ag.” Large players can bring new knowledge, economies of scale, and open marketing channels, which helps bring down cost and helps the movement grow. However, many of these food movements are premised on the appeal to “natural” and “small,” and in many ways the movement ideology is often antithetical to scale. The very things that need to happen to mainstream a movement undermine credibility among a certain set of movement promoters.

• Science evolves. When a movement is new and undefined, as “regenerative” is at the moment, it is easy to attach to it all of one’s hopes and dreams of food system reform. But, as the movement becomes more defined and standardized, scientists begin to conduct studies and find that the world is complex and nuanced. Studies find, for example, that organic food isn’t substantively more nutritious than conventionally produced food; and, that while organic uses fewer synthetic pesticides it also has lower yields and thus requires more land to produce the same amount of food. Studies find that localness of food has little relationship with greenhouse gas emissions. And so on. A movement loses some of its luster when it isn’t a silver bullet.

• Mainstreaming removes prestige. When everyone can have organic food, it is no longer cool to eat organic food. Part of the appeal of high-end fashion, in both clothes and food, is exclusivity. The high price point helps these products maintain their position as status symbols, but as standardization, corporatization, competition, and scale economies come about, prices often fall. For some people, and for some goods, this can lead to a type of Veblen Good Effect, where demand falls as prices fall because the good loses its position as a status symbol.

It’s unlikely we’ll ever reach a point where there aren’t ebbs and flows in sustainability-related food trends, but there may be some ways to potentially partially step off the treadmill. One possibility is to move toward more outcome-oriented and objective (rather than process-focused, subjective) sustainability labels. That said, the advent of nutrition fact panels seems to have done little to stop the cycle of dietary-related fads and trends from low fat to low carb to high protein to gluten free to plant based. Maybe these ebbs and flows are just a part of human nature.

Inflation Impacts on Premium Food Products

With the latest data coming out today from the Bureau of Labor Statistics on inflation, there is likely to be continued discussion about rising cost of food. The latest data show a 2.6% year-over-year (i.e., July 2020 to July 2021) increase in the price of food at home and a 4.6% year-over-year increase in the price of food away from home. These figures aren’t crazy high but they are higher than what we have come to expect in the past decade. For example, average year-over-year increase each July from 2009 to 2019 (i.e., the decade preceding the pandemic) for food at home was 1.04% and for food away from home was 2.54%.

In engagements in recent months with some food brands and agri-food investment groups, I’ve been asked my thoughts about whether demand for “premium” or “niche” products might be more or less affected by inflationary factors.

One way to think about this is the elasticity of demand, which tell us how the quantity (Q) that consumers want to buy varies with a change in the product’s price (P). The basic formula for a product’s demand elasticity is given below:

This formula tells us how much the quantity demanded will change (in percentage terms) with a 1% change in the product price. The term, ΔQ/ΔP, is the slope of the demand curve. It’s hard to outline any general rule for how this slope varies for conventional vs. “premium” products. However, the later term, price divided by quantity (P/Q), is almost certainly higher for premium than conventional products. By definition, premium products have a higher price and it is typically case that premium products have smaller sales (a smaller Q) than conventional products. Thus, there is reason to believe, based on the formula above, that “premium” products and brands will have larger demand elasticities - i.e., they will be more price elastic than conventional non-premium products. This would mean that a 1% change in a “premium” product’s price will cause a greater percentage change in the quantity of the “premium” product demanded than would be the case for conventional products.

So, what does the data say? There are a million “premium” products, but let’s look at a few examples. A study I conducted a few years ago estimated demand elasticities for organic and cage free eggs vs. conventional eggs using grocery store scanner data. The demand elasticities for cage free, organic, and conventional (in Dallas) were -2.99, -1.52, and -1. Thus, as suggested above, the premium egg products are more price sensitive (at least in percentage terms) than the conventional. As another example, consider this study by Dhar and Foltz on milk demand, which also used grocery scanner data. They found own-price demand elasticities of -4.4, -1.4, and -1 for non-rBST, organic, and conventional milk. Again, the premium milk products are more price sensitive (in percentage terms) than the conventional. Another example is this paper by Lin et al., which shows demand elasticities for organic apples, bananas, and grapes are -1.1, -3.2, and -3.5 whereas for elasticities for conventional apples, bananas, and grapes are -0.83, -0.7, and -0.49, respectively. In all these examples, the “premium” products are more price sensitive than the conventional products.

The above discussion would suggest that inflationary factors related to increased costs of labor, energy, or packaging, that push up retail prices will have a bigger impact on sales of premium products. That being said, keep in mind that a 1% change in the price of a premium product is a much larger absolute price change than a 1% change in the price of conventional product.

For example, suppose organic eggs sell for $3/dozen whereas conventional eggs sell for $1.5/dozen. Suppose higher costs of packaging mean each carton is now $0.25 more expensive. If this cost is fully passed on to the retail price, this would imply a (0.25/3)*100 = 8.3% increase in the price of organic but a (0.25/1.5)*100 = 16.7% increase in price of conventional. So, a fixed per-unit increase in cost will have a bigger percentage impact on conventional products than premium ones.

Even if own-price elasticities of demand are larger in absolute value for premium products, increased production, processing, and transportation costs are likely to represent a smaller percent of the retail price for premium than conventional products. In this context, it is important to keep in mind that conventional and premium products are demand substitutes. A phenomenon dubbed the Alchain-Allen or “ship out the good apples” effect comes into play. Wikipedia explains it as follows:

“when the prices of two substitute goods, such as high and low grades of the same product, are both increased by a fixed per-unit amount such as a transportation cost or a lump-sum tax, consumption will shift toward the higher-grade product. This is because the added per-unit amount decreases the relative price of the higher-grade product.”

In sum, it’s hard to know whether premium products are more or less affected by inflationary factors than conventional products. Premium products might be expected to be more demand elastic; however, if costs are increasing in a way that increases per-unit costs by a fixed amount, this will have a higher relative impact on conventional products. How’s that for economic “on the one hand … on the other hand” answer?