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How Will Food Companies Respond to Prop 37?

Three recent economic analyses have been released on the potential effects of Prop 37 in California, which would require mandatory labeling of genetically modified foods if passed in November.

Two analyses are by different groups of economists at UC Davis (Alston and Sumner and Carter et al.) and another by a consulting firm.  Each suggest potentially high costs and less consumer choice - exactly the opposite of that predicted by proponents of Prop 37.

The prediction (that Prop 37 will lead to high prices and less choice,) is based on a key assumption made by the analysts.  The assumption is that processors and retailers in California will not actually label foods and will instead substitute toward non-genetically modified ingredients.  The assumption is stated explicitly in the report by the consulting firm:

Based on experience in other parts of the world, review of the literature, and discussions with academic and business experts, we believe the most likely means of compliance for food companies is to substitute other ingredients for GE ingredients in their products. This means that companies would change the way in which they source ingredients or manufacture their products in order to avoid labeling their products with a vague and potentially frightening warning that conveys little meaningful information. 

Thus, most of the cost increase predicted in the studies is projected to come about from retailers and manufacturers choosing to use more expensive ingredients to avoid the label.

Is this what retailers will actually do?  Here are the reasons I’m not so sure:

  • Many of the biggest donors supporting Prop 37 are organic and natural food companies.  To fork over millions of dollars in donations supporting the proposition must mean they believe it will help their bottom line, which will only happen if food firms actually label their products as containing genetically modified ingredients.
  • Prop 37 would imposes zero-tolerance for accidental presence of biotech in food.  No country in the world (even Europe) imposes a zero-tolerance limit for their mandatory labels of genetically modified food.  Achieving zero-tolerance is practically impossible and extraordinarily costly. Food firms facing the chance of costly lawsuits may very well simply decide to label.
  • Part of the reason there are virtually no GMO-labeled products in Europe (even though they are allowed) is because of competition between food companies.  It is a type of prisoner’s dilemma problem.  Even though all firms could make more money using GM ingredients, they choose to avoid GM because they know they’ll lose relative market share to competitors who don’t label.  Thus, they all avoid GM and no one labels.  The situation in California is different because, as mentioned above, the costs of falsely labeling will be much higher due to the zero-tolerance rule.  Moreover, consumer demand for the absence of GMOs in food is lower in California than in Europe, as my research shows.  This means the incentives for the sort of prisoner’s dilemma outcome are lower.  None of this is to mention the differences in markets structure of US and European in food retailing (the use of private labels in Europe is much higher and the retailers there exert much more influence on the entire marketing chain).

I do not think the arguments in favor Prop 37 are particularly strong, but I’m not entirely sure that the assumptions used  to project the costs of Prop 37 will ultimately match what happens if it passes.

Addendum:  In the post above, I mention a study by Carter et al. in a way that inadvertently implied they argued that passage of Prop 37 would lead to firms avoiding the label by switching to non-GM or organic.  Here's what they actually say in their report:

Prop 37 would result in many products on the food shelf carrying a GM label. It might get to the point where there are so many products with GM labels that most consumers would just ignore the labels because they would be everywhere.

They seem to agree with my point that it will be hard for firms to avoid GE labels given the zero tolerance limit.