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New York Times Opinion Video

A recent opinion video from the New York Times entitled “Meet the People Getting Paid to Kill Our Planet” is making the rounds.

I don’t intend to respond to the the claims in the video in entirety (if you’re curious, my view resembles those of Aaron Smith at UC Davis). However, because I made a 2 second cameo in the video saying the word “cow tax,” I think it’s important to widen out that selective edit. Here’s the background commentary from the narrator in the video.

It’s outrageous what the Big Ag lobby has gotten away with. Here are some big wigs. Any suggestion that methane should be regulated are quickly branded a “cow tax.” A catchy rallying cry that politicians and commentators compare it [insert video of several folks, including myself saying “cow tax”] that flips a smart green idea to something that sounds absurd and wont pass. That’s the Big Ag lobby in action.

If you’re curious to see my “cow tax” comment in wider context, the whole interview I gave with Steward Varney on Fox Business is available here. I’ll leave it to you to judge whether I gave the impression that greenhouse gas emissions are unimportant or that there aren’t actions we could take to reduce greenhouse gas emissions from animal agriculture. Moreover, one can read, among other things, my post from March 2019 entitled “A Case for a Carbon Tax - Meat and Livestock Edition.” Here’s a broader discussion I provided summarizing my food policy research.

The New York Times video attempts to raise the alarm on some serious issues. If the film makers are really serious about engaging on these complex issues instead of trying to score cheap shots, I’m all ears.

Testimony before the US House of Representatives

Earlier today I testified before the U.S. House of Representatives Committee on Agriculture, Livestock and Foreign Agriculture Subcommittee. The topic was "State of the Beef Supply Chain: Shocks, Recovery, and Rebuilding." Links to hearing and written testimonies of the four witnesses can be found here.

My written testimony is reproduced below (or, if it’s easier to read, in this pdf).

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Chairman Costa, Ranking Member Johnson, and Members of the Subcommittee, thank you for inviting me here today. I am a food and agricultural economist and I serve as Distinguished Professor and Head of the Agricultural Economics Department at Purdue University.

I will begin by providing some background on some of the economic factors that have contributed to the volatility in cattle and beef markets in recent years. Then, I will shift my focus to three economic issues currently facing the beef cattle industry: packing capacity and resiliency, price discovery, and the importance of trade and innovation.

For the past couple years, beef and cattle markets have been extraordinarily turbulent and volatile. Major events include the loss of a major packing plant to fire in 2019, demand-induced disruptions from COVID-19 resulting from the decline in restaurant spending and the spike in grocery spending, supply-induced disruption from COVID-19 resulting from the worker illnesses in packing plants, increasing feed prices, drought in the West, and recently, increased Chinese imports and cyber-attacks. Only one other year in the past 30 has witnessed more volatility in live fed cattle prices than 2020. Consumers likewise experienced significant price shocks. Retail beef prices increased 25% year-over-year price in June 2020 before falling 3% year-over-year in May 2021.

When trying to understand the current challenges, some historical perspective is warranted. Over the past decade, cattle inventories have followed a V-shaped pattern. Corresponding cattle prices have followed an inverse V-shaped pattern. From 2010 to 2015, total number of commercial cattle slaughtered fell by more than 16%. The decline resulted from producers cutting inventory as a result of a dramatic increase in feed prices and a drought in some parts of the Midwest. The change in cattle numbers affected the packing sector. There was, at the time, too much packing capacity relative to the number of cattle, and returns to cattle processing took a hit. Some small and medium packers exited because it was no longer profitable, and some large packers shuddered plants in an attempt to align capacity with inventory.

The high levels of capacity relative to cattle numbers, coupled with strong demand, led to a rise in cattle prices. Following a common cyclical pattern (the “cattle cycle”), producers retained heifers and expanded their herds to capture the benefits of higher prices that were experienced in 2014 and 2015. By 2019, total commercial cattle slaughter had increased 16.7% relative to the 2015 low. The packing sector, having adjusted to a smaller herd size, now found itself in the opposite position: there was a high number of cattle relative to processing capacity, which put downward pressure on cattle prices. It was against this backdrop that we experienced the unexpected fire, pandemic, and cyber-attack that further exacerbated the effects of limited capacity. If these unexpected events had occurred in 2014 or 2015, the impacts on producers would have been much different.

There is a key lesson to take from this recent historical episode. There are long lags and ripple effects in cattle and beef markets. A producer makes a decision today to breed a cow, and it will be roughly three years till the resulting offspring is ready for market. Likewise, investors today decide to build a new packing plant. It will be years before construction is finished and the capacity is brought online. Everyone is betting on the future with information that ultimately be two to three years old by the time outcomes are realized. Cattle inventories have already started to fall, and cattle prices have risen since last summer. My recommendation to you, as policy makers, is the following: do not overly focus on what is happening today. Consider what will be needed 3 to 5 years from now. Market participants adapt to changing circumstances, although sometimes more slowly than we’d like because of biological and construction lags, but policy ideally should focus on longer-run forces that improve the well-being of producers and consumers in an industry.

With that backdrop, I will move on to the first of three current issues facing the industry. There are a number of state and federal initiatives to increase processing capacity. As previously, noted, processing capacity in 2020, even if the pandemic hadn’t occurred, was likely to be “tight,” which contributed to downward pressure on cattle prices. We appear, however, to be in a different phase of the cattle cycle. Cattle inventory is falling. Feed prices are rising. There is a drought in West. These factors will, over time, likely bring cattle numbers closer in line with current capacity. Moreover, even absent federal investments, there are a number of private initiatives to increase automation and add more packing capacity. More capacity, and fewer cattle, will help support future cattle prices. But, as the experience of the past decade has revealed, that will not be the end of the story. Whether we are setting ourselves up, in five years' time, for another situation in the packing sector like the one experienced in 2014 and 2015 remains to be seen. Additional government investments in capacity, for the purpose of improving cattle prices, may be fixing yesterday’s problem.

There is another argument being made for adding capacity: improving resiliency to the sector. Extra capacity could be seen as a form of insurance against unexpected capacity reductions from events like fire, pandemic, or cyber-attack. COVID-19 infections led to and dramatic reduction the nation’s beef slaughter capacity. There was little excess capacity in the system and nowhere for market-ready cattle to go. My research with Purdue colleague Meilin Ma indicates that even if we would have had a more distributed packing sector consisting of more small and medium sized plants instead of a small number of large plants, the price spread dynamics and beef supply disruptions would not have likely have been appreciably different than what we witnessed. The problem at the time was not the size or localness of the plants but total industry capacity.

However, excess capacity is expensive, and it is in no individual packer’s interest to routinely operate at significantly reduced capacity. Imagine approaching an investor asking for tens of millions of dollars with a plan to only operate a facility at only 50% capacity. Few bankers would agree to such a deal. Support for subsidizing additional processing capacity might be justified on public insurance grounds, but ultimately, the ebbs and flows of the cattle cycle will determine the long-run size of the packing industry, and newly subsidized plants will be at an advantage over older existing plants when cattle numbers come back in line with capacity and ultimate profitability determines the size of the packing sector. Support for small and local processors might benefit local economic ecosystems and increase custom harvest operations for producers, but these operations, because they lack economies of scale, must focus on quality and service to be competitive, and are such a small part of the national industry that investments at this size are unlikely to significantly alter the aggregate industry capacity. It is also worth noting that costs of adding packing capacity are not limited to concrete and iron. I encourage you to consider other costs and barriers that limit new entrants thus expanded capacity. Availability of labor has been a significant challenge for the industry and labor constraints put a limit on processing capacity. Other factors include the costs of complying with federal, state, and local regulations related to labor, food safety, zoning, transportation, and more.

Second, in light of the relatively low cattle prices experienced in 2020, there have been a number of proposals to affect the marketing of cattle. One set of concerns has focused on the share of cattle sold on a negotiated or cash basis. While the share of cattle sold in this manner, roughly 20%, has not changed much since the high-cattle-price era experienced in 2014 and 2015, it is lower than was the case a decade ago. Cattle sold on a formula basis often utilize the negotiated, cash price as a base. Thus, trades on a relatively small number of cattle influence the price for a much larger number of formula-priced cattle. A concern has emerged as to whether there are enough trades in the cash market to truly reflect market fundamentals. In efforts to improve price discovery, an important distinction needs to be made: price levels and price volatility. Even if all cattle were traded on a negotiated, cash basis, the price level would not necessarily improve; however, we might be more confident that any given transaction would be reflective of the “true” underlying supply and demand conditions at the time and location. Whether, in fact, there are too few cash transactions to reflect market fundamentals is debatable.

Attempting to mandate more cattle be sold in a negotiated, cash basis has potential benefits and certain costs. The fact that most producers and packers choose to sell cattle using alternative marketing arrangements suggests they see benefits in this form of marketing in the form of increased certainty, lower transactions costs, and supply chain coordination. Mandating a certain percent of cattle be sold on a negotiated basis would entail some producers and packers foregoing a marketing method they currently find more desirable. That is a cost. Moreover, strengthening of consumer demand for beef over the past couple decades has occurred over a period in which there was increased use of formula pricing that rewarded quality improvements. Eroding the ability of consumers, retailers, and packers to incentivize quality through formulas and vertical coordination may have detrimental impacts on demand.

The best economic case for mandating more negotiated transactions rests on the argument that price discovery is a public good. Are there less costly ways to improve price discovery than a mandate? Livestock Mandatory Reporting (LMR) is one tool that has improved price transparency and discovery. Continued research into improvements in this legislation might further facilitate price discovery. Taxes to avoid, or subsidies to use, negotiated cash markets are seldom mentioned despite having similar economic intuition as a mandate. Even if a mandate were pursued, it might be made more efficient if coupled with a “cap and trade” system, where obligations to secure cattle in a cash market might be bought and sold in a secondary “offset” market similar to what currently exists for fuel manufactures mandated to blend a given amount of biofuels. Including negotiated grid or formula transactions in a mandate would also lessen the costs of the policy. It is important to consider solutions that may be less costly and restrictive than a mandate because the cattle industry is constantly evolving and needs to remain cost-competitive with other animal- and plant-proteins to have a place on consumers’ dinner plates.

I will conclude with an encouragement to focus on policies that improve the health of the entire industry. Discussions of cattle prices and packing capacity can give the impression that beef and cattle markets represent a zero-sum game. But, one party’s gain does not have to come at the expense of another. What policies increase the size of the pie available to all participants: cow-calf producers, backgrounders, feedlots, packers, retailers, and ultimately, consumers?

As witnessed in recent months, improved trade relations have the ability improve economic circumstances for multiple segments of the industry. The U.S. exports about 12% of beef production. Trade agreements are important to help open markets for U.S. producers to allow products to flow to consumers who value them most.

Investments in research and innovation that increase demand or improve productivity are likely a net win for consumers, producers, and the environment. Had we not innovated since 1970, about 11 million more feedlot cattle would have been needed to produce the amount of beef U.S. consumers actually enjoyed last year. Innovation and technology saved the extra land, water, and feed that these cattle 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.

Despite the challenges of the past couple years, the beef cattle system responded remarkably well to a series of large, unexpected disruptions. Producer prices have been on the rise. Consumer demand is strong. These core facts should remain front of mind when considering changes that would significantly affect the cattle industry going forward.

Effects of a Ban on Junk Food Advertising

About a month ago, Tamar Haspel re-opened a debate on the merits (or, rather, demerits) of junk food advertising to children in her regular Washington Post column. My intent is not to take issue with anything written there per se, but rather to bring up a dimension to this debate she didn’t address.

Even if accepts the premise that “advertising works”, and increases the rate at which people buy junk food, that knowledge is insufficient to understand the impacts of an advertising ban for at least two reasons. First, what will people consume instead once ads are banned, and what is the cost and healthfulness of the newly purchased items? Second, how will food manufacturers and consumers respond to the ban?

In a paper back in 2014, Vincent Réquillart and Louis-Georges Soler, while very much in favor of policies aimed at promoting healthy eating, do a good job describing the various ways that food companies might respond to advertising bans or taxes. Companies don’t just “sit still.” For example, if a firm can no longer advertise, what happens to the money the previously spend in this way? Perhaps they invest in cost savings technologies that allow them to lower the price of the food, which would encourage additional consumption. Or, unable to compete by advertising, firms may engage in more price competition, again driving down prices and bringing more consumers into the market - presumably the opposite of the intended effect of the policy.

A couple years ago, Pierre Dubois, Rachel Griffith, and Martin O’Connell published a very careful and through paper in the Review of Economic Studies on this very topic by studying advertising on potato chips in the U.K. They found that an advertising ban would lower the share of consumers buying potato chips by about 5.3 percentage points; however, they also estimated that in response to the ban, firms would lower chip prices, which would bring more consumers back to the chip market, making the net effect of the advertising ban only a 4 percentage point reduction on the share of shoppers buying chips.

So far so good if the goal is an overall reduction in chip buying. However, they also showed that the advertising ban (after all the anticipated price changes) would increase consumption of other unhealthy products by about 2.7 percentage points. The problem, as they point out, is that “these alternative snacks are, on average, less healthy than potato chips (their mean nutrient score is 20 compared to around 14 for potato chips).”

They offer a solution to this problem: a broader ban on advertising to include all “junk food,” however it is unclear which foods would be deemed “junk.” And, the broader point remains: there will likely be offsetting price effects, albeit perhaps not large enough to completely offset the impacts of the lack of advertising.

Ultimately, Tamar ends her piece making a moral argument, and insofar as advertisements aimed at kids, she raises some good points. Still, it is important to recognize policies often have unintended effects. Neither companies nor consumers are passive bystanders in the face of policy changes. They respond, and if not in ways that completely offset the intended effects, at least in ways that can significantly dampen the intended effects.

The non-price effects of soda taxes and bans

The American Journal of Agricultural Economics just published a paper I co-authored with Sunjin Ahn, who is a post-doc at Mississippi State University entitled “Non‐Pecuniary Effects of Sugar‐Sweetened Beverage Policies.” (for the non-economists out there, “non-pecuniary” just means non-price).

Here was our motivation for the study:

There is some market evidence that passage of SSB [sugar sweetened beverage] taxes might generate outcomes beyond that predicted by price elasticities (or the pecuniary effects). Non‐pecuniary effects could amplify the effects of a tax, increasing the intended effects of the policy. In particular, the tax (and the debate and publicity surrounding it) could send information to consumers about the relative healthfulness of beverage options and send cues as to which choices are “socially acceptable”
...
Signaling and information effects associated with SSB taxes are only one potential non‐pecuniary effect, and it is possible that some non‐pecuniary factors, such as reactance, could dampen the effects of a tax, and in the extreme could result in outcomes opposite that intended by the policy. ... Reactance is thought to arise from perceptions of threats to individual freedom, among other factors (Brehm 1966). Thus, although it seems clear that non‐pecuniary effects might exist, the size and the direction of the effect is ambiguous.

We tackled this issue by conducting a series of experiments through surveys with consumers. We asked consumers to participate in a series of simulated grocery shopping exercises. Consumers first made choices between beverage options at a given set of prices, and then they were randomly allocated to different treatments where either:

  • A) prices of SSB increased but respondents were not told why,

  • B) prices of SSB increased and respondents were told it was a result of a soda tax,

  • C) prices of SSB increased and respondents were told it was a result of a shortage of sugar beets and sugar cane,

  • D) the size of SSB was reduced but respondents were not told why,

  • E) the size of SSB was reduced and respondents were told the reduction was due to a government ban on large sized sugared sodas, or

  • F) the size of of SSB was reduced and respondents were told the reduction was due to a plastic shortage.

By comparing how choices of SSBs change when people were told prices or size changes were a result of a policy vs. other non-policy factors, we can get a sense of the size and direction of the non-pecuniary effects.

When conducted our first study in 2016, we found significant results related to the SSB taxes. In particular, our results suggested people who were told price changes were a result of a tax were more likely to choose SSB than people who were not given a reason for the price change. We certainly weren’t the first to find such an effect. Here is a bit about previous research on this topic:

Just and Hanks (2015) argued that consumers might respond with resistance when a new policy obstructs their ability to obtain their preferred option. They argued that the phenomenon arises because consumers are emotionally attached to consumption goods, resulting in reactance. Policies perceived as paternalistic might cause consumers to “double down” on purchases of forbidden or restricted goods (Lusk, Marette, and Norwood 2013). Just and Hanks (2015) constructed a model in which controversial policies such as a sin tax could lead to an increase in the marginal utility for a good, potentially leading to increased consumption even if prices rise. In addition, Hanks et al. (2013) found that demand for unhealthy foods under a tax frame increased while the demand for subsidized healthy foods fell. Similarly, Muller et al. (2017) found that almost 40% of low‐income individuals increased their share of expenditures on unhealthy food after an unhealthy food tax.

When we sent the paper off for review, we received a number of valuable comments, which caused us to make a number of changes to our experiment, and repeat the study with some extensions in 2019. What did we find with these newer data? On average: nothing, nada, zilch. There was no significant difference in the average market share of SSBs across the various information treatments. However, we did find significant variability in the treatment effects, meaning some people choose more SSBs when they knew it was a tax/ban and others chose less; however, these variations were only partly explained by demographic effects. In summary, our results didn’t provide a clear answer on the question we sought out to address: non-pecuniary effects, to the extent they exist, seem to work in different ways for different people, making the net effect small and hard to identify, at least in our experimental setting.

A note on the publication process is worthwhile. Normally, it is very hard to publish null results. This is problematic for the advancement of science because it results in publication biases like the file draw problem. To the credit of Tim Richards, the journal editor, and the three anonymous reviewers at the American Journal of Agricultural Economics, we received a positive reaction and ultimately, after a more changes, acceptance for publication even though we failed to replicate our previous result and found null effects. This is really an example of peer-review working at it’s best.

Unscrambling COVID-19 Food Supply Chains

That is the tile of a new paper with Trey Malone and Aleks Schaefer, both at Michigan State University. Here is the abstract:

This article uses evidence from the egg industry to investigate how the shift from food-away-from-home and towards food-at-home affected the U.S. food supply chain. We find that the onset of the COVID-19 pandemic increased retail and farm-gate prices for table eggs by approximately 141% and 182%, respectively. In contrast, prices for breaking stock eggs-which are primarily used in foodservice and restaurants-fell by 67%. On April 3, 2020, the FDA responded by issuing temporary exemptions from certain food safety standards for breaking stock egg producers seeking to sell into the retail table egg market. We find that this regulatory change rapidly pushed retail, farm-gate, and breaking stock prices towards their long-run pre-pandemic equilibrium dynamics. The pandemic reduced premiums for credence attributes, including cage-free, vegetarian-fed, and organic eggs, by as much as 34%. These premiums did not fully recover following the return to more “normal” price dynamics, possibly signaling that willingness-to-pay for animal welfare and environmental sustainability have fallen as consumers seek to meet basic needs during the pandemic. Finally, in spite of widespread claims of price gouging, we do not find that the pandemic (or the subsequent FDA regulatory changes) had a meaningful impact on the marketing margin for table eggs sold at grocery stores.

We tried to tease out the effect of the pandemic itself on egg prices from the impact of FDA rules that barred eggs from easily moving from the restaurant to the grocery market. Here’s what we find on that latter point.

These results suggest that had the FDA not suspended Egg Safety Rules for breaker producers seeking to sell into the table eggs market - farm-gate and retail table egg prices would have been approximately 53% and 56% higher than those observed in the last week of May. On the other hand, breaking prices in the same week would have been about 50% lower.

The key results as they related to impacts on commodity egg prices are shown in the following graphs (the dashed lines are our forecasts of what would have happened had COVID19 not occurred).

eggpriceimpacts.JPG

You can read the whole paper here.