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How do consumers respond to rising food prices?

That's the question asked in this working paper by Rachel Griffith, Martin O’Connell and Kate Smith.  The abstract: 

“Over the Great Recession real wages stagnated and unemployment increased. Concurrently, food prices rose sharply, outstripping growth in food expenditure, and leading to a reduction in calories purchased. This has led to concern about rising food poverty. We study British households to assess how they adjusted to changes in the economic environment. We show they switched to cheaper calories; implying food consumption was smoother than expenditure. We use longitudinal data to quantify the way households lowered their per calorie spending, and show they done this in part by increasing shopping e ffort, and without lowering the nutritional quality of their groceries.”

When we feel the pinch, we can substitute away from more expensive to less expensive foods.  But, we can also increase the effort we expend in finding better prices.  In short, our time is a valuable commodity that we treat like other economic goods.  

That fact was also emphasized in a paper by Broda, Leibtag, and Weinstein in the Journal of Economic Perspectives in 2009.  They used some creative methods to ask the question: do the poor pay more or less than the rich?  They write:

“In this paper, we circumvent the problems of previous studies by using a dataset that contains actual purchases of around 40,000 households collected by Nielsen. By focusing on the actual prices paid by households, we show that poor households systematically pay less than richer households for identical goods. The poor pay less in part because they shop in cheaper stores and in part because they pay less for the same goods even in the same store. This latter effect probably arises because poorer households are more likely than richer households to buy goods on sale, even in the same store. We also confirm that the poor shop more in convenience stores—where prices are 11 percent higher than in traditional grocery stores—but show that this effect is dominated by their higher share of expenditure in supercenters where prices are 10 percent lower than in grocery stores.”

Note that these authors aren't comparing apples to oranges.  They compare the prices paid by rich and poor households for exactly the same goods.  

When asked how consumers respond to higher prices or lower incomes, so often we economists refer to indifference curves and budget constrains or do a fair amount of hand-waving.  Yet, as these studies show, reality is more complex.  We can use our time to find better prices, or we can alter out consumption bundle to provide the same nutritional quality in a less expensive fashion.   

How Animal Welfare Labeling Affects Egg Purchases

A couple of weeks ago in Slovia I saw a presentation of a paper authored by Alexander Schjøll, Frode Alfnes, and Svein Ole Borgen.

The authors conducted an interesting experiment with a Norwegian grocery store chain called REMA 1000 to see how different labels and information campaigns changed sales of cage vs. cage-free eggs.  

For the first part of the study, the authors simply changed labels.  At the beginning of the study, the "battery" or caged eggs simply had the descriptor "12 farm eggs."  The authors replaced this with a new carton that had "BATTERY HENS" printed in large letters in mid 2011.  The new cartons also had the following text in smaller font (translated from Norwegian):

“From 2012, you can only buy eggs from barn systems at REMA 1000. Eggs from hens in cages, as these, are not available from 2012 for purchase in REMA 1000 stores. Battery hens live in cages with little opportunity to move freely. Hens living in barn systems can move indoors in environments similar to their natural environment. This contributes to good health and welfare. REMA 1000 knows you are concerned about quality. We believe animals that thrive provide the best ingredients.”

The authors looked to see what happened when the new labels were introduced, and watched sales for about 6 months.  Then, at the beginning of 2012, the grocery chain completely removed the "battery" cage eggs from their stores.

So, here are the key questions:

  • Did shoppers respond to the label change?
  • Did the label cause people to switch to cage-free barn eggs or to the even more expensive organic with more stringent standards?
  • What happened when the "battery" eggs were completely removed?  Did sales of organic jump or did they just shift to the next lowest price alternative, the "barn" system?

Here is a graph with the results.

The authors write (in a newer version of the paper I couldn't find online):

“In mid-July, REMA 1000 introduced its new battery egg package in some stores, and had a nationwide rollout of the new package in August 2011. As shown, the market share of battery egg packages fell from 54% in June to 28% in September 2011, after varying between 51% and 61% in the month before the introduction of the new package. From September 2011, the sales of battery eggs were relatively stable until they were finally withdrawn from the market at the end of the year.

On January 1, 2012, the retail chain removed battery eggs from its shelves. . . .

The market share for organic eggs remained constant both when the negative battery egg cartons were released and when the battery eggs were removed from the stores.”

I interpret this to mean that these consumers viewed the cage, "battery cage" and cage-free "barn" eggs (what these authors call indoor free-range) as close substitutes.  This is also supported by the fact that the authors also note that total egg sales did not much change when the labels were added or when the battery cages were removed.  That primarily means, most people just paid more for eggs (although the authors do not report any information on the relative prices of the eggs).

Other experiments in the store looked at various posters and displays that tried to increase organic sales, but as the authors report, none of them had any substantive effect.

Are there any implications we can draw from this experiment for what is going on in California - assuming that their ban on sales of battery cage eggs withstands legal challenges?  

The above experiment suggested that about 25% of consumers in Norway willingly switched from cage to cage-free eggs when they had added information.  However,  about 30% of consumers still preferred the cage eggs when these were remove from the store. These 30% of consumers were essentially "forced" to buy a higher price option that they didn't previously pick (I use the word "forced" loosely because the consumers presumably could have chosen not to buy eggs at all).  It's hard to know how big the economic loss was for this 30% without knowing more about relative prices, quantities purchased, and consumer characteristics.  Where these 30% on the lower or upper end of the socio-economic ladder? 

Impacts of Dietary Recommendations

Following the government's dietary recommendations may lead to . . . climate change?

New research suggests the following:

“if Americans adopted the recommendations in USDA’s “Dietary Guidelines for Americans, 2010,” while keeping caloric intake constant, diet-related greenhouse gas emissions would increase 12 percent.”

Rather than trying to anticipate the unintended consequences of such recommendations, the study authors want to add another layer on top of the nutritional recommendations

“The take-home message is that health and environmental agendas are not aligned in the current dietary recommendations,” Heller said.

The paper’s findings are especially relevant now because the USDA Dietary Guidelines Advisory Committee is for the first time considering food sustainability within the context of dietary recommendations, he said.”

As I've pointed out before, trying to integrate nutritional and environmental objectives into recommendations involves value judgement that go beyond scientific evidence. Moreover, focusing just on C02 emissions or nutritional composition (as if that's easy to characterize) ignores many other factors.  On a per-acre basis, which crops are the biggest users of pesticides or water? You might be surprised to find out that it is not corn, soybeans, or wheat but rather many fruits and veggies like lemons, strawberries, etc. 

Rather than trying to add layer upon layer to the dietary recommendations, why not respect people's choices?  The price of food reflects the resources used and the demands on those resources.  If the problem is that prices don't fully reflect water use or C02 emissions, then the idea is to think about assigning property rights in a way that that information-aggregating markets help allocate those resources.  But, I suppose it's less fun to let markets allocate resources.  That would take away our power to tell others what to eat.  

Reducing Food Insecurity

Last week, I mentioned the new USDA report on food insecurity.  I also mentioned a WSJ editorial by James Bovard arguing that food stamps don't reduce food insecurity because the number of people enrolled in food stamps has risen dramatically while food insecurity remains essentially unchanged.

I noted that we don't know the counterfactual (i.e., how much food insecurity would have changed had enrollment in food stamps not increased).  And, I also noted that there is some good academic research on the relationship on food insecurity and food stamp participation.

One of the big problems with trying to tease out the link between these two is that they are jointly determined.  That is, I may enroll in food stamps precisely because I'm food insecure. This sort of selection effect will make it look like being on food stamps is associated with food insecurity, but clearly this is just correlation, not causation.

Here is a careful paper published in the Journal of the American Statistical Association that tries to get at the issue:

“Under the weakest restrictions, there is substantial ambiguity; we cannot rule out the possibility that SNAP increases or decreases poor health. Under stronger but plausible assumptions used to address the selection and classification error problems, we find that commonly cited relationships between SNAP and poor health outcomes provide a misleading picture about the true impacts of the program. Our tightest bounds identify favorable impacts of SNAP on child health.”

One of the measures of "child health" is food insecurity, and this research seems to suggest null to positive effects of food stamp participation and child food insecurity.  

A lot of the discussion on the web related to the USDA report seems to be wrapped up in ideological baggage associated with beliefs about the desirability of cutting or expanding the food stamp program (or, for example, utilizing work requirements).  Those who would like to reduce the size and scope of the food stamp program often try to argue that food stamps do not reduce food insecurity and may actually increase it.  My view is that the best analysis doesn't support such an argument.  There may be other good reasons for reducing the size of the food stamp program, but the food security argument isn't one of them.  

Another argument I made in my previous post was that technological development that leads to lower food prices seems a comparatively good strategy for reducing food insecurity.  

As such, I was intrigued to see this white paper by Graig Gundersen at the University of Illinois on food insecurity.  One of the five drivers he discusses to reduce food insecurity is to focus on the importance of low food prices.  

He also writes, when discussing, what food groups can do (or perhaps what they shouldn't do):

“Third, they can view proposals encouraging organic foods and local foods with skepticism. While proposals to encourage, say, local food procurement by supermarkets can have ancillary benefits, these benefits do not generally extend to low-income households because they cannot afford these items. Instead, the benefits are more likely to extend to upper-income households that can afford these items. Moreover, by devoting scarce resources to encouraging the entrance of these into the food supply chain, this diverts resources away from factors that would help low-income households. ”