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Emerging Roles for Food Emerging Roles for Food LabelsLabels

Dr. Shida HenneberryDr. Shida Henneberry

Professor of Agricultural EconomicsProfessor of Agricultural Economics

Oklahoma State UniversityOklahoma State University

Srh@okstate.eduSrh@okstate.edu

Nanjing Ag University Nanjing Ag University

February 2004February 2004

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Demand SideDemand Side

Health ConcernsHealth Concerns Consumers Demand More Information Consumers Demand More Information

on Food Attributes:on Food Attributes:1.1. QualityQuality2.2. Nutrition ContentNutrition Content3.3. Production processProduction process4.4. SafetySafety5.5. The origin The origin

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Supply SideSupply Side

Quantitative CharacteristicsQuantitative CharacteristicsNutritional compositionNutritional composition

Qualitative CharacteristicsQualitative CharacteristicsNot easily measuredNot easily measured

Health claims: disease prevention, Health claims: disease prevention, fitnessfitness

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The Role of Food LabelsThe Role of Food Labels

Voluntary LabelsVoluntary Labels

Mandatory LabelsMandatory Labels

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The Use of LabelsThe Use of Labels

Nutritional content– Nutritional content– a good source of a good source of vitamin Cvitamin C,,

Country of originCountry of origin Production process – Production process – free of GMO or free of GMO or

produced under fair labor practices,produced under fair labor practices, Health Claims – Health Claims – May prevent cancer,May prevent cancer, Warnings about the product – Warnings about the product – may may

upset the stomach.upset the stomach.

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Use of Labels to Gain Price Use of Labels to Gain Price PremiumsPremiums

A form of Advertising A form of Advertising Product DifferentiationProduct Differentiation

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Effectiveness of LabelsEffectiveness of Labels

Research has shown that Research has shown that consumers will pay a small consumers will pay a small premium for eco-labeled premium for eco-labeled (environmentally sound practices) (environmentally sound practices) products (apples, fish). products (apples, fish).

Compared to Organics, Eco-labeled Compared to Organics, Eco-labeled may be a less-desirable choice for may be a less-desirable choice for consumers.consumers.

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ExpendituresExpenditures

U.S. producers spend over 12% of U.S. producers spend over 12% of domestic food expenditure on domestic food expenditure on packaging and advertising, packaging and advertising, including labeling costs.including labeling costs.

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Confused ConsumersConfused Consumers

Consumers purchasing behavior Consumers purchasing behavior does not always reflect their stated does not always reflect their stated preferences. preferences.

Growth hormones and irradiation Growth hormones and irradiation and food safetyand food safety

Chemical residues and higher price Chemical residues and higher price of organicsof organics

BiotechnologyBiotechnology

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Nutritional LabelsNutritional Labelsnot so rational choicesnot so rational choices

Purchases do not reflect rational Purchases do not reflect rational choices.choices.

1.1. HungerHunger

2.2. Hectic scheduleHectic schedule

3.3. Source of foodSource of food

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Labels may help confused Labels may help confused consumers make choices that consumers make choices that better reflect their preferences.better reflect their preferences.

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Costs and Benefits of Food Costs and Benefits of Food LabelsLabels

Benefits:Benefits:Price premiumsPrice premiumsIncreased salesIncreased sales

Costs:Costs: Chemical analysisChemical analysis Printing of labelsPrinting of labels The verification associated with The verification associated with what is what is stated on the labelstated on the label Third party servicesThird party services

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Government Intervention Government Intervention in labelingin labeling

The goal is to influence individual The goal is to influence individual consumption choices to align them consumption choices to align them with social objectives.with social objectives.

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The U.S. Labeling lawsThe U.S. Labeling laws

USDA governs poultry and meat USDA governs poultry and meat labels. labels.

FDA governs health claims FDA governs health claims FTC governs advertising claimsFTC governs advertising claims

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The NLEAThe NLEANutrition Labeling and Education Act of Nutrition Labeling and Education Act of 19901990

NLEA required mandatory nutrition NLEA required mandatory nutrition labeling for almost all packaged labeling for almost all packaged food and set strict regulations for food and set strict regulations for health claims.health claims.

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Costs of NLEACosts of NLEA

NLEA has been costly to producers NLEA has been costly to producers and consumers (higher food and consumers (higher food prices). FDA estimates that over prices). FDA estimates that over the next 20 years, the NLEA would the next 20 years, the NLEA would cost:cost: $163 mil to the gov’t $163 mil to the gov’t $1.4 bil to $2.3 to the food industry$1.4 bil to $2.3 to the food industry

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Post NLEAPost NLEA

Significant increases in the use of health Significant increases in the use of health claims:claims: Fruits & vegetablesFruits & vegetables Low-fat dairy productsLow-fat dairy products

Nutrition labels provide measurable Nutrition labels provide measurable benefits by improving diet quality as benefits by improving diet quality as measured by Healthy Eating Index measured by Healthy Eating Index (HEI). (HEI).

HEI is impacted by income, age, college HEI is impacted by income, age, college educationeducation

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Mandatory labelingMandatory labeling

Is used to impact consumption Is used to impact consumption decisions to bring them more in line decisions to bring them more in line with what is deemed best for society. with what is deemed best for society.

Mitigating potential inefficiencies Mitigating potential inefficiencies resulting from imperfect information resulting from imperfect information about product characteristicsabout product characteristics

Experience and Credence Experience and Credence Characteristics. Characteristics.

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Processed Based LabelingProcessed Based Labeling

Inform consumesInform consumes Shape the production processShape the production process In case of credence characteristics In case of credence characteristics

consumes may trust public consumes may trust public agencies more.agencies more. Food safetyFood safety Production conditionsProduction conditions GMOsGMOs Ethical characteristicsEthical characteristics

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Response to GM Food Response to GM Food Labeling is MixedLabeling is Mixed

Chinese consumers place a higher Chinese consumers place a higher value on technologyvalue on technology

European & Japanese consumers European & Japanese consumers may prefer traditional ingredients may prefer traditional ingredients

53% of Europeans reject GM foods.53% of Europeans reject GM foods. 64% of US consumers are 64% of US consumers are

supportive or neutral towards GM supportive or neutral towards GM foods.foods.

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Country of Origin Country of Origin RegulationsRegulations

The 2002 U.S. Farm Bill mandated COOL The 2002 U.S. Farm Bill mandated COOL for fresh & frozen food commodities for fresh & frozen food commodities such as: such as: BeefBeef PorkPork LambLamb FishFish Fruits & Vegetables andFruits & Vegetables and PeanutsPeanuts

The new law will take effect in The new law will take effect in September 2004September 2004

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Exclusions for covered Exclusions for covered commodity include:commodity include:

Being an ingredient in a processed food Being an ingredient in a processed food item.item.

Being served in a food service establishmentBeing served in a food service establishment

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Expected COOL ImpactsExpected COOL Impacts

ConsumersConsumers ProducersProducers Retail IndustryRetail Industry International TradeInternational Trade GovernmentGovernment

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COOL Impacts on COOL Impacts on U.S. ConsumersU.S. Consumers

ProponentsProponents Right to know where their food has Right to know where their food has

been produced been produced WTP StudiesWTP Studies Belief that American Food Products Belief that American Food Products

are safer than importsare safer than imports TraceabilityTraceability

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COOL Impacts on COOL Impacts on U.S. ConsumersU.S. Consumers

OpponentsOpponents The right to know argumentThe right to know argument

The labeling exemption of food service The labeling exemption of food service establishments & poultryestablishments & poultry

Is COOL likely to provide information Is COOL likely to provide information critical to consumers choices ?critical to consumers choices ?

What is the social welfare impact What is the social welfare impact affecting an industry segment from affecting an industry segment from consumers making choices opposed to consumers making choices opposed to their interests?their interests?

Higher cost of food to consumersHigher cost of food to consumers

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COOL Impacts on COOL Impacts on ProducersProducers

ProponentsProponents Creating an identity:Creating an identity:

Certified Angus BeefCertified Angus Beef Organic ProductsOrganic Products Dolphin Safe TunaDolphin Safe Tuna Washington State ApplesWashington State Apples

Price premiumsPrice premiums Increased consumer demand for USA Increased consumer demand for USA

labeled Ag productslabeled Ag products

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COOL Impacts on COOL Impacts on ProducersProducers

OpponentsOpponents No evidence that price premiums will No evidence that price premiums will

occuroccur No evidence that increased consumer No evidence that increased consumer

demand will occurdemand will occur Producers will end up paying the Producers will end up paying the

additional cost of labelingadditional cost of labeling The required tracking system is The required tracking system is

excessive, unnecessary and too costlyexcessive, unnecessary and too costly

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The Food IndustryThe Food IndustryRetailersRetailers

CostsCosts Record-keeping costsRecord-keeping costs Tracking & labeling costs of ground Tracking & labeling costs of ground

meatmeat

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Estimated Industry Costs Estimated Industry Costs Related to COOLRelated to COOL

Exceeding $1.3 billion annually (FMI)Exceeding $1.3 billion annually (FMI) $353 million annually for the meat industry $353 million annually for the meat industry

(American Meat Institute)(American Meat Institute) Cost of monitoring COOL for Produces is Cost of monitoring COOL for Produces is

estimated at $56 million/year by the U.S. estimated at $56 million/year by the U.S. General Accounting Office (GAO)General Accounting Office (GAO)

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International Trade IssuesInternational Trade Issues

Most US trading partner countries Most US trading partner countries require COOL at retail for covered require COOL at retail for covered foodsfoods

COOL as relief from foreign COOL as relief from foreign competition (more protectionism)competition (more protectionism)

COOL: may be challenged at WTO as a COOL: may be challenged at WTO as a non-tariff trade barriernon-tariff trade barrier

COOL compliance may be most costly COOL compliance may be most costly for LDC suppliers to the U.S.for LDC suppliers to the U.S.

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Current DebateCurrent Debate

two year delay in the labeling two year delay in the labeling requirements requirements

Unanswered QuestionsUnanswered Questions Consumer willingness to pay for COOLConsumer willingness to pay for COOL Meat sold to grocery stores versus Meat sold to grocery stores versus

meat for exports or food service marketmeat for exports or food service market Producers focusing their advertising Producers focusing their advertising

thrust on U.S. produced beefthrust on U.S. produced beef

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Unanswered QuestionsUnanswered Questions

Consumer willingness to pay for COOLConsumer willingness to pay for COOL Meat sold to grocery stores versus Meat sold to grocery stores versus

meat for exports or food service meat for exports or food service marketmarket

Producers focusing their advertising Producers focusing their advertising thrust on U.S. produced beefthrust on U.S. produced beef

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Thank YouThank You