The Benefits and Costs of COOL
Dr. John M. Connor
In the last PAER the legal and regulatory aspects of the new
Country-of-Origin-Labeling (COOL) law were discussed. The American
Meat Institute, other meat-industry trade associations, and many
USDA officials generally opposed the passage of the COOL legislation.
Some economists are skeptical about the wisdom of this policy.
These positions were publicly justified by assertions that the
industry costs of implementing COOL were significantly higher
than the benefits to consumers of red meats, peanuts, fruits,
and vegetables. This article examines the issues surrounding the
benefits and costs of implementing COOL by comparing the USDA's
analysis with other economic information.
Benefits
The benefits side of the COOL equation has been sorely neglected
in the national debate. USDA has failed to consider any information
relevant to benefits; so have the industry opponents of COOL.
There is evidence that substantial benefits arise from country
of origin labeling from the consumer perspective and from the
perspective of the industry.
At a fundamental level, our society values information and choice
for consumers. Markets cannot operate properly unless information
valued by the purchaser is available. Similarly, without meaningful
choice, consumers are unable to express their preferences.
The methods of estimating costs and benefits with regard to labeling
are very different. The last major change in food labeling occurred
in 1994, when federal legislation was passed requiring nutritional
labeling on foods covering over two-thirds of the U.S. food system.
COOL is far simpler than nutritional labeling that requires a
chemical analysis of the content of each food item by an independent
laboratory.
The nature of the benefits depend in large part upon the "utility
value" or "satisfaction" attributed to them by
the consumer. Economic studies have shown that there are added
benefits to be gained by using labels to segment the market, allowing
each group of consumers to buy the products corresponding to their
willingness to pay. When consumers are unable to distinguish the
specific qualities of different products, they are not willing
to pay as high a price as they would if they were sure that the
product was of a quality more likely to precisely meet their needs.
Many surveys relevant to the labeling of food have revealed overwhelming
consumer support for such labeling and significant concern for
information as to where food is produced. For example:
Fresh Trends 2002 found that 86 percent of consumer respondents
in a national survey favor country of origin labeling.
The National Public Policy Committee performed a study designed
to evaluate producer preferences for agricultural, food and
public policy found that 98 percent of U.S. agricultural producers
favored labeling.
A multi-university study published in February 2003 on the
North Carolina State University Web site found that a large
majority of consumers was concerned about where their food originated.
The Florida Department of Agriculture and Consumer Services
performed a survey in January 2003, finding that 62 percent
of consumers interviewed would purchase U.S. produce if it had
an identifying mark.
Colorado/Nebraska Study of Benefits
There is a substantial body of research on the specifics of food
labeling within the discipline of agricultural economics. A recent
study regarding consumer willingness-to-pay for beef labeled as
to country of origin was conducted by researchers at Colorado
State University and the University of Nebraska-Lincoln and released
on March 20, 2003.) The study used panel survey data to determine
consumers' willingness to pay for meat labeled as U.S. origin.
The researchers pointed to the specific characteristics that generally
motivate consumers as shown in past research:
Consumers are becoming increasingly concerned with the quality,
safety, and production attributes of their food (Caswell, 1998).
Consumers' concern with the safety and origin of beef is especially
true in light of the recent European and Japanese BSE outbreaks
and concerns with E-coli 0157:H7 in the U.S. beef. The origin
and processes used to produce beef products are not apparent to
the consumer through experience, consumption or visual inspection
of the product. Therefore, without additional information, consumers
are not able to differentiate the origin or processes used to
produce the beef products they purchase in the retail store. Production
attributes that may be valued by consumers such as organic, non-GMO
or country of origin are considered to be credence characteristics.
Truthful labeling of credence characteristics allows the consumer
to judge the product before purchasing (Caswell, 1998).
The credence characteristics identified by Colorado State/University
of Nebraska study apply to other food items as well as beef, the
subject of their analysis. In the beef study, the researchers
found that the vast majority of consumers (73 percent) in Denver
and Chicago were willing to pay an 11 percent and 24 percent premium
for steak and hamburger, respectively, that is an average of 19
percent more for steak labeled "Guaranteed USA: Born and
raised in the U.S." The primary drivers of these results
were consumers' food safety concerns, preferences for labeling
source and origin information, desires to support U.S. producers,
and beliefs that U.S. beef was of higher quality.
Value of Benefits
This willingness-to-pay calculates into a substantial monetary
amount. There are approximately 29 million steers and heifers
slaughtered each year. Each animal produces an average of 90 pounds
of steak, according to industry experts. Origin labeling was found
to be worth a 10.5 percent increase in steak prices for 72.9 percent
of those surveyed. USDA scanner data for February, 2003 show that
the average U.S. steak price is $4.75 per pound. This results
in an aggregate willingness-to-pay of $964.51 million per year
based upon the number of steaks produced by U.S. slaughter steers
and heifers, the 10.5 percent increase, and the 72.9 percent of
consumers that have such a willingness.
As to ground beef, the nation's 275 million consumers ate an
average of 29.63 pounds of ground beef per year. Assuming a 24.3
percent increase in the price found in the Colorado State study,
the aggregate willingness-to-pay is $3,070.78 million.
The per capita consumption for beef "cuts", (steaks
and roasts) is 38.97 pounds on average from 1999 to 2001. USDA
scanner data show $4.75 per pound for steaks and $2.56 for roasts
in February 2003. An average steer or heifer produces about 90
pounds of retail steaks and 150 pounds of roasts. Using these
weights, the average price for "cuts" is $3.38 per pound.
Assuming that 72.9 percent of consumers are willing to pay 10.5
percent, or 34 cents per pound more for the cuts, the aggregate
willingness-to-pay is $2,772.66 million.
Other Benefits for Consumers
In addition to the willingness-to-pay, there are other possible
benefits that are important but difficult to quantify. For example,
the U.S. has spent considerable resources to maintain confidence
in the integrity of the food supply. As a result, the U.S. food
system has been largely insulated from the global food scares
such as foot and mouth disease and mad cow disease. Product labels
increase consumer confidence by allowing them to feel informed
and knowledgeable, even if they do not actually read the label
information. The consumer confidence issue incorporates a risk
reduction benefit. If the consumer perceives that they are at
reduced risk of harm, they feel protected. As an analogy, consumers
buy insurance to be protected, but they hope that they will not
have to actually utilize the insurance protection they purchased.
Second, there is an opportunity to reduce risk and cost due to
food safety problems or outbreaks that may originate in a particular
country. If processing plants have product segregated and identified,
they can avoid some of the tremendous losses emanating from shutdowns
and recalls. Further, consumers can avoid products from the affected
countries that are already on the retail shelf or in the consumer's
pantry. Past recall efforts have been hampered by an inability
to procure a large portion of the product because it had already
been sold. This is especially the case with regard to perishable
foods.
Producer Benefits
Producers may also benefit from food origin labeling, because
an increased willingness to pay on the part of the consumers will
be passed on at least partially as higher farm prices and increased
returns to producers. Depending on the way in which consumer preferences
shift, either domestic or foreign producers will benefit, possibly
both. Apart from the direct mark-up in prices to reflect the added
assurance, another way that prices might increase is as a result
of an expansion of demand for the product. When products are displayed
side by side with one of lesser quality and the consumer has no
way of telling the difference, potential customers might shy away
from the market, especially in cases where consumer health might
be affected. Rectifying such a situation by providing consumers
with the knowledge and information needed and leaving the choice
up to them could not only maintain current customers but attract
new consumers who are prepared to act on the information given.
This would result in an overall increase in the demand for the
product and an increase in net returns for producers. Thus, the
benefits of country of origin labeling are significant. The science
of quantifying such benefits is well recognized in the field of
economics, though few detailed studies have been commissioned
on this specific issue.
Record-Keeping Costs
The USDA issued an estimate as to the record-keeping costs of
the voluntary guidelines on November 21, 2002. It was required
to do so under the Paperwork Reduction Act of 1995. The total
cost calculated was $1,967.76 million in the first year for all
covered entities. For the following reasons, it appears that the
USDA cost estimate was high.
Costs to Producers
The USDA cost estimate stated that the producer record-keeping
burden would be $1 billion. It assumed that there were 2 million
farms, ranches, and fisherman (production entities) that the time
required to develop a record-keeping system to comply with the
voluntary guidelines is one day; that the time required to generate
and maintain records is one hour per month; and that labor cost
$25 per hour. This resulted in a cost estimate of $400 million
to establish a record-keeping system and $600 million per year
to maintain records, for a total fiscal year cost of $1 billion.
The first issue is the number of production entities that will
be affected. It is possible that the guidelines may not cover
production entities at all because they are not within the textual
scope of the labeling legislation. However, for argument's sake,
let us assume that such entities may be covered.
The USDA assumption that 2 million producers will be affected
is far too high. First, all 2 million producers in the country
do not produce covered commodities. Statistics from the National
Agricultural Statistics Service (NASS) show that there are 1.03
million cattle producers (2003), 75,350 hog farms (2002), 64,170
sheep and goat farms (2002), 12,221 peanut farms (1997), 106,069
fruit and nut farms (1997), and 53,7171 vegetable farms (1997).
The total number of producers [excluding fisherman] that could
potentially be affected is 1,342,527. This number is 33 percent
less than the USDA estimate.
The second issue is whether the USDA estimate as to number of
additional labor hours to maintain records is correct. The USDA
assumed, without articulation, that each producer would require
one day to implement a record-keeping system and one hour per
month to maintain records. However, there should be no need for
new records, beyond those records kept for other purposes, that
are required for producers and growers to show the country of
origin their product.
Livestock producers currently maintain records for taxes, health
rules, and other programs that are sufficient to show the origin
of their livestock. These records include records on births, animal
purchases, feed purchases, sales, inventory and health. Any auditor
can glean sufficient information from these records to determine
whether producer representations are accurate as easily as a tax
or accounting auditor can verify the propriety of tax or financial
documents. Thus, no new record keeping will be necessary for livestock
producers (See the last issue of PAER on this issue).
Growers of fresh produce maintain the same records as livestock
producers as well as any extra documentation required under the
Perishable Agricultural Commodities Act and its regulations. The
seed and input records maintained by growers should be sufficient
to demonstrate U.S. product. We anticipate that no new records
should be necessary with regard to such growers.
Though the majority of producers of covered commodities produce
exclusively U.S. product, we acknowledge that producers of fish,
shellfish, cattle, hogs, and sheep can procure their product from
other countries. Documents showing such purchases are currently
maintained for tax and other purposes. Therefore, such producers
should have no additional record-keeping burden.
The third issue is whether the USDA applied the proper labor
cost to the labor requirements. USDA estimated the value of time
for producers at $25 per hour. No basis for that labor cost number
was provided. USDA further estimated that each producer would
require eight hours (a one time cost) to establish a record-keeping
system and 12 hours per year to maintain the records. Keeping
in mind that the additional labor could be zero, let us examine
the USDA assumptions on their own merit.
The best data source to estimate the value of each hour of labor
comes from the Bureau of Labor Statistics (BLS). BLS data show
that the median value of farm labor is $7.76 per hour. If one
applies the BLS data for labor cost and the aforementioned NASS
data on producer numbers to the USDA labor hour estimate for establishing
a record-keeping system, the labor cost is reduced by almost 80
percent. In sum, producers' labor costs for COOL are at most $124
million and quite possibly nothing.
Costs to Handlers
The labeling legislation allows, but does not require, the Secretary
of Agriculture to require "that any person that prepares,
stores, handles, or distributes a covered commodity for retail
sale maintain a verifiable record-keeping audit trail." The
USDA has not only chosen to require such an audit trail, but also
has required retailers to ensure that this is done through private
contracts.
USDA estimates that there are 100,000 food handlers (including
packers, processors, importers, wholesalers, and distributors)
in the country. Though it concedes that many do not handle covered
commodities, USDA goes on to assume all will choose to comply.
Further, USDA presumes that food handlers require two days of
labor to create a record-keeping system at an additional one hour
per week to maintain the system. Last, USDA establishes a value
of $50 per hour for labor to generate a $340 million record-keeping
burden. This cost estimate is inflated.
First, the number of affected entities is too high. For the covered
commodities, the proper number of relevant packers, processors
and manufacturers is about 9000. Similarly, for the covered commodities,
the total number of wholesalers, distributors and importers is
at most 15,000. This is 76 percent less than the USDA estimate.
Second, as with producer cost estimate, USDA's per hour labor
value is too high and without support as to handlers. The Bureau
of Labor Statistics value of the closest category of laborer shows
a mean wage rate of approximately $13.60 per hour, almost 75 percent
less than the USDA estimate.
Third, because the vast majority of covered commodities are produced
within the U.S., most handlers will not have any purchases from
foreign origin. There are only a few dominant firms in each category
likely to procure product from many sources, including foreign
sources. Importers, however, procure all products from foreign
sources by definition.
As a result, the record-keeping burden for handlers resulting
from the labeling legislation will be minimal. All importers already
must keep records on the country of origin of their product pursuant
to customs regulations. Thus, they will not be affected with an
increase burden. More than 90 percent of other food handlers are
unlikely to purchase foreign origin products at the current time.
Thus, a maximum of 10 percent, or 2,400, of the food handling
firms are likely to be affected by an additional record-keeping
burden as a result of labeling legislation. In sum, the total
first year labor cost for record-keeping will be $2.21 million
for those 10 percent of food handlers above and beyond the records
currently maintained for other purposes.
Costs to Retailers
All retailers will be required to provide information to consumers
as to the country of origin of covered commodities. The labeling
legislation defines retailers as those licensed by the Perishable
Agricultural Commodities Act. There are 31,000 such licensees.
USDA claims that each retailer will require five days for one
person to establish a record-keeping system and one hour per day
to maintain the records. USDA presumes that the wage rate for
such duties is $50 per hour. Thus, their total cost estimate is
$625.75 million for retail record-keeping. That estimate is again
too high.
First, the record-keeping time assumed by the USDA is exaggerated.
Retailers are merely a conduit of labeling claims made by their
suppliers. Thus, they need merely to pass such information on
to consumers. In the case of covered commodities sold in packages,
retailers can merely require that suppliers place the required
origin information on the package label. In the case of covered
commodities that are sold in bulk form, the origin claims made
by suppliers on the boxes and invoices should contain the necessary
information for retailers to pass on to their customers. Some
of the bulk products, such as apples and oranges, often contain
individual stickers that could be modified or added to contain
origin information.
Retailers currently maintain detailed records as to purchases
and sales. Certainly, there has been a proliferation of product
categories in recent years, with promotions of higher value products
with special attributes, including organic, natural, or another
branded program. The addition of a category containing origin
information would not be a significant feat. Such information
should be sufficient for auditors to verify labeling claims. In
sum, there will be little need to create a new record-keeping
system for COOL. Rather, slight changes to existing record-keeping
and display processes are all that is necessary. The labor time
is probably less than half of USDA's assumption.
The USDA labor hour rate is also too high. The Bureau of Labor
Statistics show that the median wage rate for retail wage earners
is approximately $9 per hour. There may be some involvement of
supervisory personal at a higher median wage rate of $24.75 per
hour, but such involvement is likely no more that 10 percent of
the total hours. The weighted average per hour wage rate is thus
$10.75 per hour. The total cost of establishing a record-keeping
system for retailers in the first year at most $70 million for
retailers, would be almost 90 percent less than the USDA estimate.
Total Record Keeping Cost
Assuming that the USDA adopts at the least, a cost alternative
program for complying with the labeling legislation, the total
record-keeping cost for producers, handlers and retailers should
be between $69.86 million and $193.43 million. These more realistic
estimates constitute a 90-95 percent reduction in the USDA estimate.
Considering that U.S. consumers purchase and eat approximately
236.4 billion pounds of covered commodities, per pound cost of
record-keeping for labeling is between three-hundredths (3/100ths)
and eight-hundredths (8/100ths) of a cent per pound. There is
no reason to believe that this small cost impact would lead to
consumers avoiding covered commodities (such as beef) and substituting
non-covered commodities (such as poultry).
Conclusion
Country of origin labeling for food is a potentially important
component of consumer choice. The reduction of food-system risk
and the preservation of consumer confidence in the food system
are additional benefits. Every credible study has shown that consumers
value this information, and some studies show a significant willingness-to-pay
to get this information. The combination of survey data and experimental
auction data that is currently available leads us to the conclusion
that the consumer willingness-to-pay for labeling amounts to billions
of dollars across all covered commodities.
References
Umberger, Feuz, Calkins, and Sitz, "Country of Origin Labeling
of Beef Products: U.S. Consumers' Perceptions," Presented
at the 2003 FAMPS Conference: "Emerging Roles For Food Labels:
Inform, Protect, Persuade." Washington, D.C., March 20-21,
2003, available online at http://dare.agsci.
colostate.edu/extension/cool.pdf.
Note: This article summarizes part of "Country of Origin
Labeling: A Legal and Economic Analysis" by professors John
Van Sickle (University of Florida), Roger McEowen (Kansas State
University), C. Robert Taylor (Auburn University), Neil E. Harl
(Iowa State University), and John M. Connor (Purdue University).
It can be read in its entirety on the Worldwide Web at: http://www.iatpc.fred.
ifas.ufl.edu/docs/policy_brief/PBTC_03-5.pdf .
John M. Connor is a Professor in the Department of Agricultural
Economics at Purdue University. |
