Consumer Valuation of rBST-free and Organic Milk

1. Consumer Valuation of rBST-free and Organic Milk Jeremy D. Foltz University of Wisconsin Dept. of Ag. &Applied Economics Program on Agricultural Technology Studies

2. Outline • Introduction: • The valuation problem of GMO labels • Price Premiums and Market Shares for rBST-Free and Organic Milk • Determinants of Consumer Demand • Estimates of Consumer Valuation • Conclusions • What this means for the industry

3. Labeling and Product Introduction • Controversies about GMO-free and organic labels • Recent Monsanto suit against Maine dairy • USDA organic label rules • Product introduction in milk market is a labeling issue • Do Consumers benefit from the introduction of labeled milk?

4. Typical Milk Labels Unlabeled Organic rBST Free

5. A Different Approach to Consumer Valuation Studies • Previous Research • Survey data • Experiments • Our Approach: Revealed Preference • Supermarket data on sales of milk in US by type (organic, rBST-free, unlabeled) • 260 weeks of data from 1997-2002: • Repeat purchases over time as the market changes and matures • Aggregate data from 12 major US cities

6. Average Milk Price by City

7. Average Market Share by City

8. Labeled Milk Prices:1997-2002 • Big price increases for both rBST-free and organic milk • Organic milk increased 29% • rBST-free milk increased 46%

9. Prices by Year

10. Labeled Milk Market Shares:1997-2002 • Market share increases • Five fold increase for organic milk • 50% increase for rBST-free milk, • Market for rBST-free peaked in 1998

12. Consumer Valuation of New Products • Estimate consumer demand with demand system • Calculate total benefit to consumer from new product introductions as: • Variety Effect VE • Competitive Effect CE

13. Variety Effect • Benefits consumers get from having new products in the market. • Most of benefit goes to consumers of new products • But benefit exists even if you do not purchase a good. • “More variety is better than less variety”

14. Competitive Effect • Competition from new products reduces the prices of existing products • Competitive effect = benefit consumers derive from lower prices

15. Competitive Effect Estimates • Prices decreasing with • number of brands • presence of organic and rbst free brands • Brand Introduction: an unlabeled brand drops average price only $0.0012 per gallon. • Effect of rbst-free and organic brand introduction is $0.02 per gallon ( 1¢ for each)

16. Variety Effect • Total variety effect of labeled milk: 17¢ per consumer per week • Ranges from • A low of 12¢ • To a high of 27¢

17. Variety Effect • Major differences between rBST-free milk and organic milk in the variety effect • Organic milk • very high willingness to pay • nearly 90% of variety effect) • rBST free milk: • Low willingness to pay more • Estimate that at $1 extra per gallon no demand for rBST free milk

18. Yearly Value to U.S. Consumers of rBST-Free & Organic Milk • Yearly Competitive Effect: $130 million • Yearly Variety Effect: • Average estimate $2.5 billion • Minimum estimate $1.6 billion • Yearly Estimated Value to Consumers $ 1.7 – $2.6 billion

19. More Results • Asymmetric substitution effect between unlabeled milk and both rBST-free and organic milks • Once you go organic you don’t go back • rBST-free “starter” or “gateway” milk • More likely to go to organic from rBST-free

20. Conclusions • Most of the valuation of milk labeling is from Organic not from rBST-free • GMO free element not most important part of consumer valuation • Organic labeling worth a lot in milk

21. Conclusions • Is rBST free labeling worth the cost? • To industry? • Individually? • Collectively? • To regulators? • To consumers?

22. Consumer Valuation of rBST-free and Organic Milk Jeremy D. Foltz foltz@aae.wisc.edu