Willingness-to-Pay for Natural, Organic, and Amer. Assoc. of Wine Economists Bordeaux, France June, 2016 Willingness-to-Pay for Natural, Organic, and Conventional Foods: The Effects of Information and Meaningful Labels by Wallace Huffman, ISU, and Jonathan McFadden, ERS

Introduction Increasingly popular foods are those labeled as “Organic” and “All Natural” Organic Food Popularity has been enhanced by implementation of the U.S. National Organic Plan in 2002, establishes a strictly process-based standard - Produced without excluded methods: synthetic chemicals, biotechnology, irradiations, - Produced with National List of Allowed Substance, but not those Disallowed: synthetic fertilizers and pesticides, growth hormones, antibiotics - Farm must have an Organic Production Plan certified by a USDA NOP certifying agent Foods produced under the NOP: 100% or ≥ 95% organic ingredients can be labeled as “Organic” and carry the USDA’s organic food seal; ≥ 70% organic ingredients can only carry “Made with Organic (up to 3 Ingredients); no USDA Organic seal or statement “Made with Organic Ingredients.” All-Natural Food Seems to be growing consumer sales, but good data are not available -lacks a set of guidelines or legally-binding standard; no certification process the USDA has informal policy, e.g., no artificial flavors, coloring, chemical preservatives the FDA suggests no artificial or synthetic substances Some consumers are confused about differences between organic and all natural foods Moreover, organic and natural foods are “credence goods”

Objective: To test for food label and information treatment effects reflected in consumers’ WTP for organic, all-natural and conventional foods To carry out the project, we identify a random sample of adult consumers, 18-65 years of age in the Des Moines area and obtained agreement that they would come to a central location an participate in an ISU project assessing consumers’ preference on food. -Subjects were paid $65 for participating; about 75 minutes of time; 102 total -We collected socio-econ-demographic information from each subject - Experimental commodities 3lbs of red delicious apples, 1 ¼ lb fresh broccoli 12 grade A large eggs -Subjects receive information from food labels and 5 information treatments, including a no-information base line Some findings: -Subjects on average are WTP the most for organic and the least for conventional products -Information treatment effects matter, sometimes in complex ways -Household attributes, esp the age of children affect WTP premiums for organic and all natural foods

Figure 1: Commodity Labels for Apples, Eggs, and Broccoli

Packaged Information Perspectives (i) An organic food industry perspective on organic food, (ii) Independent, third-party, verifiable perspectives on organic foods, (iii) Natural food industry perspective on “natural” and “all natural foods,” and (iv) Independent, third-party, verifiable information on natural foods Each perspective limited to 1- 8.5x11” sheet of paper and organized under the following headings: General Statement; Production Standards; and Nutrition, Taste and Appearance to ease information processing by subjects [See Handout] Information Treatments A no information baseline (ii) The natural food industry perspective (iii) The natural food industry perspective plus independent, 3rd party perspective on natural foods (iv) The organic food industry perspective (v) The organic food industry perspective plus independent, 3rd party perspective on organic foods

Figure 2: Subject Activities in a Session

Econometric Model

Conclusions and Implications ●Organic and all-natural foods serve niche markets, but we find a large and diverse set of subject demographic effects on WTP premiums, suggesting a shift to a broader base of consumers ●The addition of independent organic information to the organic food industry information reduces the premium for organic relative to conventional foods ●But, the addition of independent natural information to the natural food industry information increases the premium for natural relative to conventional foods ●We find surprising positive effects on WTP premium for organic food relative to conventional and natural foods after subjects receive the natural food industry perspective; but no effect of the organic food industry perspective on WTP premium for all-natural foods. -The organic food industry seems to have benefited from vague food labels and low quality natural food information -It seems that the natural food industry might gain from an objective food standard and meaningful labels

●Subjects who regularly read food labels in deciding to purchase new food are willing to pay premium for organic and all-natural foods relative to conventional foods; ● Subject’s pre-experiment information about organic foods significantly increased the premium of organic over natural foods ● Subject attributes affect the organic food premium, and number of children by age generally matter for the premium for O/C, N/C and O/N foods

Table 7: Zero Bids across Commodities and Types Conventional All-Natural Organic Apples 2 (1.9%) 3 (2.9%) Eggs 4 (3.9%) 1 (1.0%) Broccoli 0 (0.0%) The first number in each cell is the count of zero bids. The second number in parentheses expresses each count as a fraction of the 102 bids per commodity and type.

Figure 3: Information Treatment Effects on WTP Differences

Switching from all-natural Switching from organic to Table 6: Expected Value of Third-Party Information Switching from all-natural to conventional Switching from organic to Conventional Apples (per 3 lbs.) $2.90 $2.97 Eggs (per dz.) $0.06 $0.00 Broccoli (per 1.25 lbs.) $0.26 $0.10 Premium gains in the first column are calculated from sample sizes of 55, 36, and 50 subjects for apples, eggs, and broccoli (respectively). Premium gains in the second column are calculated from sample sizes of 49, 36, and 50 subjects for apples, eggs, and broccoli (respectively). The zero valuation of third-party information in switching from organic to conventional eggs arises because the percentage switching is zero, i.e., the number of subjects “buying” conventional who received third-party organic information equals the number of subjects “buying” conventional who received the organic industry information treatment.