Policy in Action: AMS Involvement in Differentiating Food and Agricultural Markets Kenneth C. Clayton Agricultural Marketing Service United States Department of Agriculture

Issue as Framed “... problems of asymmetric information can be solved either by private sector initiative... or by government intervention...” “... problems of asymmetric information can be solved either by private sector initiative... or by government intervention...” “A government solution may fail... Even a well- meaning government may not be able to figure out ‘true’ consumer preferences.” “A government solution may fail... Even a well- meaning government may not be able to figure out ‘true’ consumer preferences.” “... the government-backed standard may be difficult to adapt to a new situation.” “... the government-backed standard may be difficult to adapt to a new situation.”

Agricultural Standards Context Agricultural commodity standards and their application are distinctly different things Agricultural commodity standards and their application are distinctly different things Standards in contemporary context include both traditional agricultural product commodity standards and agricultural production process standards Standards in contemporary context include both traditional agricultural product commodity standards and agricultural production process standards

Agricultural Commodity Standards Relate to “search” attributes Relate to “search” attributes Simply language for commercial trade Simply language for commercial trade Primarily used by private sector to facilitate commerce Primarily used by private sector to facilitate commerce Reduce transactions costs Reduce transactions costs Usage may promote fairness and equity Usage may promote fairness and equity Benchmark for differentiated, branded products Benchmark for differentiated, branded products

Agricultural Commodity Standards - Federal Government Application Find wide application in voluntary, user-pays grading services offered by Federal government Find wide application in voluntary, user-pays grading services offered by Federal government Find application in private marketing claims, some of which are certified by Federal government through voluntary, user-pays certification services Find application in private marketing claims, some of which are certified by Federal government through voluntary, user-pays certification services Find application in certain Federal government regulatory programs intended to 1) support cooperative marketing and 2) protect market participants from fraudulent and deceptive practices Find application in certain Federal government regulatory programs intended to 1) support cooperative marketing and 2) protect market participants from fraudulent and deceptive practices

Agricultural Production Process Standards Relate to “credence” attributes Relate to “credence” attributes Private sector marketing claims increasingly based on verification of agricultural production processes Private sector marketing claims increasingly based on verification of agricultural production processes Federal government verification sought in some cases Federal government verification sought in some cases Regulatory in certain cases Regulatory in certain cases Voluntary, user-pays verification service in most cases Voluntary, user-pays verification service in most cases

Re-Framing the Issue What role ought government play in differentiating food products? What role ought government play in differentiating food products? Private market Private market Government regulatory intervention Government regulatory intervention Private market with government facilitation (non- regulatory) Private market with government facilitation (non- regulatory)

Re-Framing the Issue What role ought government play in development of commodity and/or production process standards? What role ought government play in development of commodity and/or production process standards? What role ought government play in the application of commodity and/or production process standards? What role ought government play in the application of commodity and/or production process standards?

Current Situation - USDA Commodity Grade Standards 600 product descriptions - basis for quality differentiation 600 product descriptions - basis for quality differentiation Developed and modified at producer, processor, retailer, consumer request Developed and modified at producer, processor, retailer, consumer request Some use at retail; widest application earlier in marketing chain Some use at retail; widest application earlier in marketing chain Use not mandated by Federal government Use not mandated by Federal government Mandatory application per some Federal fruit & vegetable marketing order regulations Mandatory application per some Federal fruit & vegetable marketing order regulations

AMS Maintains Standards for 600 Commodities

Broadening Government Role in Commodity Standards Industry-led consensus standards Industry-led consensus standards International standards organizations International standards organizations Development of open, digital standards Development of open, digital standards

Current Situation - USDA Grading Services Continued extensive use Continued extensive use Innovations in service delivery Innovations in service delivery Instrumentation Instrumentation Automation Automation Electronic certificates Electronic certificates Demand for grading services as quality control by large firms Demand for grading services as quality control by large firms

Current Situation - Certification Programs Rely on end product examination Rely on end product examination Voluntary, user-pays funded Voluntary, user-pays funded Specifications developed by private companies - often benchmark on USDA grade standards Specifications developed by private companies - often benchmark on USDA grade standards

AMS Certification Programs

Benefits of USDA Grading and Certification Private Private Mechanism to differentiate products Mechanism to differentiate products Reduced development costs Reduced development costs Low cost, trained nationwide work force Low cost, trained nationwide work force Public Public Reduced cumulative development costs Reduced cumulative development costs Efficient allocation of labor resources Efficient allocation of labor resources Reduced entry barriers in consolidated industries Reduced entry barriers in consolidated industries

Current Situation - Production Process Standards Relate to “credence” attributes Relate to “credence” attributes Audit of production processes rather than inspection of end products Audit of production processes rather than inspection of end products Prescriptive in 3 cases: 1) organic standards, 2) certain livestock marketing claims (e.g., no antibiotics, free range, grain fed), and 3) foreign government requirements (e.g, BEV for Canada, Mexico, Japan) Prescriptive in 3 cases: 1) organic standards, 2) certain livestock marketing claims (e.g., no antibiotics, free range, grain fed), and 3) foreign government requirements (e.g, BEV for Canada, Mexico, Japan) Mainly, USDA assists industry in supporting their claims - based on adherence to ISO quality system protocols Mainly, USDA assists industry in supporting their claims - based on adherence to ISO quality system protocols

AMS Process Verification Programs

Benefits of USDA Process Verification Programs Maintains ISO principle of separation of program design and verification Maintains ISO principle of separation of program design and verification Private entities develop verifiable programs to support marketing claims Private entities develop verifiable programs to support marketing claims USDA audits programs to verify compliance USDA audits programs to verify compliance Provides marketing cachet of USDA seal Provides marketing cachet of USDA seal Provides mechanism for product differentiation according to credence attributes Provides mechanism for product differentiation according to credence attributes

What Role Ought Government Play in Development of Commodity and/or Production Process Standards? USDA standards are either useful or not USDA standards are either useful or not USDA standards can be reflective of “true” consumer preferences USDA standards can be reflective of “true” consumer preferences USDA standards provide a basis for product differentiation USDA standards provide a basis for product differentiation USDA standards can address market failure due to asymmetric information and reduce transactions costs depending on use USDA standards can address market failure due to asymmetric information and reduce transactions costs depending on use

What Role Ought Government Play in Application of Commodity and/or Production Process Standards? This is the more pertinent question This is the more pertinent question Regulatory or prescriptive applications fair game as to whether market failure (asymmetric information, public good) or social welfare bases justified Regulatory or prescriptive applications fair game as to whether market failure (asymmetric information, public good) or social welfare bases justified Voluntary, user-pays applications reduce transactions costs and facilitate marketing Voluntary, user-pays applications reduce transactions costs and facilitate marketing