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

Outline Introduction: The valuation problem of GMO labels 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 Estimates of Consumer ValuationConclusions What this means for the industry What this means for the industry

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

Typical Milk Labels UnlabeledOrganicrBST Free

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

Average Milk Price by City

Average Market Share by City

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

Prices by Year

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

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

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”

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

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

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

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

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

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 More likely to go to organic from rBST-free

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 GMO free element not most important part of consumer valuation Organic labeling worth a lot in milk Organic labeling worth a lot in milk

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

Consumer Valuation of rBST-free and Organic Milk Jeremy D. Foltz