1. The National Animal Identification System and Country-of-Origin Labeling: How are They Related? Prepared by: Wendy J.Umberger Assistant Professor and Extension Economist Department of Agricultural and Resource Economics Colorado State University Email: wendy.umberger@colostate.edu Western Center for Risk Management Education Western Extension Marketing Committee

2. Background of country-of-origin labeling provision –What is COOL –What are the controversies related to COOL? –Estimates of Costs and Benefits Issues related to verification of COOL COOL versus the National Animal ID System (NAIS) Presentation Overview

3. What is Mandatory COOL? Title of the 2002 Farm Bill Retailer shall inform consumers at the final point of sale of the country of origin of covered commodities. Only animals born, raised and slaughtered/processed qualify for “ Product of U.S.A ” label Exemption for food service Secretary of Agriculture can not mandate a national identification system to verify country-of-origin

4. Proponents’ Reasoning Behind COOL Consumers’ “right to know” Food safety - U.S. food supply is “safer” Protection of the U.S. market Increase demand for U.S. products Voluntary labeling will not work –Mandatory labeling program is the only way to get all segments of the food chain coordinated Ex. Nutritional labeling Necessary after BSE incidents in North America

5. The Controversy: COOL Law Exemptions? 1. Ingredients In Processed Food Products 2. Poultry and Dairy No Chicken, Turkey, Eggs, Milk 3. Food Service Establishments Restaurants, Cafeterias 4. Retailers With Less Than $230,000/Year In Fruit & Vegetable Sales Butcher Shops, Fish Markets, Small Grocers Why are some meat products exempt if “consumers have the right to know”???

6. The Controversy: Labeling of Country-of-Origin? U.S. Origin… Meat Must Be Exclusively From Animals 1.Born, Raised, and Slaughtered (Processed) In U.S. Also includes beef from animals born and raised in Alaska or Hawaii (transported for no more than 60 days through Canada to the U.S. for slaughter) What about feeder animals from Canada or Mexico that are finished in U.S.?

7. “Mixed Origin” and “Blended Origin” Meat Labeling Mixed Origin = Products with an origin that includes production steps (e.g. born, raised, slaughtered) that occurred in more than one country, including the U.S. –Ex. “Product of Canada, Raised and Slaughtered in United States” Blended = different products of different origins that are combined for retail sales with no material change –Ex. Ground beef – “Product of Australia; Product of Mexico, Raised and Slaughtered in U.S.A.; Product of U.S.A.;”

9. The Controversy: Necessary Records and Verification USDA didn’t create an “unknown origin” label Self-Certification is not sufficient Retailers must label covered commodities –Must keep Point of Sale records for 7 days –Must keep records of origin for 2 years Suppliers must provide information about country of origin –Producers, handlers, processors, packers, importers Verifiable (auditable records) –Suppliers must maintain records –Affidavits may be used to certify origin and existence of records

10. What Are the Costs? 1.Cost of Preserving the Identity of Animal (Covered Commodity) 2.Cost of Labeling the Products 3.Compliance Costs 4.Unexpected Industry Costs  Structural changes  Domestic or export demand changes

11. Cost Estimates: USDA-AMS First Year Cost Estimates (Millions of Dollars) BeefPorkLamb Producers 36815015 Processors 5383687 Retailers 7801559 Total 1,68667332

12. 8 Billion lbs. Sold @ 10cents/lb from 35 mil cattle $805$23Retail Dist. & Store 29 MilHdSteer/Heifers 6 MilHdCows/Bulls $435-522$15-18Packer / Processor $1,571-1,716 $109-167 $198 Segment Cost (Million $) $47-$52 $3.75-5.75 $4.88 $/Head Total 29 Mil. Head SoldFeedlots 38 MilHdcalf crop 2.5 MilHdImports Cow-calf Producers & Backgrounders Calculation Process 8 Billion lbs. Sold @ 10cents/lb from 35 mil cattle $805$23Retail Dist. & Store 29 MilHdSteer/Heifers 6 MilHdCows/Bulls $435-522$15-18Packer / Processor $1,571-1,716 $109-167 $198 Segment Cost (Million $) $47-$52 $3.75-5.75 $4.88 $/Head Total 29 Mil. Head SoldFeedlots 38 MilHdcalf crop 2.5 MilHdImports Cow-calf Producers & Backgrounders Calculation Process Cost Estimates: Sparks / CBW Source: Andersen. R.S. and S. Kay. “COOL Cost Assessment.” Published by the Sparks/CBW COOL Consortium. April 2003. http://www.ams.usda.gov/cool/comments/cool1041.pdf.

13. Cost Estimates Across Livestock Industry Sectors Beef –$47-52/head –~$0.10/pound Pork –$3.25-$10.25/head –~$0.075/pound Fish and Seafood –$0.05 to $0.075/pound Source: Andersen. R.S. and S. Kay. “COOL Cost Assessment.” Published by the Sparks/CBW COOL Consortium. April 2003. http://www.ams.usda.gov/cool/comments/cool1041.pdf.

14. Potential Benefits of COOL? Mandatory COOL may be an Appropriate Policy Tool if (Golan et al, 2000): –Asymmetric information exists –Disclosure of possible negative quality attributes does not exceed the benefits –COOL increases demand for product  Increased Demand? Market Share Higher Price Will Consumers Pay For Country Of Origin Information?

15. Consumer Studies Examining Possible Market Impact of COOL: 1.2002 Colorado Supermarket Study: Loureiro and Umberger. “Estimating Consumer Willingness to Pay for Country-of-Origin Labeling.” Journal of Agricultural and Resource Economics. 28(2)(August 2003):287-301. 2.2002 Chicago, IL & Denver, CO Consumer Auction Study: Umberger et al. “Country-of-Origin Labeling of Beef Products: U.S. Consumers’ Perceptions.” Journal of Food Distribution Research. 34(3)(November 2003b): 103-116. 3.2003 Continental U.S. Consumer Study: Loureiro and Umberger. “Assessing Preferences for Country-of-Origin Labeled Products.” Journal of Agricultural and Applied Economics. Forthcoming April 2005.

16. 2002 Colorado Supermarket Study: Loureiro and Umberger. “Estimating Consumer Willingness to Pay for Country-of-Origin Labeling.” Journal of Agricultural and Resource Economics. 28(2)(August 2003):287-301. 243 Consumers surveyed in supermarkets along the Front Range of Colorado Consumers Very Receptive to COOL “Mandatory COOL Program” –$183.77/year –$3.53/week “U.S. Certified Steak” = 38% Premium for label “U.S. Certified Hamburger”= 58% Premium for label

17. 2002 Chicago, IL & Denver, Colorado Consumer Study: Umberger et al. “Country-of-Origin Labeling of Beef Products: U.S. Consumers’ Perceptions.” Journal of Food Distribution Research. 34(3)(November 2003b): 103-116. 273 Consumers in Denver and Chicago Surveyed on WTP for COOL Hamburger and Steak Experimental Process- paid $50 to participate Bid on “USA Guaranteed: Born and Raised in the U.S.” Labeled & Unlabeled Steak

18. Consumer Research on COOL: Important Food Characteristics Colorado Front Range Study: Extremely to Very Desirable 1.Fresh 2.Food Safety Inspection 3.High Quality 4.Lean 5.Visual Presentation Very to Somewhat Desirable 7.Source Assurance 9.Beef Raised in your region of the country Chicago, IL & Denver, CO Study: Extremely to Very Desirable 1.Fresh 2.Food Safety Inspection 3.Color 4.Price 5.Leanness Very to Somewhat Desirable 9.COOL 11.Source Assurance 13.Beef Raised in your region of the country

19. Consumers’ Rationale for Preferring COOL: (75 % Preferred Labeled, 22% Indifferent) Safety and Health of Meat, 45% –U.S. better regulations and standards –Mad Cow Disease More Information (Awareness of conditions, Identify meat if Outbreak Occurs), 32% Support Producers 21% Location (Prefer from certain countries, Learn about importing countries), 12.5% Quality of Meat Higher in U.S., 11% Freshness of Meat Closer to Home, 4.5% Source: Umberger et al. “Country-of-Origin Labeling of Beef Products: U.S. Consumers’ Perceptions.” Journal of Food Distribution Research. 34(3)(November 2003b): 103-116.

20. 2002 Chicago, IL & Denver, CO Study: Umberger et al. “Country-of-Origin Labeling of Beef Products: U.S. Consumers’ Perceptions.” Journal of Food Distribution Research. 34(3)(November 2003b): 103-116. “COOL Steak” –73% Consumers were Willing to Pay Premium –11% Premium for label “COOL Hamburger” –72% Consumers were Willing to Pay Premium –24% Premium for label “U.S. Guaranteed Steak” versus Unlabeled Steak –69% Consumers were Willing to Pay Premium –19% Premium for labeled steak

21. Are Consumers Willing-to-Pay for their Taste Preference?: Canadian vs. US $5.20 $3.59 $2.07 $5.20 $0.00 $2.07 $3.17 $1.61 $2.03 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 Domestic PreferringCanadian PreferringIndifferent Average Bid ($/lb) Domestic Bid Canadian Bid Difference N = 106 45% N = 78 34% N = 49 21% Umberger, W.J., D.M.Feuz, C.R. Calkins, B.M.Sitz.“Consumers’Preferences and Willingness-to-Pay for Beef Originating from the U.S., Canada, and Australia.”Paper Presented at the2003 WAEA Annual Meetings.

22. Are Consumers Willing-to-Pay for their Taste Preference?: Australian vs. US $5.04 $2.74 $1.18 $4.82 $0.00 $1.18 $2.45 $2.08 $2.59 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 Domestic PreferringAustralian PreferringIndifferent Average Bid ($/lb) Domestic Bid Australian Bid Difference N = 139 60% N = 40 17% N = 54 23% Umberger, W.J., D.M.Feuz, C.R. Calkins, B.M.Sitz.“Consumers’Preferences and Willingness-to-Pay for Beef Originating from the U.S., Canada, and Australia.”Paper Presented at the2003 WAEA Annual Meetings.

23. 2003 Continental U.S. Consumer Study: Loureiro and Umberger. “Assessing Preferences for Country-of-Origin Labeled Products.” Journal of Agricultural and Applied Economics. Forthcoming April 2005. Mail survey sent during Spring & early Summer 2003 Representative sample of 5000 households in the continental U.S., 673 respondents Perceptions of safety of meat, agency for certifying origin, and fairest mechanism to pay for costs of COOL Would you be WTP for “Certified U.S.” beef, pork, and poultry? Compare value of COOL, source-verified, tenderness, food safety inspected Socio-demographics representative of U.S. population

24. 3.17 3.10 3.03 2.62 2.13 3.72 4.23 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 United States CanadaAustraliaNew Zealand DenmarkArgentinaMexico Country of Origin Average Ranking (1-5) Perceived Safety of Meat Products from Exporting Countries Source: Loureiro and Umberger. “Assessing Preferences for Country-of-Origin Labeled Products.” Journal of Agricultural and Applied Economics. Forthcoming April 2005.

25. Who Should Certify COOL? Government USDA Inspection Service 63% Third-Party Independent Certifiers 22% Local Producers 13% Other Agencies 2% Source: Loureiro and Umberger. “Assessing Preferences for Country-of-Origin Labeled Products.” Journal of Agricultural and Applied Economics. Forthcoming April 2005.

26. Fairest Mechanism to Pay for COOL? Higher Income Tax 2% Fees Applied to Producers 12% Higher Meat Prices 40% Use of Existing Government Budget 40% Other (Import tariffs) 6% Source: Loureiro and Umberger. “Assessing Preferences for Country-of-Origin Labeled Products.” Journal of Agricultural and Applied Economics. Forthcoming April 2005.

27. Other Issues Related to Verification of Country of Origin Concerns regarding how COOL can be implemented in an auditable system since a mandatory animal ID system can not be created to maintain an animals origin information Without individual ID, source verification becomes difficult and potentially requires more costly segregation Market may discount animals sold by producers who aren’t able to provide specific source documentation information

28. Other Issues and Remaining Questions Related to COOL Will COOL increase beef demand? –Unlikely due to supply vs. demand issue Costs versus Premium estimates? –Chicken and pork highest, but likely the least costly to label with country-of-origin Appears consumers have some misconceptions when asked directly if they are WTP for COOL –COOL is NOT TRACEABILITY –Relative value of origin-label versus other meat attributes Competitiveness of U.S. versus major importers? Animal ID makes COOL easier, but they are 2 separate issues

29. Why Individual Animal ID? Live animal traceability Disease surveillance Document origin Homeland security –Bio-security Food safety assurance Reduce the financial and social impacts of animal health incidents Market Access Value-added Opportunities for Genetic and Product improvement

30. Why NAIS: To Maintain Market Access! Within the U.S. and for Export Markets Countries with national ID –Europe, Australia, Canada, Japan Countries implementing ID –Brazil, Argentina, Uruguay, Mexico

31. US Beef Export Market About 10% of production Japan32% Mexico26% S Korea24% Canada10% 30 other 8% High quality beef Variety meats and hides (70% of tongues are exported) Drop of 9% in demand would cause price to drop by 15% 82%

32. John Hayes, Senior Director of U.S. supply for McDonalds (CNNMoney 2 July 2004) "We do have a captive supply of poultry. The animal ID program for us currently is most focused on cattle," he said. "We'll continue over the next few years to increase the amount of traceable animal ID products that we can buy, and at some point in the not-too-distant future we'll draw a line in the sand and say that after a certain date, all of our animal products will be from animals that are under an animal ID program," Hayes said.

33. What Can Animal ID Do For Producers? Help you maintain improved records on purchased cattle by source i.e. order, buyer, market, producer Manage cattle while on your operation – health, performance Added value at marketing – Sort off poor performers – BQA certified – Process-verified – Fit various alliance/premium programs

34. Cost Estimates of ID Will Vary Depending on the Method and Size of Operation Common MethodEstimated Cost/Head EID Dangle Tags/Buttons$1.85 to $4.00 MicrochipsNA Boluses$3.65 to > $4.00 Retinal Imaging$5.00 to $10.00 Information available at: http://www.beefstockerusa.org/rfid/

35. Kevin Dhuyvetter and Dale Blasi: Web-based spreadsheet to calculate RFID costs. www.beefstockerusa.org Estimated Costs of an RFID System (Example is based on 250 Head at 8% Interest Cost)

36. ID Costs Decline with Herd Size Kevin Dhuyvetter and Dale Blasi: Web-based spreadsheet to calculate RFID costs. www.beefstockerusa.org

37. Uncertainties Associated with Mandatory Animal ID Costs of system? –$100 million annually to maintain Ability to maintain tags throughout production? What happens once the hide is gone? Sharing of the costs vs. benefits in the food supply chain? Liability issues? –Producers no longer invisible participants in the marketing channel Change in market structure?

38. Public vs. Private Needs and Uses Third Party Database Potential Industry Use Examples: 1.Birth Records 2.Health Records 3.Genetic Information 4.Carcass Data USDA National Database USDA Required 1.Animal ID number 2.Previous premises number 3.Current premises number 4.Dates and times of transfer

39. Summary The Mandatory COOL Program provides Neither traceability nor individual animal ID THUS, Neither COOL nor the NAIS is a food safety program However, the NAIS substantially increase the U.S. government’s ability to respond to animal health and disease outbreaks –Ensuring the safety of animal and meat product that could enter the food supply chain Consumers value both COOL and Traceability, but based on consumer research what they appear to really want is traceability

40. Summary Continued A U.S. Animal ID system is inevitable, but the future of mandatory COOL is less certain In 2004, Public Law 109-199 was signed into law, postponing implementation of the mandatory COOL program for all commodities except wild and farm-raised fish and shellfish until 9/30/2006 COOL will probably continue to be an issue A NAIS will likely be implemented in a “technology neutral” manner Some level of animal ID will be especially important to maintain and re-establish access to export markets

41. Conclusions Consumers’ needs and wants should play a dominant role in food production. However, the needs of each member of the food system must also be met for the system to exist and to function efficiently.