What Happens When Food Marketers Require Restrictive Farming Practices?

Abstract

The dimensions that define a food product have expanded rapidly to include characteristics of the production process, marketing arrangements, and implications that production and consumption of the product have for the environment. Some market intermediaries have responded by requiring that their suppliers abide by restrictive production practices. We examine the economic effects of such restrictions and apply this analysis to limitations on the use of antibiotics in U.S. pork production. Results from conceptual and simulation analyses show that, in the absence of demand growth, less pork is sold due to higher costs in the restricted segment, and both pork consumers (on average) and producers are harmed. Demand growth of between 6–11% from adding new consumers who will consume the restricted (antibiotic‐free) product but not the conventional product is needed to return consumer surplus to the level in the base case, and between 2–4% demand growth was required to return producer surplus to base. When restricted and conventional products are modeled using a vertical differentiation framework, results depend importantly on the ease with which consumers can switch to a seller who offers their desired product type. Significant distributional impacts among consumers are present when switching costs are prohibitive.

Heterogeneous consumers and differentiated food markets: Implications for quality signaling in food supply chains

“…Examples include retailers and food service firms moving toward sourcing only cage-free eggs, meat that is "antibiotic-free," or food processors sourcing only non-GM ingredients (Saitone et al, 2015). Food firms are responding to what they perceive their customers want, in a bid to differentiate themselves in a competitive food retailing and food service environment.…”

“…Put these two propositions together and we have the specter of downstream retailers imposing increasingly restrictive production standards that may be responding to a vocal of minority of consumers. Examples include retailers and food service firms moving toward sourcing only cage-free eggs, meat that is "antibiotic-free," or food processors sourcing only non-GM ingredients (Saitone et al, 2015). Paradoxically, could the outcome be less choice for consumers, despite underlying preference heterogeneity?…”

“…Using a series of simulations, calibrated around 2013 values for U.S. hog production and consumption, Saitone et al (2015) examine the economic effects of retailer-driven restrictions on the use of antibiotics in U.S. pork production, finding that, in the absence of demand growth, consumer and producer surplus are reduced, with significant distributional impacts among consumers in the presence of prohibitive switching costs. Why would downstream retailers require restrictive practices in the absence of demand growth?…”

“…As Saitone et al (2015) note, the scope and scale of consumer switching costs also matters, and this may come down to the degree to which downstream retailers compete on different production-related attributes or converge on a single practice. A&W Canada's decision to source only "natural" beef (produced without the use of growth promotants, including hormone implants) was met with vocal opposition among many in the Canadian beef industry.…”

“…The downstream food processing and retailing sector has become increasingly concentrated, giving more weight to the product sourcing decisions of major buyers with respect to agricultural production practices (e.g., cage-free eggs, hormone-free beef, use of gestation crates in hog production, GM-free foods)(Saitone, Sexton, & Sumner, 2015).3 https://www.fooddive.com/news/6-trends-to-impact-the-food-industry-in-2019/544677/ (Food Dive, January 7, 2019); http://www.leansupplysolutions.com/ blog/seven-major-trends-influencing-food-service-supply-chains/ (Lean Supply Solutions, February 2, 2018); https://www.forbes.com/sites/phillempert/ 2018/11/15/whole-foods-market-misses-the-biggest-trend-with-their-2019-forecast/#1ee5d3484992 (Forbes, November 15, 2018); https://rsmus.com/whatwe-do/industries/consumer-products/food-and-beverage/top-trends-for-food-and-beverage-industry-businesses.html (RSM, January 7, 2019). 4 https://business.financialpost.com/news/retail-marketing/maple-leaf-foods-diving-deeper-into-plant-based-protein-with-us310-million-factory (Financial Post, April 8, 2019).…”