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Economic Analysis of Country of Origin Labeling (COOL)

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Economic Analysis of Country of Origin Labeling (COOL) REPORT TO CONGRESS Economic Analysis of Country of Origin Labeling (COOL) April 2015 U.S. Department of Agriculture Office of the Chief Economist Washington, D.C. Economic Analysis of Country of Origin Labeling (COOL) Contents Summary ......................................................................................................................................... 1 Modeling Approaches ..................................................................................................................... 3 Equilibrium Displacement Model Approach .............................................................................. 3 Other Approaches ........................................................................................................................ 4 Assumed Regulatory Costs ......................................................................................................... 5 Results ............................................................................................................................................. 8 Estimated Impacts on Consumers ............................................................................................... 8 Estimated Impacts on Producers, Processors, and Retailers ....................................................... 9 Estimated Impacts of the 2009 Rule ........................................................................................ 9 Estimated Impacts of the 2013 Rule ...................................................................................... 12 Conclusions ................................................................................................................................... 14 Citations ........................................................................................................................................ 16 Appendix A .................................................................................................................................... A Appendix B ..................................................................................................................................... B Appendix C ..................................................................................................................................... C Economic Analysis of Country of Origin Labeling The Agricultural Act of 2014 (2014 Farm Bill) directed the U.S. Department of Agriculture (USDA) to conduct an economic analysis of mandatory country of origin labeling (COOL). Specifically, the 2014 Farm Bill included the following provision: SEC. 12104. COUNTRY OF ORIGIN LABELING. (a) ECONOMIC ANALYSIS.— (1) IN GENERAL.—Not later than 180 days after the date of the enactment of this Act, the Secretary of Agriculture, acting through the Office of the Chief Economist, shall conduct an economic analysis of the final rule entitled ‘‘Mandatory Country of Origin Labeling of Beef, Pork, Lamb, Chicken, Goat Meat, Wild and Farm-raised Fish and Shellfish, Perishable Agricultural Commodities, Peanuts, Pecans, Ginseng and Macadamia Nuts’’ published by the Department of Agriculture on May 24, 2013 (78 Fed. Reg. 31367) that makes certain amendments to parts 60 and 65 of title 7, Code of Federal Regulations. (2) CONTENTS.—The economic analysis described in subsection (a) shall include, with respect to the labeling of beef, pork, and chicken, an analysis of the impact on consumers, producers, and packers in the United States of— (A) the implementation of subtitle D of the Agricultural Marketing Act of 1946 (7 U.S.C. 1638 et seq.); and (B) the final rule referred to in subsection (a). In fulfilment of this directive, USDA submits this report to the House Committee on Agriculture and the Senate Committee on Agriculture, Nutrition, and Forestry. Summary The 2014 Farm Bill directed USDA’s Office of the Chief Economist (OCE) to conduct an economic analysis of its 2009 and 2013 country of origin labeling (COOL) rules. To help meet that directive, OCE contracted with a group of qualified agricultural economists with expertise in livestock marketing issues to conduct a study on the economic impacts of COOL on consumers, producers, and packers in the United States. The study team consisted of Drs. Glynn Tonsor and Ted Schroeder at Kansas State University, and Dr. Joe Parcell at the University of Missouri. Their study considered both the 2009 and 2013 USDA final labeling rules on the U.S. beef, pork, and poultry markets, as required by the 2014 Farm Bill directive. Most of the material in this report draws directly from the Tonsor, Schroeder, and Parcell study (Appendix A) and the regulatory impact analyses conducted for the 2009 (Appendix B) and 2013 (Appendix C) rulemakings on COOL. The findings of the Tonsor, Schroeder, and Parcell study are broadly consistent with USDA’s prior regulatory impact analyses that were developed as part of the promulgation of regulations to implement the COOL statutory requirements. Namely, the economic benefits of implementing the COOL regulations would be insufficient to offset the costs of the requirements whether analyzing the impacts through economic models of beef, pork, and poultry industries or of the U.S. economy as a whole. In terms of consumers, USDA’s regulatory impact analyses concluded that while there is evidence of consumer interest in COOL information, measurable economic benefits from mandatory COOL would be small. USDA’s regulatory impact analyses also found little evidence that consumers would be likely to increase their purchases of food items bearing U.S.-origin labels. Similarly, the Tonsor, Schroeder, and Parcell study concluded, after a review of consumer labeling theory and available academic research, that there was little to no evidence of a measurable increase in consumer demand for beef or pork as a result of COOL requirements. While the economic benefits of COOL may not translate into measurable increases in market-level consumer demand, USDA’s regulatory impact analyses and numerous comments received on the regulatory proposals indicate substantial interest in COOL. A consumer’s right to know benefits those consumers who desire COOL information. In terms of producers, packers, and retailers, USDA’s regulatory impact analysis for the 2009 COOL rule estimated incremental implementation costs of $1.3 billion for beef, $300 million for pork, $183 million for chicken, and $2.6 billion for all covered commodities (beef, pork, chicken, lamb, goat, fish, fruits, vegetables, ginseng, peanuts, pecans, and macadamia nuts). To estimate longer run economic impacts from the rule, USDA analyzed how the estimated cost shifts would affect the overall U.S. economy after a 10-year period of adjustment. USDA’s economic modeling estimated that these cost shifts would result in an estimated $212 million reduction in consumers’ purchasing power in the 10th year following implementation of the 2009 COOL regulation. In estimating first-year economic impacts of the 2009 COOL rule, Tonsor, Schroeder, and Parcell developed an economic model of the beef, pork, and poultry industries. The study estimated that implementation of the 2009 COOL regulation resulted in economic welfare losses in the first year of $405 million in the U.S. beef industry, but short-term gains of $105 million in the pork industry and $635 million in the poultry industry. To estimate longer run economic impacts from the rule, the researchers analyzed how the estimated cost shifts would affect the beef, pork, and poultry industries over a 10-year period of adjustment. Over a cumulative 10-year period, the Tonsor, Schroeder, and Parcell analysis found that the 2009 COOL requirements resulted in economic welfare losses totaling a discounted net present value of $8.07 billion for the U.S. beef industry and $1.31 billion for the pork industry. Model results indicated that the U.S. poultry industry, however, would see an increase in economic welfare of an estimated $753 million. Chief among differences with respect to USDA’s regulatory impact analysis is the use of a modeling approach focusing solely on the beef, pork, and poultry industries rather than the U.S. economy as a whole, and the summation of discounted economic welfare impacts for each of the first 10 years of implementation. 2 USDA estimates of adjustment costs for the 2013 amendments for labeling of muscle cuts of beef and pork ranged from $53 million to $192 million, with the expectation that the adjustment costs would decline over time. The incremental impacts of the 2013 amendments to the COOL regulations were estimated in the Tonsor, Schroeder, and Parcell study to result in additional discounted economic welfare losses, over the first 10 years, of $494 million for the beef industry and $403 million for the pork industry, but an estimated economic welfare gain of $67 million for the poultry industry. Modeling Approaches COOL is an example of a process attribute where a segment of consumers express a stated desire to know where food originates. Absent additional information, however, COOL conveys no science-based difference in production processes or product attributes. Existing research has not revealed that consumer demand for country of origin information is sufficient to lead to measurable increases in demand for labeled beef and pork in the marketplace. However, including COOL requirements causes the industry to incur costs. Those costs come from maintaining and providing information on where animals were born, raised and slaughtered. Since implementation of the 2013 amendments,
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