Choices Magazine, 4Th Quarter 2005

4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Table of Contents 4th Quarter 2005 — Volume 20, Number 4

A Statement from the Editors ...... 213 Washington Scene ...... 215 by Dr. Joe L. Outlaw, Co-Editor, Choices

Articles

Theme: Consumers and Markets Consumers and Genetically Modified Commodities (William K. Hallman, Guest Editor) Consumers’ Desire for GM Labels: Is the Devil in the Details? ...... 217 by William K. Hallman and Helen L. Aquino Consumer Willingness to Pay for GM Food Benefits: Pay-off or Empty Promise? Implications for the Food Industry ...... 223 by Benjamin Onyango and Ramu Govindasamy Lies, Deep Fries, and Statistics!! The search for the truth between public attitudes and public behaviour towards genetically modified foods...... 227 by Craig Cormick Testing Public Policy Concepts to Inform Consumers about Genetically Engineered Foods ...... 233 by J. Lynne Brown and Wei Qin American Opinions of GM Food: Awareness, Knowledge, and Implications for Education ...... 239 by William K. Hallman and W. Carl Hebden Consumer Responses to GM Foods: Why are Americans so Different?...... 243 by W. Carl Hebden, Hyun Kwan Shin, and William K. Hallman What the Print Media Tell Us About Agricultural Biotechnology: Will We Remember? ...... 247 by Joan Thomson and Laura Dininni Ag-Biotech: It’s Not Just What’s for Dinner Anymore, but the Future Contents of our Medicine Cabinets...... 253 by Jennifer Medlock and Edna Einsiedel I Will Not Eat It with a Fox; I Will Not Eat It in a Box: What Determines Acceptance of GM Food for American Consumers?...... 257 by Venkata Puduri, Ramu Govindasamy, John T. Lang, and Benjamin Onyango

©1999–2005 CHOICES. All rights reserved. Articles may be reproduced or electronically distributed as long as attribution to Choices and the American Agricultural Economics Association is maintained. Choices subscriptions are free and can be obtained through http://www.choicesmagazine.org.

4th Quarter 2005 • 20(4) CHOICES Theme: Agribusiness and Finance Supply Chains in the Agricultural Sector (Michael D. Boehlje, Guest Editor) A Frictionless Marketplace Operating in a World of Extremes...... 263 by Allen F. Wysocki Food Safety in Three Dimensions: Safety, Diet Quality, and Bio-Security ...... 269 by Jean Kinsey Transitioning from Transaction-Based Markets to Alliance-Based Supply Chains: Implications for Firms...... 275 by Thomas L. Sporleder, Constance Cullman Jackson, and Dennis Bolling Risk Sharing and Transactions Costs in Producer-Processor Supply Chains ...... 281 by Allan W. Gray and Michael D. Boehlje Logistics, Inventory Control, and Supply Chain Management ...... 287 by Frank Dooley

Grab Bag Perspectives on Traceability and BSE Testing in the U.S. Beef Industry ...... 293 by DeeVon Bailey, James Robb, and Logan Checketts Made in China: Is it Over for the U.S. Textile Industry? ...... 299 by Siyi Guo, Ereney Hadjigeorgalis, and Jay Lillywhite

Coming Attractions ...... 305 Developing New Energy Sources from Agriculture / Jim Duffield, Guest Editor Tilling Latin American Soils / Peter Goldsmith, Guest Editor

CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association A Statement from the Editors

Welcome to our sixth issue of Choices. USDA, and to nonmembers of AAEA. Outreach part- • Choices continues to gain a wider distribution. The ners are important, not only in helping us increase number of subscribers has nearly doubled. Since our readership, but also in helping us maintain relevance. first issue in November 2004, there have been over More information and forms to nominate or agree to 50,000 PDF downloads of Choices material. The elec- be an outreach partner are available at http:// tronic format has enabled readership from across the www.choicesmagazine.org/outreach.htm. world. For example, so far in 2005 there have been • Our objective is to publish at the end of each quarter more than 67,000 hits to the website from Canada, of the year. Please note that our thematic coverage in Europe, Asia, and Australia. this issue focuses on Consumers and Genetically Mod- • We encourage you to submit thematic proposals and ified Commodities and Supply Chains in the Agricul- single articles for the “Grab Bag” section of Choices. tural Sector. Future themes will focus on the emerging We have had a relatively small number of “Grab Bag” trends in Latin American agriculture, developing new paper submissions during our editorship. For submis- energy sources from agriculture, the Farm Bill, check- sion requirements, see http://www.choicesmaga- off programs, invasive species, future of the livestock zine.org/submissions.htm. industry, and returns to research and extension. If you • The response from potential outreach partners has have an idea for a thematic proposal and were wonder- been slow in developing. We hope those with mailing ing whether we already have someone committed to a lists will continue to help us distribute Choices theme in the area, you can check out the calendar at announcements to extension, policy, agribusiness, http://www.choicesmagazine.org/themes.htm.

4th Quarter 2005 • 20(4) CHOICES 213 214 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Washington Scene by Dr. Joe L. Outlaw, Co-Editor, Choices FY2006 Budget Reconciliation As 2005 comes to a close there is a major rush to com- There is hope that House and Senate conferees can recon- plete several items of unfinished business in Washington, cile the differences between their two bills before the all while keeping an eye on activities ongoing in Hong Christmas break. Over the FY 2006-2010 period, the Kong at the WTO Doha Round meetings. At this time, House version would cut nearly $50 billion, while the December 23rd appears to be the target for completing Senate version cuts $35 billion. Some of the more contro- Congressional work for the year in Washington. Work on versial agricultural and nonagricultural differences in the legislation continues to proceed in areas of interest to our two reconciliation bills include: differences in Medicare profession, including budget reconciliation, appropria- and Medicaid cuts, provisions for drilling in the Arctic Na- tions, immigration reform, and tax cuts. Listed below are a tional Wildlife Reserve (ANWR), and extension of the few of the key issues being discussed in Washington D.C. milk income loss contract (MILC) payments for dairy Doha Round farmers. The next meeting of the World Trade Organization Farm Bill (WTO) scheduled for December 13th-18th is currently U.S. Secretary of Agriculture Johanns recently finished a underway in Hong Kong. There has been no shortage of series of farm bill listening sessions across the United opinions in the press and among the academic community States. He expects to have a summary of what he heard at regarding the prospects for progress in Hong Kong. While the listening sessions out by the end of the year or early many U.S. observers have lowered expectations for the 2006. Policy observers indicate that Congressional work meeting in Hong Kong, there is significant pressure on all will begin on the 2007 Farm Bill in 2006, but not much parties to reach a new agreement prior to Trade Promotion should be decided until early 2007. While they don’t ap- Authority (TPA) expiring for President Bush in July 2007. pear to have widespread support, there is a group of 21 TPA, formerly known as “fast track,” allows future interna- Democratic members of the House of Representatives who tional trade agreements to be subject to an up-or-down have introduced a bill to extend the 2002 farm bill by one vote, but not amendment, in Congress. After the very year (through 2008). The purpose of the bill would be to close vote for passage of the CAFTA agreement, there is provide farmers and ranchers some policy certainty while considerable doubt that the Congress could pass a Doha they wait to see what happens in the Doha Round negoti- Round agreement if it became subject to amendments. ations. U.S. Trade Representative Rob Portman has indicated that to meet the TPA expiration deadline, a new trade agree- Beef Trade with Japan ment would need to be finalized by mid-2006. th There may be some who are secretly hoping for no On December 11 , Japan announced that it would re- agreement in this round of trade talks. Most political and sume imports of U.S. and Canadian beef under 21 trade observers think that a new agreement is a necessity months of age. The Japan market, which has been closed for the United States as the U.S. is likely to face and lose to U.S. beef for nearly two years, was previously the largest more challenges against other commodities without a new export market for U.S. beef. While U.S. beef should arrive peace clause provision that is likely to be included in a new in Japan within weeks of the announcement, there have agreement. been Japanese consumer surveys that indicate some reluctance to U.S. beef. With the opening of Japan, 67 coun-

4th Quarter 2005 • 20(4) CHOICES 215 tries have now established trade for prehensive strategy to help farmers retary for Rural Development Tom U.S. beef and beef products. and ranchers cope with high energy Dorr. USDA is also interested in cre- costs and develop long-term solu- ating risk management tools that Energy tions. He also announced the forma- help producers manage energy-based In early December, Secretary of Agri- tion of the USDA Energy Council, input risk. culture Johanns announced a com- which will be chaired by Under Sec-

216 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Consumers’ Desire for GM Labels: Is the Devil in the Details? by William K. Hallman and Helen L. Aquino

The current U.S. policy regarding the labeling of GM foods is dictated by the Food and Drug Administration Articles in this Theme: (FDA). In 1992, the FDA published a policy describing Consumers’ Desire for GM Labels: how foods made from GM plants would be regulated. Is the Devil in the Details? ...... 217 FDA will require special labeling if the composi- Consumer Willingness to Pay for GM Food Benefits: tion of food developed through GM differs signif- Pay-off or Empty Promise? Implications for the icantly from its conventional counterpart. . . To Food Industry...... 223 date FDA is not aware of information that would Lies, Deep Fries, and Statistics!! The search for the truth distinguish GM food as a class from foods devel- between public attitudes and public behaviour oped through other methods of plant breeding towards genetically modified foods...... 227 and thus, require such foods to be specially Testing Public Policy Concepts to Inform Consumers labeled to disclose the method of development about Genetically Engineered Foods ...... 233 (FDA, 1992). American Opinions of GM Food: Awareness, Knowledge, The 1992 FDA policy requires special labeling of a and Implications for Education...... 239 GM food derived from new plant varieties under several Consumer Responses to GM Foods: Why are Americans so circumstances. Specifically, labels are required to notify Different?...... 243 consumers if the GM food is no longer equivalent to its What the Print Media Tell Us About Agricultural non-GM counterpart. In such cases, the food product also Biotechnology: Will We Remember? ...... 247 needs to be renamed. Labels are also required on a GM Ag-Biotech: It’s Not Just What’s for Dinner Anymore, food product if its use or the consequences stemming from but the Future Contents of our Medicine Cabinets. . . 253 its use have changed, a new nutritional aspect was intro- I Will Not Eat It with a Fox; I Will Not Eat It in a Box: What duced that was not customary to the product, or a known Determines Acceptance of GM Food for American allergen was introduced that was not implicit to the prod- Consumers? ...... 257 uct. However, while these regulations require that consumers be alerted when the characteristics of a familiar dients if they choose to, as long as the statement does not food product have been substantially altered, the labels do express or imply that the non-GM food is superior. not need to indicate that the change was produced In contrast, in July 2004, the European Union (E.U.) through the process of genetic modification. As such, there put into effect a labeling law that requires any food are no current regulations mandating that GM foods be product that contains more than 0.9% GM material to be identified as such. labeled as such (Alvarez, 2003). This move now allows However, the FDA released draft voluntary guidelines the importation of GM material into the European for the food industry on ‘positive’ and ‘negative’ GM food Union, ending a defacto moratorium. Moon and Bala- labeling (FDA, 2001). In effect, food manufacturers can subramanian (2004), argue that the E.U. policy requiring voluntarily label their products as containing these ingre- mandatory labeling is the outcome of two regulatory prin- dients, but are not required to do so. Similarly, manufac- ciples. The first of these is the separation of scientific risk turers can label their products as containing no GM ingre- ©1999–2005 CHOICES. All rights reserved. Articles may be reproduced or electronically distributed as long as attribution to Choices and the American Agricultural Economics Association is maintained. Choices subscriptions are free and can be obtained through http://www.choicesmagazine.org.

4th Quarter 2005 • 20(4) CHOICES 217 assessment from risk management, mined by market forces. That is, the consumer’s food purchases (Jaeger, allowing E.U. regulatory agencies to fate of GM foods should be decided 2002) to estimates that food prices take into consideration complex eco- by the cumulative purchasing deci- would increase by approximately 5% nomic, political, and societal con- sions of informed individuals. (Houtman, 2002). cerns. The second is the application However, despite the fact that an On the other side of the debate, of the precautionary principle, estimated 60 to 70% of processed labeling advocacy groups maintain requiring continued scientific risk foods on American shelves contain that mandatory labeling of GM assessment to resolve any uncertainty ingredients derived at least in part products would offer increased about potential adverse effects of from GM Crops (GEO-PIE, 2003), choices to consumers, the freedom to agrobiotechnology on health or the major food manufacturers in the exercise religious or dietary prefer- environment. This policy takes for United States have decided not to ences, and the ability to use market granted that although no problems label their products as containing forces to express their political views have yet been found with GM food GM ingredients. In part, this is in support or opposition to the use of products, they cannot be proven safe because many in the food industry GM technology. As such, arguing with absolute certainty. Mandatory fear that consumers will interpret against food labeling is difficult polit- labeling theoretically allows the GM food labels as warnings implying ically, since doing so risks charges assumed majority who would prefer that the products are of inferior qual- that government and industry are to avoid GM foods the ability to do ity or are unsafe and will reject prod- conspiring to deny consumers the so, passing the additional costs ucts bearing them (GMA News, right-to-know what they are eating involved onto those who seek to dis- 2001; The U.S. Food Safety and (Hallman, 2000). turb the status quo by producing or Inspection Service, 2002). As a consuming GM products. result, rather than providing more GM, What GM? According to Moon and Bala- useful information to American con- Consumer research conducted over subramanian (2004), the current sumers, The National Food Proces- the past several years at the Food Pol- American policy of voluntary label- sors Association claims that labeling icy Institute (FPI) at Rutgers Univer- ing represents a compromise between will only serve to confuse consumers sity finds that, despite being on consumer demand to make informed and place importance on something American supermarket shelves for choices and the avoidance of costs that is not a health or safety issue more than a decade, genetically mod- associated with over-regulation. This (Pew Ag Biotech, 2003). ified food is an unfamiliar topic for policy is grounded on rules estab- There is also reluctance to label most Americans. In the most recent lished by the FDA governing the GM foods because of the projected national survey, less than half of the determination of substantial equiva- costs associated with crop segregation respondents (48%), were aware that lence between GM and non-GM and other identity preservation meth- GM foods are currently available in foods, and a tradition of minimal ods required to ensure that GM and supermarkets, and only a third (31%) oversight of foods and ingredients non-GM ingredients are kept sepa- believed they had personally con- that are generally regarded as safe rate. Without such a system at every sumed GM food (Hallman, Heb- (GRAS). The policy takes for granted stage of the supply chain, it would be den, Cuite, Aquino, & Lang, 2004). that since GM foods are safe, volun- impossible for manufacturers to In the same survey, 28% (incorrectly) tary labeling theoretically allows con- ensure that their labels accurately believed that GM foods are required sumers who wish to avoid GM foods reflect the GM or non-GM contents to be labeled and 40% said they did the power to do so, without impos- of their products. The added costs of not know. Only about one in three ing additional costs on the assumed these systems would ultimately be Americans (32%) were aware that majority who do not have such a passed on to the consumer, yet it is there is no mandatory labeling policy preference (and based solely on scien- unclear whether the majority of con- in place in the United States. tific risk assessments, should not have sumers would use the information such a preference). for which they would ultimately be Desire for Labels Both of the current E.U. and paying. Estimates of these costs vary Given the lack of awareness of GM U.S. labeling policies are based on greatly, ranging from a projected the idea that ultimate acceptance (or increase of between $0.23 and $3.89 foods and confusion about current rejection) of GM foods can be deter- annually in the cost of an average labeling regulations in the United

218 CHOICES 4th Quarter 2005 • 20(4) Not interested Somewhat interested Very interested

Pesticides 10% 17% 73%

Contains GM 12% 23% 65%

Organic 13% 23% 64%

Country of origin 12% 32% 56%

Crossbreeding 19% 30% 51%

Grown locally 22% 33% 45%

State grown 30% 30% 40%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Figure 1. Consumer desire for additional information on food labels. States, the issue does not seem to be a they knew about the issues, whether mation was present, including 44% priority for most Americans. The GM foods were for sale in supermar- of those who said they rarely or never topic of labeling was examined in kets, and whether they had eaten read food labels. detail as part of the 2003 National foods with GM ingredients, the However, Americans’ desire for survey conducted by FPI (Hallman et respondents were asked directly more information about the foods al., 2003). Prior to any mention of whether or not they would like to see they eat extends well beyond the GM foods, 600 Americans were GM foods labeled as such. In issue of genetic modification. In the asked how often they typically read response, 94% said they did favor 2004 National Study, the respon- food labels. More than half of the such labels. Even among the respondents were asked how interested they respondents (54%) said they read dents who said they never pay atten- were in having additional informa- them “frequently” or “always,” and tion to food labels, 95% said they tion on food labels concerning a 30% said they “sometimes” read food wanted this information. Further, number of attributes (Hallman et al., labels. Only 17% said they “rarely” or more than three quarters (67%) of 2004). The results show that the “never” read food labels. Despite this, respondents said they would take the majority of those surveyed were ‘very more than three quarters (78%) of time to read food labels if this infor- interested’ in seeing information on the respondents said that there was food product labels concerning no additional information they were nearly all of the attributes presented 1. The issue of genetic modification interested in seeing on food labels. In to them (See Figure 1). Of greatest was introduced as follows: “Now I response to an open-ended question, interest is labeling information con- would like to ask you a question of those who said there was addi- cerning whether pesticides were used concerning another food production tional information they wished to see in growing the food (73%), if the method. Genetic modification on labels only six respondents (less food contains GM ingredients involves new methods that make it than 1%) said that they would like (65%), and whether the food was possible for scientists to create new labels to indicate whether the prod- grown or raised organically (64%). plants and animals by taking parts uct contained genetically modified The message consumers are clearly of the genes of one plant or animal ingredients. sending suggests a strong preference and inserting them into the cells of In contrast, after the issue of GM for more information about the foods another plant or animal. This is foods was introduced1 and respon- they are eating. sometimes called genetic engineer- dents were queried about how much ing or biotechnology…”

4th Quarter 2005 • 20(4) CHOICES 219 What is on the Label Matters cerned. The shoppers at natural food biotech industry. When combined, stores, who were the most aware of about three quarters of the respon- This apparent overwhelming support GM foods, said that if they saw GM dents (74%) reported an increase in for additional information on food on a food label they would not buy willingness to consume GM foods labels suggests that Americans wish the product because they did not with the inclusion of some form of to retain “consumer sovereignty;” the want food that contained such ingre- safety certification. right to make food choices based on dients. The shoppers at conventional their own values (Thompson, 1997). food stores, who were generally less Really However, those choices may confirm But How Will Consumers aware of GM, said that they wanted food manufacturers’ fears. When React to GM Labels? more information about the technol- asked how a GM food label would Of course, it is well known that what ogy before they would buy a product affect their purchasing decisions, consumers say they will do in surveys labeled as such. more than half (52%) said it would and what they actually do often While these reactions seem to make them less willing to purchase diverges. In our 2003 focus groups confirm the food industry’s concerns the product, 38% said it would make we asked the participants how often about how GM food labels are likely no difference, only 4% said they they read labels and, when they do to be interpreted by American con- would be more willing to buy a prod- read labels, what information they sumers, data suggest that not all GM uct labeled as genetically modified, are seeking. Consistent with other food labels may be off-putting. and 6% did not know (Hallman et research on how consumers use food Americans say they would be more al., 2003). labels, our focus group respondents willing to purchase GM foods if the Focus groups conducted by the told us they only read labels when labels on such products included FPI to examine how consumers inter- they evaluate a new product or if they information certifying their safety. pret information on food labels con- notice that something has changed Safety certification from a variety of firm consumers’ wariness of purchas- on the label of a product they usually entities positively influenced reported ing foods labeled as containing GM buy. They also told us when they do willingness to purchase GM prod- ingredients (Hallman, Aquino, & read labels they primarily look to the ucts. Respondents were asked how Phillips 2003). Participants were seg- ingredients panel and to the nutri- labels certifying food safety from var- mented by their self-assessed aware- tional panel for fat content, sodium ious sources, including the USDA, ness of food technologies and content, or calorie information. In FDA, EPA, the biotech industry, whether they shopped at conven- fact, none of the participants even medical and scientific organizations, tional or ‘natural’ food stores. Several noticed the addition of a GM food and environmental/consumer different label phrases and place- label on the products they were eval- groups, would impact their willing- ment options were tested. In general, uating until it was pointed out to ness to purchase GM food. For every consumers who considered them- them. Once having been made aware source presented, 40-50% of respon- selves to be more aware, were very of them, however, the participants dents indicated that the label would skeptical of the claims on the food had strong reactions to the labels, make them more willing to purchase labels. They questioned the motiva- questioning the quality and safety of the product (Hallman et al., 2004). tions of the food producers who the food products to which they were The strongest positive influences labeled the products and wanted to affixed. on respondent willingness to pur- know more details regarding the ben- So, this is the conundrum for chase were labels from the FDA efits and outcomes of genetic modifi- U.S. policy makers. When you ask (52% report increased willingness) cation. In contrast, the less aware Americans if they want GM food and the USDA (52%), followed consumers were much more likely to labels, nine-in-ten say they do. This closely by medical/scientific organi- perceive the labels as warnings. In the is consistent with the views of those zations (44%), the EPA (43%), and absence of more detailed information who favor mandatory labeling, argu- consumer/environmental groups regarding the consequences of ing that consumers have a right to (42%). The biotech industry had the genetic modification, these consum- know and a right to choose. How- strongest negative impact, with one ers perceived the mere presence of a ever, since most Americans know in-five respondents (20%) reporting label as a signal that it was something very little about the technology, even a decrease in willingness to purchase about which they should be con- simple declarative sentences about GM products certified as safe by the

220 CHOICES 4th Quarter 2005 • 20(4) the presence of GM ingredients on a So, if labels are not the proper online: www.gmabrands.com/ food label are likely to cause the route to greater awareness about GM news/docs/newreleaase.cfm. product to be rejected by consumers. foods, and consumers do want to Hallman, W.K. (2000). Consumer This is consistent with the position know more about the foods they are concerns about biotechnology: of opponents of mandatory labeling eating, whose responsibility is it to International perspectives. (Food who argue that in the absence of any inform them and what should con- Policy Institute Report No. RR- evidence that GM products are infe- sumers be told? Indeed, the devil is in 0602-003). New Brunswick, NJ: rior or unsafe, any label that causes the details. Rutgers University, Food Policy consumers to believe otherwise is Institute. Available on line: http:/ misleading. The effect of such labels For More Information /www.foodpolicyinstitute.org/ would be to cause consumers to Alvarez, L. (July 2003). Europe acts docs/reports/Con- reject foods made with GM ingredi- to require labeling of genetically sumer%20Concerns%20About ents, thereby reducing real consumer altered food. New York Times, %20Biotechnology%20RR- choice. They argue that without an 152(52533), A3. 0602-003.pdf informed consumer base, this is a Food and Drug Administration Hallman, W.K., Adelaja, A.O., case where providing more informa- (FDA). (May 1992). Statement Schilling, B.J., & Lang, J. (2002). tion doesn’t necessarily translate into of policy: Foods derived from Public perceptions of genetically providing good information. new plant varieties. Federal Regis- modified foods: Americans know The paradox, of course, is that ter, (57 FR 22984). not what they eat. (Food Policy without GM labels, it is unlikely that Food and Drug Administration Institute Report No. RR-0302- American consumers will become (FDA). (January 2001). Guid- 001). New Brunswick, NJ: Rut- much more aware of the presence of ance for industry: Voluntary gers University, Food Policy Insti- GM foods than they already are. labeling indicating whether foods tute. Available online: http:// Awareness of the availability of GM have or have not been developed www.foodpolicyinstitute.org/ foods on supermarket shelves has using bioengineering – Draft docs/reports/Pub- changed little since our first survey Guidance. U.S. Food and Drug lic%20Perceptions%20of%20Ge focused on the issue in 2001 (Hall- Administration, Center for Food neti- man, Adelaja, Schilling, & Lang, Safety and Applied Nutrition, cally%20Modified%20Foods.pdf 2002). Yet, as already noted, consum- Washington, DC. Hallman, W.K., Aquino, H.L., & ers who are unaware of GM technol- Food Safety and Inspection Service Phillips, D. M. (April 25, 2003). ogy are likely to see such labels as (FSIS), USDA. (May 2002). The GM Labeling Debate: warnings and reach conclusions that CODEX Committee on Food Caveat Emptor: Caveat Venditor; may not be warranted. Labeling Thirtieth Session. USA Cui Bono? Invited paper pre- Enticing consumers to purchase Comments. http:// sented at the conference ‘Cross- products by making false or mislead- www.fsis.usda/oa/codex/ ing Over: Genomics in the Public ing statements is illegal in the United biotech02.htm. (Accessed Octo- Arena’ sponsored by the Genome States. Indeed, the 2001 FDA draft ber 5, 2003). Prairie Project, Kananaskis, labeling guidelines do not permit Genetically Engineered Organisms Alberta, Canada. manufacturers to express or imply Public Issues Education (GEO- Hallman, W.K., Hebden, W.C., through labeling that a non-GM PIE) Project. (2003). GE foods in Aquino, H.L., Cuite, C.L., & food is superior to that which con- the market. Cornell Cooperative Lang, J.T. (2003). Public Percep- tains GM ingredients. Ironically, Extension.: Available online: tions of Genetically Modified given that the existing research sug- http://www.geo-pie.cornell.edu/ Foods: A National Study of gesting that many American consum- crops/eating.html (Accessed American Knowledge and Opin- ers are likely to interpret GM food October 2003). ion. (Food Policy Institute labels as warnings, the adoption of GMA News. (May 2001). GMA Says Report No. RR-1003-004). New mandatory labeling regulations in the Massachusetts Mandatory Label- Brunswick, NJ: Rutgers Univer- United States might have the unin- ing Bill 'Unnecessary and Redun- sity, Food Policy Institute. Avail- tended effect of being a kind of gov- dant.' Press Release. Available able online: http:// ernment required ‘false advertising.’ www.foodpolicyinstitute.org/

4th Quarter 2005 • 20(4) CHOICES 221 docs/reports/ Measure 27: Labeling of Geneti- William K. Hallman (hall- NationalStudy2003.pdf cally Modified Foods, Oregon [email protected]) is Director, Hallman, W.K., Hebden, W.C., State University Extension Ser- and Helen L. Aquino is Research Cuite, C.L., Aquino, H.L., & vice, EM 8817. Analyst, Food Policy Institute, Rut- Lang, J.T. (2004). Americans and Moon, W., & Balasubramanian, S.K. gers, The State University of New Jer- GM Food: Knowledge, Opinion (2004). Public attitudes toward sey, New Brunswick, NJ. The & Interest in 2004. (Food Policy agrobiotechnology: The mediat- research described here was supported Institute Report No. RR-1104- ing role of risk perceptions on the by a grant provided to the Rutgers 007). New Brunswick, NJ: Rut- impact of trust, awareness, and Food Policy Institute by the U.S. gers University, Food Policy Insti- outrage. Review of Agricultural Department of Agriculture (USDA), tute. Available online: http:// Economics 26(2), 186-208. under the Initiative for the Future of Agricultural Food Systems (IFAFS) www.foodpolicyinstitute.org/ Pew Ag Biotech. (2003). This food grant #2002-52100-11203 ‘Evalu- docs/reports/ contains GM ingredients”: Useful ating Consumer Acceptance of Food NationalStudy2004.pdf or useless info? AgBiotech Buzz: Biotechnology in the United States,’ Houtman, N. (October 2002). To Spotlight. Available online: http:/ Dr. William K. Hallman, Principal Label or Not To Label? UMaine /pewagbiotech.org/buzz/dis- Investigator. The opinions expressed Today. The University of Maine play.php3?StoryID=72 in the article are those of the authors Research. Available online: http:/ Thompson, P.B. (1997). Food bio- and do not necessarily reflect official /www.umaine.edu/research/ technology’s challenge to cultural positions or policies of the USDA, the UMTLabelOrNot.htm. integrity and individual consent. Food Policy Institute, or Rutgers Uni- Jaeger, W.K. (October 2002). Eco- The Hastings Center Report, versity. nomic Issues and Oregon Ballot 27(4), 34-39.

222 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Consumer Willingness to Pay for GM Food Benefits: Pay-off or Empty Promise? Implications for the Food Industry by Benjamin Onyango and Ramu Govindasamy The Promise of Ag-Biotech duction technology, product benefit); (ii) how consumer The biotechnology industry has spent substantial money valuation of these attributes vary across product types researching and developing genetically modified (GM) (e.g., whether it is consumed as a fresh product, a pro- products with tangible consumer benefits. The potential cessed product, an animal-based product); and (iii) how benefits include longer shelf stability, enhanced sensory the preferences over product attribute and product type appeal, reduced allergenicity, and nutritional or wellness combinations are influenced by the consumer demograph- attributes (Riley & Hoffman, 1999; Feldman et al., 2000). ics. It is understandable that these distinct consumer GM food Understanding the values consumers place on individ- products’ benefits (which are not available in the non-GM ual product attributes may provide insights for the food products) are likely to be critically important for broad industry in tailoring targeted marketing product strategies consumer acceptance. However, as GM food products in line with changing consumer demands. The study with enhanced and functional attributes appear in the results may also help policy makers decide which potential marketplace, consumers will be faced with the choice benefits of genetic modification are viable and acceptable between GM products bringing tangible benefits (but car- to consumers. rying unknown risks) and the traditional non-GM products that do not provide distinct and tangible consumer Data and Modeling Framework benefits. It is important that researchers contribute to the ongo- Data used in this analysis were obtained from mail inter- ing discourse over benefits and risks of biotechnology by views of respondents recruited at the end of a national providing scientifically credible information on how con- telephone survey conducted and completed between Feb- sumers value various food attributes, including process ruary 27, 2003 and April 1, 2003. The mail survey elicited attributes such as genetic modification. This is especially consumers’ stated preference for the GM foods. Those true given that food consumption in the United States and participating in the mail survey received a five-dollar other developed countries is driven by factors other than incentive for their effort. A total of 661 participated in the physiological need. The majority of consumers in these mail survey with 409 (61.9%) returning completed sur- countries want foods that are not only safe, but also pro- veys distributed as follows: bananas: 137; cornflakes: 128; mote good health and overall well being (Senauer, 2001). and ground beef: 144. This study contributes to the ongoing debate over food Before fielding the choice modeling mail survey, the biotechnology by explicitly modeling how consumers experimental design was subjected to several lengthy dis- trade-off the potential or perceived risks of GM foods with cussions by various groups, comprised of life and social the possibility of extracting significant benefits from GM scientists. This facilitated decisions on the appropriateness foods. of products that may appeal to the larger public, with In particular, this study analyzes (i) how consumers potential and likely attributes and plausible genetic modi- value the attributes embodied in food products (e.g., pro- fication technologies through which the products could be ©1999–2005 CHOICES. All rights reserved. Articles may be reproduced or electronically distributed as long as attribution to Choices and the American Agricultural Economics Association is maintained. Choices subscriptions are free and can be obtained through http://www.choicesmagazine.org.

4th Quarter 2005 • 20(4) CHOICES 223 delivered. The products chosen were 5 either whole (fresh), processed; or animal-based. In terms of benefits, 0 care was taken to incorporate benefits 1.12 2.58 3.33 3.36 that could broadly impact a con- -5 -4.67 sumer’s health, have some type of -10

consumer benefit, or provide a "soci- WTP -9.2 etal" benefit. While in the case of -15 technologies, the strategy was incorporating a wide range of existing and -20 potential technologies such as plant -21.51 or animal-based genes or micro- -25 organisms (bacterium). Consumer preferences over food longer Added attributes are analyzed within the Bacterium Stays Riper Stays Own Genes antioxidants Plant Genes Animal genes

random utility discrete choice model Benefits & Technologies and pesticides Less chemicals framework (McFadden, 1978; Rev- elt and Train, 1998). Since market Figure 1. Willingness to pay: banana. data from GM food products are not available, stated preferences (SP) 30 18.8 choice modeling framework (Lou- 20 16.56 viere, Hensher, & Swait, 2000) is 10 4.55 used. The empirical model (i.e., the random parameter model) was esti- 0 -0.15 mated to obtain respondents' valua- -10 tion of the benefits and the technolo- WTP -10.12 -20 gies jointly. The analysis involved -30 examination of potential industry -28.19 products in very specific details. -40 -36.56 Whose advantage was in terms of -50 respondents' ability to relate to specific product characteristics based on

carefully thought out answers. For Added Bacterium for energy Own genes compounds Plant genes example, corn flakes with longer shelf Antioxidants Animal genes life versus corn flakes that stay crispy Benefits & Technologies Less pesticides in milk longer or a banana that does Figure 2. Willingness to pay: cornflakes. not often bruise as quickly. ues imply changes were beneficial erences may be different from the Consumer Stated Preferences (i.e., a consumer was willing to pay a actual buying behavior. The willingness to pay/accept values positive amount for an increase of the Figures 1-3 present the mean was estimated by evaluating the ratio attribute), while negative values willingness to pay for bananas, corn- of the attribute coefficient (benefit or implied reduction in utility (i.e., the flakes, and ground beef. Most of the technology) to the coefficient of the consumer required compensation benefits across the three products monetary variable. Ceteris paribus, which may be in the form of a price have a positive effect on choice across implicit prices were obtained that discount for a unit increase in the the three products. The exception is represent marginal rates of substitu- attribute in this case the value may be antioxidants in the banana and added tion between the attribute of interest taken to measure willingness to nutrients for stronger teeth and (technology and benefit) and the accept (WTA)). In reality, when con- bones in ground beef that were insig- monetary attribute. The positive val- sumers are presented with actual nificant. The significant and positive choices of GM products, stated pref- product benefits have a welfare

224 CHOICES 4th Quarter 2005 • 20(4)

have placed a negative valuation of 10 5.86 7.16 less pesticide use, added antioxidants, 5 3.08 and a banana that ripens longer. 1.67 Unlike the benefits, respondents 0 largely placed negative valuation on -0.74 technologies, ranging from 63-84%. -5 -4.03 Cornflakes WTP -10 In case of cornflakes (a processed -15 -12.81 product), respondents valued all the benefits positively. The benefits -20 included: less chemicals/pesticides in -20.35 corn production, added antioxidants -25 to reduce aging, and added compounds for increased energy. How- ever, given the normal distribution Bacterium Own genes

Plant genes assumption, about 18-40% of the stronger Animal genes

Few antibiotics Few respondents could have valued these Compounds for modified corn teeth and bones Fed on genetically

Added antioxidants benefits negatively. Results indicate Benefits & Technologies that respondents were willing to pay Figure 3. Willingness to pay: ground beef between 5% and 19% more to obtain the direct health and environ- improving effect on a genetically reduces bruising). Respondents were mentally related benefit of corn pro- modified food choice. The negative willing to pay about 3% more com- duced with less pesticides and chemi- coefficients on genetic modification pared to the current price in order to cals. Unlike the case of benefits, technology imply that moving from obtain such benefits. On the other respondents largely placed a negative the conventional food production hand, in case of technology; if the valuation on technologies ranging technology reduces the probability of banana product is a result of genetic from 47-81%. As a result, if the selection as that may lead to overall modification via plant, animal, or cornflakes are genetically modified reduction in a consumer’s utility. bacterium genes, the respondents using plant, bacterium and animal Conversely, a positive coefficient on a needed to be compensated to accept genes, consumers need to be com- technology leads to an increase of it. The results show that more compensated by about 10-37% more to utility. When ground beef was a pensation is required to induce accept the cornflakes. product of cows fed on GM corn and acceptance of processes involving ani- a banana was modified using its own mal, bacterium, and plant genes Ground Beef genes, in this case technology served (22%, 9%, and 5%, respectively). For ground beef (animal-based prod- to enhance consumer utility. Genetic Conversely, if the GM banana was a uct), with the exception of added modification involving animal genes, result of own gene transfer, consum- compounds for stronger teeth and Bacterium, and plant genes has a ers were willing to pay 3% more for bones which turned out to be insig- negative effect on choice (i.e., reduces the product. The results also show nificant, consumers were willing to the probability of the GM alternative that respondents ranked technology pay 2% more to obtain the benefits being selected). from least to more acceptable (i.e., of less antibiotics in cow production moving from a small to a larger nega- and 3% more for antioxidants to Bananas tive and vice-versa). They ranked slow down the aging process. In con- In the case of the banana (a fresh genetic modification via own genes trast, consumers required a compen- fruit or vegetable product), posi- top, followed by plant, with bacte- sation to accept ground beef, which tively associated benefits were: use of rium and animal-based technologies was a product of genetic modifica- less pesticides and chemicals to grow at the bottom. Given the normality tion involving animal or bacterium bananas, and increased shelf life (i.e., assumption, at the same price, about genes (20% and 13%, respectively). a banana that stays riper longer and 32-35% of the respondents would However, if the ground beef was a

4th Quarter 2005 • 20(4) CHOICES 225 product of a cow fed on GM corn, may suggest that attitudes may be Revelt, D., & Train, K. (1998). consumers were willing to pay 6% somehow more promising for GM Mixed Logit with repeated more. With the normality assump- processes involving own- or plant- choices. Review of Economics and tion, at the same price, about 52- based gene technology. Respondents’ Statistics, 80, 647-657. 62% of the respondents placed a pos- willingness to pay for benefits Riley, P., & Hoffman, L. (March itive valuation on fewer antibiotics embedded in the products suggests 1999). Value-enhanced crops: and antioxidants. On the other hand, that there is potential for GM foods Biotechnology’s next stage. Agri- compared to cornflakes and bananas, in the market. cultural Outlook, 18-23. fewer respondents placed a positive Understanding the values con- Senauer, B. (2001). The Food Con- coefficient on technology ranging sumers place on individual attributes sumer in the 21st Century: New from 19-60%. can provide insights for the food Research Perspectives. Paper pre- industry in tailoring targeted market- sented at the 71st EAAE Seminar: Implications for Food Industry ing product strategies in line with The Food Consumer in the 21st The study results show that the use of changing consumer demands. The Century, April 18-20, Zaragoza, choice modeling experiments pro- study results also provide informa- Spain. vides a way of valuing non monetary tion to policy makers on which direc- attributes associated with consumption to go in terms of genetic modifi- Benjamin Onyango (onyango@ae- tion of GM food products and a way cation (i.e., what is viable and sop.rutgers.edu) is Research Asso- ciate, Food Policy Center, and Ramu of identifying consumer preferences. acceptable). Godvindasamy is Associate Professor, The results indicate how different Department of Agricultural, Food, attributes of price, product benefits, For More Information and Resource Economics and Associ- and technology influence consumer Feldman, M.P., Morris, M.L. & ate Director, Food Policy Institute, demand for genetically modified Hoisington, D. (2000). Geneti- Rutgers University, New Brunswick, food products. The results show how cally Modified Organisms: Why New Jersey. Research described here a consumer makes tradeoffs between All the Controversy? Choices was supported by a grant provided to the product attributes. (First Quarter), 8-12. the Rutgers Food Policy Institute by The results suggest that across the Louviere, J., Hensher, D. & Swait, J. the U.S. Department of Agriculture products, direct health, environmen- (2000). Stated Choice Methods: (USDA), under the Initiative for the tal and production-related benefits Analysis and Application. Cam- Future of Agricultural Food Systems have a positive effect on choice. Also, bridge, University Press. (IFAFS) grant #2002-52100-11203 the results generally show that McFadden, D. (1978). Modeling the ‘Evaluating Consumer Acceptance of genetic modification is viewed nega- choice of residential location. In Food Biotechnology in the United tively. However, through the choice A. Karlqvist, L. Lundqvist, F. States,’ Dr. William K. Hallman, modeling experiments, respondents Snickars, and J. Weibull (Eds.). Principal Investigator. The opinions viewed own- and plant-based genetic Spatial Interaction Theory and expressed in the article are those of the modification less negatively than the Planning Models. Amsterdam: authors and do not necessarily reflect use of bacterium and animal-based North Holland, 75-96. official positions or policies of the US- genetic modification. These results DA, The Food Policy Institute, or Rutgers University.

226 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Lies, Deep Fries, and Statistics!! The search for the truth between public attitudes and public behaviour towards genetically modified foods by Craig Cormick

Which of these two statements do you think is true? Another study from the University of Illinois found • About half of the Australian public will not eat geneti- that the assumptions that both opponents and proponents cally modified foods. had towards the publics’ attitudes towards GM foods were • About half of the Australian public will eat genetically more often fallacies that actual (Wansink & Kim, 2001). modified foods. They included: The answer is, of course, that both are true, but which one • People need to be, and want to be, informed. you choose to accept will depend on your ideological per- • Changing consumer attitudes will change their behav- spective. iour. Consumer surveys are often quoted in the formation • The biotechnology controversy will be forgotten. of government and industry policy relating to GM foods, • People will become biotechnology advocates once they but in addition to the common problem of selective use of have the facts. data, it now also needs to be asked whether consumer sur- The reason is the sources that policy makers use to receive veys actually reveal the whole truth of consumer behav- data, which is often opinion surveys, media coverage, and iours. activist groups, which, when taken together, do not pro- As has been shown by a study conducted for the Euro- vide an accurate representation of actual public behav- pean Commission (2001), policy decisions are too often iours. based on perceptions of public perceptions, rather than a The accuracy of many surveys themselves need to be solid understanding of what public perceptions actually looked at as well. In a 2002 survey in Australia, Green- are. peace asked: ‘If you knew a product contained ingredients The study listed ten common misassumptions that did made from genetically engineered plants or animals, not stand up to solid scrutiny. They included: would that make you less likely to buy or not buy?’ Sixty • The cause of the problem is that lay people are igno- eight percent of the respondents agreed with the statement rant about scientific facts. (Taylor Nelson Sofres, 2002). The reference to both GM • The public thinks, wrongly, that GMOs are unnatural. foods and animals and the broadbanding of responses • The public demands zero risk, and this is not reason- increases the response rate. Alternatively, a weighted ques- able. tion asked by Biotechnology Australia in 2001 to analyse • It’s the fault of the BSE crisis: as citizens no longer the effect of weighting, and often quoted by pro-biotech- trust regulators. nology advocates, was: ‘Would you eat foods that had been • The public is a malleable victim of distorting sensa- genetically modified to be healthier?’ Sixty percent of tionalist media. those surveyed said yes (Millward Brown [MB], 2001).

4th Quarter 2005 • 20(4) CHOICES 227 There have been many attitudinal Relativity of Concerns Risk-Benefit Comparisons polls towards GM foods conducted Next, let’s consider the relative rank- Another indicator of consumer around the world that encompass the ing of concerns. A study conducted acceptance is gained from looking at good, the bad, and the ugly, but as for Biotechnology Australia by the risk-benefit comparisons, measuring more and more data becomes avail- Market Attitude Research Services the perceived benefits of GM foods able on consumer behaviours regard- (2001) looking into food concerns, to their perceived risks. Expressed as ing GM foods, in countries where sought ratings across a five-fold scale a ratio of benefits to risks, the Mill- labelled GM foods are on supermar- of very concerned, quite concerned, ward Brown (2001, 2003) studies ket shelves, the indication is that little concern and not concerned. showed that Australians have tended most attitudinal surveys might not be While 39% had high concerns about to see increased risks over benefits obtaining the full answers. GM foods, it was the smallest high over the two years. In 2001 the ratio Trying to determine simple concern compared to 45% high con- was risks rating 73% and benefits rat- answers to consumer behaviours cern about the uses of pesticides in ing 57%, and in 2003 this had towards GM foods is a complex task, food, 46% high concern about changed to 74% risk and 51% bene- yet there are enough indicators to human tampering of foods, and 58% fit. show that behaviours can be quite high concern about food poisoning. However, it must be noted that different to the findings obtained in Similar results were obtained from during 2001 the concept of risk in most attitudinal surveys. This is very similar studies conducted by the UK society changed enormously. Follow- important when considering the Food Standards Agency (2001), and ing September 11, and the subse- amount of agricultural food policy by Wirthlin (2001) in the USA, yet quent bombings in Bali, Madrid, and decisions in government and indus- relativity of concerns is rarely taken London, the world suddenly became try that are based on available data. into account. a riskier place to live in and risk rank- The holy grail of all surveys into Biotechnology Australia updated ings rose on most surveys. Similarly, GM foods and the consumer is to this survey question in the study by while perceptions of risk towards best determine what percentage of Millward Brown (2003), asking GM foods have risen in Australia, the public would, or would not, eat about GM food concerns relative to levels of concern have not risen. GM foods. This is usually done environmental concerns and found Firstly, let’s look at the impact of through asking a variation of ‘Would again that GM food high concerns, actual choice versus hypothetical you eat GM foods?’ or ‘Do you have at 11%, were lower than high con- choice. Before GM labelling came concerns about eating GM foods?’ cerns about Pollution at 35%, into force in Australia, in December But are these the best relevant ques- Nuclear Waste at 26%, the Green- 2001, a tracking study conducted by tions to ask? house Effect at 17%, and Cloning at Quantum Market Research (2000) First, let’s look at the correlation 12%. A study into GM food atti- found that 46% of the population of concerns and behaviours. Studies tudes, undertaken by the Rural would not buy GM foods, even if undertaken for Biotechnology Aus- Industries Research and Develop- they were labelled. But that figure tralia by the research company Mill- ment Corporation, found that there dropped to 41% in a subsequent ward Brown (2001, 2003) show that were five food concerns higher than Quantum (2002) survey, indicating about 75% of consumers in Australia GM foods (Owen, Louviere, & that the matter of choice and trust state they have concerns about eating Clark, 2005): appeared to be influential in attitude GM foods – a statistic often quoted 1. Diseases in beef that could pass formation, and that a labelling by anti-GM activists. Yet, the same on to human. regime can have some impact on studies show that about half the Aus- 2. Bacteria and disease in foods. public attitudes. tralian population are willing to eat 3. Hormones to accelerate growth While six different GM food GM foods, despite concerns. This in animals. types are approved for consumption indicates that the relationship 4. Antibiotics in meat. in Australia: cotton oil, canola, corn, between concerns and behaviours is 5. Pesticide residue on fruits and soy, sugar, and potato - the majority not necessarily a direct and compara- vegetables. 6. Fruits and vegetables that have GM commodity is soy or canola. ble one. been genetically engineered. There have been about a dozen products on supermarket shelves that are

228 CHOICES 4th Quarter 2005 • 20(4) labelled as containing GM ingredi- never been at a time in our society that nobody seems very concerned ents. These include donuts, chocolate when we have been so removed from about it. cake, cake icing, and several types of agricultural production as we are So why is that – if so many peo- chicken loaf and frozen chicken. now, with an increasingly urbanised ple state that they are concerned However, as highly-refined prod- society whose experience and under- about GM foods? ucts that have no trace of novel DNA standing of food is restricted to in the final food are exempt from supermarket shopping, and we have The Importance of Consumer labelling in Australia, most oils do little knowledge of how food is actu- Segments not require labelling, and fast foods ally produced. An indication of why has been pro- such as those deep-fried in these oils It also raises the question, if so vided by Environics International do not therefore need to be labelled many people view these common (2000), a Canadian company who either. This causes some over-heated modifications as genetic modifica- has done some cluster graphs on con- debate about the accuracy of GM tions, why isn’t that being reflected in sumer attitudes to food, and whose food labelling, but the changes in any adverse consumer behaviour research translates well into Australia. attitude do indicate a diminution in towards these foods? The general finding of its research rejection of GM foods when they Let’s look a little closer at those showed that attitudes towards GM were labelled. donuts and chocolate cakes and foods are more driven by general atti- chicken loaf that really are genetically tudes towards food than attitudes to Understanding modified and are labelled as such. gene technology. Next, we should look at public First, we need to look a little bit at They have defined six distinct understanding of GM foods. In the the details of the labelling. A typical consumer segments: Millward Brown (2003) study, peo- label might read, Ingredients: sugar, • Food Elites – who prefer to eat ple were asked which of the following water, wheat flour, vegetable oil, egg, organics and the best foods and modifications were genetic modifica- cocoa powder, fresh cream, thickener, will pay for them (about 8% of tions of food. milk solids, emulsifiers, salt, corn the population). starch (genetically modified). • Naturalists – who prefer to buy % Who View According to the supermarket from markets rather than super- Modification It as GM chains, although they are often on markets (about 16%). The Change of Grain Crops to 78% the receiving end of anti-GM cam- • Fearful Shoppers – who have con- Make Them Pest Resistant paigns about their foods, there has cerns about most foods – pre- Foods Produced Using Gene 74% been little to no diminution in sales dominantly elder consumers Technology Processes of those foods that are labelled as (about 28%). Food Made from Animals Fed 66% containing GM ingredients. • Nutrition Seekers – who treat food with GM Stock Feed Could this be explained by con- as fuel for the body (about 20%). The Change of the Flavour in 52% sumers simply not being able to find • Date Code Diligent – who read Food the fact that the food has GM ingre- labels, but generally only look at Flavour or Nutritional 52% dients on the label? Perhaps. But at use by date and fat content – pre- Enhancements in Food the deli counter in Woolworths, all dominantly younger women – Colours in Food 35% across Australia, there have usually (about 13%). Food with Preservatives 32% been two or three types of sliced • The Unconcerned – who don’t Food Grown with the Use of 30% chicken loaf that have been clearly really care too much what they Pesticides labelled ‘contains genetically modi- eat – predominantly younger Food Grown Using Fertilizers 26% fied soy’ on a plastic label, standing men – (about 13%). up by the meat. It is clear and promi- Those top three are concerned So a minimum of about 30% of nent, and I have made it a habit of about many food issues and also con- the population believe that most any always asking the person in the deli, cerned about GM foods. The bottom modification to foods makes them wherever I travel, whether anybody three have specific concerns only, or genetically modified. This is no sur- comments or complains about the aren’t too concerned about foods and prise when we consider that we’ve GM ingredients. Invariably, I’m met are not concerned about GM foods. with a blank look and the response

4th Quarter 2005 • 20(4) CHOICES 229 Focus group responses in a study ing them. But focus group respon- would require between a 30 to 50% conducted by Eureka Strategic dents actually showed a drop in con- discount to purchase a GM product. Research (2005), showed that when cerns when they were told they had Potential health benefits, however, people were served a cake that may been eating GM foods for several increased acceptance of the GM contain some GM soy, typically years. foods, confirming the focus group responses were along the lines that Another major finding from findings above. since cakes weren’t that good for you focus groups is that there are five key There are many more factors we respondents wouldn’t mind eating factors of influence in determining could look at too, such as the impact them. Or: acceptance or rejection of GM foods of anti- and pro-GM misinformation and crops. (MB, 2001, 2003; Eureka on consumer behaviour, food safety “I think 2% [of the product Strategic Research, 2005) They are: scares and gender differences, all of being GM] isn’t a whole lot that would do anything • Information - a level of under- which have some impact upon wrong.” standing of the technology and behaviours. what it can and cannot do, which If we look at those products that has to be provided from a credi- What Consumers Say Versus are labelled GM on supermarket ble source. What They Do shelves in Australia, it is apparent • Regulation - a level of confidence Having looked at lots of survey that they are the type of foods most that effective regulation exists to results and the way that they are consumed by the bottom three cate- protect humanity and the envi- interpreted, and questioned the find- gories of consumers. If a GM soy ronment. ings of many of them, we now have milk was introduced to the market, • Consultation - a feeling that the to ask: are we any closer to that holy which would have a higher appeal to public has had some input to the grail? We know that what consumers the first three categories, I suspect development of the technology. say and what consumers do can be consumer reaction would be very, • Consumer choice - the ability for different things, such as the number very different. an individual to accept or reject of people who say they would prefer Understanding the different each application of the technol- to eat organic foods far outweighs the nature of segments and understand- ogy. numbers who actually do. It’s not ing that there is not one single ‘pub- • Consumer benefit - a clear individ- that consumers actively tell lies in lic’ is vital to understanding con- ual and societal benefit from each surveys as much as they’ve often sumer behaviours. application. given an answer that is consistent All five of these need to be met, how- Focus Group Studies with a preferred or idealised action, ever, and currently GM foods do not rather than an actual one. A useful supplement to survey work rate well on information and fall Consumers are peculiar animals, is focus groups, which are often able down on consumer benefits. and despite many concerted studies, to drill much deeper into drivers of Some surveys, such as that con- we are still far from understanding attitudes. In a series of focus groups ducted by the Rural Industry them well. Yet, we know from animal conducted by Millward Brown Research and Development Corpora- behaviour studies that observing ani- (2003), for instance, while accep- tion, quoted earlier, have sought to mals in zoos and laboratories can be tance and rejection of GM foods capture a deeper level attitude and different from how they behave in stood at about 50:50, as it had in behaviour linkage (Owen, Louviere, their natural environment. 2001, there had been a major change & Clark, 2005). Its survey used quite Perhaps that’s where we need to in the cause of rejection. In 2001 the a complex set of variables to quantify go next, into the natural habitats of major stated cause was health and how much a person would pay for a consumers - the supermarkets - medical concerns, and yet in 2003 GM or non-GM potato, potato undertaking more ethnographic that had been replaced by no appar- chips, or milk. The study also found studies, based on our knowledge of ent benefit. distinct consumer segments, defin- existing consumer segments from It can be argued, of course, as able by traits such as health, attitude attitudinal studies, watching behav- some anti-GM activists do argue, to new products, and price sensitiv- iour rather than asking about it. How that people are eating GM foods only ity. It also found that if there were no do consumers really behave, in super- because they aren’t aware they’re eat- benefits to the consumer, people

230 CHOICES 4th Quarter 2005 • 20(4) markets, when faced with GM foods and Other Issues, Australian Pub- Quantum Market Research. (2002). that are labelled, and have price and lic Opinion, commissioned by GM Consumer Research (tele- product differences? Biotechnology Australia. phone interview of 1,000 respon- That is the question we need to Millward Brown. (2001). Biotechnol- dents, conducted for be feeding into agricultural food pol- ogy Public Awareness Survey (13 Biotechnology Australia). icy formulation to ensure that deci- focus groups and computer-aided Taylor Nelson Sofres. (2002). Austra- sions that are being made are in line telephone interview of 1,000 lian Attitudes to Genetic Engineer- with actual consumer behaviours. adult males, commissioned by ing, (national telephone interview The indications from Australia Biotechnology Australia). Avail- of 1,001 respondents, conducted are that when asked in surveys con- able online: http://www.biotech- for Australia Greenpeace). sumers are only marginally support- nology.gov.au/assets/documents/ UK Food Standards Agency. (2001). ive of GM foods - yet when in the bainternet/ Consumer Attitudes to Food Stan- supermarkets, considering the types BA%5FPublic%20awarnessrepor dards, UK Food Standards of foods that are currently GM, there t%5F200120050401164151%2 Agency. is only marginal rejection of those Epdf. Wansink, B. and Kim, J. (April foods. Millward Brown. (2003). Biotechnol- 2001). The marketing battle over ogy Public Awareness Survey (13 genetically modified foods, false For More Information focus groups and computer-aided assumptions about consumer Environics International. (2000, telephone interview of 1,000 behaviour. American Behavioural March). Global public perception adult males, commissioned by Scientist, 44(8). of food biotechnology. Presented at Biotechnology Australia). Avail- Wirthlin Group Quorum Surveys. The Convergence of Global Reg- able online: http://www.biotech- (2001). US Consumer Attitudes ulatory Affairs: Its Potential nology.gov.au/assets/documents/ Towards Food Biotechnology. Impact on International Trade bainternet/ Wirthlin Group Quorum Sur- and Public Perception, Saska- MB2003Final20050713094939 veys. toon, Canada. %2Epdf. Eureka Strategic Research. (2005). Owen, K., Louviere, J., & Clark, J. Craig Cormick (Craig.cormick@bio- Public Awareness Research, (tele- (2005). Impact of Genetic Engi- technology.gov.au) is Manager of Public Awareness, Biotechnology Aus- phone poll of 1067 adult respon- neering on Consumer Demand. tralia, Canberra Australia. Biotech- dents and 17 focus groups Rural Industries Research and nology Australia, the Government conducted for Biotechnology Development Corporation. agency responsible for co-ordinating Australia). Available online: http:// biotechnology issues in Australia, has European Commission. (2001). Pub- www.rirdc.gov.au/reports/GLC/ 05-015.pdf. been conducting comprehensive sur- lic Perceptions of Agricultural Bio- veys since its inception in 1999, technologies in Europe research Quantum Market Research. (2000). GM Consumer Research (tele- tracking changing attitudes to GM project. foods and crops as well as health and phone interview of 1,000 respon- Market Attitude Research Services. medical applications in biotechnol- dents, conducted for (2001). Genetic Modified Food ogy. www.biotechnology.gov.au Biotechnology Australia).

4th Quarter 2005 • 20(4) CHOICES 231 232 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Testing Public Policy Concepts to Inform Consumers about Genetically Engineered Foods by J. Lynne Brown and Wei Qin

Current Situation anced information, which might support more informed Although U.S. farmers have rapidly adopted genetically opinions. engineered (GE) soybeans, corn, and cotton over the last However, most readily available information presents, decade, American consumers remain relatively unaware at best, one perspective on the issue of use of GE foods in that ingredients derived from these GE crops are in over the U.S. food system. Information from the biotechnology 70% of the processed foods they buy. Surveys indicate that industry offers arguments and data in support of adoption, consumers are more concerned about GE applications in while that from some environmental and consumer groups animals than in plants and that presence of a consumer raises concerns and supports a ban until certain conditions benefit is likely to increase acceptance (Hallman et al., are met. Information from scientific academies and orga- 2003; PEW, 2002). Despite incidents (Monarch butter- nizations is harder to find and, once located, is often diffi- flies, Starlink, Prodigene) that reveal weaknesses in manag- cult to understand and represents only the scientific per- ing and regulating GE crops and the Food and Drug spective, giving little recognition to the values and social Administration’s (FDA) use of voluntary rather than man- norms that also contribute to opinions. Readily available datory regulatory review of GE food products, the public media reports also tend to be biased to whatever view seems open to more applications of genetic engineering makes the story newsworthy. We sought a framework for entering the food system. A test case is on the horizon. presenting print information about GE fast growing In 2000, AQUA Bounty (now called AQUA Bounty Atlantic salmon that would provide a balanced view on the Technologies, Inc.) submitted a petition to the FDA to issue of FDA approval. permit its GE fast growing Atlantic salmon to enter the U.S. food system. This salmon was genetically engineered Public Policy Education to enable the continuous production of growth hormone, Alan Hahn (1988) pulled several decades of work into a instead of seasonal production as in conventional salmon. model for educators interested in resolving public issues The resulting GE Atlantic salmon reaches market weight through policy education. Although the model emphasizes in roughly half the time required for conventional Atlantic the process used by an educator to help a group inform salmon used in fish farming. Using focus groups in 2003- itself, some key concepts could be applied to written com- 2004, we discovered that consumers could envision a munications about an issue. Once the issue is clearly iden- range of consequences resulting from approval of this ‘ani- tified, these include a) understanding the perspectives of mal’ application. They expressed great concern about all the stakeholders in the issue; b) considering alternative impacts on human health and the environment, indicating solutions to the issue including the ‘do nothing’ option; a situation where outrage could drive public opinion (Qin and c) examining the consequences of each solution. Only & Brown, submitted). Consumer response will determine when this is worked through, would citizens have suffi- the success or failure of this GE salmon if approved by the cient data with which to make an informed choice of solu- FDA. One antidote to opinions driven by outrage is bal- tion to the issue in question. In particular, gathering information on stakeholder perspectives and generating all the

4th Quarter 2005 • 20(4) CHOICES 233 possible consequences of a solution Our information sheets contained The resulting ‘perspectives’ and ‘con- are difficult for an individual to do. two sections, one of invariant back- sequences’ sections shared 96% of For that reason, most efforts at public ground and the second that differed. the same sentences and phrases, dif- policy education rely on working In the invariant section, we presented fering only in omission of agency with a group of people over time. factual data comparing traditional names and addition of a consequence Indeed, Cooperative Extension has selective breeding and genetic engi- statement (for example, regulation of been involved in public policy educa- neering and then described how GE fish farming may change) to intro- tion with groups for many years salmon was created, how fish farming duce each consequence’s section. around issues of river basin manage- is done, and the current status of These information sheets were ment, farmland protection, land use FDA review of GE salmon. The sec- reviewed by an expert in fish genetics planning, intensive livestock opera- ond section presented either view- for accuracy and in policy education tions, water quality, and municipal points of various stakeholders on or for bias. Little bias was detected and governance. the consequences of FDA approval of a few inaccuracies were corrected in However, the introduction and GE salmon. We will use ‘perspectives’ both information sheets. regulation of GE foods has primarily and ‘consequences’ to distinguish The reading level for both infor- occurred at the national level. Less these two approaches for the second mation sheets was twelfth grade. regulatory debate has occurred at the section in the rest of this paper. state, regional, or county level, We developed the second section Experimental Design although an Oregon initiative to by gathering information about GE We tested each information sheet introduce mandatory labeling failed, salmon provided by various stake- with a randomly assigned group of as have recent efforts to limit GE holder organizations. Using this, we consumers. We developed two ques- crop use in certain counties in Cali- wrote summaries that we felt repre- tionnaires, one containing the conse- fornia (Clapp, 2004). Concerned cit- sented the perspectives of regulatory quences and the other the perspec- izens may be unable to find or form agencies, AQUA Bounty, the fishing tives information. In each, prior to groups to investigate the issues sur- industry, scientific review panels, reading the information sheet, the rounding introduction of GE foods environmental groups, consumer subject was asked a) how they felt into the food system. We felt that groups, and international agencies on about the use of fast growing GE print fact sheets were an economical approval of this GE application. The salmon in fish farming to produce method of providing information on stakeholder group, along with various fish for human consumption using GE foods for literate citizens. How- members (regulatory agencies such as an approval/disapproval scale; b) how ever, we wanted to organize the infor- FDA, EPA, and USDA), was listed at interested they were in information mation in a manner reflecting the the top of the summary and all the about GE salmon; and c) how much concepts of public policy education, summaries linked together became factual information they could tell but were unsure what format would the ‘perspectives’ approach. We then someone wanting a verbal explana- have the most impact on understand- identified consequences that were tion of development and use of GE ing an issue. To resolve this, we embedded in these viewpoints and salmon in the food system. After decided to compare the effect of two used verbatim sentences and para- reading the information sheet, they ways of organizing print information graphs from the perspective summa- were asked these three questions about the impacts of introducing GE ries to organize explanations of each again, as well as how confident they fast growing Atlantic salmon (called of the consequences. Stakeholders felt in their understanding of some of GE salmon hereafter) into the food were not identified by name in these the questions surrounding the intro- system. ‘consequence’ summaries. For duction of GE salmon into the food instance, “Some government com- system (for example: How might GE Information Format missioned reports” was used in conse- salmon affect consumer choice?). As FDA reviews GE salmon, the quences while “the National Research They were also asked a series of ques- major issue is whether to approve or Council” was cited in perspectives. tions about ability (readability, ease disapprove its entry into the food sys- This list of consequences and their of understanding) and information tem. For our study we chose to con- explanations became the ‘conse- quality (how interesting, factual, sider the solution of FDA approval. quences’ approach. An example of biased, and desirable length). Finally, each approach is shown in Table 1.

234 CHOICES 4th Quarter 2005 • 20(4) Table 1. Illustrations of perspectives and consequences. Perspectives example Related consequence example The National Fisheries Institute, representing the fishing industry, feels that • Production of GE salmon may spare wild fish populations. farming of Atlantic salmon replaces a diminishing natural resource, helps conserve wild Farming of Atlantic salmon replaces a diminishing natural resource, helps conserve salmon populations and produces protein efficiently. It take less than two pounds of feed wild salmon populations, and produces protein efficiently. It take less than two to produce one pound of farmed salmon compared to five pounds of wild feed to produce pounds of feed to produce one pound of farmed salmon compared to five pounds of one pound of wild salmon. They acknowledge that salmon do escape from ocean wild feed to produce one pound of wild salmon. pens, and some escapees have spawned in nearby rivers and interbred with • Regulation of fish farming may change. wild salmon. However, fish farmers are improving containment systems. In Fish farmers acknowledge that salmon do escape from ocean pens, and some addition, farmers must protect the local environment or their fish will die. escapees have spawned in nearby rivers and interbred with wild salmon. Advancements in technology have reduced the amount of salmon excrement However, fish farmers are improving containment systems. In addition, and areas around farms are routinely monitored for pollution effects. Fish farmers must protect the local environment or their fish will die. farmers keep the use of therapeutics (antibiotics) as low as possible. Advancements in technology have reduced the amount of salmon Environmental Defense (ED) recognizes that aquaculture is the only available means excrement and areas around farms are routinely monitored for pollution to significantly supplement fish catches in a hungry worl,d but feels that aquaculture effects. Fish farmers keep the use of therapeutics (antibiotics) as low as must be done in an environmentally sustainable manner. They recommend that EPA possible. strengthen its oversight of fish farms and improve salmon farming practices. Approval of Other groups recognize that aquaculture is the only available means to significantly GE fish for commercial sale should require evidence of ecological, as well as food supplement fish catches in a hungry world, but feel that aquaculture must be done in safety, and the approval process should be open to the public (transparent). an environmentally sustainable manner. They recommend that EPA strengthen its oversight of fish farms and improve salmon farming practices. Monitoring and enforcement actions to detect noncompliance should be increased to provide stronger environmental regulation of fish farming. Note: Italic and bold italic text in the perspectives section matches the respective section in consequences. The remainder of the consequences text on regulation of fish farming came from other group perspectives and the remainder of the perspectives text for Environmental Defense became part of a different consequence not shown. they rated the necessity of each sec- (32 vs. 23 times a year). They were Assessments of knowledge and tion in the information sheet to be middle-aged, Caucasian (90%), interest after reading an information well informed on the issue. mostly college educated (74%), with sheet did differ. Although both Subjects were recruited at an art median household incomes of groups showed significant increases festival in a small college town who $60,000. About two-thirds were not in knowledge and interest, those met the criteria a) being 21-65 years aware of GE salmon development. reading the consequences informa- old; b) ate fish at least once a month; The two groups of participants tion reported greater gain in knowl- and c) not a college student from the did not differ significantly in baseline edge and more interest in learning local college. The sample was strati- measures (prior to reading either about GE salmon than those reading fied by age and gender and assigned information sheet) of approval of GE the perspectives information. one version of the questionnaire to salmon, self-assessed knowledge, or The effect on approval was more complete within two-hour time interest in learning about genetic complex. Prior to reading the infor- blocks. The questionnaires were engineering (See Table 2). There mation, both groups slightly disap- alternated by time blocks so that half were also no significant differences in proved of GE salmon. While the dif- the sample completed the perspec- ratings of ability or information qual- ference was not significant, those in tives questionnaire and half the con- ity between groups. Both groups the perspectives group were initially sequences questionnaire. Data check- rated the information as moderately somewhat less negative about GE ing, entry, and analysis followed. easy to read and understand. Both salmon than those in the conse- groups also found the information quences group. After reading the Influence of Information Format sheets moderately to rather interest- information, the assessment of both on Knowledge and Perceptions ing, rather factual, and just about groups shifted upward slightly and Participants reading either informa- right to provide the information nec- significantly for the perspectives tion sheet did not differ in demo- essary to reach an informed opinion. group. However, approval of both graphic characteristics, except those Both groups felt the information groups still hovered in the neutral who read the consequences sheet ate sheets exhibited little bias about range (half a unit on either side of salmon significantly more often than introducing GE salmon into the food zero in our scale). Further analysis those reading the perspectives sheet system. revealed that the consequences group

4th Quarter 2005 • 20(4) CHOICES 235

Table 2. Effect of information on participants’ views. reading consequences information Perspectives Consequences rated background information on Viewpoint N= 103 N = 102 fish farming as more necessary than Approval of GE salmona those reading perspectives information. Turning to the second section, Pre-approval -0.11a±1.60 -0.45a±1.75 both groups rated the various sum- Post-approval 0.16b±1.66 -0.36a±1.77 maries presented in either the per- Self-assessed knowledgeb spectives or consequences section as at least rather necessary (5 on a scale Pre-knowledge 1.69a±1.03 1.96a±1.19 of 7) except for one section. Those Post-knowledge 3.7b±1.18* 4.2b±1.17* reading perspectives information felt Interest in learning about GE salmonc viewpoints of Canadian and British scientists were only moderately nec- Pre-interest a a 4.07 ±1.48 4.39 ±1.76 essary (4 on a scale of 7). Post-interest 4.30b±1.28* 4.80b±1.59* Confidence in understandingd Implications How GE salmon are made 3.63±1.34 3.92±1.42 If professionals want to encourage How they will be regulated 3.33±1.21 3.61±1.50 formation of informed opinions on an issue through the presentation of Effect on the environment 3.94±1.49 4.27±1.54 balanced information, the use of a Effect on consumer choice 3.77±1.47* 4.29±1.39* consequences format would appear Effect on consumer health 2.87±1.43** 3.48±1.81** to help do this. Our experiment indi- Notes: Different superscripts indicate significant differences in pre vs. post values for each information cated that participants reading conse- sheet. Effect of information on approval, knowledge, and interest was compared when controlling for salmon consumption and respective pre-values. Effect on confidence was compared controlling for quences information reported more salmon consumption only. Significant differences between information formats is indicated as *p<0.05, ** p<0.01. interest in learning about GE a7-point scale where -3 = strongly disapprove, 0 = neutral, and 3 = strongly approve salmon, as well as a higher self-assess- b7-point scale where 1 = nothing at all and 7 = a great deal ment of their ability to verbally c7-point scale where 1 = not interested at all and 7 = extremely interested d7-point scale where 1 = not at all confident and 7 = extremely confident explain the development and use of GE salmon in the food system compared to those reading perspectives included a greater number who ini- confident in understanding how GE information. Participants viewed tially strongly disapproved of GE salmon was made and will be regu- both formats as non-biased and fac- salmon than in the perspectives lated and they were moderately con- tual, characteristics important for group (14 vs. 3, respectively). Des- fident in understanding the effects on communicator credibility. However, pite these negative initial attitudes, the environment. However, those each information sheet presented exposure to the consequences infor- reading consequences information conflicting viewpoints or outcomes. mation shifted their approval ratings were more confident than those read- Perhaps as a result, neither format led the same degree of magnitude ing perspectives information about to changes in approval of GE salmon upward (toward approval) as those understanding the effects on con- use in the food system that had much reading perspectives information. We sumer health and consumer choice. real life significance. Perhaps of most interpret this finding to mean that Finally participants rated the importance, participants reading the neither consequences nor perspec- necessity of the components in both consequences information reported tives information changed approval sections of the information sheet they greater confidence in understanding ratings to any meaningful degree. read. Regardless of format read, par- some of the questions surrounding Participants indicated their deg- ticipants felt that four of the five top- the entry of GE salmon into the food ree of confidence in understanding ics covered in the invariant back- system. some of the questions about intro- ground section were rather necessary One drawback to our informa- ducing GE salmon into the food sys- (5 on a scale of 7). Selective breeding tion was the reading level. It was dif- tem (Table 2). Both groups indicated was considered moderately necessary ficult to lower the level because a they were somewhat to moderately (4 on a scale of 7). However, those

236 CHOICES 4th Quarter 2005 • 20(4) breadth of topics was covered, from education. Cornell Cooperative tive approach. Submitted to Sci- science to regulation. Plus, further Extension public information ence Communications. In Press. simplification could easily result in bulletin, no. 214. Ithaca, NY: bias. Although not intentional, our Cornell University. J. Lynne Brown ([email protected]) is an volunteer sample was well educated, Hallman, W.K., Heben, W.C., Associate Professor, and Wei Qin is a which enabled them to understand Aquino, H.L., Cuite, C.L., & Ph.D. student, respectively, Depart- the information. Perhaps only those Lang, J.T. (2003). Public percep- ment of Food Science, Penn State who are better educated will form the tions of genetically modified foods: University, University Park, PA. informed citizenry needed for resolv- National study of American knowl- Research described here was supported ing public policy issues. This may be edge and opinion. New Brun- by a grant provided to the Rutgers particularly true for issues that are swick, N.J.: The Food Policy Food Policy Institute by the U.S. not locally driven. Finally, our ran- Institute, Rutgers University. Department of Agriculture (USDA), domization process may not have Pew Initiative on Food and Biotech- under the Initiative for the Future of Agricultural Food Systems (IFAFS) evenly distributed all differences nology (PEW). (2002). Environ- grant #2002-52100-11203 “Evalu- between the groups. mental savior or saboteur? ating Consumer Acceptance of Food Debating the impacts of genetic Biotechnology in the United States,” For More Information engineering. Available online: Dr. William K. Hallman, Principal Clapp, S. (2004). Ag biotech contin- http://Pewagbiotech.org/ Investigator. The opinions expressed ues to expand despite obstacles. research. in the article are those of the authors Food Chemical News 46 (45), 12- Qin, W., & Brown, J.L. Consumer and do not necessarily reflect official 15. perceptions of genetically engi- positions or policies of the USDA, Hahn, A. (1988). Resolving public neered salmon and information The Food Policy Institute, or Rutgers issues and concerns through policy effect on perceptions--A qualita- University.

4th Quarter 2005 • 20(4) CHOICES 237 238 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association American Opinions of GM Food: Awareness, Knowledge, and Implications for Education by William K. Hallman and W. Carl Hebden

Agricultural biotechnology is a controversial science that 2002; Hallman, Hebden, Aquino, Cuite, & Lang, 2003; typically involves removing the genes from one plant or Hallman, Hebden, Cuite, Aquino, & Lang, 2004) that animal and inserting them into the genes of another plant found Americans are generally uninformed about GM or animal to exploit beneficial characteristics of the donor food and largely unaware of its presence in the food system organism (like pest resistance or increased productivity). and their own diets. This did not prevent them from offer- Genetically modified crops have been adopted at an ing opinions and thoughts about the technology, however, extraordinary rate over the past decade, and this prolifera- and this article discusses several of these findings. Sam- tion of transgenic science, particularly genetically modified pling methodology, sample sizes, and survey instruments (GM) food, continues to rouse apprehension among many for all three surveys can be found at www.foodpolicyinsti- consumers around the globe. Public policy toward GM tute.org. food tends to reflect consumer sentiment and those countries with strict regulation or bans tend to have constituen- Knowledge and Awareness cies that are against the adoption of such products. Where About three-quarters of Americans are indeed aware that disputes over commodity trading are concerned, it is diffi- methods of modifying genes exist (not necessarily in food). cult to name an issue that has created a deeper interna- About half of Americans say they have heard or read some tional schism. or a great deal about GM foods, but the majority of Amer- The United States is a powerhouse of GM productiv- icans have never had a discussion about it, suggesting that ity. The United States is the largest producer of food bio- is a topic about which, most people are ill-equipped to technology products, harvesting about two-thirds (63%) converse. of the world's GM crops. Most of the soy, canola, and cot- While the American public may possess a rudimentary ton, and almost half of the corn produced in the United notion that the technology exists and a vague recollection States and Canada consist of GM varieties (Pew, 2003a). that it has indeed been used in food, they are largely Because these crops are the source of some of the most unaware of the prevalence of GM ingredients in everyday common ingredients used by American food processors food products. Fewer than half of the respondents in the (such as corn syrup, soy protein, canola, and cottonseed latest Food Policy Institute (Hallman et al., 2004) study oil), and because GM varieties are often mixed with ordi- realized that foods containing GM ingredients are avail- nary varieties during shipping, processing, and storage, able in supermarkets and fewer than one in three believed most estimates suggest that between 60% and 70% of pro- they had personally consumed GM foods. Though it is cessed foods on American shelves contain ingredients technically possible for one to have avoided eating GM derived at least in part from GM crops (GEO-PIE, 2003). foods, this would entail a level of specialized knowledge The American public, however, is unaware that we use that the average consumer is unlikely to possess; Ameri- these products every day. Funded by the United States cans are eating GM foods in massive quantity without Department of Agriculture (USDA) under its Initiative for knowing it. There is evidence, however, that awareness has Future Agriculture and Food Systems program, Rutgers been slowly and steadily increasing since 2001, and despite University’s Food Policy Institute conducted three public their lack of awareness, U.S. consumers do seem to have a opinion surveys (Hallman, Adelaja, Schilling, & Lang,

4th Quarter 2005 • 20(4) CHOICES 239 vague understanding of how long that it may be used in foods, but has only about a third knew that GM these products have been available. no clue as to how, where, why, or in foods are not required to be labeled, Those who were aware that some what products they might find genet- and three out of four did not know products in supermarkets contain ically modified material. these products were tested for human GM ingredients (fewer than half of In addition, Americans do not and environmental safety. the sample) were confused as to appear to possess the tools needed to which products are actually available. completely understand and evaluate Opinions While the majority appropriately rec- the technology or its products. To Considering that American consum- ognized the availability of either GM assess consumer knowledge, respon- ers know little about the science, corn or GM soy products and a little dents were asked to evaluate a series laws, prevalence, or events surround- more than half correctly acknowl- of true/false statements designed to ing GM food, it is no surprise that edged that both are currently on the gauge their comprehension of the they also have uncrystallized and market, many respondents incor- basic scientific concepts underlying highly malleable opinions about the rectly reported that GM rice or GM the science. These included such technology. chicken are currently available. statements as “There are bacteria that Although over the past three Most striking was the widespread live on wastewater,” and “By eating a years American opinions toward belief in the availability of GM toma- genetically modified food a person’s plant-based GM food products seem toes. genes could also become modified.” split between the roughly half who Though tomatoes were the GM In the most recent FPI study (Hall- approve, roughly two in five who dis- food product most often identified man et al., 2004) study, less than approve, and the one in ten who have by respondents as being available in 50% of respondents could provide a no opinion, the Food Policy Insti- the marketplace, no GM tomatoes correct answer to more than half of tute’s study (Hallman et al., 2003) are currently for sale in the United these questions, and nine out of ten showed that consumers can easily be States. “failed” the quiz (less than 70% cor- persuaded to change their opinions It is quite possible that these rect answers). However, Americans when presented with new informa- respondents were exhibiting an indis- do not overestimate their knowl- tion about benefits and risks. For tinct recollection for the highly visi- edge. The majority readily admit to example, many of those who said ble Flavr Savr tomato that was exten- knowing little or nothing at all about they are strongly opposed to the tech- sively marketed by Calgene and the science. nology said they would buy GM covered widely by the news media Media accounts of GM food do food products if it reduced pesticide before being removed from the not appear to have had substantial use (the most common application of shelves in 1997 due to production impacts on American consumers. the science). and transportation problems (Mar- Only about one in five Americans Previous studies (Hossain & tineau, 2001). Indeed, when respon- can remember reading or seeing a Onyango, 2004; Macnaghten, 2004; dents participated in a word associa- news story about GM food and less Pew, 2003b), as well as all three Food tion exercise in the 2003 study, than 1% could recall specific details Policy Institute studies (Hallman et tomatoes were often mentioned as about a story. When asked directly al., 2002; Hallman et al., 2003; Heb- one of the first thoughts or images about seven stories that had been cir- den et al., 2004) showed that Ameri- they associated with the terms culated in the media to some extent cans are far less approving of the use “genetic engineering” and “genetic over the past decade, such as the Star- of genetic modification techniques modification.” link corn incident (Kalaitzandonakes, that involve animals, though it It is clear from these studies that Marks, & Vickner, 2004), none should be noted that animal-based Americans are generally uninformed seemed to have caught the attention applications are not currently in use about the GM foods they consume of many American consumers. other than in an experimental con- every day, and most have only a Americans also know little about text. vague understanding of the presence the laws and regulations dealing with of GM products in the food system. GM food. While most Americans A Need for Education This data paints a picture of a con- understand which government bod- sumer who has heard of genetic mod- ies are responsible for regulating Both proponents and opponents of ification in some form, understands these products (FDA, USDA, EPA), the technology believe that there is a

240 CHOICES 4th Quarter 2005 • 20(4) need to educate consumers about majority of discourse about GM food PIE) Project. (2003). GE foods in GM food, and the good news is that seems to be contained, has missed the the market. Cornell Cooperative Americans claim to be a receptive average American consumer. The Extension. Available online: audience. nature of the Internet is such that http://www.geo-pie.cornell.edu/ When asked to rate their interest one must actively search for informa- (Accessed October 2003). in several hypothetical television tion to find it, and American con- Hallman, W.K., Adelaja, A.O., shows related to GM food, Ameri- sumers typically have not searched Schilling, B.J., & Lang, J.T. cans replied enthusiastically. These for such information. Successful out- (2002). Public perceptions of included such topics as “who regu- reach therefore, must also be targeted genetically modified foods: lates and monitors GM food,” “how at media such as television and news- Americans know not what they GM food might affect the environ- papers where the information can be eat. New Brunswick, NJ: Food ment,” “whether GM food will affect regularly digested within the context Policy Institute, Cook College, world hunger,” “the potential benefits of consumers’ normal media con- Rutgers - The State University of of eating GM food on personal and sumption. New Jersey. family health,” “which foods or In sum, Americans are unaware Hallman, W.K., Hebden, W.C., brands of food contain GM ingredi- of the presence of GM foods in their Aquino, H.L., Cuite, C.L., & ents,” “whether genetic modification lives and diets and uninformed about Lang, J.T. (2003). Public percep- affects the cost of food for consum- the science, regulation, and events tions of genetically modified ers,” and “whether GM food affects surrounding it. Americans have not foods: A national study of Ameri- the farmers' cost of producing food,” yet made up their minds about GM can knowledge and opinion. among others. All of these topics food largely because they have not (Publication number RR 1003- received high ratings of interest from yet thought about the issue. This 004). New Brunswick, NJ: Food American consumers, particularly doesn’t mean that Americans lack Policy Institute, Cook College, those topics related to human health. opinions about the issues, or that Rutgers - The State University of Respondents claimed to be most they are unwilling to express them. New Jersey. interested in whether there is a However, as a whole, American opin- Hallman, W.K., Hebden, W.C., potential for GM foods to harm ions about the technology are weakly Cuite, C.L., Aquino, H.L., & humans and whether anyone has ever held, poorly formed, and highly mal- Lang, J.T. (2004). Americans and fallen ill from eating it. leable. Americans say they are highly GM food: Knowledge, opinion, While American consumers are interested in the topic of GM food, and interest in 2004. (Publication potentially receptive to passively but to date it doesn’t appear to have number RR-1104-007). New watching television shows about been a very high priority for most Brunswick, NJ: Food Policy these topics, most have never actively consumers. Few have actively sought Institute, Cook College, Rutgers sought information about these information about it, and few have - The State University of New issues. Nine out of ten respondents talked with anyone about the issues. Jersey. said they had never looked for infor- As such, efforts to educate about GM Hossain, F., & Onyango, B. (2004). mation about GM food, suggesting foods are most likely to reach an Product attributes and consumer that the remainder of those who said uninformed and easily influenced acceptance of nutritionally they had heard or read something audience: the American food con- enhanced genetically modified about it (about one in five) probably sumer. foods. International Journal of did so as a result of their habitual Consumer Studies, 28(3), 255- media consumption. When asked For More Information 267. where they might go for information, Gaskell, G., Allum, N.C., and Stares, International Food Information Cen- if they desired it, most respondents S.R. (2003). Europeans and Bio- ter (IFIC). (2001). US consumer said they would search the Internet technology in 2002: Eurobarom- attitudes toward food biotechnol- for information, while one in ten eter 58.0. Brussels: European ogy. Available online: http:// respondents said they would go to Commission. www.ific.org (Accessed July the library for information. Genetically Engineered Organisms 2004). These results suggest that out- Public Issues Education (GEO- Kalaitzandonakes, N., Marks, L.A., reach via the Internet, where the & Vickner, S.S. (2004). Media

4th Quarter 2005 • 20(4) CHOICES 241 coverage of biotech foods and sheet: Genetically modified crops New Jersey. Research described here influence on consumer choice. in the United States. Available was supported by a grant provided to American Journal of Agricultural online: http://pewagbiotech.org/ the Rutgers Food Policy Institute by Economics 86(5), 1238-1246. resources/factsheets (Accessed the U.S. Department of Agriculture Macnaghten, P. (2004). Animals in July, 2004). (USDA), under the Initiative for the their nature: A case study on pub- Pew Initiative on Food and Biotech- Future of Agricultural Food Systems lic attitudes to animals, genetic nology (Pew). (2003b). 34% of (IFAFS) grant #2002-52100-11203 modification and ‘nature.’ Sociol- Americans know something ‘Evaluating Consumer Acceptance of ogy, 38(3), 533-551. about GM foods. Outlook on Sci- Food Biotechnology in the United Martineau, B. (2001). First fruit: ence Policy, 25(9), 100-101. States,’ Dr. William K. Hallman, The creation of the Flavr Savr Principal Investigator. The opinions expressed in the article are those of the tomato and the birth of biotech William K. Hallman (hall- authors and do not necessarily reflect foods. London: McGraw-Hill [email protected] ) is Director official positions or policies of the Education. and W. Carl Hebden is Research USDA, The Food Policy Institute, or Pew Initiative on Food and Biotech- Analyst, Food Policy Institute, Rut- Rutgers University. nology (Pew). (2003a). Fact gers University, New Brunswick,

242 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Consumer Responses to GM Foods: Why are Americans so Different? by W. Carl Hebden, Hyun Kwan Shin, and William K. Hallman

While transgenic science remains a major source of con- have heard of European demonstrations against GM troversy around the globe, genetically modified (GM) foods, and less than a quarter were aware of the recent food is everywhere in the United States. From the high refusal of African nations to accept US GM food aid. fructose corn syrup in our colas to the soy protein in our (Hallman, et al., 2004). energy bars, almost every processed food contains a small Though Americans claim they are interested in various quantity of ingredients derived from GM crops. And while topics related to agricultural biotechnology, GM food has many in the food industry are not keen to label products seemingly slipped from the pages of science fiction and that contain GM food, they make no attempt to hide or onto our plates with little fanfare or controversy, and it disguise it either. GM food is here, it has been here for a remains there, largely unrecognized and unnoticed by long time, and Americans consume it in large quantity – those who consume it. Only about one in five Americans even if we do not know it. say they have discussed the topic more than once or twice Where GM food is concerned, the two primary differ- with anyone (Hallman et al., 2004), a figure comparable ences between America and most of the world might seem to that of the United Kingdom, Greece, Portugal, Spain, to contradict. On the one hand, we are the chief producers and Belgium, though considerably less than Europe as a and consumers of GM crops, and on the other hand we whole (where GM foods are conspicuously absent) and seem to know less about its presence in our lives than substantially less than such countries as Germany and many of our counterparts living in other nations. Denmark where reported discussion is at its highest While Americans perform better than European and (Gaskell, Allum, & Stares, 2003). Asian consumers on quizzes about the genetic concepts Opinions about the application of biotechnology vary behind GM foods (Hallman, Hebden, et al., 2003; Hall- around the world, but the strongest opposition to the man, Jang, Hebden, & Shin, 2005; Huang, Bai, Pray, & technology is concentrated within Europe and many Asian Tuan, 2004; Gaskell, Allum, & Stares, 2003), Americans countries. The majority of Europeans believe GM foods remain relatively unaware of agricultural biotechnology are risky, not useful, and not to be encouraged (Gaskell, itself (Pew Initiative on Food and Biotechnology, 2005). Allum, & Stares, 2003). Other research shows that Euro- As is frequently pointed out, less than half of Americans pean consumers are far less willing even to consume beef realize that foods containing GM ingredients are sold in from cattle fed on GM corn (Lusk, Roosen, & Fox, 2002). supermarkets and less than one in three believe that they It has been suggested that European rejection of GM have personally consumed GM foods. Those who know foods is related to fear of the unknown and avoidance of GM foods are sold in supermarkets are also confused as to risk (Laros & Steenkamp, 2004), though Poortinga and which products are on the shelf. Many seem convinced Pidgeon (2005) have also suggested that European rejec- that they are eating GM tomatoes and GM chicken, nei- tion of GM foods may be less due to risk perception and ther of which is for sale in the United States (Hallman, fear than the absence of tangible benefits. Indeed, Arvani- Hebden, Cuite, Aquino, & Lang, 2004). toyannis and Krystallis (2005) have found that while It is also unlikely that many Americans are aware that Greek consumer attitudes are overwhelmingly negative there is a worldwide controversy surrounding the foods toward GM foods, this is not necessarily the final word on they eat every day. Little more than a third of Americans the matter, and that there are some market segments that

4th Quarter 2005 • 20(4) CHOICES 243 may be receptive to the potential been mixed during shipment, are so Europe, farms are much smaller and benefits of GM foods. Korean con- finely processed as to remove all situated closer to population centers sumers, who have proven to be traces of modified DNA, or pro- and often adjacent to or in the midst strongly fearful of GM products, do cessed food products that may have of ‘natural’ areas. While still consid- show signs of bending under the been “contaminated” as a result of ered private property, many countries promise of benefits (Hallman et al., one of the aforementioned scenarios. have laws that permit hikers to cross 2005). The stark difference in policy agricultural lands so long as they do Consumer opinion is a powerful between the United States and its no harm. This structural difference driver in governmental policy toward trading partners has caused a mud- may help to explain why many in GM food around the globe. The dled trade situation that may only Europe see what happens on farms as response to GM foods (by both con- become more confusing with the occurring ‘in nature’ and why many sumers and regulators) is very impor- increasing production of GM foods in America see farming as quite sepa- tant for the US export market, which and shifting international policies rate from nature. has lost millions of dollars due to (Phillips, 2003). Another important factor may be European resistance (Pew Initiative the sources in which consumers place on Food and Biotechnology, 2003). Explanation of Differences their trust. European public opinion The manifestation of E.U. opposi- Some literature suggests that cultural polls suggest that Europeans, particu- tion began with an outright ban on determinants play an important role larly those in the Northern regions of the importation of these products in the consumer’s approval of a spe- Europe, tend to trust consumer and and remains, opponents suggest, as a cific technology, and that beliefs environmental groups while invest- stifling labeling policy today. These about its benefits and risks are rooted ing relatively little trust in “estab- policy decisions, it has been argued, in more general knowledge and atti- lished” institutions such as academia may have also had a negative eco- tudes toward nature and technology and government (Zechendorf, 1998). nomic impact on the European and are therefore difficult to change This is important because consumer Union (van Meijl & van Tongeren, (Bredahl, 2001). More specifically, and environmentally oriented action 2004). Siegrist (1999) found that an indi- groups tend to frame agricultural Similarly, U.S. agricultural vidual’s assessment of gene technol- biotechnology in a highly negative exports to countries like South Korea ogy is affected by both their world light. In contrast, Americans tend to have plummeted from several million view and by their perceptions of ben- trust scientific and academic sources tons of corn exported several years efit and risk of the technology. of information while tending to have ago to virtually nothing today Because these views are also culturally very little trust in consumer and (Korean Ministry of Agriculture and constrained, it is possible that inter- environmental groups (Lang, & Forestry, 2004) due to recently insti- national differences in opinion Hallman, 2005). tuted GM labeling policies strongly toward GM food are embedded in These cultural attitudes toward influenced by consumer sentiment. these cultural attitudes. trust can play an important role in In addition to the European Another important influence may consumers’ evaluation of risk. Union restrictions, countries includ- be related to the scale and structure Research suggests, for instance, that ing Australia, New Zealand, South of agriculture in the United States while American consumers say they Korea, China, Japan and others have and Europe. Agriculture in the would like GM foods to be labeled, introduced mandatory labeling poli- United States typically occurs on they remain confident in the current cies that complicate trade with the farms that are set apart both physi- policy of the FDA that does not United States which currently has no cally and psychologically from the require such labeling (Loureiro & mechanisms in place to track geneti- urban centers where most of the pop- Hine, 2004). This is consistent with cally modified components from ulation lives and also from the ‘natu- the historically high level of trust farm to fork. While it would be rela- ral’ parks and other recreational areas American consumers have had for tively easy to identify a shipment of where those urban dwellers go ‘to get regulatory agencies like the USDA grain, for instance, that is entirely away.’ In the United States, farms are and FDA. Moreover, Harrison, Boc- composed of modified organisms, private property, often posted against caletti, & House (2004) found that this becomes much more difficult trespass. In contrast, in many parts of trust in regulators plays an important when dealing with products that have

244 CHOICES 4th Quarter 2005 • 20(4) role in willingness to purchase GM nature and agriculture, trust and Policy Institute. Rutgers Univer- food. media treatment, and the interaction sity. Finally, most consumers receive between these all seem to play influ- Hallman, W.K., Hebden, W.C., information about complex scien- ential roles in consumer opinion Cuite, C.L., Aquino, H.L., & tific concepts like agricultural bio- around the world. As such, interna- Lang, J.T. (2004). Americans and technology through the media tional differences in public opinion GM Food: Knowledge, Opinion (Hoban & Kendall, 1993). While about GM foods represent a clash of & Interest in 2004. (Food Policy how the information about such cultures, politics, and policies. As the Institute Report No. RR-1104- issues is presented can be important, gaps between these become narrowed 007). New Brunswick, NJ: Rut- the mere presence or absence of an with increasing internationalization gers University, Food Policy Insti- issue within the media plays a large of trade, communications, and cul- tute. Available online: http:// part in public awareness and partici- ture, it is unclear how much longer www.foodpolicyinstitute.org/ pation in that topic (McCombs & Americans will be oblivious to the docs/reports/ Shaw, 1972). Perhaps American con- abundance of GM crops grown in NationalStudy2004.pdf sumers seem apathetic toward GM fields across the Nation or to the Harrison, R.W., Boccaletti, S., & foods simply because they have not appearance of GM foods on their House, L. (2004). Risk percep- been exposed to a great deal of infor- plates. tions of urban Italian and United mation about it. States consumers for genetically The American press has not cov- For More Information modified foods. AgBioForum, ered this topic extensively with the Arvanitoyannis, I., & Krystallis, A. 7(4), 195-201. Available online: exception of a few “spikes” in cover- (2005). Consumers’ beliefs, atti- http://www.agbioforum.org. age revolving around specific events tudes and intentions towards Hoban, T., & Kendall, P. (1993). (McInerney, Bird, & Nucci, 2004). genetically modified foods, based Consumer Attitudes about Food The European press, however, has on the ’perceived safety vs. bene- Biotechnology. North Carolina covered the biotechnology issues fits’ perspective. International Cooperative Extension Service. rather extensively, and this has had an Journal of Food Science & Technol- Huang, J., Bai, J., Pray, C., & Tuan, effect on public awareness, opinion ogy 40(4): 343-360. F. (2004). Public Awareness, and policy (Durant, Bauer & Bredahl, L. (2001). Determinants of Acceptance of and Willingness to Gaskell, 1998), driving European consumer attitudes and purchase Buy Genetically Modified Foods consumers to be both cognizant of intentions with regard to geneti- in China. (unpublished report – the technology and wary of it. Simi- cally modified foods: Results of a Rutgers University). larly, in South Korea, where consum- cross-national survey. Journal of Korean Ministry of Agriculture and ers know less about the science Consumer Policy, 24, 23-61. Forestry. (2004). Statistic Service. behind GM foods than Americans, Durant, J., Bauer, M., & Gaskell, G. Available online: http:// awareness of the technology’s exist- (1999). Biotechnology in the www.maf.go.kr. ence and the issues surrounding it are Public Sphere: A European Lang, J. T., & Hallman, W. K. superior to that of the United States, Source Book. London, UK: Sci- (2005). Who Does the Public quite possibly due to greater atten- ence Museum Press. Trust? The Case of Genetically tion by the Korean media (Hallman, Gaskell, G., Allum, N.C., & Stares, Modified Food in the United Jang, Hebden, & Shin, 2005). S.R. (2003). Europeans and Bio- States. Risk Analysis, 25(5), 1241- technology in 2002: Eurobarom- 1252. Conclusion eter 58.0. Brussels: European Laros, F. J. M., & Steenkamp, J. E. Consumer opinion can be a powerful Commission. M. (2004). Importance of fear in driver for public policy. Negative atti- Hallman, W.K., Jang, H.M., Heb- the case of genetically modified tudes toward GM foods in Europe den, C.W., & Shin, H.K. (2005). food. Psychology & Marketing, and Asia have caused a contentious Consumer Acceptance of GM 21(11), 889-908. and confusing trade situation and the Food: A Cross Cultural Compari- Loureiro, M. L., & Hine, S. (2004). loss of valuable export markets. Dif- son of Korea and the United Preferences and willingness to ferences in culture, perceptions of States. Forthcoming report. Food pay for GM labeling policies. Food Policy, 29 (5), 467-483.

4th Quarter 2005 • 20(4) CHOICES 245 Lusk, J., Roosen, J., & Fox, J. about genetically modified food: Zechendorf, B. (1998). Agricultural (2002). Demand for beef from November 2005 update. Avail- biotechnology: Why do Europe- cattle administered growth hor- able online: http://pewagbio- ans have difficulty accepting it? mones or fed genetically modi- tech.org/research/2005update/ AgBioForum, 1(1), 8-13. Avail- fied corn: A comparison of 2005summary.pdf. able online: http://www.agbiofo- consumers in France, Germany, Phillips, P.W.B. (2003). Policy, rum.org. the United Kingdom, and the national regulation and interna- United States. American Journal tional standards for GM foods. W. Carl Hebden is Research Analyst, of Agricultural Economics, 85(1), In: P.G. Pardey, & B. Koo (eds), Hyun Kwan Shin is Visiting Scholar, 16-29. Biotechnology and Genetic and William K. Hallman is Director, McInerney, C., Bird, N., & Nucci, Resource Policies. (1-5). Washing- respectively, Food Policy Institute, M. (2004). The Flow of Scien- ton D.C.: International Food Rutgers, the State University of New tific Knowledge From Lab to the Policy Research Institute. Jersey, New Brunswick, New Jersey. Lay Public: the Case of Geneti- Poortinga, W., & Pidgeon, N. The research described here was sup- cally Modified Food. Science (2005). Trust in Risk Regula- ported by a grant provided to the Rut- Communication, 26, 75-106. tion: Cause or Consequence of gers Food Policy Institute by the U.S. McCombs, M. E., and Shaw, D. L. the Acceptability of GM Food? Department of Agriculture (USDA), under the Initiative for the Future of (1972). The agenda-setting func- Risk Analysis, 25(1), 199-209. Agricultural Food Systems (IFAFS) tion in mass media. Public Opin- Siegrist, M. (1999). A causal model grant #2002-52100-11203 ‘Evalu- ion Quarterly, 26, 176-87. explaining the perception and ating Consumer Acceptance of Food Pew Initiative on Food and Biotech- acceptance of gene technology. Biotechnology in the United States,’ nology (2003). U.S. vs. E.U.: An Journal of Applied Social Psychol- Dr. William K. Hallman, Principal examination of the trade issues ogy, 29(10), 2093-2106. Investigator. The opinions expressed surrounding genetically modi- van Meijl, H., & van Tongeren, F. in the article are those of the authors fied food. Available online: http:/ (2004). International diffusion of and do not necessarily reflect official /pewagbiotech.org/resources/ gains from biotechnology and the positions or policies of the USDA, the issuebriefs/europe.pdf European Union's common agri- Food Policy Institute, or Rutgers Uni- Pew Initiative on Food and Biotech- cultural policy. Agricultural Eco- versity. nology (2005). Public sentiment nomics, 31 (2-3), 307-316.

246 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association What the Print Media Tell Us About Agricultural Biotechnology: Will We Remember? by Joan Thomson and Laura Dininni

In contrast to our European counterparts, Americans awareness of, in contrast to educating or informing the have not demonstrated strong opinions about agricultural public on, an issue. Becoming aware of an issue is neces- biotechnology. Nor has American awareness of agricul- sary, yet not sufficient, to become informed or take action tural biotechnology changed substantially over time (IFIC, on the topic. To do so also requires that an issue becomes 2001). Both the public’s lack of familiarity with agricul- salient. Media effects research shows that for an issue to tural biotechnology and their limited perception of its rel- become salient it must be covered with high frequency evance in daily living influence their perspectives toward over a period of time. Coverage of peak events, that is, the technology. This overall lack of public understanding greater coverage of a topic over a period of time, increases creates an environment in which whatever information the likelihood that the critical event that is covered will people are told is more likely to become what they believe. capture the public’s attention, providing an opportunity Media agenda-setting theory posits that what is for the issue to become salient for Americans. Thus, criti- reported in the media sets the agenda for what public cal events which garner peak coverage can put the topic on issues individuals consider to be important (McCombs & the public’s “radar screen.” Shaw, 1972). Empirical evidence has shown that agenda- Furthermore, peak events may provide an opportunity setting effects of media are minimal for obtrusive issues, for information from a diversity of sources to reach deci- issues with which individuals have direct experience. How- sion-makers and the public (Abbott & Lucht, 2000). Con- ever, agenda-setting effects of the media are strong for troversy carries news value and often creates a media unobtrusive, indirectly experienced issues because the pub- hoopla, or a peak in coverage, where journalists cover a lic has a need for orientation to those issues, particularly topic with vigor. When an issue is seen as more controver- when an issue is perceived as personally relevant to the sial, journalists, guided by the norm of objectivity, may reader. For most Americans, genetic modification through attempt to present opposing viewpoints. Because most agricultural biotechnology is an unfamiliar and abstract newspaper stories are based on information provided by concept, lacking any real context. In agenda-setting theory sources (Gandy, 1982; Soloski, 1989), print media sources terms, it is an unobtrusive issue. for information on agricultural biotechnology have the Studies of “second level” agenda-setting, or “attribute” potential to strongly influence what the public reads about agenda-setting, have shown that media presentations affect this technology. Therefore, it is essential that those sources public perceptions not only regarding what issues are effectively frame information for the public’s understand- important, but also what aspects of those issues are impor- ing so that information is what will be remembered. tant. Both what and how the media report on a topic is Based on our knowledge of how media can influence reflected in public understanding and opinion about that public opinion, plus the American public’s limited knowl- issue. edge regarding biotechnology and GM foods, mass media Space in the “daily news hole” is often event driven; coverage of agricultural biotechnology has the potential to that is, reporters will cover what is news today, increasing strongly influence public opinion, particularly through

4th Quarter 2005 • 20(4) CHOICES 247

Table 1. Frequency of Agricultural 20 Biotechnology Articles in 2001 and 2002 in The New York Times, 18 NYT Washington Post, and Wall Street 16 POST Journal. 14 WSJ YEAR N NYT POST WSJ 12 2001 210 109 64 37 10 8

2002 173 59 56 58 Frequency 6 critical event peak coverage. There- 4 fore, we investigated what the media 2 reports in overall and in peak cover- 0 age. Our analysis of news copy shows JUL JAN JUN FEB SEP APR OCT DEC NOV MAY AUG not only what topics garner coverage MAR and who provides the relevant infor- Figure 1. Agricultural biotechnology articles published monthly during 2001 in mation, but also the extent to which three national U.S. newspapers. a topic is covered and how. The newspapers selected for our 12 NYT study, the New York Times, the Wash- 10 ington Post and the Wall Street Jour- POST nal, have a combined national reader- 8 WSJ ship over 3.6 million (Editor & 6 Publisher, 2000). Media studies have asserted that articles in the national Frequency 4 newspapers tend to spread vertically 2 through the news hierarchy, setting the national news agenda (Gitlin, 0 1980). These national papers, touted JUL JAN JUN FEB SEP APR OCT DEC MAY NOV AUG as “breakfast reading for congress,” MAR the “unofficial newspaper of record” Figure 2. Agricultural biotechnology articles published monthly during 2002 in (Ulrich, 2002), and “the publication three national U.S. newspapers. of choice for capitalism’s brightest or regional papers is likely to follow an average of 16 a month. This cov- stars” respectively, command atten- the same pattern as that of the erage was a mix of baseline and peak tion. In fact, according to Herman nationals. coverage. Such a peak is evident in and McChesney (1997:138), three Our analysis of U.S. print media early 2001 (see Figure 1). In 2002 national newspapers in the United coverage of agricultural biotechnol- (see Figure 2), elevated coverage is States, the New York Times, the Wall ogy in 2001 and 2002 indicates that extended through several months. In Street Journal, and USA Today, along national coverage of agricultural bio- both years, peak coverage is most with the news agencies, “set the technology is quite limited. A com- clearly illustrated through the New agenda for the rest of the press and prehensive key word search of articles York Times, also reflecting The Times for broadcasters as well.” Because of published during these two years in more frequent coverage of agricul- this, the potential exists for articles the New York Times, Washington Post, tural biotechnology overall. carried in these nationals to travel not and Wall Street Journal found just In 2001 and 2002, agricultural only through the news hierarchy to 210 articles were published in 2001 biotechnology coverage was most other newspapers published by the and 173 in 2002, see Table 1. often found on page one of the sec- national firms, reaching a readership tion in which it appeared. Peak close to 12 million (Editor & Pub- Peaks in Coverage events were most often reported as lisher, 2000), but also to other news breaking news, printed in the front outlets across the U.S. If so, coverage Across two years these three national section, and more often than not, on of agricultural biotechnology by local papers published only 383 articles, or the first page. Further statistical anal-

248 CHOICES 4th Quarter 2005 • 20(4)

12 Sources in Articles

10 GMO REL Sources are not consistently used. LEGAL REG Across all agricultural biotechnology 8 PLANT GE articles in 2001, almost one-third cited none (61, 29% in 2001; 63, 6 36% in 2002). In 2001, U.S. govern-

Frequency 4 ment sources were most frequently cited in both overall coverage (39 2 articles, 19%) and within peak cover- 0 age of GMO release (10 articles, 29%). The next most frequently JUL JAN JUN FEB SEP APR OCT DEC NOV MAY AUG MAR cited sources in overall coverage were Figure 3. Coverage of three most frequent themes in agricultural biotechnology industry affiliated (19 of 210, 9%). articles during 2001 in three national U.S. newspapers. However, industry sources were cited in only 6% of peak GMO release 12 articles. Activist groups were cited 10 TRADE third most frequently in overall cov- WORLD HUNGER erage, in 15 of 210 (7%) articles, 8 GMO REL whereas activist groups were cited 6 second most frequently, 9% of the time, in GMO release articles.

Frequency 4 Among the articles citing a source

2 in 2002 (110 of 173, 64%), the most frequently cited sources were indus- 0 try affiliated (21 of 173, 12%), comprising almost one-fifth (21 of 110, JUL JAN JUN FEB SEP APR OCT DEC MAY AUG NOV MAR 19%) of all agricultural biotechnol- Figure 4. Coverage of three most frequent themes in agricultural biotechnology ogy sources of information. The next articles during 2002 in three national U.S. newspapers. most frequently cited sources were U.S. government affiliated (16 of ysis revealed peaks in coverage for with six articles in August and ten in 173, 9%), followed by university- two of the most frequently reported September (see Figure 4). Coverage affiliated sources (12 of 173, 7%). themes, GMO release in 2001 and of agricultural biotechnology in Activists (all types) were cited 11 world hunger in 2002. which trade was the primary theme, (6%) times. Farmers were only cited In 2001, GMO release, identified in 27 articles, occurred throughout four (2%) times. in 35 articles, was one of the three the year. GMO release was again one However, in the 2002 peak cover- most frequent themes covered. Figure of the three most frequent themes, age of world hunger, U.N. affiliated 3 shows a peak in coverage with 10 appearing in 21 articles. However, in and developing nation government articles in March. Legal regulation 2002 this theme showed no peak in sources were most frequently cited. and general articles about plant coverage. This pattern is not consistent with genetic engineering were the other As the issue changes, what is per- the most frequently cited sources in two most frequent themes in 2001 tinent to one topic may not be so for overall coverage for 2002; the pattern with 33 and 21 articles, respectively. another. To further understand what changed. In the case of the world However, neither are representative is reported, we looked at sources hunger peak, the topic being dis- of peak coverage, for this coverage cited in such coverage and how the cussed allowed for a diversity of occurred throughout the year. risks and benefits of the issue are sources, thus far silent. It appears that In 2002, coverage discussing agri- reported; that is, the tone. sources cited reflect their relevance to cultural biotechnology’s role in world the topic. A greater diversity of topic hunger, the second most frequent coverage provided public access to a theme for the year (N=24), peaked

4th Quarter 2005 • 20(4) CHOICES 249 greater diversity of sources of infor- many, is a critical question: Is agricul- not be the only explanation for this mation. tural biotechnology beneficial or not difference in story recall. The use of acknowledged sources to the environment, our quality of Framing can provide a way to in agricultural biotechnology report- life, and our economic welfare? Rais- link the unfamiliar with the familiar, ing is surprisingly limited. With few ing and discussing the risk/benefit not only addressing one of the exceptions, U.S. government and question for the public is likely to dimensions by which individuals industry are more often referenced encourage greater cognitive elabora- assess risk, but also enhancing recall than are other sources. However, as tion, or thinking, about agricultural of a topic. The more often a schema the world hunger theme illustrates, a biotechnology, particularly when the and its connections are activated, the controversial critical event garnering public is provided with the motiva- more those memories are reinforced, peak coverage may provide an oppor- tion to do so, for instance, through and the more likely they are to be tunity to hear from a greater diversity peak coverage of a “critical” event. retrieved. Much of the public of the of information sources. developed world shares an inaccurate Crafting Effective Messages, image of developing countries. Cate Tone of Articles Media Coverage to Remember (1994) states that Adamson, founder Most often in both 2001 and 2002, Our research indicates that how top- and author of UNICEF's annual articles emphasized neither the risks ics are covered varies across the issue, State of the World's Children report, nor benefits of agricultural biotech- as well as within the issue. Even argues that the public has “an impres- nology (36% in 2001; 36% in 2002). though print media coverage of agri- sion that the developing world is a Less often, both the risks and benefits cultural biotechnology is limited— theater of tragedy in which poverty were covered (29% in 2001; 20% in both in the extent of such coverage as and human misery figure promi- 2002). However, in peak GMO well as what issues are covered and nently in almost every scene.” In release coverage in 2001 risks were how—such information is essential addition, media often portray the most often emphasized. In fact, in to engage broader citizen awareness West as a Samaritan figure providing GMO release peak coverage in 2001 on a topic. aid in a time of need to countries in and in GMO release baseline cover- In a national survey by Hallman Africa. Accounts of suffering and age in 2002, risks were highlighted, et al. (2004), respondents were asked relief fall, almost without exception, 56% and 71%, respectively. There- if they recalled several agricultural into “a pre-set narrative” that por- fore, tone appears to reflect the topic, biotechnology news stories. Almost trays helpless victims and “heroic sav- not type, of coverage. one-quarter (24%) indicated that iors.” When agricultural biotechnol- As in 2001, articles published in they remembered the world hunger ogy is linked to this narrative it is not 2002 most frequently mentioned peak event, the African refusal of only more likely to be remembered, neither risks nor benefits of the tech- GM grain food aid, even though this but it is also more likely to be per- nology (36%). However, in peak cov- peak only occurred over two months ceived as less risky because it is paired erage of world hunger, both risks and in 2002. In contrast, only 7% with a more familiar concept, feeding benefits were mentioned most often remembered any Bt pollen/Monarch the world’s hungry. (45% of articles). Peak thematic cov- stories, categorized as a GMO As we know, consumers often erage differs in tone from overall cov- release, that surfaced through a much voice concerns about agricultural erage. As the world hunger theme longer peak in coverage, from June to biotechnology, viewing it as a risky illustrates, a controversial critical December in 1999. Given the large technology. Risk assessment can also event garnering peak coverage may media hoopla generated by this story, be influenced by framing a decision also provide an opportunity to dis- one might expect a much higher in terms of losses and gains (Tversky cuss the risks and benefits of this story recall. World hunger, a theme & Kahneman, 1986). Framing a technology. that emerged in 2002, is representa- decision in terms of loss makes the Given that overall coverage of tive of peak coverage and is remem- loss more salient to the decision agricultural biotechnology empha- bered. Although the Monarch peak maker. If a risk is framed in terms of sized neither risks nor benefits, the occurred three years prior to the loss, then the risk is seen as an oppor- public is provided little information world hunger critical event, time may tunity to avoid loss and an individual with which to understand what, for will take more risk to avoid loss than

250 CHOICES 4th Quarter 2005 • 20(4) to chance a gain (Highhouse & Yuce, ing on emotional imagery (Wansink save lives. Washington, D.C.: 1996). & Kim, 2001) ease the cognitive bur- The Annenberg Washington Pro- In fact, when discussing the dif- den of processing information, gram in Communications Policy ferences in consumer perceptions reducing the complex social implica- Studies of Northwestern Univer- between medical and agricultural tions of agricultural biotechnology to sity. Available online: http:// biotechnology, Wansink and Kim a scientific breakthrough to alleviate www.annenberg.northwest- (2001) assert that medical biotech- misery and reducing ambiguity ern.edu/pubs/disas/disas10.htm nology is often framed as avoiding a through compelling emotional cues. (Accessed August 2004). loss and agricultural biotechnology is Furthermore, emotion increases Editor & Publisher (2000). Audit framed as an improvement on a arousal, enhancing the chances of Bureau of Circulation. Available product that is already perceived to effective storage in memory. online: http://www.naa.org/info/ be sufficient by American consumers, When the media is essentially the facts00/14.html. a gain. When acceptance of agricul- sole provider of information on a Gandy, O.H. Jr. (1982). Beyond tural biotechnology is framed as topic, the public is apt to understand agenda-setting: Information sub- avoiding massive loss of human lives, the issue in the same manner as the sidies and public policy. Nor- as in the case for world hunger, we media portrayed it. Because of the wood, NJ: Ablex. see that perceived risks of the tech- complexity of agricultural biotech- Gitlin, T. (1980). The whole world is nology are likely to be accepted to nology and its perceived lack of rele- watching: Mass media in the avoid a loss (of human life). The vance for Americans, using cues such making and unmaking of the decision to accept a risk is simplified as emotional imagery can be more new left. Berkeley: University of when it prevents such tragic loss. effective than scientific information California Press. Acceptance of agricultural biotech- in increasing the public’s awareness of Hallman, W.K., Hebden, W.C., nology is now linked with alleviation and comfort with agricultural bio- Cuite, C.L., Aquino, H.L., & of starvation in the “Third World.” technology. Little direct experience Lang, J.T. (2004). Americans and What Americans have not sat guiltily with agricultural biotechnology GM food: Knowledge, opinion, munching down snacks as that nag- leaves the public in the position of and interest in 2004. Food Policy ging “Save the Children” imagery gaining understanding of this com- Institute report RR-1104-007, pops up on their television screens? plex technology and the social and Rutgers University. The decision to accept a technology economic implications of its use Herman, E., & McChesney, R. that is purported to avert the loss of through the media’s coverage. Peak (1997). The global media: The human lives is easy. The Bt pollen/ coverage can increase awareness of an new missionaries of corporate Monarch stories framed acceptance issue, helping the public to remem- capitalism. London: Contin- of agricultural biotechnology as ber, particularly when that coverage uum. potentially causing loss, ecological is framed as an event to remember. Highhouse, S., & Yuce P. (1996). loss. However, unlike ecological con- Perspectives, perceptions, and cepts involving Monarch butterflies, For More Information risk taking behavior [Electronic images of starving children provide a Abbott, E., & Lucht, T. (2000, July). version]. Organizational Behavior link with an established schema, cul- How triggering events affect mass and Human Decision Processes, tivated through media and culture. media coverage and source use 65, 159-167. Retrieved on Febru- Although we may lament the loss of a concerning genetically modified ary 29, 2004 from JSTOR. species of butterfly, for most of us, it organisms in Britain and the International Food Information Cen- has little meaning to us directly, United States. Paper presented to ter (IFIC). (2001). U.S. con- unlike the loss of human life. the Agricultural Communicators sumer attitudes toward food Emotional imagery such as starv- in Education USACC 2000 Con- biotechnology. Available online: ing children portrays agricultural bio- gress, Washington D.C. http://www.ific.org (Accessed technology as a beneficial solution to Cate, F.H. (Ed.). (1994). Interna- August 2004). world hunger. Effective framing uses tional disaster communications: McCombs, M.F., & Shaw, D.L. imagery to package the message in a Harnessing the power of commu- (1972). The agenda-setting func- form that is easily understood, mini- nications to avert disasters and tion of mass media. Public Opin- mizing issue complexity. Cues draw- ion Quarterly, 36, 176-187.

4th Quarter 2005 • 20(4) CHOICES 251 Soloski, J. (1989). Sources and chan- modified foods: False assump- gers Food Policy Institute by the U.S. nels of local news. Journalism tions about consumer behavior. Department of Agriculture (USDA), Quarterly, 66, 864-870. American Behavioral Scientist, under the Initiative for the Future of Tversky, A., & Kahneman, D. 44, 1405-1417. Agricultural Food Systems (IFAFS) (1986). The behavioral founda- grant #2002-52100-11203 ‘Evalu- tions of economic theory. The Dr. Joan Thomson (jthom- ating Consumer Acceptance of Food Journal of Business, 59, S251- [email protected]) is Professor of Agricul- Biotechnology in the United States,’ S278. tural Communications and Laura Dr. William K. Hallman, Principal Ulrich’s International Guide to Peri- Dininni is a M.S. candidate, De- Investigator. The opinions expressed odicals (2002). Vol. 5. New Prov- partment of Agricultural and Exten- in the article are those of the authors idence, N.J.: Bowker. sion Education, The Pennsylvania and do not necessarily reflect official positions or policies of the USDA, Wansink, B., & Kim, J. (2001). The State University, University Park, The Food Policy Institute, Rutgers marketing battle over genetically Pennsylvania. This research was supported by a grant provided to the Rut- University, or Penn State University.

252 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Ag-Biotech: It’s Not Just What’s for Dinner Anymore, but the Future Contents of our Medicine Cabinets by Jennifer Medlock and Edna Einsiedel

Forget about farm-to-fork when it comes to genetically the number of stakeholders is large, so is the disparity in modified (GM) crops. Think farm-to-pharmacy, or farm- opinion. Prodigene, an early industry player in PMF, has to-factory. Produced through plant molecular farming this outlook for the technology on its website (www.prodi- (PMF), this new set of transgenic crops is being grown not gene.com): for food, but to produce medicines and industrial prod- Imagine a day when taking children in for vacci- ucts. For example, potatoes have been modified to pro- nations will not involve a single tear being shed. duce a vaccine against the Norwalk virus, research that is Imagine that, in the place of a shot, the doctor currently in human clinical trials to determine efficacy gives your child a small bag of edible treats. This (Tacket et al., 2000). On the industrial side, corn plants bag of treats will not be any ordinary snack—it have been modified to produce trypsin, an enzyme used in will be an edible vaccine grown in corn and then the manufacturing process of insulin and vaccines, an made into an appealing snack. application already on the market in the United States Meanwhile, from the NGO perspective, a spokesper- under the name TrypZeantm (www.prodigene.com). son from Friends of the Earth forecasts a very different GM food production and PMF differ in one very sig- future, saying that with “just one mistake by a biotech nificant way. In GM food, the product is the plant (to be company, we’ll be eating other people’s prescription drugs consumed by humans or animals). In PMF, the product is in our cornflakes” (www.foe.org). the medical or industrial compound (the plant is not des- The diversity of stakeholders demonstrates the chal- tined for the food chain). For GM food, the idea is to lenges for policy development around this emerging tech- make crops easier to grow, for example through insect or nology. In Canada, no commercial applications of PMF herbicide resistance, or to enhance a crop’s nutritional have yet been approved. Policy is still in the early stages of value, as in vitamin A enriched “Golden Rice.” In PMF, development, which provides a useful entry point for the crop is used as a production vehicle or factory (Ma, stakeholder and public assessment of the technology to be Drake, & Christou, 2003). It is the ultimate product, the incorporated into policy development. Two studies con- medical or industrial compound that is of interest, not the ducted by the Genome Prairie GE3LS (Genomics, Ethics, plant itself, which is considered a waste product after the Environment, Economics, Law, and Society) research compound is removed. PMF products can be grown in team, one on focus group discussions with the general both food crops and nonfood crops (corn and tobacco are public (Einsiedel & Medlock, 2005) and one on stake- the most common platforms). holder interviews (Mistry, Einsiedel, Medlock, & Perra- By uniting agricultural biotechnologies with medicinal ton, 2005), will be discussed in this article (along with and industrial processes, PMF has already aroused contro- their consequent policy implications), but first we will versy. Those with a stake in this technology include con- provide context on the regulatory situation in Canada. ventional farmers, PMF companies, food processors and While the Canadian government conducts its policy exporters, academic scientists, patient groups, policymak- review (involving a number of departments including ers, as well as members of the general public. And just as

4th Quarter 2005 • 20(4) CHOICES 253 Agriculture and Agri-Food Canada, food or feed crops, or new crops as crops either by mistake (accidentally Health Canada, and Industry Can- production platforms. moving plant material from a green- ada), the crops involved in PMF are As policy development moves house to a field) or by malicious regulated under the authority of the beyond the bounds of the CFIA’s sci- intent (for example, through bioter- Canadian Food Inspection Agency ence-based safety assessments, assess- rorism). (CFIA). Plants used for plant molec- ments by stakeholder groups and the On the issues of safety and regu- ular farming are labelled as ‘plants public are integral to developing lation, while participants were willing with novel traits’ or PNTs, and socially sustainable policy. to accept a certain level of uncer- broadly PNTs are defined as plants tainty with PMF, they were also con- that have had a specific trait added to Public Views cerned about the abilities of regula- them through genetic engineering or Focus groups were conducted in four tors to adequately manage the other methods. PNTs can be devel- cities across Canada (Toronto, Hali- technology because resources to do so oped using conventional breeding or fax, Vancouver and Montreal) (see were seen to be inadequate. Concern through transgenic techniques. It is Einsiedel & Medlock, 2005). was also expressed about the ade- the resulting product that defines it Because of the unfamiliarity of PMF, quacy of standards to monitor as a PNT, and not the process of participants received a 10-page brief- longer-term impacts. development. ing document in advance of the ses- Concern over long-term side The following appears on the sion that outlined the technology, its effects for human health and the CFIA’s molecular farming web page: potential applications, and how it environment was raised by those “All PNTs in Canada are subject to might be treated by the Canadian respondents with the highest level of the same strict science-based regula- regulatory system. They were asked trepidation about PMF. They won- tions. However, since PNTs for to read the document and bring with dered about whether enough time molecular farming may present them three key questions and/or con- had been or would be allowed to greater potential for environmental cerns with regards to the develop- effectively study these effects. Con- or human health risks, the Govern- ment of the technology. cern about proper balancing of com- ment of Canada may put even more Not surprisingly, awareness of mercial versus public interests was stringent restrictions on the use of PMF before being contacted for the also expressed. these novel plants than for other study was very low, with only two of Ultimately, acceptance or rejec- PNTs” (bold in original) (CFIA, the 48 participants ever having heard tion of PMF was dependent on the 2005). of the technology, but none knowing perceived “purpose” of the applica- In the meantime, the CFIA has of any specific applications. In con- tion. Whether a particular applica- indicated that it is currently involved trast, participants revealed a high tion had a “useful” or worthwhile in a broad policy review of plant level of awareness of GM food and purpose had a substantial influence molecular farming. Until this consul- evaluated PMF within that reference, on participants’ perceptions. This tation and analysis are complete, calling PMF a “cousin” of GM food. purpose dimension was explored in applications for confined research Focus group participants dis- more detail in the next stage of the field trials for PNTs intended for cussed their concerns around four session, where reactions to five spe- plant molecular farming will be main themes: potential contamina- cific applications of PMF (that are addressed on a case-by-case basis. tion of food crops; safety issues; currently in or close to commercial The amendment lists a number of appropriate regulation; and, long- production) were elicited from par- “interim recommendations” for PMF term impacts. ticipants. The different applications developers, the major one suggesting The potential contamination of were chosen strategically to incorpo- that use of major food or feed crop food crops was the most dominant rate different streams of PMF work; species for PMF is not recom- issue raised. The main concern was for example, are reactions different mended. Other recommendations that the ‘modified’ product would get for products made in food crops ver- include choosing host species that are into the food chain through direct sus nonfood crops? Or for industrial “as amenable to confinement as pos- cross-pollination, animals, or wind. compounds versus medical com- sible” and encouragement to consider As well, concern was raised that pounds? After discussing the applica- fibre crops, small-acreage specialty humans might contaminate food tions, participants rated each of them on a four-point “acceptability spec-

254 CHOICES 4th Quarter 2005 • 20(4) trum” (Fully Acceptable, More case-by-case basis, assigning different a burgeoning field. For social and Acceptable, Less Acceptable, and levels of acceptability depending on environmental groups, if PMF were Unacceptable). The five applications context of the application. Distinc- to proceed, a strong regulatory that were used in the discussion are: tions were made also between pro- framework needed to be in place to 1. Tr ypsin in corn: Tr y ps i n, a pro - ducing compounds in food crops and control it. However, like members of tein derived from corn, is used in nonfood crops, with food crops the public, this group had doubts a variety of commercial applica- assigned a lower level of acceptability about the capacity of the government tions including the processing of overall, though a significant level of to adequately monitor the industry. some biopharmaceuticals; risk was perceived in all applications. Also echoing the public groups, Interleukin in tobacco: 2. Interleu- both food and nonfood crops were kin, a potential treatment for PMF Stakeholder Views considered acceptable for PMF devel- Crohn’s disease, has been tested opment (again across all sectors in field trials in Canada using To complement the public focus tobacco as a platform; group work, the GE3LS team con- except for the social/environmental 3. Norwalk virus vaccine in pota- ducted a set of surveys with other groups who did not support any toes: Norwalk virus capsid pro- groups with an interest in PMF applications), but there was a strong tein (NVCP), used as a test (farmers, academic and government preference for nonfood crops as there antigen, was able to trigger scientists, and representatives from was a sense of inevitability that con- immune responses in healthy vol- the food industry, PMF industry, tamination would occur at some unteers who ingested transgenic patient groups and social/environ- point in the future (all sectors raised potatoes; mental groups) (see Mistry et al., the risk of contamination to the food 4. Gastric lipase in corn: Gastric 2005). The specific objectives of this supply). A representative from the lipase, used to treat cystic fibrosis, PMF industry preferred nonfood has been produced using corn as work were: 1) To obtain a general crops due to a perceptions issue, say- a production vehicle and is cur- assessment of plant molecular farming that “if it happens once, the rently advancing through clinical ing in terms of risk, benefits, and trials; and challenges; 2) To examine perceived industry is dead.” 5. Bioplastics in corn: Still in the risk, benefit, and acceptability of four Another finding common across experimental stage, biodegradable PMF applications currently in devel- all sectors was support for regulation molecules are derived from corn opment; and 3) To elicit views on on a case-by-case basis. There is a rec- to produce bioplastics. how PMF should be regulated. ognition that the vast variety of pro- When judging the various appli- An interim report has been com- tein products that can be produced cations, people assigned a higher level pleted on this work. The applications from PMF should not be dealt with of acceptability if the purpose was tested were similar to those in the using blanket regulation. How an seen to provide a significant benefit public focus groups (Interleukin in application should be regulated was to human health (Norwalk virus vac- tomato, bioplastics in plants, trypsin dependent on a combination of the cine in potatoes and gastric lipase in in corn, and vaccine in tomato). An product (toxicity/stability, location of corn applications). If the purpose was interim report has been completed accumulation), production platform seen to provide economic benefits, on this work. In the study, there was (i.e., food/non-food) and scale (how but not significant new benefits to conditional acceptance of PMF many acres?). Preferences for contain- human health (i.e., a new way of pro- across all sectors, except for the social ment/confinement strategies were ducing an existing treatment as in the and environment groups who did not also application-specific, but gener- Interleukin example), then the appli- support going ahead with any appli- ally followed a ‘better safe-than-sorry’ cation was rated less highly. Finally, if cations. attitude where more containment is the benefits were perceived to be A major caveat for support of better. entirely economic (i.e., lower cost PMF was the lack of a regulatory Where the stakeholder groups industrial products), the value framework. This gap was mentioned diverged from the public sample was assigned was even lower. by all sectors, but for different rea- in the comparison between medical In general, while medical applica- sons. From the industry perspective, and industrial applications. The tions were consistently preferred over not having a regulatory framework opinions of stakeholder interviewees industrial applications, members of was seen as a threat to investment in were more nuanced, and there was the public appear to judge PMF on a cautious support of both as respon-

4th Quarter 2005 • 20(4) CHOICES 255 dents could see benefits and concerns voices need to be heard in shaping biotech/reg/pmfamve.shtml raised in both cases. For example, policy. (Accessed November 8, 2005). concern was raised in the medical Einsiedel, E.F., & Medlock, J.E. arena regarding whether there would Lessons from These Early (2005). A public consultation on be pharmacologically active drugs in Conversations plant made pharmaceuticals. the plants or whether they would be The importance of early understand- AgBioForum, 8(1). benign until purified and then coming of public and stakeholder views is Ma, J.K., Drake, P.M., & Christou, bined with other elements. In the evident. This has been a major lesson P. (October 2003). The produc- industrial arena, concerns were from the experiences of the GM food tion of recombinant pharmaceu- voiced about the potentially large debates. Public concerns revolve not tical proteins in plants. Nature acreages to be used to be profitable. just over why products are being Reviews Genetics, 4, 794-805. The issue of public involvement made from a technology, but how Mistry, J., Einsiedel, E., Medlock, J., and public awareness was raised they are produced and introduced & Perraton, K. (July 2005). many times in the stakeholder inter- into the marketplace. This involves Stakeholder and public views on views. Those in the PMF industry the accompanying regulatory frame- plant molecular farming. Paper fear the “drugs in my cornflakes” work that can encourage confidence presented to the International view will take hold. An agriculture in their introduction and use. Consortium of Agricultural Bio- industry representative suggested that Members of the public and stake- technology Research (ICABR), “the biggest risk (of PMF) is public holders are clearly making trade-offs Ravello, Italy. perception of risk.” Overall, there in their initial assessments. For mem- Tacket, C.O., Mason, H.S., Loson- was general belief that public views bers of the public, these include con- sky, G., Estes, M.K., Levine, on this technology will ultimately siderations of long-term impacts, not M.M., & Arntzen, CJ. (July determine its future. just to human health, but also to the 2000). Human immune However, how to respond to the environment. Expectations that regu- responses to a novel norwalk public perception issue differed latory systems similarly weigh differ- virus vaccine delivered in trans- among sectors, and fell into general ent considerations, from economic genic potatoes. Journal of Infec- spheres of thinking. Those in aca- and commercial gain to public inter- tious Diseases, 182(1),302-305. demia and the PMF and food indus- est considerations, are also evident. Epub 2000 Jul 06. tries felt that the public just needs Members of the public, stakeholders, objective information — educate and regulators clearly have much to Jennifer Medlock (jemedloc@ucal- them and they will understand and learn from each other. gary.ca) is a PhD student and Edna they will accept. Those in the govern- Einsiedel is Professor, respectively, ment, social/environmental, and For More Information Faculty of Communication and Cul- agricultural industry sector felt that ture, University of Calgary, Alberta, yes, members of the public should Canadian Food Inspection Agency Canada. Support for this study from (CFIA). (2005). Plant Molecular receive information, but should also Genome Canada and Agriculture be engaged in discussion and their Farming. Available online: http:// and Agri-Food Canada is gratefully www.inspection.gc.ca/english/sci/ acknowledged.

256 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association I Will Not Eat It with a Fox; I Will Not Eat It in a Box: What Determines Acceptance of GM Food for American Consumers? by Venkata Puduri, Ramu Govindasamy, John T. Lang, and Benjamin Onyango

Food biotechnology, also known as the genetic modifica- possible risks regarding food biotechnology (Frewer, Shep- tion of plants and animals, is a scientific revolution with a herd, & Sparks,, 1994). Researchers, policy makers, and potentially enormous impact on public life. Such techno- food producers would be wise to heed consumers’ prefer- logical advances rarely occur without public debate and ences for particular traits, plant-based GM, and the con- these advances are no exception. Proponents view biotech- cerns regarding regulatory support when implementing nology in terms of its potential to improve food quality, plant and animal genetic modifications. enhance natural disease resistance, and reduce the use of chemical pesticides. Opponents cite ethical and moral Data and Modeling concerns, as well as uncertain long-term impacts to the In 2004, The Food Policy Institute at Rutgers University health of people and the environment. fielded a nationally representative telephone survey of Many in the food industry and government sector 1,200 noninstitutionalized adult Americans, yielding a ±4 believe that public acceptance of biotechnology is critical percent sampling error rate. This survey data is the basis for its future development. As a first step, therefore, for our examination of the factors influencing respon- increased consumer awareness through public education is dents’ approval of plant and animal genetic modifications. desirable. Beyond educational efforts, however, it is impor- A logistic model framework is used to explore the relation- tant for industry and scholars to better understand which ship between socio-economic, demographic, and value factors might influence consumer acceptance of biotech- attributes and the factors influencing respondents’ nology. Previous studies of American consumers suggest approval of plant and animal genetic modifications. that acceptance is driven by knowledge and awareness of biotechnology and confidence and trust in the food system Consumer Perceptions about Plant and Animal- (Onyango & Nayga, 2004). Yet, it is not clear if there are Based Genetically Modified (GM) Foods any specific consumer benefits that Americans would readily accept. This analysis examined the influence of demographic variables, value attributes, and socio-economic status on the Many American consumers support advances in biotechnology that result in food with beneficial traits. For approval of plant-and animal-based GM. Demographic example, American consumers would be interested in try- variables included sex, race/ethnicity, age, and level of education. Value attributes included knowledge about bio- ing new varieties of fruits and vegetables that taste better or reduce the use of pesticides (Hoban, 1997; Hallman et technology, religious service attendance, self-reported al., 2002). Additionally, Americans generally support med- political leanings, trust in the government, confidence in scientific institutions, skepticism about biotechnology ical and crop biotechnology (Hoban, 1997; Hallman et al., 2002). However, Americans tend to support the use of companies, and confidence in the competence of govern- biotechnology in plants more than in animals (Hallman et ment regulators. Socio-economic status was measured by self-reported household income. In general, the results al., 2002, 2003, 2004). Furthermore, people with low trust in regulatory agencies have the highest concern about indicate higher consumer support for plant-based rather

4th Quarter 2005 • 20(4) CHOICES 257 than animal-based GM foods. Over- 70% all, twice as many respondents (55%) High School approve of plant-based genetically 60% Some or Four Years College modified foods compared to approval Graduation (27%) of animal-based genetically 50% modified foods. While this result is consistent with other surveys, a closer 40% examination of the data reveals more detailed insights and allows us to fur- 30% ther characterize American accep- 20% tance. Basic demographic variables 10% revealed interesting opinions. Men were 20% more likely than women 0% to support plant-based genetic modi- Approve Plant GM Approve Animal GM fication and 16% more likely to Figure 1. Respondents’ opinion about approval of plant and animal-based GM approve animal-based genetic modi- food by their education. fication. Among Caucasians, more than half (58%) approved of plant- 100% based genetic modification and one- 90% Low Score quarter (27%) approved of animal- Medium Score 80% based GM. Among other ethnicities, High Score about half (46%) approved of plant- 70% based GM and one-quarter (26%) 60% approved of animal-based GM. The 50% logistic regression estimates show that Caucasians were 30% more 40% likely than other ethnicities to 30% approve of plant-based GM. A simi- 20% lar percentage of Caucasians were more likely than other ethnicities to 10% approve of animal-based GM. 0% Among younger respondents (35 Approve Plant GM Approve Animal GM years old or younger), half (52%) Figure 2. Respondents’ opinion about approval of plant and animal-based GM approved of plant-based GM and food by their objective knowledge about genetically modified foods. one-quarter (24%) approved of animal-based genetic modification. of animal-based genetic modifica- animal-based genetic modification. Fifty-eight percent of middle-aged tion than the middle-aged respon- Among those with a high school (35-54 years old) respondents dents. The results suggest that non- diploma or less education, 46% approved of plant-based genetic Whites, the young, and women were approved of plant-based genetic modification and 28% approved of less approving of either technology. modification and 23% approved of animal-based genetic modification. As seen in Figure 1, about two- animal-based genetic modification. Among older respondents (55 years thirds (62%) of college graduates According to logistic regression esti- old and older), about half (54%) approved of plant-based genetic mates, those who have some college approved of plant-based genetic modification and roughly one-third education are 27% less likely than modification and one-quarter (27%) (37%) approved of animal-based college graduates to approve of plant- approved of animal-based genetic genetic modification. Among those based genetic modification. This sug- modification. According to logistic with at least some college education, gests that increased formal education regression estimates, younger respon- 59% approved of plant-based genetic increases approval of plant-based dents were 15% less likely to approve modification and 26% approved of genetic modification.

258 CHOICES 4th Quarter 2005 • 20(4)

In terms of value attributes, 70% respondents’ knowledge of biotechnology was assessed by asking 12 60% Worship Regularly questions relating to biotechnology. Worship Occasionally Those who answered 1 to 5 questions 50% NO Worship correctly were classified as low scor- 40% ers; those who answered 6 to 9 questions correctly were classified as 30% medium scorers; and those who 20% answered 10 to 12 questions correctly were classified as high scorers. As seen 10% in Figure 2, all high scorers approved 0% of plant- and animal-based GM. Approve Plant GM Approve Animal GM Among medium scorers, two-thirds (65%) approved of plant-based Figure 3. Respondents’ opinion about approval of plant and animal-based GM genetic modification and one-third food by those who attend church or other house of worship. (36%) approved of animal-based genetic modification. Among low 70% Low Income scorers, half (51%) approved of 60% Medium Income plant-based genetic modification and High Income one-fifth (21%) approved of animal- 50% based genetic modification. Accord- 40% ing to logistic model estimates, low scorers were 20% less likely to 30% approve of plant-based GM than 20% medium and high scorers and were 14% less likely to approve of animal- 10% based GM than medium and high scorers. This suggests that knowledge 0% Approve Plant GM Approve Animal GM of biotechnology positively influences the approval of plant- and ani- Figure 4. Respondents’ opinion about approval of plant and animal-based GM mal-based GM. In other words, the food by their income. more a respondent knew about GM, the more likely they were to approve approved of animal-based genetic based genetic modification. The of its use. modification. Among people who results suggest the less one visits a More than half of self-declared attend services occasionally, more place of worship, the more approving liberals, centrists, and conservatives than half (57%) approved of plant- of biotechnology. approved of plant-based GM. In con- based genetic modification and one- Among respondents who say they trast, less than one-third of these quarter (27%) approved of animal- trust scientific institutions, three- respondents approved of animal- based genetic modification. Among quarters (78%) approved of plant- based GM. Yet, according to logistic respondents who attend religious ser- based genetic modification and 39% regression estimates, liberals were vices regularly, roughly half (49%) approved of animal-based GM. 15% more likely to approve of ani- approved of plant-based genetic Among respondents who say they mal-based genetic modification com- modification and one-quarter (24%) trust the government, three-quarter pared to centrists and conservatives. approved of animal-based genetic (76%) approved of plant-based GM As seen in Figure 3, among modification. Logistic regression esti- and 38% approved of animal-based respondents who never attend reli- mates showed that those who never GM. Among respondents who have gious services, two-thirds (66%) attend religious services were 37% confidence in regulators, less than approved of plant-based genetic more likely than those who attend two-thirds (63%) approved of plant- modification and one-third (32%) services regularly to approve of plant- based GM and one-third (32%)

4th Quarter 2005 • 20(4) CHOICES 259 approved of animal-based GM. Concluding Remarks and Policy Frewer, L.J., Hedderley, C., Howard, According to logistic model esti- Implications C., & Shepherd, R. (1997). mates, respondents who trust the Objection mapping in determin- This article suggests differential government (29%), respondents who ing group and individual con- acceptance and approval of genetic have confidence in scientific organi- cerns regarding genetic modification involving plant or ani- zations (66%), and respondents who engineering. Agriculture and mal genes. The results can contribute have confidence in the ability of reg- Human Values, 14, 67 -79. to our understanding of GM food ulators (28%), were more likely to Hallman, W.K., Adesoji, A.O., acceptance and be used to derive approve the plant-based genetic Schilling, B.J., & Lang, J.T. marketing strategies and in policy modification. Respondents who trust (2002). Public perceptions of formulation. Similar to previous scientific institutions were 30% more genetically modified foods: studies, this article suggests that likely to approve of animal-based Americans know not what they demographic, socio-economic, con- genetic modification. This suggests eat. (Food Policy Institute Report sumer value attributes, and trust in that those who trust key stakeholders RR-0302-001). New Brunswick, key stakeholders help drive accep- are more likely to approve of plant- NJ; Food Policy Institute, Cook tance of genetic modification based genetic modification. Further- College, Rutgers - The State Uni- (Onyango & Nayga, 2004). In gen- more, those who trust science and its versity of New Jersey. Available eral, the public is more approving of institutions are even more likely to online: http://www.foodpolicyin- plant-based GM than animal-based extend that trust to animal-based stitute.org/docs/reports/Pub- GM. Furthermore, the results of this GM. lic%20Perceptions%20of%20Ge survey suggest that a better under- As shown in Figure 4, among netically%20Modified%20 standing of biotechnology, trust in respondents with high household Foods.pdf (Accessed August 26, the GM regulatory framework, and income (above $75,000), 67% 2005). biotechnology corporations’ motives approved of plant-based genetic Hallman, W.K., Hebden, W.C., are critical for the acceptance of modification and 32% approved of Cuite, C.L., Aquino, H.L., & genetic modification. A general out- animal-based GM. Among respon- Lang, J.T. (2003). Public percep- reach program to educate and inform dents with a moderate household tions of genetically modified foods: consumers about biotechnology will income ($35,000 - $75,000), 51% A national study of American not help the public make informed approved of plant-based genetic knowledge and opinion. (Food decisions about the desirability of modification and 27% approved of Policy Institute Report RR-1003- this technology. Rather, a targeted animal-based genetic modification. 004). New Brunswick, NJ; Food communication strategy that takes all Among respondents with low house- Policy Institute, Cook College, these differences between the con- hold income (below $35,000), 48% Rutgers - The State University of sumer segments would be more effec- approved of plant-based GM and New Jersey. Available online: tive. Additionally, the pursuit of a 23% approved of animal-based GM. http://www.foodpolicyinsti- trustworthy corporate and industry- Logistic regression estimates show tute.org/docs/reports/ wide image would help assure con- that the low income group was 27% NationalStudy2003.pdf sumers that biotechnology is, per- less likely, and the moderate income (Accessed August 26, 2005). haps, a technology that is worth the group was 25% less likely, to approve Hallman, W.K., Hebden, W.C., risk. of plant-based genetic modification Cuite, C.L., Aquino, H.L., & compared to the high income group. For More Information Lang, J.T. (2004). Americans and The low income group was 11% less GM food: Knowledge, opinion, likely than the moderate income Frewer, L.J., Shepherd, R., & Sparks, and interest in 2004. (Food Policy group to approve of animal-based P. (1994). The interrelationship Institute report RR-1104-007). genetic modification. The results between perceived knowledge, New Brunswick, NJ: Food Policy suggest the higher the household control and risk associated with a Institute, Cook College, Rutgers income, the more approving of bio- range of food-related hazards tar- - The State University of New technology. geted at the individual, other Jersey. Available online: http:// people and society. Journal of www.foodpolicyinstitute.org/ Food Safety, 14, 19-40. docs/reports/

260 CHOICES 4th Quarter 2005 • 20(4) NationalStudy2004.pdf at Rutgers, the State University of swick, New Jersey. This research was (Accessed August 26, 2005). New Jersey, New Brunswick, New supported by a grant provided to the Hoban, T.J. (1997). Consumer Jersey. Ramu Govindasamy is Associ- Rutgers Food Policy Institute by the acceptance of biotechnology: An ate Professor, Department of Agricul- U.S. Department of Agriculture international perspective. Nature tural, Food and Resource Economics, (USDA), under the Initiative for the Biotechnology, 15, 232-234. and Associate Director, Food Policy Future of Agricultural Food Systems Onyango, B., & Nayga, R.M., Jr. Institute, Rutgers, the State Univer- (IFAFS), grant #2002-52100- (2004). Consumer acceptance of sity of New Jersey. John T. Lang is a 11203 “Evaluating Consumer Accep- nutritionally enhanced geneti- Doctoral Candidate, Department of tance of Food Biotechnology in the cally modified food: Relevance of Sociology and Research Assistant, United States,” Dr. William K. Hall- gene-transfer technology, Journal Food Policy Institute and Depart- man, Principal Investigator. The ment of Human Ecology, Rutgers, the opinions expressed in the article are of Agricultural and Resource Eco- State University of New Jersey, New those of the authors and do not neces- nomics, 29(3), 567-583. Brunswick, New Jersey. Benjamin sarily reflect official positions or poli- Onyango is Research Associate, Food cies of the USDA, The Food Policy Venkata Puduri is Post Doctoral Policy Institute, Rutgers, the State Institute, or Rutgers University. Associate, Department of Agricul- University of New Jersey, New Brun- tural, Food and Resource Economics

4th Quarter 2005 • 20(4) CHOICES 261 262 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association A Frictionless Marketplace Operating in a World of Extremes by Allen F. Wysocki Exciting Times in Food Retailing Articles in this Theme: These are both evolving and challenging times for food distribution and retailing. Never before have the same A Frictionless Marketplace Operating in a World of consumers behaved in so many different ways. Consider Extremes ...... 263 Sally, a hypothetical shopper, who may begin her food Food Safety in Three Dimensions: Safety, Diet Quality, and shopping experience by visiting the neighborhood super- Bio-Security ...... 269 center, searching for items she perceives to be undifferenti- Transitioning from Transaction-Based Markets to Alliance- ated, seeking larger sizes and the best prices for given prod- Based Supply Chains: Implications for Firms ...... 275 ucts. Sally decides to stop at Whole Foods to satisfy Risk Sharing and Transactions Costs in Producer-Processor particular nutritional needs, social causes, or deeply-held Supply Chains ...... 281 beliefs such as organic food products are safer. On the way Logistics, Inventory Control, and Supply Chain home, she stops by the fresh seafood distributor to pick up Management ...... 287 today’s fresh catch for this evening’s meal. Waiting for her when she arrives at home is the wine she ordered on the Frictionless (2000 and beyond) internet three days ago from her favorite vineyard in The “Frictionless Marketplace” is characterized by a another state. renewed emphasis on the individual shopper. Redundant Sixty years ago, Sally’s shopping experience would have supply chain components such as warehouses are elimi- been quite different. Shopping at a limited number of spe- nated and the retailer once again becomes the “Agent” for cialized food retailers like the butcher or general store, she the shopper, facilitating the transfer of goods and services would be greeted by name. The day’s current events, and from manufacturers to end-users (Terbeek, 1999). mutual friends would be discussed while the retailer Greater customer focus must go beyond the superficial assembled her order based on her list and known purchas- by addressing all the basic building blocks of the organiza- ing habits. Today, consumers face a much different shop- tion. The status quo must change from disconnected, ping experience. They have increasing choices regarding multiple channels, and silos to a unified orchestration of where to purchase their meal solutions. Sally could just as the customer experience. Retailers need to be capable of easily have decided to stop by the local Boston Market or delivering a unified seamless customer experience that the neighborhood grocery store deli to pick up a ready-to- treats customers as the unique individuals they are. In a eat meal in answer to the question: “what is for dinner?” frictionless marketplace: Where are we headed and what forces have moved us • Core competency arises out of anticipation of shopper from the shopping experience of sixty years ago? If the needs. forces and trends identified in this paper hold, there are at • The internet, the dominate form of technology, links least, two, inter-related dimensions to describe what future all supply chain participants. grocery supply chains might look like in a frictionless mar- • Information technology is applied to the individual ketplace, operating in a world of extremes. shopping experience in ways never dreamed of in the past.

4th Quarter 2005 • 20(4) CHOICES 263 • Shoppers are the primary source entiated concepts are doomed for access to customers’ mindshare and of information, not manufactur- failure. personal information. ers or retailers. What are the forces driving • Retailer orientation is that of an change in the food system? What key Economies of scale and scope agent, one who uncovers the factors are impacting current grocery Mega retailers break the boundaries. needs of customers and then supply chains, and the evolution of The world’s top retailers are rapidly facilitates the fulfillment of those grocery retailing in the United States? expanding across geographies, chan- needs. nel formats, and product/service cat- • Grocery stores are organized in Forces Driving Change in Grocery egories, blurring market segments whatever manner that better Supply Chains and devouring market share. Com- meets the needs of customers, Primal forces driving change include petitors must differentiate themselves such as local and intimate shop- changes in the marginal cost of time, in order to survive. ping experiences. economies of scale and scope, dietary Partnering becomes pervasive. • Grocery store headquarters return practices and needs, the use of con- Companies can no longer compete as to the store-level, where the great- sumer technology, and demographic an island of one. Leading retailers are est interaction with customers shifts. evolving their enterprises into flexible occurs. “value networks” based on strong • The power within the system The marginal cost of time integration and collaboration with resides with the customer. The need for convenience. In the partners. There will be increased • Store employees are the true dif- 1950s, it took an average of two pressure to match the responsiveness ferentiators between competing hours to prepare a meal. By the late and agility of these connected and retail entities. 1970s, it still took about an hour, but mutually dependent business models. • Success is measured by customer today, even 20 minutes in the kitchen Dietary practices and needs loyalty and shopper performance. is too much (Saaristo, 2005). Ameri- • Profitability is based on how well cans spend an average of 32 minutes Customer value drivers fragment. Cus- the customer has been satisfied. per day for meal preparation and tomers are fragmenting into micro- • The manufacturer’s focus is on cleanup (United States Department segments as a result of pronounced the end-user customer, leading to of Labor-Bureau of Labor Statistics, shifts in demographics, attitudes, and deeper and longer-lasting manu- 2004). patterns of behavior. These patterns facturer-retailer relationships. Grocers and restauranteurs recog- of behavior are shaped by increasing nize the value of convenience. Approxi- consumer awareness of eating A world of two extremes mately 35% of meals eaten and not healthy, current diet trends, and Traditional segmentation no longer prepared at home in 2004 were pro- social causes. Consumers are “trading works in a complex and divergent vided by fast-food restaurants. Super- down” to low-cost commodities on marketplace filled with diverse cus- markets have been very aware of this one end and “trading up” to high- tomers and individualism. Customer and have increased their share of value, premium brands and compa- behavior appears at times to be meals eaten and not prepared at nies on the other. Retailers serving schizophrenic: they will demand low home from 18% in 2000 to 27% in the needs of “average” customers are prices for goods that are viewed as 2004 (The Food Institute, 2004). doomed to failure. commodities, yet be willing to pay Gatekeepers become more guarded. Use of consumer-focused technology sizable premiums for products that Overwhelmed, time-strapped cus- mean more to them personally. This tomers are seeking greater control Information exposes all. Customers will result in two extremes: 1) huge over their interactions with busi- continue to gain market power and mega-retail formats dominating one nesses. Armed with technology and knowledge by access to information – end of the spectrum, and 2) focused regulation, they will actively protect virtually wherever, whenever, and specialists dominating the other themselves from “me-too” marketing however they want it. Retailers must (IBM Business Consulting Services tactics. Only retailers offering differ- provide value propositions and shop- Group, 2004). Retailers and suppliers entiated, relevant value will gain ping experiences that keep customers caught in the middle with undiffer- coming back even in a world of total

264 CHOICES 4th Quarter 2005 • 20(4) Total retail trade in 2003: $3.78 trillion

All others Food services & drinking 10.1% Other general places merchandise stores 9.5% 6.8% Furniture & home Food & beverage stores furnishing stores 13.5% 2.7% Electronics & appliance stores Warehouse clubs & 2.5% supercenters - food (est.) 2.5%

Building mat. & garden Warehouse clubs & equip. & supplies dealers supercenters - nonfood 8.5% (est.) Health & personal care 3.3% stores 5.1% Gasoline stations 7.0% Motor vehicle & parts dealers Clothing & clothing 23.9% accessories stores 4.7%

Figure 1. Food-based retailing accounts for 23% of all U.S. retail trade. Source: 2004 Food Industry Review information transparency (IBM Busi- the largest age groups, are still grow- ways to cut costs, while maintaining ness Consulting Services, 2004). ing and they have very different a distinct value proposition. needs. Grocery supply chains must Demographic shifts identify needs and deliver value to What Grocery Supply Chains Look Increasingly diverse population. Eth- these demographic segments (The like Today nic diversity continues at an increas- Food Institute, 2004). Long-standing Grocery supply chain channels are ing rate. Between 1990 and 2010, life stage patterns are becoming less blurring as store formats look more the U.S. Hispanic population is pro- predictable. People are marrying alike. Two sets of counter-veiling jected to grow by 80% and reach later, divorcing more, having second forces describe the current state of nearly 14% of the overall population. families, starting second careers, and grocery supply chains in the United The non-Hispanic White share of the even raising their grandchildren. States: 1) private label/store brands U.S. population will decline to 64% Money pressures increase. The vs. national brands, and 2) channel by 2020, and by 2030, it will be less average American spent only 10.1% push vs. channel pull strategies. than half the population under age of their disposable income on food in Food-based retailing accounted 18. The Black population is expected 2003 (USDA-ERS, 2004), the lowest for a 22.8% (Figure 1) of all U.S. to double by the middle of this cen- of any country in the world. How- retail trade in 2004 (United States tury (United States Census Bureau, ever, most real income gains have Census Bureau, 2005). This is 1996). Clearly, grocery supply chains accrued to the top 20% of the popu- approximately $888.1 billion in retail can no longer adopt a one-size-fits-all lation. In particular, cost increases in trade. While this food share is down mentality to meeting the needs of an housing and education are putting from 25.5% in 2003, total food- increasingly diverse population. pressure on food purchasing. Grocery based retail sales continue to grow The population saddle. Those supply chains must continually find each year. between the ages 15-24 and over 55,

4th Quarter 2005 • 20(4) CHOICES 265 Label Manufacturing Association, user requests. Trade and promotional 20% 2005). dollars are targeted to end-users and the demand created by end-users National brands pulls products and services through 15% National brands accounted for the grocery supply chain. Every day approximately 83.7% of all grocery low pricing, end-user coupons, and sales in 2003 (The Food Institute, advertising targeted to end-users are 10% 2004). National brand manufactur- the currency of a supply chain utiliz- ers have found it necessary to offer ing channel pull. Examples of gro- trade and promotional dollars to pro- cery supply chains utilizing channel 5% mote their products, to gain access, pull include Wal-Mart and Sav-A- and maintain shelf space. Manufac- Lot. turers spent 16.3 % of gross sales on 0% trade promotion (Figure 2) in 2004. Two Main Food Systems: Grocery For consumer and packaged goods and Foodservice 1999 2000 2001 2002 2003 2004 companies this amounted to 48% of In the mid 1990s, it appeared that Figure 2. Trade spending as a percent their total marketing budget and the food dollars spent away from home of gross sales. ROI on promotion spending contin- would surpass food dollars spent at Source: Cannondale Trade Promotion Study 2005 ues to be negative (Forum, 2005). home in the early part of this century. Private label/store brand growth The sheer size of trade and promo- This has not happened. In 2004, tional allowances has led to a literal Private label products, or store food at home spending was approxi- dependence on them by grocery brands, continue to grow in impor- mately 53.5% of total food expendi- tance in grocery supply chains. Store retailers. Even retailers that are push- tures,1 while food away from home ing their own store brands, must brand products encompass all mer- spending accounted for the remain- think twice about any decision to dis- chandise sold under a retail store's ing 46.5% (Table 1). Food at home place national brands and the trade private label. Store brands now spending is predicted to decline to dollars they bring. account for 20% of the items sold in 52.0%, leaving food away from U.S. supermarkets, drug chains, and home spending at 48.0%. Increased Channel push vs. channel pull mass merchandisers. They represent competition from warehouse clubs, more than $50 billion of current In a channel push strategy, the supply supercenters, drug stores, and the business at retail and are achieving chain starts with the input supplier increasing emphasis on meals-to-go new levels of growth every year (Pri- or manufacturer and ends with the have tempered this trend. vate Label Manufacturing Associa- end-user. In a channel pull strategy, tion, 2005). the supply chain starts with the end- The Evolution of Grocery Supply U.S. shoppers save approximately user and ends with the input supplier Chains or manufacturer. $15.8 billion annually by purchasing If grocery supply chains do take on store brands over national brands. A channel push strategy relies on suppliers and vendors to introduce the forms described in the frictionless The difference is the so-called "mar- marketplace, they will come full cir- keting tax," which consists of adver- and promote products and services to tising and promotional costs incurred supply chain intermediaries. Trade 1. Total food expenditures exceeded by national brand makers that are dollars and promotional allowances $959.4 billion in 2004, higher passed on in the form of higher prices are the currency of a supply chain than the food-based retailing num- at retail. Store brands remain impor- utilizing channel push. Channel push ber ($888.1 billion) cited earlier tant to retailers. Retailers use store is common in grocery supply chains because it includes all retail outlets brands to increase business and win and may account for as much as 17 such as money spent in hotels for customer loyalty. Store brands give % of sales in retailers’ budgets. The meals, snacks at entertainment retailers a way to differentiate them- Albertsons and Kroger supply chains facilities, meals in institutions, and selves from competition (Private utilize channel push strategies. Channel pull strategies rely on airline feeding (USDA-ERS, satisfying demand created by end- 2004).

266 CHOICES 4th Quarter 2005 • 20(4) Table 1. Projected expenditures for food 2001-2013. Food at homea Food away from homeb Year $ million % of total $ million % of total Total ($ million) 2001 463,600 53.80 398,100 46.20 861,700 2002 485,200 53.90 415,000 46.10 900,200 2003 498,100 53.56 431,900 46.44 930,000 2004 513,000 53.47 446,400 46.53 959,400 2005 526,500 53.18 463,600 46.82 990,100 2006 544,900 53.05 482,200 46.95 1,027,100 2007 562,300 52.86 501,400 47.14 1,063,700 2008 580,900 52.69 521,500 47.31 1,102,400 2009 600,000 52.52 542,400 47.48 1,142,400 2010 619,800 52.35 564,100 47.65 1,183,900 2011 640,500 52.20 586,600 47.80 1,227,100 2012 661,400 52.02 610,000 47.98 1,271,400 2013 688,200 52.04 634,300 47.96 1,322,500 Note. Data from USDA-ERS (2004). a Includes food for off-premise uses. b Includes both meals and snacks. cle from how they used to be orga- store performance and profitability Saturation (1975-1990) nized. The evolution of the grocery based on securing and maintaining Customers became consumers in the supply chain can be categorized by customers. saturation phase, and cookie-cutter five phases (Terbeek, 1999): pre- retail locations signaled cost-efficien- development, development, satura- Development (1945-1975) cies. The “one size fits all” attitude tion, and decline. The fifth phase, The development phase spawned the was as pervasive as Tide™ in grocery frictionless, was already discussed. birth of a consumer-segment orienta- aisles. Core competency was mea- tion, where new products were intro- sured by how well retailers could buy Pre-development (before 1945) duced to post World War II con- products. Operations were stream- The pre-development phase was sumer-product hungry shoppers. The lined by information technology at characterized by an individual shop- retailer no longer knew the customer all levels. Point of sale information per orientation, where the retailer intimately. Core competency resulted was collected, studied, and managed. performed multiple functions. Infor- from creating superior logistics sys- Store headquarters were moved to mation resided with the individual tems. Information technology moved buildings no longer connected to the employees/owners who knew each to the back room to handle logistics warehouses or stores, and power customer by name and their shop- of emerging grocery distribution sys- within the system resided with the ping preferences. Core competency tems. The focus was on national retailer. Store employees became resulted from creating superior cus- brands. Store headquarters were expensive to have. Success was mea- tomer satisfaction. Information tech- located at the warehouses, while sured by the amount of deal money nology was used for basic bookkeep- power within the system resided with buyers could wrestle from manufac- ing, and no single grocer had a the manufacturer. Success was mea- turers, while the key industry trend technological advantage. Grocery sured in cases moved per hour. The was consolidation and profitability stores were organized locally and the key industry trend was how fast the was determined by how efficiently focus was on bulk items. Grocery grocery chain was growing. Profit- stores managed categories. store headquarters were located at ability was determined by the num- each individual store, while power ber of national brands items carried. Decline (1990-2000) within the system resided with the In the decline phase, consumers shopper. The key industry trend was found it difficult to differentiate

4th Quarter 2005 • 20(4) CHOICES 267 between retailers and consumers were grocery supply chains. These forces United States Census Bureau. taught to switch retailers for the next may ultimately determine which sup- (2005). Annual benchmark report lowest price on national brands. Core ply chains survive. Survival may for retail trade and food services: competency became how to run the depend on: 1) supply chains based on January 1992 through February most effective committee meetings. channel push and channel pull strate- 2005. Current Business Reports Information technology focused on gies, and/or 2) supply chains based Series BR/04-A. fine tuning, and squeezing as much on huge mega-retail formats and United States Census Bureau. efficiency out of the system as possi- focused specialists. (1996). Population projections of ble to compete with retailers like the United States by age, sex, race, Wal-Mart. Chains became too big to For More Information and Hispanic origin: 1995 to react to market changes, while The Food Institute. (2004). The Food 2050. Available online: http// smaller, independent grocery chains Institute’s Food Industry Review- www.census.gov/prod/1/pop/ differentiated themselves by being 2004 Edition. Elmwood Park, p25-1130/. innovative and in-tune with their NJ: The Food Institute. USDA-ERS. (2004). Food CPI, customers. Manufacturers were the Forum Magazine. (2005). Cannon- prices, and expenditures: Expendi- critical source of information as dale Trade Promotion Study tures as a share of disposable retailers tried to make sense of the 2005: Saying No to the Status income. Available online: http:// blurring supply and consumer chan- Quo. Forum, Second Quarter www.ers.usda.gov/Briefing/cpi- nels. The power within the system 7(2), 72-84. foodandexpenditures/Data/ resided with investors on Wall Street. IBM Business Consulting Services. table7.htm. Store employees, as a labor pool, were (2004). The Retail Divide: Lead- United States Department of Labor- scarce. Success was measured by the ership in a World of Extremes. Bureau of Labor Statistics. share price, while the key industry Somers, NY: IBM Global Ser- (2004). American time use survey. trend was globalization. Profitability vices. Available online: http:// was all too often based on the trade Private Label Manufacturing Associa- www.bls.gov/tus/. and promotional dollars garnered tion. (2005). Market Profile. from manufacturers. Available online: http:// Allen F. Wysocki ([email protected]) is www.plma.com/storeBrands/ Associate Professor and Master of Agribusiness Coordinator, Food and Coming Full Circle sbt05.html. Resource Economics, University of With the dawn of the frictionless Saaristo, T. (2005). Quick Meals. Florida, Gainesville, Florida. The marketplace, we have come full circle Available online: http://tom- author gratefully acknowledges the from the neighborhood grocer of the saaristo.com/quick.html. ideas received from Jack Allen, Profes- pre-development phase, to “agents” Terbeek, G.A. (1999). Agentry sor Emeritus, Food Marketing Part- of the future who utilize technology Agenda: Selling Food in a Friction- nerships for Food Industry Dev- and systems to once again become less Marketplace. Chesterfield, elopment, East Lansing, MI, and “intimate” with customers. Numer- VA: Breakaway Strategies and the from Bob Harris, Chairman of Alli- ous forces are driving change within American Book Company. ance Foods, Coldwater, MI.

268 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Food Safety in Three Dimensions: Safety, Diet Quality, and Bio-Security by Jean Kinsey

Food safety in three dimensions refers to the matrix of is- food or water with salmonellae or E. coli that results in sues and activities that lead to safe food consumption in food “poisoning,” a nasty short-term illness associated with today’s world. Starting with the first principle that food foreign travel or imported produce. This stereotype is just should nourish the body and not cause illness, debilita- the tip of the iceberg when it comes to problems related to tion, or death, a broader concept, “safe food consump- safe food consumption. Table 1 lists the ten most well- tion,” is called for. Food safety typically refers to food that known and well-tracked pathogens leading to food-borne is free from harmful, but naturally occurring microbiologi- illnesses in the United States. The Centers for Disease cal contamination. Safe food consumption includes: Control (CDC, 2005a) estimates that these pathogens 1. safety from known (chemical or biological) substances represent only a fraction of the cases and hospitalizations that lead to known (or unknown) illness or death (bot- and less than half of the deaths actually caused by food- ulism, pesticides, cholera) borne pathogens. Norwalk-like viruses generate the largest 2. safety from long-term chronic diseases related to qual- number of reported cases of food-borne illnesses per year, ity of diets (diabetes, heart disease) Taxop las ma go n dii (a parasite) generates the largest number 3. safety from deliberate contamination anywhere along of hospitalizations, and campylobacter causes the largest the supply chain of an otherwise safe food supply (bio number of deaths (Ropeik & Gray, 2002). Microbial con- or chemical terrorism) tamination can occur at any node in the food supply Since violating any one of these three safety mandates chain. For foods that are not processed (cooked) before leads to unsafe food consumption, it takes all three to consumers eat them, sanitation at farm, packing, distribu- bring safety, quality, and security to the tion, retail, and home nodes is critical. food system. It takes the cooperation of The hazard of humans passing microbes all parties in the food chain (farmers, to food by dirty hands or coughing is not manufacturers, retailers, consumers, and trivial. The hazards of dirty equipment, all their service providers and regulators) trucks, or warehouses are ever present. to deliver the safe consumption of food. Keeping cold and frozen food the right When food harms people, it is every- temperature throughout the supply chain body’s problem. The immediate victims takes vigilance all along the chain. become ill or die, other consumers’ health The cost of food-borne illnesses care costs rise, employers lose employees, caused by microbes is estimated at $6.9 to and the profitability of the supply chain $33 billion per year (USDA-ERS, 2003). that handled and sold the food is dimin- Hepatitis B. This includes direct medical costs, as well ished. as lost wages, productivity, and estimated value of life years Safety from Known Substances That Lead to Known lost to premature death. It does not include these costs for (or Unknown) Illness or Death children with food-borne illnesses, costs to employers, or the costs borne by food companies involved in recalls or When one thinks about food safety, one usually thinks law suits. Nonreported illnesses account for much of the about natural or accidental microbial contamination of difference between the low and high number. The low

4th Quarter 2005 • 20(4) CHOICES 269 Table 1. Reported food-borne illnesses from bacteria, viruses, or parasites – United States. Cases/Year Hospitalization Deaths (millions) (cases/year) (people/year) Norwalk-like virus 9.200 20,000 124 Campylobacter spp. (1/1000 cases lead to Guillain-Barre syndrome) 2.00 10,500 1000 Salmonella spp. 1.413* 15,600 550 Clostridium perfringens 0.250 50 10 Giardia lamblia .200 500 1 Escherichia coli .173 2,800 80 Listeria monocytogenes .003* 2,500 500 Taxoplasma gondii .113 22,600 375 Shigella spp. .090 1,250 14 Total Reported 13.440 75,896 2,654 CDC Estimated Total Incidents 76.00 325,000 5,000 Source: Ropeik and Gray, 2002. * Adjusted from data on http://www.ers.usda.gov/data/foodborneillness/ number is based on reported cases cally modifying plants and animals. estimated that the benefit-cost ratio and the high number is an estimate The link between bovine spongiform from reducing Salmonella Enteritidis of what the costs would be if all cases encephalopathy (mad cow disease) in shell eggs by refrigeration to be were reported. Profits lost when con- and variant Creutzfeldt Jakob Disease 0.65, 3.56, 2.56, and 8.87, depend- sumers or stock holders lose confi- (vCJD) was confirmed using trans- ing on the method used to calculate dence in a brand name or a company genic mice in 1999 (Acheson, 2001), the benefits. A third study showed are more temporary and less than one but as with many chronic and long- that for every dollar saved by pre- might expect. Research on meat and term illnesses, the time lag between venting a premature death from a poultry recalls has shown that recalls exposure and illness is several years food-borne illness, there is an econo- cost less than 1% of sales and that making epidemiological evidence in my-wide gain of $1.92 (Golan, Ral- there may actually be some offsetting humans hard to establish. By June ston, Frenzen, & Vogel, 2000). Oth- gains if consumers substitute other 2005, there were 177 known cases of er studies show that consumers are products (Shiptsova, Thomsen, & vCJD in the world; 156 of them in willing to pay more for safer food Goodwin, 2002). Stock prices typi- the United Kingdom, 12 in France, 2 than the losses that might incur due cally fall after a serious recall, but in Ireland, and one in each of seven to illness using the cost-of-illness ap- subsequent recalls in the same com- other countries, including the United proach to measure the benefits of saf- pany and minor recalls elsewhere cre- States (CDC, 2005b). er food (Antle, 2001). In the real ate no significant stock price declines Most studies have found the ben- world, consumers demonstrate their (Thomsen & McKenzie, 2001; efit-cost ratio of taking steps to re- willingness to pay at the supermarket Hooker, 2002). duce the risk of food-borne illnesses when they buy organic food to avoid The relationship between food, to be positive. For example, Ollinger pesticides and “natural” foods to diet, and chronic (or delayed) diseas- and Mueller (2003) found that avoid additives. They pay for safer es is much less well established com- Pathogen Reduction/Hazard Analysis food at tax time by supporting gov- pared to knowledge about microbial and Critical Control Point programs ernment agencies such as the Food food-borne illnesses. For example, in meat and poultry plants translated and Drug Administration, Depart- there is virtually no known link be- into a benefit value (in terms of ments of Agriculture, and state health tween pesticide residue in food and health cost savings) at least two times departments. In most developed cancer, antibiotic resistance in hu- the cost to the industry. However, de- countries, consumers have come to mans and eating meat from animals finitive links between the reduction expect their government to ensure that have been routinely fed antibiot- of pathogens in processed meat and safe (and honest) food and they are ics, human disease and feeding poultry and human health incidents generally willing to pay for it. growth hormones to cattle or geneti- are very hard to find. Lakhani (2000)

270 CHOICES 4th Quarter 2005 • 20(4) Safety from Long-Term Chronic Overweight children ages 2-5 have Table 2. Costs associated with the Diseases increased from 7 to 10% since 1994. unsafe food consumption in the United States, 2000. Eight percent of U.S. adults (Knowl- Even though the relationship be- er et al., 2002) and about 4% of chil- Type of tween food, diet, and chronic disease Health Care Health Care dren in America have Type 2 diabe- is largely unknown and understudied Problem Costs Deaths tes. The rise in this for the food-borne Microbial $6.9* - $37 2,654-5,000 noninherited diabetes substances discussed Food-borne billion (includes Persons per in children is of great above, it is well known Illness losses due to year concern since diabetes that Type 2 diabetes1 death) is a chronic disease and between 20 and Obesity $93 - $117 26,000 Persons that absorbs over 10% 40% of cancers in Related billion (direct per year of all health care dol- Diseases and indirect adults in the United lars. It is growing costs) States are linked to along with obesity in Ratio of Low: 93/6.9 = 26/5 = 5.2 obesity and are rising children; it is a health Obesity Costs 13.5 at a near epidemic rate care disaster in slow to Microbial High: 93/37 = (Knowler, Barret- Costs 2.5 motion. Obese chil- Comer, Fowler, Ham- dren with diabetes will *Estimated cost based on four types of microbes: man, Lachin, Walker, Campylobactor, Salmonella, E.-coli, Listeria http:/ increase our collective /www.ers.usda.gov & Nathan, 2002; health care costs for as long as they Calle, Rodriguez, Walker-Thur- ing it to the low and high estimates (and we) live. mond, & Thun, 2003). The rapid for the costs of microbial contamina- In the American Journal of Man- rise in obesity around the world sug- tion reveals that obesity-related dis- aged Care (1998), Wolf reported that gests that it must be considered in eases are between 2.5 and 13.5 times relative to overweight people (those the same arena as microbiological as expensive as microbial-caused with body mass indexes [BMI] of 25- pathogens when it comes to safe food food-borne illnesses. The $93 billion 30), obese people with body mass in- consumption. Just as it is the quanti- for obesity health care costs is 1% of dexes of 30-35 cost 1.5 times as ty of microbes in the food that leads the 2000 U.S. gross domestic prod- much to care for. Those with a body to acute illness, it is the quantity of uct of $10,236.9 billion (Economic mass index of more than 35 cost 1.75 calories in the diet - relative to energy Report to the President, 2003) and times as much to care for as those expended by the body - which con- 10% of the amount spent on food who are merely overweight. One tributes to Type 2 diabetes and other and beverage by U.S. consumers. study estimated that health care for obesity-related complications. Even though the CDC has recently overweight and obese people adds an In the United States, adult obesi- recalculated the number of deaths average $732 to the annual medical ty has doubled since 1980 to 30% of due to obesity and the health-related bills of every American (Connolly, the population and overweight ado- problems of being overweight, obesi- 2003). lescents have tripled since 1980 to ty is a major and growing problem What does it cost for obesity-re- 15%. (FDA, 2002; CDC, 2005c). for safe food consumption. lated diseases in the United States? Total and indirect costs are estimated Food Defense: Securing a Safe 1. Type 2 Diabetes is a disease where to be $93 billion (Connolly, 2003) to insufficient insulin is produced in Food Supply from Deliberate $117 billion in 2000 (FDA, 2002). Contamination the body or cells ignore insulin. Table 2 compares the costs of micro- Before the onset of Type 2 Diabetes bial-related food-borne illnesses to Until September 11, 2001, food se- in numerous youth, it was called health care costs related to obesity. By curity meant having access to enough adult-onset diabetes. Type 1 diabe- any comparison you want to select, food, at all times, for an active, tes is a condition where insulin is the costs of obesity are much larger healthy life (Nord, 2002). Now there not produced in the body and is than the costs of microbial pathogen is a second and new definition of typically considered to be an inher- contamination. Using the conserva- food security, better referred to as ited condition (www.diabetes.org/ tive estimate of $93 billion a year for food defense. It means taking actions about-diabetes.jsp). obesity-related diseases, and compar- to secure the production, processing,

4th Quarter 2005 • 20(4) CHOICES 271 and distribution chain from bio (or tablished to focus research and edu- retail locations, is that traditional chemical) terrorists so that food is an cation on the issue of food defense: food safety will also be improved. unattractive target and unlikely to be The National Center of Food Protec- Food safety in three dimensions deliberately contaminated with an tion and Defense led by the Universi- refers to a new three part program to agent that would make people ill, ty of Minnesota (http://www.ncf- try and ensure safe food consump- cause death, or cause an economic pd.umn.edu) and the National tion. Food scientists will tell you that loss to individuals or to industry. Ar- Center for Animal and Zoonotic “the dose makes the poison.” No guably, if food is produced according Disease Defense led by Texas A&M food can be guaranteed to be totally to good farming and manufacturing (http://fazd.tamu.edu). The collabo- free of microbes or other substances practices, the chances of it being rative efforts of these and other cen- that could, in adequate amounts, compromised by a deliberate terrorist ters with their many partners will be harm a human being. The issue is are less, but certainly not zero. U.S. instrumental in designing programs controlling the amount of harmful federal government units such as the and policies that will help to defend substances be they microbes, chemi- Food and Drug Administration the food system. They are helping cals, pharmaceuticals, or simply too (FDA) and the United State Depart- private companies learn about vul- many calories. In an era where food ment of Agriculture (USDA), and nerable locations and practices. It is travels great distances, through many now the Department of Homeland vital that food that is already safe not stages in the supply chain, being han- Security (DHS), are actively studying be deliberately contaminated with dled by many parties before it reaches this new hazard, developing educa- known and unknown substances that the fork, the possibility of accidental tional programs, and encouraging could potentially harm or kill thou- mishandling or deliberate contami- private companies to take precau- sands of people in a very short time. nation is real. Safe food consump- tionary measures to minimize the Terrorism does not necessarily tion demands that the path of food possibility of a food terrorism event. have to kill people to succeed. It can be traced to its origins. The FDA More regular and rigorous testing on could create sudden shortages and has new regulations to be in force by input ingredients and supplies, re- then panic by disrupting lean supply December 2005 that mandate all stricted access to processing areas, or chains at ports or distribution centers companies that buy and sell food be locked trucks and storerooms are when commercial inventories are able to trace that food to the party among the many activities private maintained on a flow basis. It only they bought it from and the party companies can do to needs to create a cri- they sold it to. Retail stores and res- lessen the attractive- sis of confidence in taurants obviously need not trace it ness of food as a tar- the safety or avail- to consumers (FDA, 2005). This will get. DHS leads a co- ability of food from lead to the adoption of new informa- ordination effort a particular source tion technologies such as radio fre- among the private (a brand or a re- quency identification (RFID) tags sector and local, gion). This could and readers and it will add some state and federal mean large econom- costs. Compared to the potential agencies to make the ic losses to private losses in the case of a serious food- food system less vul- food companies as borne illness outbreak or a terrorist nerable to terrorist Anthrax. they shut down, attack, this investment is likely to attacks. clean up, and re-es- have a high and positive benefit-cost Food defense is the third dimen- tablish their credibility. It only needs ratio, just as the investments in food sion of safe food consumption. There to cause consumers/citizens to lose safety practices have had in the past. are billions of dollars being spent by confidence in their government agen- Food defense reinforces food safe- private companies, public agencies, cies in terms of being able to ensure ty. It will enhance good manufactur- and universities to learn more about safe food. This makes food security ing practices and vigilance along the how food and the food system in the (defense) a vital part of assuring safe food supply chain. It will improve United States might be used as a de- food consumption. A positive exter- consumers’ confidence in the food structive weapon by terrorists. Two nality of all this effort by companies system and in their personal futures. Department of Homeland Security to secure plants, transportation, and People who live in a secure environ- Centers of Excellence have been es- ment are more likely to invest in

272 CHOICES 4th Quarter 2005 • 20(4) themselves and perhaps even be more www.gpoaccess.gov/eop/ Ollinger, M., & Mueller, V. (2003). likely to eat healthier diets. Safe food (Accessed 2005 Data from 2003). Managing for safer food: The consumption means paying attention Food and Drug Administration economics of sanitation and pro- to the health and economic conse- (FDA). (2002). Consumer, March cess controls in meat and poultry quences of food consumption, to a –April, p. 8. plants. Washington, DC: USDA, triumvirate of food safety issues and Food and Drug Administration ERS Agricultural Economics to a plethora of good practices by ev- (FDA). (2005). Available online: Report No. 817. eryone in the food chain. http://www.fda.gov/oc/bioterror- Ropeik, D., & Gray, G. (2002). Risk. ism/bioact.html; http:// Boston: Houghton Mifflin Co., For More Information: www.cfsan.fda.gov/~dms/ pp. 98-100. Acheson, D. (July/August, 2001). fsbtac25.html. Shiptsova, R., Thomsen, M.R., & “You are What I Eat.” Food Qual- Golan, E.H., Ralston, K., Frenzen, Goodwin, H.L. (2002). Producer ity, July/August, pp. 22-33. P., & Vogel, S. (2000). The costs, welfare changes from meat and Antle, J. (2001). Economic Analysis benefits and distributional conse- poultry recalls. Journal of Food of Food Safety. In Bruce Gardner quences of improvements in food Distribution Research, 33(2), 25- and Gordon Rausser (Eds.), safety: The case of HACCP. In 33. Handbook of Agricultural Econom- Laurian J. Unnevehr (Ed.), Eco- Thomsen, M.R., & McKenzie, A.M. ics, Chapter 10, Vol. 1B. New nomics of HACCP: Costs and Ben- (2001). Market incentives for safe York: Elsevier. efits. St. Paul, MN: Eagan Press. foods: An examination of share- Calle, E.E., Rodriguez, C., Walker- Hooker, N. (2002). Stock market holder losses from meat and Thurmond, K., & Thun, M.J. reaction to food recalls: A poultry recalls. American Journal (April 2003). Overweight, obe- GARCH application. Applied of Agricultural Economics, 83(3), sity, and mortality from cancer in Economics Letters, 9, 979-987. 526-637. a prospectively studied cohort of Knowler, C. W., Barret-Connor, E., Townsend, M.S., Peerson, J., Love, U.S. adults. The New England Fowler, S.E., Hamman, R., B., Achterberg, C., & Murphy, Journal of Medicine, 348(17), Lachin, J.M., Walker, E.A., & S.P. (2001). Food insecurity is 1625-1638. Nathan, D.M. (February 2002). positively related to overweight Centers for Disease Control (CDC). Reduction in the incidence of women. Journal of Nutrition, (2005a). Available online: http:// Type 2 Diabetes with lifestyle 131, 2880-2884. www.cdc.gov/ncidod/eid/ intervention or Metformin. The United States Department of Agri- vol5no5/mead.htm. New England Journal of Medicine, culture – Economic Research Ser- Centers for Disease Control (CDC). 346(6), 393-403. vice (USDA-ERS). (2003). (2005b). Available online: http:// Lakhani, H. (2000). Benefit-Cost Foodborne illness cost calculator. www.cdc.gov/ncidod/dvrd/vcjd/ Analysis of Reducing Salmonella Available online: factsheet_nvcjd.htm. Enteritidis: Regulating Shell Egg www.ers.usda.gov/data/food- Centers for Disease Control (CDC). Refrigeration. In Laurian J. Unn- borneillness. (2005c). Available online: http:// evehr (Ed.), Economics of Wolf, A.M. (1998). Impact of obesity www.cdc.gov/PDF/ HACCP: Costs and Benefits, on healthcare delivery costs. Facts_About_Obesity_in_the_U Chapter 8. St. Paul, MN: Eagan American Journal of Managed nited_States.pdf. Press. Care, 4(3), Sup., 141-148. Connolly, C. (2003). Health costs of Nord, M. (2002). Household food obesity near those of smoking. security in the United States. ERS Jean Kinsey is Professor, Applied Eco- Washington Post, May 14, p. A9. Information, November. Available nomics Department, and Co-Direc- tor, The Food Industry Center, Uni- Economic Report to the President. online: http://ers.usda.gov/publi- versity of Minnesota, St. Paul, (2003). Available online: http:// cations/fanrr29/. Minnesota.

4th Quarter 2005 • 20(4) CHOICES 273 274 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Transitioning from Transaction-Based Markets to Alliance-Based Supply Chains: Implications for Firms by Thomas L. Sporleder, Constance Cullman Jackson, and Dennis Bolling

Rapid technological innovation, such as biotechnology material that is patented, trademarked, protected as trade and information technology, is part of food industry secrets, or otherwise insulated from imitation. Genetic dynamics and complicates individual firm strategy. As engineering enhances the stock of intellectual property these technologies become more important, managers of (IP). IP, in turn, invites and empowers food and agribusi- firms in the global food system wrestle with defining their ness firms to create strategies to differentiate their prod- optimal strategies. Also, judging supply chain performance ucts. In general IP, flowing from product or process inno- from a public policy perspective becomes more arduous. vation, provides a foundation for a novel basis for rivalry Managers must decide over time on their firm’s research relative to a firm’s competitors (Bontis, 2002). Managers and development (R&D) initiatives, the firm’s core com- continually pursue strategies which they believe may result petencies and boundaries, and the firm’s relationships to in sustainable competitive advantage for their firm relative upstream suppliers and downstream customers. How can to rivals (Porter, 1985). we better understand these dynamics and the implications Like biotechnology, rapid advances in information for participants within those supply chains? technology are inviting enhanced supply chain coordina- Rapid advances in biotechnology generate the oppor- tion. For example, online B2B (business-to-business) mar- tunity for genetically engineered customized production of ketplaces connect consumer-goods manufacturers, suppli- plant and animal products that possess distinct traits tar- ers, and retailers in networks for the purpose of geted to specialized end-use markets. Pharming is a good minimizing costs. GlobalNetXchange recently announced example of this.1 Promising scientific processes provide the a merger with rival WorldWide Retail Exchange in an foundation for an increasing stock of intellectual property effort to facilitate all member firms of the merged in the form of genetically engineered plant and animal exchange to better control supply chain inventory and reduce supply chain cost (Chicago Sun-Times, 2005). 1. The two major markets that dominate biotechnology The longer-term foundation of rivalry in the global applications are human health and food. Recent trends in food system is shifting. Encouraged by the rapid develop- biotechnology suggest that the traditional lines between ment of IP, the foundation of rivalry within the global food and medicine will blur. The future medicine cabinet food system is shifting away from tangible assets toward may contain compounds harvested from bioengineered intangible assets (Boehlje, 1999). The consequences of this pharmaceutical plants. These plants have been altered by evolution are pervasive and fundamentally change the recombinant DNA technology (genetic engineering) to character of relationships among firms within the global contain genes capable of ‘manufacturing’ a biologic or food system. In particular, when the basis for rivalry is cen- drug compound. These compounds are then harvested and tered on intangible assets, value-creating vertical networks make their way into applications in human medicine or are spawned in response (Sporleder & Moss, 2002). veterinary health applications. Hence, ‘pharming’ is the This article discusses the consequences of the changes use of genetically engineered plants or livestock to produce that are evolving in food supply chains. The basic notion is medically useful products. that the basis for rivalry is shifting in the interdependent

4th Quarter 2005 • 20(4) CHOICES 275 “farm gate to plate” food industries. mizes transaction value. In essence, supply chain is useful. Such a supply The discussion focuses on vertical vertical network alliances form (often chain consists of firms that participate network coordination or alliance- based on IP) around an objective of in a vertically-linked organizational based supply chains as one special- maximizing value added within the network and share a strategic vision ized response to this new basis for vertical supply chain. centered on the objective of creating rivalry. How these responses result in For example, Suiza Foods, value within the network. Member transitioning away from transaction- through their Morningstar Foods firms remain independent, but trust based markets is discussed, particu- division, formed a strategic alliance one another and may more readily larly for commodity markets. Value with Hershey to create supply chain share proprietary information. Of capture has enhanced the need for value. Hershey is responsible for con- course, a network may be only a por- supply chain participants to cor- tributing enhanced flavor technolo- tion of a supply chain. rectly identify the target market gies while Morningstar is responsible Alliance-based supply chains space.2 The authors argue that food for contributing enhanced packaging imply the ability to differentiate supply chains have unique character- technologies (Wall Street Journal, products and to quickly respond to istics based on the nature of vertical 2000). Sparling and Cook (1998) market changes compared to tradi- dependencies found within chains. analyze an international strategic alli- tional transaction-based supply ance involving Casa Ley with Sun chains. Alliance-based supply chains Vertical Network Alliances World International. This strategic can identify targeted markets and cre- Strategic alliances are intermediate alliance, based on IP leveraging, was ate value for products and services. between open spot markets and com- aimed at enhanced shelf-life vine-ripe This is a huge leap from the typical plete vertical integration (Sporleder, tomatoes and other fresh products. focus in transaction-based supply 1992). Vertical alliances coagulate The foundation adopted here for chains to creating value. Value cre- among upstream and downstream the transition to alliance-based sup- ation is accomplished by forming firms in an effort to form networks ply chains is that firms in vertical net- alliances that leverage intellectual that are synergistic and add value works can increase value creation by property to match unique product beyond what an individual firm may increasing dependence on a small characteristics and information tech- be able to achieve (Lazzarini, Chad- number of suppliers (limiting suppli- nology with under-served markets. dad, & Cook, 2001). The networks ers to one or a few) and thereby deep- are formed to create competitive ening incentives of suppliers to share Supply Chains as a Basis for advantage by investing in and con- knowledge and engage in R&D. Rivalry trolling relation specific assets, Firms in alliance-based supply chains One of the challenges that occur for knowledge sharing routines, comple- may make performance-enhancing managers and entrepreneurs within mentary resources and/or capabili- investments of benefit to their down- the global food system is to adjust ties, and effective governance within stream customers and the overall sup- managerial perceptions concerning the vertical network (Dyer & Singh, ply chain (Sporleder & Peterson, the identification of rivals. Percep- 1998; Sporleder, 1994; Sporleder & 2003). tions may change with or without Peterson, 2003; Teece, 2000). technology adoption. A more sophisticated understand- Supply Chains and Vertical Retail grocery stores in the ing of how exchange relationships Networks United States illustrate the evolution develop revolves around intellectual Networks are defined as a mode of in the perception of rivals over time. property that induces firms to structure organization that is used by managers The now outdated managerial per- exchange relations vertically within the or entrepreneurs to position their ception was that retail grocery stores food chain in a manner that maxi- firm at a competitive advantage over competed against similar stores in the rival firms. This arrangement is same industry. The perception of viewed as a long-term, purposeful rivalry has now evolved to include 2. Value capture often is defined as the arrangement that allows each firm to not only the traditional competitors managerial strategy to enhance operate as a distinct firm, yet partici- but also quick service food establish- value of the firm’s product or service pate in a vertically-allied network. A ments, such as McDonalds and and/or reduce costs without sacrific- formal definition of an alliance-based Burger King. This expanded percep- ing quality.

276 CHOICES 4th Quarter 2005 • 20(4) tion of rivals is multi-industry in cially critical in the early stages of a performance of IP-driven relation- scope. This evolution in rivalry has cooperative interfirm alliance. ships is more difficult, compared to resulted in retail grocery store man- The generic items summarized in physical asset-driven relationships, agers perceiving their market to Table 1 offer some indication of the because of the tacit knowledge include selling meals, not solely the challenges to, and the evolution of, involved.4 Tacit knowledge (knowl- traditional role of selling ingredients managerial perceptions presented edge that people carry in their minds for meals. One obvious consequence within alliance-based supply chains. that is, therefore, difficult to access of this evolution has become more The first six items of the table are and difficult to codify) often is a fac- delicatessens and ready-to-eat prod- associated with internal management tor in understanding the value prop- ucts offered in grocery stores. of the firm. The next four items are osition of relationships and the value As supply chains transition from factors associated with the competitive of knowledge firms possess within transaction-based to alliance-based, it environment in which the firm oper- the chain (Sporleder & Moss, 2002). becomes even more difficult to assess ates. The last two items of the table Some new performance measure- one’s rival. A rival’s tangible assets are are factors associated with strategic ments will surely rely on improved relatively easy to identify and assess. planning and outcomes. Not all items definition, valuation, and under- As rival firms’ holdings become may pertain to a specific situation. standing of intangibles (Lev, 2001). increasingly concentrated in intangi- Recent improvements in our abil- ble assets, the capabilities and capaci- ity to transmit information have Market Space Defined by ties of rivals become more uncertain forged new partnership and alliance Dependency and Differentiation and even ascertaining the industries opportunities among firms around Considering commodities and food that may produce future rivals the globe. Now an agribusiness firm products in a market space defined becomes more elusive. For example, may form an alliance of a block of by the degree of differentiation and traditional food processors such as growers in the United States, a phar- the nature of dependency within sup- Kellogg did not anticipate consumer maceutical firm in Europe, and a ply chains adds to our understanding preference shifts to on-the-go break- manufacturer in India to produce a of why various exchange arrange- fast foods, and new rivals developed highly specialized product based on ments are frequent in some supply from firms in industries outside the biotechnology intellectual property. chains, but not in others. The extent mainstream ready-to-eat breakfast The use of genetically engineered of differentiation, of course, typically cereal manufacturers. plants to harvest medicinal com- increases in markets closer to the The transition from transaction- pounds, such as corn to produce final consumer level. based supply chains to alliance-based monoclonal antibodies, is just emerg- Another factor inherent to agri- supply chains changes many “drivers” ing. In this example, it is no longer cultural commodities and food prod- or factors that managers must con- clear whether a firm’s rivals are grow- ucts, in a comparative sense, is per- sider. The traditional basis of rivalry, ers, a research company or a proces- ishability. Perishability partially compared to a new and evolving basis sor or even within the agribusiness determines the inherent nature of for rivalry, is outlined in Table 1. An sector. Complicating the issue is that economic dependency within supply important aspect of the new basis for the firm, via its alliances, is now chains. For less-perishable commodi- rivalry is the existence of an alliance- international with multinational ties, storage can be a primary means based supply chain centered on soft assets. of vertical coordination in the supply assets (e.g., IP) rather than hard assets As the public strives to assess the chain. Buffer stocks are held by firms (e.g., plant and equipment). A major performance of these new alliances, in upstream and downstream mar- purpose of the alliance-based net- non-traditional measurement tech- kets in an effort to mitigate risk and work becomes the commercializa- niques are required. Assessing the generally deal with unexpected tion of the technology, typically focused on target markets that are relatively low volume and/or repre- 3. Additional consequences of the shift 4. See Tirole (1988) for a standard sent specialized end-use.3 Trust from commodities to differentiated treatment of the role of market becomes more pronounced within products and some market structure forces and industry structure on the alliance-based supply chains (Sporle- issues are addressed by Rausser, performance within markets and der, 1994). For example, trust is espe- Scotchmer, and Simon (1999). industries.

4th Quarter 2005 • 20(4) CHOICES 277 Table 1. Economic drivers for managers of firms in the transition from transaction-based to alliance-based supply chains. Driver Traditional Basis of Rivalry New Basis of Rivalry Firm Assets Tangible (hard) Intangible (soft) Firm Mission Manufacture/assemble Create/add value; focus on “trait” demand Tactics Build/acquire key manufacturing facilities Quickly out-source and partner with other firms; share proprietary information Key Objective Achieve scale economies Create value, excel in low-volume target niche markets, customize products Human Resources Reward individuals Utilize empowered teams Quality/safety Fix quality problems as they occur Hazard Analysis Critical Control Point (HACCP); adopt identity preservation and traceback technologies Product/service Aspects of Rivalry Based on cost Based on traits and product differentiation; vertical traceability or “identity preservation” is an important component of the vertical network Perception of Rivals Other firms in the same industry Other vertical networks competing in the same market space Farm Gate Agricultural producer sells undifferentiated Agricultural producer harvests biotechnologically-modified and commodity which is commingled with other patented “value added” items provided under contract to first production at the first handler level, identity of handler producer or production protocols not preserved downstream Number and Turnover of Suppliers Several competitive suppliers, turnover expected; Limit suppliers to a few, turnover not expected or at least more price sensitive relationships stable; relationship relatively less sensitive to price Strategic Planning Secret strategic planning, no vertical sharing of Share strategies within a network; adopt vertical system goals; proprietary information off-load some R&D to upstream suppliers where possible Managerial Success Criterion Maximize shareholder value Maximize shareholder value partially through maximizing supply chain value creation events. Vertically dependent firms at ples of interfirm alliances. These Table 2. Selected exchange successive stages in the supply chain alternatives are attempts to enhance mechanisms that are typical within the are referred to as sequentially depen- coordination and, in part, “substi- dependency and differentiation categorization. dent because buffer stocks play a tute” for the economic role that Amount of Differentiation major role in risk mitigation and buffer stocks play in the sequentially Nature of coordination. The portions of a sup- dependent channels. The relative Dependency Generic Differentiated ply chain that rely on buffer stocks relationship among some selected Sequential • Buffer stocks • Strategic for risk mitigation typically also rely commodities and food products can • Cash market partnering transactions • Joint venture on transaction-based open markets. be easily portrayed in the market • Long-term In commodity markets character- space defined by the intersection of contracts ized by perishable commodities, differentiation intensity and sequen- Reciprocal • Seasonal • Specification reciprocal dependency is the relation- tial-reciprocal dependency (Figure 1). contracts buying under ship among vertically allied firms in Along the vertical axis, the fungi- contract the marketing channel. Buffer stocks bility of items decreases from the bot- • Just-in-time are not feasible. One consequence of tom of the axis to the top. Thus, deliveries this is that the coordination problem items such as soybean oil are more • Ownership integration is more severe and alternative fungible than pharmaceutical corn. exchange mechanisms emerge In general, the space above the hori- increasing reliance on exchange beyond simple spot market transac- zontal requires relatively increased arrangements that tend to replace tions, such as contracting, joint ven- investment, often predominantly in cash markets, such as contracting and tures, and various forms of strategic intangibles. Moving from left to right strategic alliances. partnering. In short, these alterna- of the vertical represents declining The “dependency/differentiation” tive exchange mechanisms are exam- potential for buffer stocks and the space may be used to understand the

278 CHOICES 4th Quarter 2005 • 20(4) Figure 1. Selected examples of items in the dependency and differentiation space. major thrusts within value creating toward alliance-based supply chains ment in which the firm operates, and alliance-based supply chains (Table where intangibles serve as a founda- strategic planning and outcomes all 2). The distinction of sequential and tion for spawning closer coordination must be revised when firms join an reciprocal dependency and the extent in an effort to create value. Firms alliance-based supply chain. Firms of product differentiation are factors may participate in an alliance-based may adopt new definitions of their useful for better understanding the supply chain network for the purpose rivals and look beyond traditional type of exchange mechanism that is of creating competitive advantage sectors to identify collaborators and appropriate for a particular combina- through investing in and controlling competitors, while new means of tion of dependency and differentia- relation specific assets, knowledge assessing firm performance may tion. The relative importance of sharing routines, complementary become necessary. alternative exchange mechanisms is resources, and/or capabilities. The The degree of differentiation and provided within the cells of Table 2. key element is that intellectual prop- the nature of dependency within sup- The dynamics of how firms partici- erty induces firms to structure exchange ply chains enhances our understand- pate in supply chains that drift from relations vertically within the food ing of the incentives for alliance for- transaction-based to alliance-based chain in a manner that maximizes mation. The transition to alliance- may generally be characterized as transaction value. In essence, transac- based supply chains creates chal- movement away from either cell of tion-based supply chains develop lenges in how firms assess their rela- the ‘reciprocal’ row of Table 2 to around an objective of maximizing tive position within industry and either of the cells of the ‘sequential’ value creation within the chain. requires novel approaches to under- row. The basis for rivalry is shifting standing both competitors and col- and these shifts present challenges for laborators. Participation in alliance- Conclusions managerial perceptions. Factors asso- based supply chains demands mana- The basis of rivalry within the global ciated with internal management of gerial flexibility and nimbleness, yet food system is shifting over time the firm, the competitive environ- offers virtually unlimited opportuni-

4th Quarter 2005 • 20(4) CHOICES 279 ties to leverage assets. Firm assets sis: The study of netchains. Jour- Sporleder, T.L., & Peterson, H.C. concentrated in intangibles, in tan- nal on Chain and Network (2003). Intellectual capital, learn- dem with novel alliance formation, Science, 1, 7-22. ing, and knowledge management offers exciting potential for value cre- Lev, B. (2001). Intangibles: Manage- in agrifood supply chains. Journal ation within the global food system. ment, measurement, and reporting. on Chain and Network Science, 3, Washington, DC: Brookings 75-80. For More Information Institution Press. Sporleder, T.L., & Moss, L.E. Boehlje, M.D. (1999). Structural Porter, M.E. (1985). Competitive (2002). Knowledge management changes in the agricultural indus- advantage: Creating and sustaining in the global food system: Net- tries: How do we measure, ana- superior performance. New York: work embeddedness and social lyze, and understand them? The Free Press. capital. American Journal of Agri- American Journal of Agricultural Rausser, G., Scotchmer, S., & Simon, cultural Economics, 84(5), 1345- Economics, 81, 1028-1041. L. (1999). Intellectual property 1352. Bontis, N. (2002). Managing organi- and market structure in agricul- Teece, D.J. (2000). Managing intel- zational knowledge by diagnosing ture. Rome, Italy, The Interna- lectual capital: Organizational, intellectual capital. In C. W. tional Consortium on strategic, and policy dimensions. Choo and N. Bontis (Eds.).The Agricultural Biotechnology New York: The Oxford Univer- strategic management of intellec- Research (ICABR). sity Press. tual capital and organizational Sparling, D., & Cook, R. (1998). Tirole, Jean. (1988). The theory of knowledge (pp. 621-642). New Strategic alliances and joint ven- industrial organization. Cam- York: Oxford University Press. tures under NAFTA: Concepts bridge, MA: The MIT Press. GlobalNetXchange moving head- and evidence. Policy Harmoniza- Wall Street Journal. (2000). Suiza quarters to Chicago. (April 27, tion, Convergence, and Compati- food group: Unit will develop 2005), Chicago Sun-Times. bility, A. Loyns (ed.), Friesen products in an alliance with Her- Dyer, J.H., & Singh, H. (1998). The Printers: Winnipeg, Manitoba, shey, August 30, p. 1. relational view: Cooperative strat- pp. 68-94. egy and sources of interorganiza- Sporleder, T.L. (1994). Assessing ver- Thomas L. Sporleder is Professor, tional competitive advantage. tical strategic alliances by agri- AED Economics Department, The Ohio State University, Constance Academy of Management Review, business. Canadian Journal of Cullman Jackson is Vice President of 23, 660-679. Agricultural Economics, 42, 533- Agricultural Ecology, Ohio Farm GlobalNetXxchange web site: https:/ 540. Bureau Federation, and Dennis Bol- /www.gnx.com/reg/index.jsp. Sporleder, T.L. (1992). Managerial ling is President and CEO, United Lazzarini, S.G., Chaddad, F.R., & economics of vertically coordinated agricultural firms. Ameri- Producers, Inc., respectively, Colum- Cook, M.L. (2001). Integrating bus, OH. supply chain and network analy- can Journal of Agricultural Economics, 74, 1226-1231.

280 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Risk Sharing and Transactions Costs in Producer-Processor Supply Chains by Allan W. Gray and Michael D. Boehlje

Introduction Supply chains have been a dominant focus of both aca- Several forces are converging to encourage the agricultural demic research and business strategy in the food and agri- industry to form more tightly aligned supply chains. Effi- business industries for the past decade. Much discussion, ciency, synergies, inter-firm pooling of resources, customer analysis, and experimentation with various forms of verti- responsiveness, and risk sharing are the four key objectives cal alignment using governance structures such as strategic that firms seek to improve by forming such chains alliances, joint ventures, contracts, and vertical integration (Besanko, Dranove, & Shanley, 2000). Efficiencies are has occurred. Much of the recent debate and discussion, as often gained by more accurately sharing information well as the controversy concerning the development of between parties in the chain. For example, a pork proces- these arrangements has focused on the production sector, sor may be able to manage the flow schedule of hogs and in particular, the linkages between producers and pro- through the slaughter plant by contracting or even owning cessors. the production stage of the pork chain. And complemen- The effectiveness and long-term viability of a supply tary inter-firm synergies resulting from, for example, alli- chain is determined in no small part by how well the coor- ances between research and development (R&D) and dination governance structure manages the sharing of the manufacturing firms and downstream distribution and risks and rewards of the supply chain among its partici- marketing firms can also be captured with effective supply pants. The different types of risks encountered in alterna- chains. tive supply chain business structures, the incidence of risk Responsiveness to consumer demand is another reason on the part of individual supply chain partners and the for developing supply chains. Products that can be differ- sharing of risk and reward among supply chain partici- entiated at various stages of the food chain allow for the pants has important implications for who will be the most potential to meet the demands of certain segments of the likely participants in a supply chain, as well as the benefits market. Retailers as well as processors argue that their sup- the various players will receive. ply chains allow them to respond to an ever changing set of consumer preferences more quickly than they could Risk Sharing and Costs of Vertical Alignment with traditional open-market transactions. The research on supply chain risk/reward sharing in agri- In addition to efficiency, inter-firm synergy, and culture has often been focused on producer impacts. As responsiveness, supply chain participants often express a noted, producers are often seeking avoidance of risk in desire to manage risks as a reason for forming supply these arrangements. However, governance structures such chains. The risks may be input/output price risk, quantity/ as contracting that lead to risk avoidance also result in quality risks, and/or safety/health risks. The recent interest lower returns on average. Governance structures that in food safety and traceability are often cited as reasons for reduce risks for producers can lead to misalignment of forming tighter vertical alliances. Agricultural producers incentives resulting in shirking behavior (moral hazard) if often state that reductions in price and volume variability not monitored carefully. For example, producers on fixed are key influencers in their decision to join a supply chain payment contracts may be more inclined to deliver lighter (Hennessey & Lawrence, 1999; Rhoades, 1995). weight hogs to the slaughter facility than the processor desires. In addition, governance structures that reduce

4th Quarter 2005 • 20(4) CHOICES 281 Figure 1. Conceptual framework for external transactions costs of risk sharing versus the internal transactions costs of vertical ownership. risks for producers can attract pro- risks, etc.) are less than the external assumed to have a lower relative risk ducers that are relatively more risk transactions costs (moral hazard, aversion than producers. Thus, as averse (adverse selection). This risk adverse selection, and risk premia). channel captain, if the processor averse nature often manifests itself in Smithfield Foods and Tyson Foods wants to source products from more less aggressive adoption of new tech- offer examples where vertical owner- risk averse producers, they must nologies and business practices – ship has been the preferred choice in design vertical arrangements to either behaviors that do not enable a value an industry where other governance take on more of the risk, or compen- chain to reap full benefits of effi- structures continue to be employed. sate the risk averse producers more ciency and productivity improve- These two firms, with their interna- for accepting the same share of the ments over time. Thus, channel part- tional brand identity and diverse risk. ners that absorb more risk in their product bases, may be in a position Two separate lines are displayed agreement with producers generally where the transactions costs of open- in Figure 1. The external transactions expect and receive higher returns to market, contract, or joint venture costs line reflects the additional risk- compensate for the higher risk and/ agreements exceed their internal sharing cost borne by the processor or risk mitigation costs. transactions costs of owning the when the exchange is between the For some firms, the risk sharing chain. processor and producers in a vertical transactions cost of monitoring chan- Figure 1 depicts the conceptual arrangement. This line increases at an nel partners exceeds the willingness framework of external transactions increasing rate as producer risk aver- of the marketplace to compensate costs of risk sharing in comparison to sion increases. Increasing external them. In these cases, the firm may internal transactions costs of owner- transactions costs reflect the addi- choose to acquire the chain (verti- ship. The vertical axis measures the tional costs that must be borne by the cally integrate), thereby avoiding the total cost of the transactions of prod- processor in the form of either transactions costs associated with ucts, services, information, and com- increased risk taking or increased moral hazard and adverse selection. pensation between stages of the compensation to the more risk averse These firms have decided that the chain. The horizontal axis represents producer for taking on more risk. internal transactions costs associated the risk aversion and/or ability to The internal transactions costs with owning both stages of the chain manage risk for producers from line reflects the cost of ownership to a (agency costs, influence costs, whom the processor may choose to processor that owns both stages of increased production risks, employee acquire products. The processor is the chain where separate firms are

282 CHOICES 4th Quarter 2005 • 20(4) Figure 2. Risk/reward sharing between the processor and producers at various risk aversion levels. replaced with employees. Internal the processor due to increased risk supply chain as described by Sporle- transactions costs of ownership are sharing costs. The increase in exter- der & Peterson, 2003). If the goal is initially assumed to be higher than nal transactions costs lead to more to reduce external transactions costs, external transactions costs. That is, formal vertical arrangements such as then firms will favor partners that are we assume that the efficiencies of an contracts, where the risks and returns less risk averse or better able to man- open-market transaction in the are dictated by the channel captain age risk. As such, contracts and simi- absence of risk aversion by the pro- (processor). There is a point along lar vertical arrangements would likely ducer result in lower transactions the producers’ risk aversion/manage- accrue to larger producers. However, costs than vertical ownership. ment scale where the risk sharing for processors willing to absorb more As producer risk aversion transactions cost of the market risk, the preferred partner may be increases, the internal transactions exchange are higher than the internal more risk averse producers in very costs of ownership do not change -- transactions costs of owning the tightly linked production contracts, only the risk sharing transactions chain. It is at or just beyond this where producer risks are transferred costs of a market-based exchange point where ownership of the chan- to the processor but rewards to the increase. There is a point where the nel (vertical integration) becomes an producer are lower. The framework additional transactions costs of risk option because the transactions costs presented here ignores any concept of sharing cause the transactions costs of of risk sharing exceed the internal market power among channel partic- the market exchange to exceed the transactions costs of ownership. Pro- ipants, and yet illustrates a logical internal transactions costs of owner- ducers at this level of risk aversion economic reason for more tightly ship. would likely choose to become a aligned vertical arrangements and The delineations across the top of grower for a vertically integrated industry consolidation to occur even the figure illustrate the different gov- firm, receiving a flat fee for their ser- in the absence of market power. ernance structures likely to be vices much like an employee of the employed. When producers have risk company. Risk Premiums and Contract management capabilities or have low Research in supply chains in Production enough risk aversion that risk sharing other industries shows that eventually A common governance structure that transactions costs are low, channel external transactions costs decline more explicitly shares risks and partners are likely to align in an below the internal transactions costs rewards between supply chain part- arms-length exchange such as open of chain ownership as firms become ners is the contract. Figure 2 illus- markets, strategic alliances, or joint more accustomed to working trates the nature of the risk premium ventures. As producer risk aversion together and better equipped to han- required to entice more risk averse rises or management ability declines, dle the risks in the exchange between producers into contract arrangements the external transactions costs rise for segments of the chain (a learning that share more risk. The horizontal

4th Quarter 2005 • 20(4) CHOICES 283 axis is the proportion of returns more capable of managing risk. This comprising a large portion of their shared by producers in a vertical again suggests that agribusinesses capital structure (Lins, 1997; Roberts arrangement with a processor. The seeking production partners in a con- et al., 1997). Table 1 illustrates the vertical axis is the risk shared by the tract-coordinated supply chain that implications of different capital producer. There are three lines in the will share the risks and rewards will structures for different business graph, each representing different tend to favor larger producers with arrangements on the return on equity levels of producer risk aversion. If the the ability to spread risk and/or pro- (ROE). Note that with no debt, producer and the processor were both ducers that are less risk averse. For independent business arrangements risk neutral, then the sharing of risk processors that are more willing and/ generate a higher ROE (and ROA and reward would be illustrated by or able to manage risk, a fixed pay- since they are equal when no debt is the 45 degree line. If the risk-neutral ment contract may be the preferred used) than the typical contract busi- processor wishes to maintain this arrangement to attract risk averse ness arrangements analyzed. As debt same level of risk sharing, but must producers that are willing to take less becomes a larger proportion of the do so with more risk averse produc- return for lower risk. capital structure of the business, the ers, the processor will have to give a ROE increases for all business greater share of the rewards to the Implications for Producer arrangements. But the independent producer — a risk premium required Financial Performance grower who does not manage operat- by the producer. And the greater the The transfer of risk and the accompa- ing risk will likely not be able to use producer’s risk aversion, the more nying reward from supplier (pro- as much debt as part of his/her capi- sizeable the risk premium becomes. ducer) to buyer (processor) suggests tal structure as the contract grower. To minimize this risk premium pay- that suppliers will likely be less prof- Comparing the ROE of the indepen- ment, the processor would prefer to itable under a vertically aligned gov- dent grower at 40% debt (23.5%) contract with producers who are less ernance structure compared to the with that of contract growers at 80% risk averse or have more capacity to traditional open-market governance debt (23.1% and 27.6%), it is appar- manage or absorb risk; this motiva- structure that has dominated agricul- ent that vertically aligned systems tion again favors larger producers. ture. And in fact most studies sup- that transfer risk to the buyer (pro- Contracts frequently spell out port this argument when profitability cessor) have equal or superior finan- portions of both “fixed” payments is measured by traditional metrics cial performance. By accessing more and incentive payments from buyers such as profit per unit of production external financing these firms also to suppliers based on performance or return on assets (ROA). But verti- have increased capacity to expand variables. The balance of fixed versus cal arrangements that share business their business. incentive payments depends, ulti- risk and rewards allow producers to Increased access to debt capital mately, on the relative risk aversion/ access more debt capital if the busi- allows vertically aligned producers to management capability of the part- ness risk is reduced through contract- generate competitive financial perfor- ners in the chain. If a processor seeks ing or similar business arrangements. mance, grow at a more rapid pace, a governance structure that allows the Analysis of pork contracting illus- and adopt new technologies more risks to be shared between the parties, trates the financial implications of quickly than those not vertically then they will seek a governance using more debt in the capital struc- aligned — further separating these structure with more incentive pay- ture of the contract production farm producers from those with less access ments. To entice risk averse produc- compared to an independent grower. to vertical markets and debt capital. ers to accept more incentive pay- Contract swine growers can in fact This outcome may, again, lead to a ments (share more of the risk), the finance their operations with debt more rapid consolidation as well as fixed payment would have to be vertical coordination of the industry greater than for less risk averse pro- as has been witnessed in poultry, ducers (this is reflected in Figure 2 as 1. The discussion here is based on pork, and potato industries. the risk premium).1 The risk sharing incentive contract literature and transactions cost of governance struc- more explicitly from the discussion Risk of Vertical Alignment of the “Second-Best” Contract by tures with more incentive payments The development of more tightly Besanko, Dranove, and Shanley will be less if the producers are rela- aligned supply chains creates new tively less risk averse or relatively (2000).

284 CHOICES 4th Quarter 2005 • 20(4) Table 1. Financial performance of various pork production business arrangements (mean return on equity, %). FINANCIAL STRUCTURE Pork Production Business Arrangement 0% Debt 40% Debt 80% Debt Independent Farrow-to-Finish 17.0 23.5 56.5 Efficiency and Marketing Incentive Finishing Contract 10.4 12.5 23.1 Death Loss Incentive Only Finishing Contract 11.3 14.0 27.6 Source: Boehlje and Ray (1999) and less easily quantifiable risks for atility in the prices they receive leading to more consolidation, par- the participants in the supply chain. because of thin markets? Do they ticularly at the production end of For example, one of the supply chain have access to a market or are they those industries. However, channel risks faced by both suppliers and closed out because only qualified captains that have the willingness and buyers is contractual or relationship suppliers can participate? Because of ability to absorb the risk may allow risks. A grower may have a contract the thinness of these markets, are producers with less ability to manage that guarantees a price for his/her they not only subject to more volatil- risk to maintain a role in the industry products, and enticements to invest ity, but also more potential for as service providers for these risk in specific assets, but what happens if manipulation? Do the prices and absorbing processors. At the same the processor goes bankrupt? What other information conveyed by these time, the transformation of the happens to the contract (availability thin markets provide accurate mes- industry to more tightly aligned sup- or terms) and the capital investments sages to consumers and suppliers ply chains will introduce new strate- made by the produer next year if the concerning quantities, qualities, cost, gic risks which will require additional processor finds other suppliers in and value? analysis and skills to manage and/or other areas who can satisfy their mitigate those risks. needs at a lower price? This risk is Conclusions not unlike that of losing a critical Tightly aligned supply chains are For More Information supplier or a lender, but losing access forming at a rapid pace in the agri- Besanko, D., Dranove, D., & Shan- to the product market has typically cultural section. Traditional transac- ley, M. (2000). Economics of not been a significant risk for pro- tions costs are a critical determinant Strategy. New York: John Wiley ducers in commodity-based agricul- of the appropriate governance struc- & Sons, Inc. ture. ture for these supply chains. How- Boehlje, M., & Ray, J. (1999). Con- The adoption of more tightly ever, risk considerations and the risk tract vs. Independent Pork Pro- aligned supply chains in agriculture is aversion/sharing characteristics of the duction: Does Financing Matter? likely to compound the risk and players are also important. The Agricultural Finance Review, 31- uncertainty related to the effective- search for reduced risk sharing trans- 42. ness of markets in providing accurate actions cost leads to the formation of Hennessey, D., & Lawrence, J. messages to consumers and suppliers supply chains among participants (Spring/Summer 1999). Contrac- in the food chain concerning prices, that are more willing to share risks as tual relations, control, and qual- quantities, and qualities of products well as rewards. More specifically, ity in the hog sector. Review of and attributes. With the formation of strategies to reduce internal/external Agricultural Economics, 21(1), 52- more tightly aligned food supply transactions costs lead to the forma- 67. chains, it can be argued that messag- tion of supply chains among partici- Lins, D.A. (October 1997). Financ- ing is much more precise, timely, and pants who are less risk averse or have ing pork producers: Challenges and generally more accurate for partici- more ability to manage or mitigate opportunities. Paper presented at pants in the chain than might be pro- risk. This suggests that, in general, the 1997 National Pork Lending vided by market forms of coordina- most tightly aligned supply chains Conference, Minneapolis, MN. tion. But, what about the risk faced that seek to share risk and rewards Rhoades, V.J. (1995). The industrial- by those who are not part of the among participants will be increas- ization of hog production. Review tightly aligned supply chain – are not ingly dominated by larger firms at of Agricultural Economics, 17(1), qualified suppliers? Is there more vol- both the buyer and supplier level – 107-118.

4th Quarter 2005 • 20(4) CHOICES 285 Roberts, B., Barry, P., Boehlje, M., & Sporleder, T.L., & Peterson, H.C. Allan W. Gray ([email protected]) is Baker, T. (Summer 1997). (2003). Intellectual capital, learn- Associate Professor and Michael D. Financing capacitities of indepen- ing and knowledge management Boehlje is Professor, Department of dent versus contract hog produc- in agrifood supply chains. Journal Agricultural Economics, Purdue Uni- tion. Journal of Agricultural on Chain and Network Science, 3, versity, West Lafayette, Indiana. Lending, 8-14. 75-80.

286 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Logistics, Inventory Control, and Supply Chain Management by Frank Dooley

Many argue that the focus point (and perhaps the linch- Many agribusiness firms do not actively manage inven- pin) of successful supply chain management is inventories tory. This does not mean that they ignore inventory. and inventory control. So how do food and agribusiness Rather, they hold large inventories because any potential companies manage their inventories? What factors drive savings from inventory reductions are far outweighed by inventory costs? When might it make sense to keep larger the inventory-induced reductions in production, procure- inventories? Why were food companies quicker to pursue ment, or transportation costs. Often economies of size inventory reduction strategies than agribusiness firms? cause long productions runs which lead to inventory accu- In 1992, some food manufacturers and grocers formed mulation. Simultaneously, seasonality leads to inventory Efficient Consumer Response to shift their focus from buildups of key inputs like seed as well as outputs like controlling logistical costs to examining supply chains corn. Economies in procurement such as forward buying (King & Phumpiu, 1996). Customer service also became a in the food industry and quantity discounts increase key competitive differentiation point for companies inventories. Similarly, unit trains and other forms of bulk focused on value creation for end consumers. In such an shipping discounts contribute to inventory buildups. environment, firms hold inventory for two main reasons, Yet, such firms must be alert to changing conditions to reduce costs and to improve customer service. The that may require more exact inventory management. One motivation for each differs as firms balance the problem of example would be if crops are marketed as small lots of having too much inventory (which can lead to high costs) value-added grain instead of commodities. Production versus having too little inventory (which can lead to lost proliferation in the seed industry may be another instance. sales). Finally, whether due to food safety concerns, GMOs, food A common perception and experience is that supply labeling, or the growth of organic food markets, identity chain management leads to cost savings, largely through preservation requires more precise inventory control. reductions in inventory. Inventory costs have fallen by about 60% since 1982, while transportation costs have The Importance of Demand fallen by 20% (Wilson, 2004). Such cost savings have led Inventory management is influenced by the nature of many to pursue inventory-reduction strategies in the sup- demand, including whether demand is derived or inde- ply chain. To develop the most effective logistical strategy, pendent. A derived demand arises from the production of a firm must understand the nature of product demand, another product. For example, when John Deere knows its inventory costs, and supply chain capabilities. demand for a tractor, it can simply compute the demands Firms use one of three general approaches to manage for the parts, materials, and components needed to pro- inventory. First, most retailers use an inventory control duce that tractor. Manufacturers of all sizes use such calcu- approach, monitoring inventory levels by item. Second, lations which are part of flow management to manage manufacturers are typically more concerned with produc- inventories, schedule deliveries for inputs, and manage tion scheduling and use flow management to manage capacity. Flow management software has evolved from inventories. Third, a number of firms (for the most part Materials Requirements Planning (or MRP) in the 1960s those processing raw materials or in extractive industries) to the much more complex Enterprise Resource Planning do not actively manage inventory. (or ERP) of the 1990s. A flow management system is set in

4th Quarter 2005 • 20(4) CHOICES 287 motion by the demand for end products. Independent demand arises from Sales response function demand for an end product. End Logistical costs products are found throughout a supply chain. Wheat is an end product for a grain elevator, as is flour for $ a miller or cereal for a grocer. By definition, an independent demand is uncertain, meaning that extra units or safety stock must be carried to guard against stockouts. Managing this uncertainty is the key to reducing inventory levels and meeting cus- 65% 70% 75% 80% 85% 90% 95% 100% tomer expectations. Supply chain Customer service coordination can decrease the uncer- Figure 1. Incremental sales and logistical costs. tainty of intermediate product demand, thereby reducing inventory vice is provided, a firm can expect ucts. The obvious difficulty is pre- costs. sales to increase (Figure 1). However, dicting how long each stage will last as a firm tries to provide perfect cus- and how abruptly sales will fall in the Customer Service and Inventory tomer service, logistical costs increase decline stage. The availability of inventory provides exponentially. Also, if a firm holds The life cycle strategy typically customer service. The Item Fill Rate too much inventory, it can lead to involves getting to profitability (IFR) measures how often a particu- low inventory turnover and hide quickly recuperating startup costs, lar product (often called a stock operational problems. For example, then sustaining high profits for as keeping unit or SKU) is available. A carrying too much stock means that long as possible, and finally acting common metric of customer service, you might not discover that your decisively for products in decline to IFR is expressed as the percentage of supplier is frequently late with deliv- minimize losses. Understanding this time that a customer can obtain the ery times. life cycle can help managers select item they seek. A firm may set its logistical tactics, inventory levels and customer service order policy at 95%, The Product Life Cycle, Demand supply chain designs. The ultimate seeking to fill 95% of the orders for Uncertainty, and Inventory goal for companies should be to have an item from inventory. The structure of independent just enough inventory to satisfy con- However, life is a bit more com- demand and logistical requirements sumer demand. plicated. A customer might not vary by stage in the product life cycle Another life cycle attribute is that obtain what they seek for several rea- (introduction, growth, maturity, and demand uncertainty shifts as we sons. The seller may have run out of decline). During introduction, logis- progress through time. Product man- a product due to an inaccurate fore- tics must support the business plan agers face substantial uncertainty cast. Or the supplier may have for product launch, while preparing during the introduction and growth shipped an incorrect package size or to handle potential rapid growth by stages, relative stability during matu- flavor. Products in inventory may be quickly expanding distribution. At rity, and increasing uncertainty in unfit for sale because of damage or an market maturity, the logistical decline. This uncertainty drives fore- expired shelf life. Finally, a seller may emphasis shifts to become cost casting accuracy and the level of not have the capability to accurately driven. In the decline stage, cash safety stock required to meet cus- track inventory in their stores or dis- management, inventory control, and tomer service expectations. tribution centers. abandonment timing become criti- The coefficient of variation (CV) To avoid shortfalls or stockouts, cal. Over-abundance of products in measures the stability of a product’s firms carry extra inventory known as the late maturity or decline stage will demand, comparing the variability in safety stock. As more customer ser- eventually result in obsolete prod- demand to the size of the average demand (Figure 2). High demand

288 CHOICES 4th Quarter 2005 • 20(4)

Inventory Costs 100 80% Unit sales Different models are used to manage 90 70% CV 80 inventory for products that are con- 60% tinually available (like milk) or prod- 70 ucts available for limited time (like 60 50% seed). The Economic Order Quan- 50 40% tity (EOQ) model determines the 40 Unit sales Unit 30% least cost level of inventory to carry, 30 20% as well as costs. News Vendor models 20 Coefficient of variation are used for products only available 10% 10 for a single period. 0 0% EOQ and News Vendor models Introduction Growth Maturity Decline have proved useful for managing Stage of life cycle inventory for many years, analyzing Figure 2. Product life cycle and uncertainty. tradeoffs among major cost components. These models are robust and easy to customize to particular indus-

Carry Order tries. Their approach to costing is similar reflecting levels of inventory, Safety Stockout as well as shipping costs or quantity discounts.

$ Inventory costs fall into three classes: 1) carrying costs of regular inventory and safety stock; 2) ordering or setup costs; and 3) stockout costs. Inventory control systems balance the cost of carrying inventory 0 5,000 10,000 15,000 20,000 25,000 30,000 against the costs associated with Order size ordering or shortfalls (Figure 3). First, carrying cost (or a cost to Figure 3. Inventory costs by order size. hold inventory) is comprised of capital costs, service costs, storage costs, variability in the introductory stage or the time from when an order is and risk costs. A carrying cost means it is difficult, if not impossi- placed until delivery is made. involves the opportunity cost for ble, to forecast demand. Thus, high Forecasting demand used to be holding inventory. If the firm did not levels of inventory must be held to more exact because products stayed have money tied up in inventory, it meet even minimal customer service in the mature product life cycle phase could either use the savings to make levels. In contrast, lower variability for a long time. Today many compa- investments in other assets or pay during maturity means that demand nies find it far more difficult to fore- down debt. Thus, a firm should first forecasts are quite accurate. However, cast sales because of product prolifer- determine what it would do with any inventory levels may still be large ation. Product line extensions result savings from a reduction in inven- because they are based on larger sales in more products that cannibalize tory. If the dollars are used to buy volumes. sales and shorten the life cycle. Thus, capital equipment, an appropriate In addition to the vagaries associ- more sales are coming from products opportunity cost is the firm’s hurdle ated with product life cycle stage, two in the erratic earlier stages of life, as rate or its “required rate of return.” If other sources of uncertainty also opposed to sales from products in the the dollars are used to pay down drive the level of inventory. First, mature stage of the life cycle. debt, the interest rate on the loan demand can vary from day to day, should be used to value the inven- week to week, or seasonally. Second, there may be variability in lead time,

4th Quarter 2005 • 20(4) CHOICES 289 tory. The other three aspects of car- depends upon the customer service manufacturer uses the cost of a pro- rying cost are non-capital costs. level, the standard deviation of duction setup instead of an ordering The service costs are often demand of the product, and lead cost. masked in a firm’s fixed costs. A firm time. Let’s explain in greater detail. Finally, stockout costs involve lost should determine how much of its Assume that it takes 10 days from sales when no inventory is on hand. insurance and tax expense is associ- the time an order is placed until a Such costs fall as inventory (and cus- ated with inventory. This is especially shipment arrives and that on an aver- tomer service) levels increase. The important in states that have an age 20 cases are sold each day. Thus, relationship between stockout costs inventory tax. A firm has cash outlays over the 10 days that we are waiting and inventory depends upon the for warehouses and materials han- for the delivery (our lead time), we accuracy of the demand forecast and dling equipment, either owning or expect to sell 200 cases. If we trusted the ability of the firm to recognize leasing space from a distributor. In our forecast, supplier, and trucking and react to a change in demand. either case, the firm should deter- company, we would simply hold 200 Stockout costs depend on how a cus- mine how much is spent on space. cases for the 10 days. But we realize tomer reacts to a stockout, the fre- Inventory risk reflects characteristics that forecasts are inaccurate, some quency of stockouts, and the avail- of the product. Some items are more suppliers are unreliable, and shipping ability of substitute products. prone to be stolen, others are more times vary. If less is sold than Stockout costs can be very high if a likely to be damaged, yet others may expected during the 10 days or if the lack of substitute products means become obsolete before a sale is shipment arrives early, we will still that a customer will switch suppliers. made. In any case, risk means that if have inventory on the 10th day and In contrast, if buyers simply substi- too much inventory is held, a certain no customer service problems are tute a different product, stockout proportion of the inventory will be encountered. However, if sales are costs may be inconsequential. unavailable for production or sale. above expectations during the 10 In practice, many firms do not To determine the cost of carrying days or deliveries are late, we might assess stockout costs because different inventory, one needs to know the run out (or stockout) of product. divisions of a firm cannot reach average quantity of inventory, an Managing the uncertainty sur- agreement on what is the cost of run- inventory carrying cost (as a percent rounding safety stock is the key to ning out. Marketing may desire a of product cost), and the average cost reducing inventory levels. But in very high stockout cost to force a per unit of inventory. If a firm plans today’s competitive environment, it is penalty cost on running out. Opera- to use inventory reductions to fund difficult to lower safety stock require- tions or finance may resist this as it other capital assets, inventory carry- ments for two reasons. First, some leads to inventory buildups. ing cost might be 30% (25% for an buyers (especially large retailers) are Service level goals can differ by opportunity cost and 5% for the ser- requiring higher customer service lev- the value placed on stockouts and vice, space, and risk costs). If the firm els, which raise safety stock levels. indirectly carrying costs. A high plans to use the savings to reduce Second, the product mix for many stockout valuation will result in debt, the appropriate rate might be firms includes more new products higher inventories and higher service 12% (7% for the interest rate and with the corresponding greater levels. One way to evaluate an inven- 5% for the other costs). Regardless of demand variability. Thus, most firms tory management policy is to choose the carrying cost rate being used, as a seeking to reduce safety stock can a service level target. From this target, firm holds more inventory, carrying only do so by focusing on aggres- the inventory policy will determine cost increases (Figure 3). sively cutting lead times. the inventory requirements and asso- Firms carry extra inventory to The second cost to consider is ciated costs of providing that level of guard against uncertain events. ordering costs. Ordering costs service. A higher service level implies Known as safety stock, the purpose of include a cost for transmitting the that more inventory will be held as this inventory is to provide protec- order, receiving the product and plac- safety stock. The tradeoff decision tion against stockouts. Safety stock is ing it into storage, inbound transpor- occurs at the point where the cost of costed just like regular inventory, it is tation, and processing the invoice. carrying extra safety stock balances an interest rate times the level of Recent advancements in information the stockout cost. safety stock. The level of safety stock technology have lowered this cost by required to guard against a stockout a factor of six for many industries. A

290 CHOICES 4th Quarter 2005 • 20(4) Closing Thoughts that do not have the supply chain Harvard Business Review, Mar/ capabilities in place or the ability to Apr., pp. 105-116. Inventory levels are affected by cus- manage them. Firms who understand Institute for Supply Management. tomer service expectations, demand their demand recognize stockout Available online: http:// uncertainty, and the flexibility of the costs and carry appropriate levels of www.napm.org/. supply chain. For products with rela- inventory are ultimately better able King, R., & Phumpiu, P. (1996). tively certain demand and a long to effectively manage inventory and Reengineering the food supply product life, it should be relatively provide the desired service level to chain: The ECR initiative in the easy to maintain desirable customer customers. As industrialization grocery industry. American Jour- service standards even as inventories affects agribusiness and agriculture in nal of Agricultural Economics, 78, are reduced. However, for products general, the importance of customer 1181-1186. characterized by erratic demand, a service and competitiveness will Wilson, R. (2004). 15th Annual State short life cycle, or product prolifera- become critical for firms and supply tion, a more responsive supply chain of Logistics Report. Council of chains. and larger buffer inventories may be Supply Chain Management Pro- fessionals. Available online: http:/ needed to meet a desired customer service level. For More Information /www.cscmp.org/. Consumers are demanding more Ballou, R. (2004). Business logistics/ th Frank Dooley ([email protected]) customer service from firms through- supply chain management, 5 ed. is Professor, Department of Agricul- out the supply chain. Firms with Upper Saddle River, NJ: Prentice tural Economics and the e-Enterprise high customer service levels may gain Hall. Center at Discovery Park, Purdue a competitive advantage over those Fisher, M. (1997). What is the right University, West Lafayette, Indiana. supply chain for your product?

4th Quarter 2005 • 20(4) CHOICES 291 292 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Perspectives on Traceability and BSE Testing in the U.S. Beef Industry by DeeVon Bailey, James Robb, and Logan Checketts

The discoveries of a dairy cow in the state of Washington and flexibility appear to indicate that a model different in December 2003 and a beef cow in Texas in June 2005, than the EU’s needs to be developed in the United States both infected with BSE, essentially removed any doubt to address consumer concerns about food safety related to that a better tracking method for animals and meat needs BSE while being cost effective. to be implemented in the United States. These tracking The U.S. animal and meat tracking system is currently methods are often referred to as traceability. However, an developing as a two-step process. The first step of this pro- important consideration evolving out of the pressure cess is the eventual implementation of an animal identifi- placed on the United States to develop some type of ani- cation system from farm to slaughter called the National mal and meat traceability system is how to address con- Animal Identification System (NAIS). NAIS may be sumer concerns about food safety related to BSE effec- phased in as a mandatory system and full implementation tively without drastically disrupting the current domestic is scheduled for 2009. The second step of the process meat production and processing system. This article would then have meat being tracked after it leaves the describes why farm-to-fork traceability is a difficult and packing plant. This two-step approach creates a “break” in costly task in modern, high-volume beef packing plants traceability at the processing plant. and also provides some insights based on survey data about consumer preferences for different tracking and testing Technical Challenges Associated with Linear Traceability for methods to address food safety concerns relative to BSE. Beef Robb and Rosa (2004) explain why a break in a two-step The Emergence of a Two-Step Traceability Process in process would exist and also discuss some of the technical the United States difficulties associated with a farm-to-fork beef traceability The dominant existing model for traceability is in the system in the United States. When beef packing moved European Union (EU) and calls for farm-to-fork (linear) from selling whole carcasses to selling cuts derived from traceability systems for meat and other food items; a sys- primal cuts, the link between the identity of the animal(s) tem many in the American food business currently con- and beef cuts was broken. Transforming cattle into beef is sider either too costly to implement in the U.S. system or a disassembly process. That is, rather than assembling not justified by “sound science.” For example, USDA esti- inputs into a final product as is done in most manufactur- mates that implementing just farm-to-slaughter traceabil- ing processes, an animal entering a processing plant is bro- ity for all program species would cost approximately $500 ken down into many parts or cuts and these parts are then million over six years. Sparks Companies Inc. estimated reassembled with the same or similar cuts from other ani- that the initial capital investment required to implement a mals and then typically placed in a box for shipment. farm-to-fork system just for cattle in the United States Modern packing plants are complex incorporating would be approximately $140 million with an additional skilled labor, mechanization, and government oversight at annual variable cost of about $108 million. Farm Founda- all production stages. The major stages involved in beef tion (2004) reports that American food firms would prefer processing at a packing plant are illustrated in Figure 1. a market rather than a regulated (such as in the EU) solu- Cattle ready for slaughter typically are purchased from tion for traceability. Consequently, concerns about costs feedlot operators and then shipped to the processing plant.

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Stage 1 at the processing plant involves slaughtering the animal as it enters the plant (Figure 1). The internal organs and hide are then removed from the animal and the carcass is split in two. These two halves are left hanging on hooks that are part of a trolley system that moves through the plant. In Stage 2, the carcass temperature is reduced and the carcass is stored in the plant’s cooler. This is also the stage in which carcass grad- ing typically takes place (Figure 1). In many cases, sorting in the cooler (Stage 2) results in batches of like carcasses (e.g., size and grade) to be sub- sequently processed as a group or “batch.” As a result of BSE- induced regulations in the U.S., segregation of carcass groups may also be done based on animal age. Stage 3 of the processing operation is the fabrication stage. The representation of Stage 3 in Figure 1 is a simplification, but understanding Stage 3 is important because it is essentially a “batch process.” This means that groups of inputs such as Figure 1. Schematic of wholesale (packer) sector stages and linkages. carcasses or parts of carcasses enter the process separately but similar Specification (commonly called the connect animal ID information to a parts of the different carcasses leave IMPS code) indicates that there are microchip embedded in the hook in groups at the end of the stage. In approximately 30 beef products just carrying the carcass through the plant Stage 3, the carcass leaves the cooler from the loin, each with four stan- on its trolley system. Tracking meat and is reduced into large primals dard weight ranges and 20 “portion once it is in the box, to the end user (typically quarters of the carcass). cuts.” This describes how many dif- is also relatively easy using bar coding During fabrication, parts of the car- ferent cuts and specifications might on boxes or some other type of iden- cass move in different directions in be dealt with in the fabrication stage. tification method. the plant while being further cut, The final stage in a typical U.S. pack- Farm-to-fork traceability assumes trimmed, and sized. Many different ing plant (Stage 4 in Figure 1) that information flows forward with butchers work on the different cuts involves moving boxes of cuts to the product through the production and parts of the carcass as it moves coolers to await transportation to stages and can also be followed back through the fabrication stage of the customers. through the production stages. The production process. At each cutting Figure 1 illustrates that the break- speed and volume of meat moving stage of the fabrication process trim is down in linear traceability between through large U.S. packing plants collected from different carcasses. the animal’s carcass and the beef exit- makes tying individual cuts moving The fabrication process involves pre- ing the processing plant is in the fab- through the fabrication floor and paring the meat to meet customer rication stage. Tracking within pro- into boxes back to animals entering specifications such as cut, size, grade, cessing plants can be accomplished to the plant virtually impossible with and other special requirements. the carcass cooling stage relatively current commercial scale technology. USDA’s Institutional Meat Purchase easily if technology is invested in to With effort and investment, fabrica-

294 CHOICES 4th Quarter 2005 • 20(4) tion stage tracking on a batch or time This suggests that a two-step system of BSE testing are central questions basis can occur. This is most easily with a break in traceability at the to the appropriate development of done for whole muscle meat cuts processing plant can be justified espe- animal and meat tracking systems in (e.g., steak), but further processed cially for animals less than 30 months the United States. This stems from items like mixed and ground trim of age by OIE standards. the implicit assumption within a components (hamburger) present However, BSE testing protocols two-step system that consumers will even more traceability problems. are often discussed as providing an accept current “science-based” testing enhanced consumer assurance protocols. An additional assumption Testing and Traceability attribute even if OIE standards indi- of the two-step system is that any fur- Obviously, significant technical issues cate that BSE testing is not required. ther efforts to establish farm-to-fork need to be addressed if farm-to-fork An example would be the recent traceability or expanded testing traceability were to be implemented trade negotiations with the Japanese should be left to the private sector’s in the U.S. beef system. In the mean- to resume importing beef from the ability to exploit any existing market time, testing protocols designed to United States. Currently, the Japa- opportunities. The private sector ensure safety against BSE and other nese test 100% of the animals enter- may also have non-price incentives food-borne diseases are used to jus- ing domestic beef production for for establishing farm-to-fork trace- tify the break in traceability that BSE and other countries, such as in ability or expanded testing such as exists in high-volume beef packing the EU, practice random BSE testing developing or maintaining brand plants. The theory is that if protocols within the general slaughter popula- image or equity, identifying produc- based on biological and statistical tion. tion efficiencies, and/or limiting probabilities are in place to establish The testing program for BSE in product liability. food safety for meat before it leaves the United States is undertaken by the packing plant and the meat is the USDA, Animal Plant Health Missed Market Opportunities? deemed safe, then there is essentially Inspection Service (APHIS), which Research and anecdotal evidence sug- no need from the perspective of food conducts non-random testing for gest that marketing opportunities safety to maintain the link between BSE with cattle considered to be in may exist for meat products with the animal entering the plant and the the “high-risk” population. The assurances beyond those offered by meat leaving the plant. high-risk population is defined as the two-step system; including farm- Testing in the beef processing sys- those animals exhibiting clinical signs to-fork traceability (Dickinson & tem is a standard statistical practice involving the central nervous system Bailey, 2002, 2005). Also, some for monitoring procedures (e.g., test- that could be consistent with BSE American meat companies have con- ing for E. coli). The World Organiza- and also dead and non-ambulatory sidered differentiating meat products tion for Animal Health (OIE) recom- cattle where such clinical signs can based on expanded BSE testing pro- mends standards intended to help not be evaluated (see http:// tocols. However, USDA has resisted countries manage human and ani- www.aphis.usda.gov/lpa/issues/ efforts by private U.S. firms to estab- mal health risks related to BSE. bse_testing/faq.html#highrisk). As lish and market products based on Recently, the OIE recommended that indicated, the APHIS testing pro- BSE testing protocols that exceed the “deboned skeletal muscle meat gram is in contrast to systems in APHIS and OIE standards, thus cre- [excluding mechanically separated other countries. However, APHIS ating a seeming dichotomy between meat] from cattle 30 months of age states that their testing program government-conducted scientific or less . . .” should not require any would be able to detect one animal testing and what might be the prefer- BSE-related conditions (e.g., tests) with BSE out of 10 million with a ence of a significant number of con- for trade (see http://www.oie.int/ 95% level of confidence. sumers. From a marketing perspec- downld/SC/2005/bse_2005.pdf). tive, this raises the question of This standard also assumes that all Consumer Acceptance of whether or not consumers are equally specified risk materials (mostly Different Traceability and as happy with a two-stage process as related to the animal’s central ner- Testing Protocols they would be with farm-to-fork vous system) have been removed and Consumer acceptance of a two-step traceability. It also raises the question that no contamination of the meat by tracking system and the effectiveness of whether or not consumers are specified risk materials occurred. equally willing to accept current gov-

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ernment BSE testing protocols as Table 1. Utah/Idaho Survey responses to questions relating to two-step they would be with either farm-to- traceability, traceability, and BSE testing. fork traceability or expanded BSE Percent Preferring At Least Percent Willing testing. Category Vs. Baseline Steak Enhanced Characteristic to Pay 5% More Steak 1: Traceable/Maybe Tested (N=103) 82% 57% Willingness to Pay for Traceability and Steak 2: Traceable/Tested (N=104) 90% 76% Enhanced BSE Testing Steak 3: Non-Traceable/Tested (N=105) 87% 72% A survey recently completed by Utah State University asked participants just like the baseline steak, the animal ring one or both to just two-stage their hypothetical preferences for producing the steak also might have tracking at the same price. A more farm-to-fork traceability compared to been tested for BSE (Steak 1), general willingness to pay (WTP) a two-step tracking process with another was traceable to the farm appears to exist for guaranteed testing either the possibility that BSE tests level with a guarantee that the animal compared to traceability (higher per- were performed on the animal pro- had been tested for BSE (Steak 2), cent willing to pay a 5% premium or ducing the beef (the system being and the final steak was not traceable more for Steaks 2 and 3 than for implemented in the United States) or to the farm level, but was guaranteed Steak 1) and traceability and guaran- the guarantee that a BSE test was per- that the animal had been tested for teed testing (Steak 2) had a slightly formed. The survey was conducted BSE (Steak 3). more general WTP than only guar- with consumers near supermarket Based on OIE standards, muscle anteed testing (Steak 3). meat counters in December 2004 products like steak from an animal This was a non-probability sur- and February 2005 in a small city under 30 months of age do not vey conducted without providing the (Preston, Idaho), a small to mid-sized require BSE testing protocols as a participants with full information city (Logan, Utah), and a larger city safeguard for human health. But, about OIE standards as they relate to (Salt Lake City, Utah). there is no USDA rule that specifi- USDA BSE testing protocols. How- Each survey participant was asked cally excludes animals in the high- ever, the survey results suggest that for his/her hypothetical preferences if risk group, other than non-ambula- given the choice many of the survey given a choice between a baseline tory or “downer” cattle, that have had participants deemed a two-stage USDA-inspected beef steak that a negative test for BSE from entering tracking process as less preferable might have been tested for BSE (i.e., the food supply. Consequently, it was than farm-to-fork traceability and/or the possibility that USDA testing for technically correct to tell partici- guaranteed testing for BSE. At the BSE might have been performed on pants that a BSE test might have least this suggests that the survey par- the animal producing the steak) and been performed for the baseline steak ticipants could benefit from better three other steaks with enhanced or Steak 1. However, given that ani- education about the risks posed by characteristics offered at the same mals in the high-risk population have BSE. But, it may also indicate that price as the baseline steak. If the a relatively small likelihood of pro- market opportunities exist if firms enhanced steak was preferred, the ducing the baseline steak, the “possi- were allowed to provide enhanced respondent was then asked to indi- bility” of the animal having been assurances about farm-to-fork trace- cate how much more he/she would tested for BSE was extremely remote ability and/or BSE testing, especially be willing to pay, if anything, for the (i.e., was a stronger statement than if cost-effective technologies can be enhanced steak compared to the the actual USDA protocol). How- developed that will allow these assur- baseline steak. Each respondent was ever, the purpose of the comparison ances to be made. told that they should consider their was to determine how the possibility What technologies are candi- responses based on the baseline steak rather than the probability of testing dates for providing farm-to-fork being part of a two-stage tracking compared to both the guarantee of traceability in the U.S. meat system? system. The choices were done in a testing and farm-to-fork traceability. Some have discussed taking DNA pairwise fashion, with each of the Table 1 demonstrates a stated samples or even using a spray-on three enhanced steaks being com- preference by the survey respondents “smart dust” (see http://chem-fac- pared one at a time with the baseline for traceability and/or guaranteed ulty.ucsd.edu/sailor/research/smart- steak. One of the enhanced steaks testing over two-stage tracking, with dust.html) to connect food products was traceable to the farm level and, well over 80% of respondents prefer- back to animals. More conventional

296 CHOICES 4th Quarter 2005 • 20(4) solutions within packing plants cost effective technologies will likely Journal of Agricultural and might require plant and line rede- be needed to facilitate a farm-to-fork Applied Economics, 37, 537-548. signs, new types of line equipment, meat system on a large scale in the Dickinson, D.L., & Bailey, D. or having fewer people and locations United States, especially for beef. In (December 2002). Meat trace- within the plant involved in breaking the meantime, smaller meat proces- ability: Are U.S. consumers will- down individual carcasses. The initial sors will likely have an advantage over ing to pay for it? Journal of solution may be to simply run groups large processors in providing trace- Agricultural and Resource Econom- of animals from the same origin able or “source verified” meat prod- ics, 27, 348-364. through plants in batches at the same ucts because the scale of their opera- Farm Foundation. (July 2004). Food time. All of these solutions run tions fits lot sizes from individual traceability and assurance: An counter to maintaining the status farms and feedlots better than high emerging frontier driving devel- quo in the American meat industry, volume plants. This assertion appears opments in the global food sys- and when suggested will likely lead to to be supported by the fact that most tem. Farm Foundation’s continued pronouncements that firms participating in source verifica- Traceability and Assurance Panel farm-to-fork U.S. traceability systems tion are small to mid-sized. Report, Oak Brook, Illinois. or expanded BSE testing are either Beef processing is moving at a Robb, J.G., & Rosa, E.L. (Fall 2004). too costly or unnecessary in the slower rate to implement tracking Some issues related to beef trace- United States. However, if economic systems than are swine and poultry; ability: Transforming cattle into incentives exist, innovative firms will perhaps not surprisingly because the beef in the United States. Western find cost-effective ways to provide industry structures for these meats Extension Marketing Committee these characteristics. are different. However, regardless of Fact Sheet. WEMC FS#7-04, whether pressure for better tracking Colorado State University, Ft. Conclusions comes from consumers, suppliers, or Collins, CO. Given that incentives may exist to procurers, it is likely that the U.S. develop farm-to-fork traceability in meat system will continue to move DeeVon Bailey ([email protected]) is trade and in domestic markets, one toward more traceability. a Professor, Department of Econom- ics, Utah State University, Logan, can ask if a two-step process repre- Utah. James Robb is the Director of sents the future of the U.S. meat For More Information the Livestock Marketing Information industry. One of the contributions of Dickinson, D.L., & Bailey, D. Center in Lakewood, Colorado. this article is to point out the techno- (December 2005). Experimental Logan Checketts is a graduate student logical difficulties associated with evidence on willingness-to-pay at the Royal Agricultural College, farm-to-fork traceability in high-vol- for red meat traceability in the Cirencester, England and Depart- ume beef packing plants in the United States, Canada, the ment of Economics, Utah State Uni- United States. The results presented United Kingdom, and Japan. versity, Logan, Utah. Approved as in this article suggest that different UAES journal paper no. 7735.

4th Quarter 2005 • 20(4) CHOICES 297 298 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Made in China: Is it Over for the U.S. Textile Industry? by Siyi Guo, Ereney Hadjigeorgalis, and Jay Lillywhite

On January 1, 2005, after more than 40 years of protec- more importantly, the Chinese textile industry faces many tion, the remaining quotas on textile and clothing imports constraints that could put a drag on any long-term export established under the Multifibre Agreement were removed. expansion. Governmental quotas that limit cotton The impending liberalization sent a shock through the imports, increasing competition for unskilled labor, U.S. and global textile and clothing industries. Fears restrictive re-zoning regulations, electricity shortages, and mounted that China’s textile industry would take over mounting concerns over pollution could hold off the long- world markets and decimate domestic textile industries. term dominance of Chinese textiles and clothing imports International organizations and producer groups predicted in the United States. that China would account for 50 and 75% of the world trade in textiles and clothing, respectively, and 65 to 75% Not Enough Cotton of the U.S consumer market. The American Textile Man- Cotton is needed to produce textiles and clothing, and ufacturers Institute predicted U.S. job losses in the range China is coming up short in this area. While China’s con- of 650,000, and the National Council of Textile Organiza- sumption of cotton has been steadily increasing since tions put the number of global job losses at 30 million. 1970, production has been volatile (Figure 1). Stocks were In response to historical quotas being removed, several completely exhausted in 2003 when consumption out- countries began erecting barriers to Chinese textile paced production by almost 2 million tons. This means imports. U.S. textile manufacturer organizations filed safe- that China will have to import 1.6 million tons of cotton guard petitions with the U.S. Commerce Department in in 2005 (China Chamber of Commerce for Import and November 2004. Turkey placed emergency import quotas Export of Textiles [CCCT]) to meet current consumption on 43 categories of Chinese textiles to avoid disruption of needs. However, cotton imports are controlled by quotas, its thriving textile market. The EU, amid worries that which for 2005 are set at 894,000 tons. Without govern- products could flood European markets, also blocked Chi- ment intervention, China faces a shortfall of 706,000 tons nese textile imports. of cotton, which could significantly affect the country’s These fears are not unfounded. The Chinese textile textile and clothing production. Any increases in textile industry benefits from an array of subsidies, direct pay- manufacturing would have to be matched by either ments, export tax rebates, and subsidized utilities and increases in domestic cotton production or increases in shipping costs. In addition, the fixed exchange rate gives import quotas set by the government, both of which are Chinese exports a competitive advantage by undervaluing possible but may not be likely given other constraints the Yuan and making Chinese exports relatively less expen- faced by the country. sive than competing exports from other countries. Add to this low labor costs and a perceived abundance of Competing for Workers unskilled labor and China’s textile industry appears to be a formidable opponent. Contrary to popular belief, China has recently been expe- But is there another side to this story? Perhaps. To riencing labor shortages in key sectors. Labor shortages are spreading rapidly among the belt of manufacturing cities begin with, China’s textile industry is broader than the U.S. industry, which generally specializes in spinning. But on China’s eastern coast – the country’s most important

4th Quarter 2005 • 20(4) CHOICES 299 8,000

7,000 Production Consumption 6,000 Exports 5,000 Imports

4,000

1,000 tons 3,000

2,000

1,000

0 1970 1975 1980 1985 1990 1995 2000

Figure 1. China’s production, consumption, exports, and imports of cotton. industry center (see Figure 2). Most Competition for workers comes estate bubbles and adopt restrictive Chinese textile and clothing factories not only from the service and agricul- measures on both real estate loans are located in Guangdong, which tural sectors. The textile industry and land. These concerns and corre- accounts for nearly a third of China’s must also compete with other manu- sponding measures to alleviate possi- total exports. This province is experi- facturing industries that have grown ble overheating have made land avail- encing an unprecedented labor short- rapidly in recent years. Figures able for industry expansion more age of two million workers. Although released by China’s Ministry of Com- expensive and effectively scarcer in Guangdong’s labor shortage appears merce show that foreign and domes- recent years. to be most acute, it is not unique. tic investment, mostly geared Adding to these restrictions is the Other areas, like neighboring Fujian, towards labor-intensive industries, Chinese government’s recent policy report a similar shortage. In fact, the increased 20% in 2003 over 2002. agenda to eradicate misuse of farm labor shortage has spread widely This investment has spurred a growth land to benefit farmers (Ministry of from Guangdong up through Zhe- in industries such as electronics, tele- Land and Resource PRC). One of jiang, to the south of Shanghai (Econ- com equipment, and chemicals that L.L. Bean's major suppliers was omist, Oct. 2004). have absorbed a large number of forced to delay a big expansion this A growing service sector and the workers that could have alternatively year when Beijing tightened land-use increasing reluctance of rural resi- been used by the textile industry. regulations. TAL Apparel of Hong dents to seek employment in urban Kong, a garment-making giant that areas have contributed to this critical Running Out of Land makes wrinkle-free shirts and pants, labor shortage in manufacturing. The China’s economy has been growing had planned to build a second service sector, in many cases, offers rapidly over the last few years, raising 350,000-square-foot factory near a higher salaries, and the work is less concerns of overheating the econ- plant in Dongguan. Beijing then physically demanding than in manu- omy. While an overheated economy ordered a moratorium on the conver- facturing. Rural residents are finding is characterized by a high level of eco- sion of farmland for industrial uses, it more attractive to stay on the farm nomic activity, it also brings with it and the project was shelved. (Buck- because increased demand for agri- shooting interest rates and inflation. man, 2004). cultural products has increased In China, the steel and cement incomes and living standards in rural industries are over-invested, energy Who Turned Out the Lights? areas. These factors, coupled with a consumption is skyrocketing, rice China has faced a persistent electric- restrictive rural to urban migration prices are rising, and the volume of ity shortage in recent years. In 2003, policy, have reduced the pool of real estate loans is growing rapidly. severe electricity shortages forced unskilled labor in urban areas where This rapid growth has forced the China to impose usage restrictions in textile factories are located. Chinese government to look into real 23 regions, affecting about 20 prov-

300 CHOICES 4th Quarter 2005 • 20(4) Figure 2. Map of China. inces and cities (Denlinger, 2004). In Shunde District of Foshan City in It’s Not Easy Being Green 2004, the Chinese National Electric Guangdong province has been with- Land, air, and water quality in China Watch Committee announced a 20 out power on Mondays and Tuesdays are deteriorating at a rapid rate. Ram- million kilowatts shortage in the since February of 2004. Honda’s pant deforestation for fuel and min- country (Wang & Wang, 2004). The Automobile plant in Guangzhou, the ing for ore result in desertification. areas most affected in 2004 were pri- capital of Guangdong province, was Water demand is growing at a rate of marily the eastern and southern prov- asked to close every Friday and Kirin about 10% a year in cities, and about inces. Eastern China is short 10 to 15 in Zhuhai was asked to close every 5% for industry. Sixty million people million kilowatts, southern China 5 Wednesday (Lyengar, 2004). in the country find it difficult to get million kilowatts. In addition, north- Although China is constructing enough water for their daily needs ern and central China are short 3 the new Three Gorges Dam that will (China Growth Cost, 2004). The million kilowatts (Wang & Wang, provide the country with an addi- World Health Organization (WHO) 2004). tional 18.2 gigawatts of electricity, it reported in 1998 that of the ten most The National Development and will not enter into operation until polluted cities in the world, seven Reform Committee reports that in 2009 at the earliest. The project is were located in China (EIA, 2003). regions with severe electricity short- also plagued by a myriad of environ- More recently, the World Bank ages, some manufacturing companies mental concerns, since inundation of reported that sixteen of the world’s are operating on alternate schedules, the area with water on the Yangtze twenty most polluted cities were in able to produce only every other day River could bring with it dangerous China, and it estimated that 300,000 or even every fourth day (Wang & concentrations of toxic waste and Chinese die each year from respira- Wang, 2004). .Several Japanese com- pollutants from neighboring indus- tory diseases (Economist, Aug. 2004). panies operating in China reduced trial centers. For now, and perhaps While pollution has been a grow- production or delayed their product quite a while, there is no evident ing problem in China for years, there delivery as a result of the modified or solution to China’s electricity prob- are indications that the government shortened operating schedules. One lem. is beginning to take this issue more of Panasonic’s companies in the seriously. In its Ninth National Five-

4th Quarter 2005 • 20(4) CHOICES 301 Year Plan, the Chinese government tries. An undervalued Yuan, favor- For More Information specifically cited the need to prevent able governmental treatment of the Buckman, R. (Sept. 10, 2004). Navi- and control pollution in the textile Chinese textile industry, and low gating China’s textile trade. Wall and other highly polluting manufac- labor costs add to this concern. Street Journal, p. A10. turing industries. The textile, paper- While countries have protectionist China Daily (February 19, 2004). making, chemical, and food indus- measures at their disposal to alleviate China to further tighten regulation tries have been targeted in particular such competitive disadvantages with on land leasing. Available online: in the pollution of the Huaihe River, China (e.g., tariff and safeguard mea- http://www.chinadaily.com.cn/ China’s third largest watercourse. sures and antidumping legislation), english/doc/2004-02/19/ These industries are responsible for the need for these measures may not content_307553.htm. 94% of the ammonia nitrogen dis- be as necessary long term as once Denlinger, P. (Oct. 4, 2004). China's charge in the river and have been thought. China faces a number of electricity shortage to continue into blamed for record Chemical Oxygen resource constraints that, taken as a winter. China Business Strategy, Demand (COD) levels in the river. whole, may restrain its textile indus- Available online: http:// In July 2004, the Huaihe Water try from dominating world markets www.china-ready.com/news/ Resources Committee reported that to the degree previously projected. Oct2004/ the river’s water quality was at its Rapid economic growth in recent ChinasElectricityShortageToCon worst level in history. In December of years has thrown China into an era of tinueIntoWinter100404.htm. 2004, China Daily reported that only unprecedented and profound change. Economy, E.C. (September 22, 57.8% of the water in the river was The textile and clothing sectors are 2004). Congressional Testimony: considered safe for domestic, agricul- caught in this web and are con- China's Environmental Challenges, tural, or industrial use. strained in ways that are inherent to a Council on Foreign Relations. In response to this crisis, the gov- changing Chinese economy. Volatile Available online: http:// ernment has gone as far as to call for cotton production and increasing www.cfr.org/pub7391/ a restructuring of these industries. demand for cotton in textile and elizabeth_c_economy/ Wang Jijie, Vice-Director of China’s clothing production, the urgent labor congressional_testimony_chinas_ State Environmental Protection shortage in manufacturing cities, the environmental_challenges.php. Administration, demanded that local strained resources of land and elec- Economist (August 19, 2004). A great governments restructure the manu- tricity, and an alarming environmen- wall of waste. Available online: facturing sector in accordance with tal deterioration could impede http://www.economist.com/dis- the river’s capacity. He urged the China’s textile and clothing industry playstory.cfm?story_id=3104453. enactment of water quality laws and from future expansion. Whether Economist (October 07, 2004). regulations. Kai Ma, Director of the these constraints will compensate for China's unexpected labour short- National Development and Reform the advantages that China enjoys in age. Available online: http:// Commission, stated in a speech to textile production remain to be seen, www.economist.com/ the Fifth China Development Forum but these issues must form part of index.html?uviewed=1. that it is vital to restructure industry any balanced debate on world textile Energy Information Administration and to change the current economic trade. In the short run, safeguards (EIA). (July 2003). China: Envi- growth pattern into a more efficient, and trade agreements, such as that ronmental Issues. Available online: environmentally sustainable one. recently concluded between China http://www.eia.doe.gov/emeu/ This movement towards a greener and the E.U., may buy some much cabs/chinaenv.html China will not be compatible with needed time for the U.S. textile Lyengar, J. (Nov. 11, 2004 ). Foreign increased production in these indus- industry. The future is uncertain, but investors mum on China's energy tries in the short term. for now it’s not yet over for the U.S. shortage. Asia Times, China study textile industry. group, http://www.chinastudy- Conclusion group.org/newsarchive/7609/ Removal of existing trade import The Ministry of Land and Resource quotas has appropriately caused con- PRC. (Oct. 24, 2005). Facing the cern for U.S. and global textile indus- left 0.2648 billion acres of farm

302 CHOICES 4th Quarter 2005 • 20(4) land. Available online: http:// cause problems for that country’s Siyi Guo is Graduate Assistant, www.mlr.gov.cn/pub/gtzyb/ booming economy. Ereney Hadjigeorgalis (ereney@nmsu gtzyxw2/gtzyxw/ Wang, F., & Wang, Z. (June 21, .edu) is Assistant Professor, and Jay t20051024_70732.htm. 2004). China restricts electricity in Lillywhite is Assistant Professor, Morning Edition (NPR), hosted by 20 provinces. Association for respectively, Department of Agricul- Renee Montagne. (September 24, Asian Research-East Asia. Avail- tural Economics and Agricultural 2004). Analysis: Shortage of factory able online: http://www.asianre- Business, New Mexico State Univer- workers in southern China may search.org/articles/2166.html. sity, Las Cruces, New Mexico.

4th Quarter 2005 • 20(4) CHOICES 303 304 CHOICES 4th Quarter 2005 • 20(4) 4th Quarter 2005 • 20(4) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association Coming Attractions

Resources and the Environment Consumers and Markets

Developing New Energy Sources from Agriculture Tilling Latin American Soils Jim Duffield, Guest Editor Peter Goldsmith, Guest Editor As recently as the early 1900s, energy sources around the Latin America has emerged as a dominant force within the world were mostly agriculturally derived and industrial global agri-food system, both as a demander and supplier products were primarily made from plant matter. Early of goods. While agribusiness investment occurs at a torrid motor fuels also came from agriculture — Henry Ford pace, the region brings to light a number of fundamental used ethanol in his original engine and Rudolf Diesel's issues facing the global community. For example, Brazil engine could run on peanut oil. By 1920, petroleum holds the world's largest reserves of tillable land. Should emerged as the dominant energy source for transportation they be developed to meet the world's needs for food, feed, fuels and industrial products. For over 80 years, the fuel, and fiber? At the heart of these fundamental issues is United States and other industrialized countries have the tradeoff between the need for growth and the need to relied on petroleum as an economical and dependable protect the vulnerable; in society and in the environment. source of energy. However, this reliance on petroleum is This theme focuses on how governments, communities, becoming a major issue as our domestic oil supplies shrink firms, and the environment are juxtaposed when Latin and our dependence on oil imports grows. The papers in America becomes the world’s “food basket” in the 21st this theme will look at agriculture's current role as an century. energy producer and explore opportunities for agriculture We are working on future theme coverage on the as our Nation struggles to secure its energy future. emerging trends in Latin American agriculture, developing new energy sources from agriculture, the Farm Bill, check- off programs, invasive species, future of the livestock industry, and returns to research and extension.

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