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April 2012 Archives

The Economics of Pink Slime

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Pink slime, or lean finely textured beef (LFTB) grabbed the spotlight in March after prominent blogger, Bettina Siegel, launched an online petition to get it banned from public school lunches. ABC News did a report shortly thereafter, and the backlash against the product has been quick. BPI, LFTB's primary producer, has temporarily shut down 3 of its 4 plants and AFA Foods has declared bankruptcy. The media has been quick to cover the nutritionists', activists', and industry leaders' point-of-views, but what can the economist add to the conversation?

Monday afternoon, I sat down with economists Dr. Brian Buhr, an expert in livestock markets and Dr. Michael Boland, director of The Food Industry Center to discuss the economic issues around LFTB. The story they told was one of waste and margins. Dr. Boland hypothesized that part of the need for LFTB comes from a USDA grading system that rewards intramuscular fat levels (commonly called marbling) because it improves a flavor profile of fresh beef cuts desired by consumers. A beef carcass with high amounts of marbling requires additional lean trimmings when making leaner ground beef for hamburger patties. Dr. Buhr added, the market hole that LFTB filled was created when case ready boneless meat cuts were packaged at the processing plant rather than at the retail butcher. Consumers wanted boneless meat, but the lean trimmings next to the fat and bone were too difficult to recover by hand. This is when Eldon Roth developed a way to spin the fat away from the meat and quick-freeze the remaining meat, creating LFTB. Additionally, Buhr and Boland noted the U.S. meat industry must compete with leaner foreign imports and that LFTB contributed to gains in meat yields because it reduced waste. Russell Cross, an animal science researcher at Texas A&M, estimates that 13 pounds of beef per animal is lean trimmings. He also estimated we'd need to raise at least 1.5 million more cattle every year to make up the loss if lean trimmings were discarded. In a time where 27% of food in America gets thrown out, Buhr pointed out the ethical ramifications of increasing already high food waste.

As economists, their analyses quickly steered towards pricing. When asked what the backlash would do to the market, Buhr pointed out the alternatives are more expensive. With a short supply of cattle and record high meat prices already, cutting out the use of lean trimmings will result in even higher prices. He added that an important element missing in the conversation is the regressive nature of increasing prices; making a lean complete protein harder to access for the poor than the rich. When asked if the effects on the meat market would be lasting, both economists were hesitant to answer. Boland noted how BPI and other producers are hoping that labeling retail products 'made with lean trimmings' will improves sales and calm consumer fears. He predicted that with meat demand as high as it is, the industry will find a new way to utilize lean trimmings because they can't afford not to. They both agreed the long-term backlash depends on what consumers are upset about. Are consumers upset about the ammonium hydroxide or the trimmings? Buhr commented that the use of ammonium hydroxide in food is regarded safe by the FDA. Both added they were surprised how quickly the backlash initiated a downhill slide for these companies, especially considering it did not stem from a food safety issue. Buhr closed by saying the issue illustrates the meat industry's need for better communication with its consumers and a proactive approach to thinking about what the next 'pink slime' is to get ahead of the conversation.

Join us on Thursday as we continue the discussion of livestock markets and the economics of using antibiotics as growth promoters in livestock feed.

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It's a food shelf. It's a grocery store. Can it be both? -

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Former TFIC directors comment on this Pioneer Press article about the Fare For All Express grocery model.

Opportunities in the Dairy Industry

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Yesterday afternoon The Food Industry Center hosted Clint Fall, CEO and President of First District Association, for the 3rd in the 2012 series of Food Industry Leader in the Classroom events. First District Association (FDA) is a dairy cooperative that operates out of Litchfield, MN. Made up of over 1,100 member owners, FDA processes approximately 3.9 million pounds of milk each day and focuses on cheese, milk, and powder production. Fall reported the coop makes more than 400,000 pounds of cheddar and more than 500,000 pounds of grade A fluid milk every day.

A food scientist by training, Fall emphasized FDA's commitment to high food safety standards, exceptional quality, and little waste. Raw milk is brought to the processing plant, then made into cheese, which is sold in 40 pound blocks or 500 pound barrels to other companies in the food industry. Every part of FDA's milk is used in the processing, with 'leftovers' such as whey protein and lactose being sold to infant formula and pharmaceuticals manufacturers. He also spoke about the coop's recently built state of the art facilities to generate as little waste as possible. Sharing some of the details, he noted the water that comes off of their evaporators, when making cheese, is clean enough to drink. It is then recycled back into the system by using the water to conduct heat. At the end of the day, the water is used to clean up the facilities.

Mr. Fall's presentation also gave us a glimpse of the farm-to-table dairy supply chain and industry. When asked about future careers, he stated the dairy and food sectors are particularly interesting industries right now for students to consider working in because of how fast everything is changing. Fall explained that when he first started working at FDA they did very little international business, but it is now steadily increasing. He also said the food industry needs everyone, from economics and business to food science and biology majors, so career opportunities are abundant.

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Generic Advertising: A Cost-Benefit Study

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In the agricultural economics literature, there are over 100 peer reviewed journal articles that try to measure the costs and benefits of generic advertising. Generic advertising is when producers work together at collective advertising, such as general advertising promoting the consumption of milk. Little research has looked at the effectiveness of promoting a specific food product in a monopolistically competitive industry. A monopolistically competitive industry is one where many firms are selling branded products that are slightly different.

In the April 2012 issue of the Journal of Agriculture and Resource Economics Mike Boland, John Crespi, Jena Silva and Tian Xia look at data from Sunsweet Prunes to measure the costs and benefits of firm level advertising in the article Measuring the Benefits to Advertising Under Monopolistic Competition. The authors highlight why the U.S. prune industry is a suitable industry to study monopolistic competition. They state that while demand has been declining, the number of sellers has increased. Prunes are also a differentiated product, which can be seen in prices, as the most expensive prunes are almost twice as costly as the cheapest prunes.

It is important to note that in monopolistically competitive industries, it is assumed that long run economic profits are zero because it is relatively easy for a new firm to enter the market resulting in dissipating profits. However, firms can make short-run profits by creating new products or marketing strategies. Their paper develops a framework of how firms in similar industries can use advertising to make economic profits in the short run; before new competitors enter the market or existing competitors increase their advertising. The authors also found that in the case of prunes, the benefits of advertising outweighed the costs. Their simulations found that Sunsweet Prunes made anywhere from $1.26 to $4.35 for every dollar spent on advertising.

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Conversations about Sweetners

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Sugar Cubes.jpgOn March 29th, Darrin Peterson, Assistant Vice President and Product Line Leader for Corn Sweeteners in Cargill's Corn Milling division, visited campus and offered his perspective on the food industry from the point of view of sweetener products. Interestingly, he and our student participants spent the majority of their conversation discussing how the sweetening of food and beverages has evolved over the last 30 years. Of particular interest was Cargill's involvement in both sides of the sweetener business, both natural and artificial. Students were especially curious in the newest sweetener product Stevia and how it works, which Cargill sells under the name Truvia. The discussion moved into a conversation about the participants' own sweetening preferences and how they have changed over time, most commonly due to calorie consciousness and personal values around food products. Darrin also presented a quiz for the students in which he provided fructose information for unnamed products such as honey, maple syrup, high fructose corn sweetener, pear juice and other juices, and similar products. Products that students thought would be 'healthier' based on fructose content, were not necessarily the case based on this attribute.

With questions ranging from production, to consumer trends, to nutritional research of sweetener products, it's clear this is a food discussion about which students have spent a lot of time thinking.

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Why Do People Buy Local?

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With the warm weather so early in the spring, gardeners and farmers have started their seeds and the local farmers markets will soon be popping up around the community. Local food vendors may have something to look forward to this year. In a survey done by Mintel, 52% of respondents said that it was more important they buy local than organic. Mintel concluded that as consumers become more interested in where their food comes from, retailers will focus on American regionalism. The local food movement is not new. Farmers markets almost doubled between 1994 and 2009 and the USDA estimated the local food market to have $4.8 billion in sales in 2008.

Local food has not escaped the attention of academia. In early 2010, Choices Magazine had an entire theme focused on Local Food - Perceptions, Prospects, and Policies. In one of the articles, Local Food Consumers: How Motivations and Perceptions Translate to Buying Behavior, Yuko Onozaka, Gretchen Nurse, and Dawn Thilmany McFadden delve into why consumers purchase local food and in which venue they choose to shop. The authors found that more people (82%) said they had bought locally grown produce than had bought organic produce (50%). While local food has no formal definition, over 70% of survey respondents considered food grown within a 50-mile radius to be local.

The first part of the study focused on what consumers think of local food. The authors found the highest percentage of consumers assigned importance to 'proven health benefits' when shopping for local foods. The next 3 most important factors were 'supporting the local economy,' 'farmers receiving fair share of economic returns,' and 'maintaining local farmland.' They also found that most consumers felt local produce was superior in terms of 'freshness,' 'eating quality,' and 'nutritional value.' In addition, consumers perceived that local food helped the local economy more and provided fairer returns to farmers than its non-local counterpart.

In the second part of the study, the authors looked at whether consumer perceptions motivated where people shopped and if consumers believed their actions had an effect on the food system. The study found shoppers who want to support their local community, purchase food through farmers markets and direct farm purchases, while those concerned with environmental impact and pesticide use shop, at natural food stores. Perhaps one of the most interesting findings from the study is people who shop at farmers markets and through direct farm purchases, report a stronger belief their actions matter. They also report the opinion of the people in their life matters more in their purchasing decisions. Those that shopped at natural food stores believed their actions mattered more than those who shopped at supermarkets, but less than those who shopped at direct markets. The authors close by saying that since local and direct food buyers have a relatively high concern for the environment, "policies to support local and direct markets seem complementary to efforts to preserve farmland and reinvigorate local economies."

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About this Archive

This page is an archive of entries from April 2012 listed from newest to oldest.

March 2012 is the previous archive.

May 2012 is the next archive.

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