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The Food Industry Center.

December 2012 Archives

On milk prices and the "fiscal cliff"

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Thumbnail image for Cow Milk Cliff Image.jpegEvery five years, U.S. Congress passes what is called a "Farm Bill". This legislation defines the set of food-related policies such as those that help agricultural producers to manage their risk, and low-income consumers with their food purchases. Like is the case with many other laws, rather than being a permanent law, the Farm Bill is designed in such way to expire after a certain number of years. The latest such legislation, passed in 2008, will expire at the end of 2012.

The idea that major legislation should be designed to have a sunset provision is a recent phenomena. In contrast, major agricultural policies of the 1950s were authorized by the Agriculture Act of 1949 which did not have an expiration date, but was designed to be a "permanent law". Reading the provisions of 1949 Act feels like looking through a window into another universe. Concepts, ideas, policies and rules that were relevant and helpful back then are far from applicable and not even remotely useful today. Similar to the original idea of the "fiscal cliff" - a set of such radical and deleterious changes in spending and taxation designed to encourage both major parties to compromise to avoid it - the "permanent law" was left in place when modern-day farm bills were being enacted. Rather than repealing the 1949 Act, the most recent Farm Bill, like many farm bills before it, just suspended it for the period of five years.

Today, U.S. dairy producers receive milk prices that are determined by market forces. Going forward, their representative organizations have petitioned the U.S. government to abolish all price support programs and help institute programs that would focus on managing very high risk in net revenue margins originating in volatile milk and feed prices. Those principles are embedded in the text of both the House of Representatives and Senate versions of the 2012 Farm Bill, designed to replace the 2008 farm bill whose dairy policy provisions expire at the end of December. Analysis done by leading dairy economists indicate that long-term effects of the proposed new policies are beneficial for consumers, as lower risk in the dairy sector would eventually translate into more affordable dairy products.

However, as "fiscal cliff" negotiations brought the entire Congress to standstill, the new Farm Bill has not been passed on time, creating a real possibility that the 1949 Act may once again be the law of the land. If that were to happen, dairy prices, rather than being an outcome of market supply and demand like they currently are and should be, would effectively be set by the U.S. government, at the level that would more than double the retail prices of milk. However, the artificial price increase would not happen overnight. The nuts-and-bolts of the ancient program insure that some weeks would pass before the Secretary of Agriculture would even be able to complete all logistical work so that the government could start with massive purchases of dairy commodities. Furthermore, at the time of writing this post, dairy futures markets do not indicate that market has any trust that such course of events would actually take place. Whatever may transpire with the "fiscal cliff" in the days and weeks to come, it is to be expected that reasonable legislation will be put in place that protects dairy consumers and continues to base milk price on market forces of supply and demand.

Further reading:
The New York Times, Dec 21, 2012:"With Farm Bill Stalled, Consumers May Face Soaring Milk Prices."

Novakovic, A. (2012, September) "Is Reverting to the 1949 Agricultural Act Really a Possibility for Dairy Price Supports?" Information Letter 12-06, Program on Dairy Markets and Policy.




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The Economic Impact of Food Waste

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IMG_20121218_171933.jpgIt is no secret that food waste is a serious issue. When talking about ending hunger and feeding an increasing population, environmental experts such as Jon Foley of the University of Minnesota Institute on the Environment often state that part of our strategy in feeding the world must include reducing food waste. The reason is the Environmental Protection Agency estimates that more than 34 million tons of food waste was generated in the United States in 2010, with only 3% diverted from landfills. Food waste is the single largest material in municipal solid waste. Worldwide, the United Nations Food and Agricultural Organization estimates that approximately one third of food produced for human consumption is lost or wasted every year.

With all the attention on how much food is wasted around the world, at The Food Industry Center we were curious about the economic impact of this food waste. Fortunately for us, Jean Buzby and Jeffrey Hyman of the USDA Economic Research Service published an estimate of the Total and Per Capita Value of Food Loss in the United States in the July 2012 issue of Food Policy. The authors focus on the retail value of food loss in the United States to estimate the economic impact.

Using Loss-Adjusteed Food Availability (LAFA) data published by the USDA ERS and Nielsen Homescan Data for retail food prices, Buzby and Hyman estimate the consumer and retail food loss value for more than 200 individual foods and categories of food. Their results are staggering. They estimate in 2008 "the total value of food loss at the retail and consumer levels in the United States was $165.6 billion." They find 41% of the value is losses in meat, poultry and fish, 17% of the value is in vegetables, and 14% of the value is in dairy products. Per capita, this represents the value of food waste to be $390 a year, almost 10% of average food expenditures. For an average household of 2.4 people, this represents 654 pounds of food not eaten at a retail value of $2.56 a day. These numbers offer a compelling case for consumers to reduce their personal food waste.

In addition to the retail cost, the authors also highlight the production costs of food waste. They state that in 2008 it cost an estimated $1.3 billion to landfill food waste, and the production of the wasted food took an estimated 300 million barrels of oil amongother costs. For this reason, the authors believe that looking for market based approaches that promote reducing food waste, while reducing the cost of production, will be the most successful approach to combat the environmental, economic, and societal implications of food waste.

Let us know what you think! What are some of your ideas to reduce food waste in the United States?



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The Value of Corporate Social Responsibility

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In response to a demand for sustainable and ethically produced goods, companies of all sizes around the world are integrating corporate social responsibility (CSR) into their business structure as a form of self-regulation. This is especially prevalent for Western companies working in third world countries where only following loose regulations may be perceived as not doing enough. While the debate on the value of CSR for a company rages on, Monika Hartman argues in Corporate Social Responsibility in the Food Sector, published in the March 2011 issue of the European Review of Agricultural Economics, the food sectors impact and dependence on the economy, the environment, and society will make CSR reporting especially relevant.

Hartman highlights that while the ethical argument for CSR is not contested, the economic argument is. The standard neoclassical view of the firm sees CSR as a moral hazard to shareholders, as the firm's only social responsibility is to maximize profits within the laws and regulations of the operation. Critics of this view have begun the search for the economic argument for firms to engage in CSR. Hartman summarizes the breadth of research on the impact of the CSR on financial performance, consumers, employees, and supply chain partners. The evidence is four mathematical meta-analyses that indicate a positive relationship of CSR and financial performance. She states that research has found "doing good does not have to be at the expense of doing well" and thus the question "has been moving from whether to when" firms benefit from CSR.

The impact CSR has on financial performance is generally reported through risk management, enhanced performance ,and brand differentiation. Food companies looking to reduce waste are not only decreasing the cost of operation, they are decreasing their environmental impact. Additionally, Hartman explains that CSR is gaining ground with employees. There is limited evidence that employees who value CSR will accept lower wages if they believe they are working in a socially responsible company. There is also support for the idea that employees stay longer and are more motivated, ultimately decreasing cost of production.

There is mixed evidence about CSRs when looking at how the consumer views the firm. On one hand, Hartman cites research that has found consumers weigh negative CSR information more heavily than they do positive, so only exceptional behavior is valued and rewarded. On the other hand, having a positive reputation helps mitigate negative press. Consumers who believe a company is socially responsible are less likely to abandon the company during a negative incidence. Additionally, Hartman states food companies are operating in highly competitive markets, and research has shown that CSR can provide a vehicle for differentiation.

Whether food companies choose to take a proactive approach to CSR or not, they may be finding pressure to engage in CSR from their supply chain. Nestle, PepsiCo, Coca-Cola, Walmart, and Unilever are all food companies who are supply chain members of the Carbon Disclosure Project. These are large food companies who have made commitments to sustainably sourcing of their products and who are encouraging supply chain partners to participate in the CDP.

Hartman closes by saying that while engaging in CSR can be valuable for a company, the larger the company the more resources there are to commit to it. Small food companies, however, receiving pressure and requests from different customers will incur a relatively high burden. Thus standards are needed in the industry to promote adoptive management, but not push out small-scale suppliers. As food is central to our lives, it is becoming more important for food companies of all sizes "to engage in a more proactive strategy with respect to CSR."



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Hurricane Sandy and the Food Supply Chain

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When Hurricane Sandy pounded the Eastern seaboard leaving millions without power, the food supply chains, from farm to fork, were inevitably affected. Crops and livestock across the Caribbean and United States were adversely affected, with some producers warning of short-term shortages and the Farm Services Agency of the USDA issuing $15.5 million in disaster funds for counties affected by Sandy. Plants and processors struggled to keep running and product moving as power outages, flooding, and damage across the region made food distribution difficult. Grocery stores flooded, resulting in the disposal of contaminated foods. Other retailers lost power, having to shut stores after suffering multi-day power outages. The problems were exacerbated by the shortage of fuel available around the NYC area.

Despite these challenges, we did not see reports of food shortages. Large cities such as New York City generally only have 2-3 days of food on hand. For this reason, the movement of food was a critical part of the Sandy recovery. New York City's Office of Emergency Management kept food supply companies at the decision making table. If needed, trucks carrying food into the city were allowed to caravan with police escorts along bridges and roads closed to the general public.

While the storm is not projected to have long term impacts on the food supply chain, the initial impact brought various groups together to work towards maintaining a steady food supply in the short-term. Anheuser-Busch switched a beer line in a Georgia plant to cans of potable water that was distributed to those in need of water. Damaged restaurants are slower at reopening, consequently decreasing food demand through the supply chain. Particularly for things like fresh fish which forces fisherman to adjust their supply. Additionally, the USDA issued waivers for SNAP participants to temporarily purchase hot foods with their benefits as well as reimburse participants who lost food in the storm.

The lack of a food shortage in New York City and the response on behalf of millions of people and companies after hurricane Sandy is a testament to the hard work and emphasis that local, state, and national emergency programs have placed on getting basic needs such as food and water to people. For more about Sandy relief efforts visit the Red Cross.



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About this Archive

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

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