Saturday, February 02, 2008

Economics is too a science...

The flap over rBST is remarkable for the extreme partisanship of the two sides and the relative ignorance of the economic principles involved. Also for the profound irony.

Consider this comment from Orion Samuelson:
For whatever reasons, among them perhaps financial, dairy processors and dairy marketers at the retail level label their milk hormone-free, and then raise the price. If you check the price of milk that is labeled “free of rBST” you will find the price is considerably higher than regular milk. In the second quarter of 2007, the Farm Bureau Market Basket Survey showed the price of a half-gallon of whole milk to be $2.22, the price of a half-gallon of milk labeled rBST-free was $3.01, a 36% premium for milk that is no different. I doubt if any of that 79-cent premium reached the producers who signed the “no rBST affadavit to satisfy the demands of the processor.

Golly, I share this frustration. My bet is people who make these decisions at Wal-Mart have never milked a cow; have never been involved in food production and give little thought to what stopping the use of technology in food production will do to hungry people around the world. It will literally take food out of their mouths.

This is a wrong decision by the dairy processing industry, because if you can’t test it, how can you label it? Agriculture must come together on this one, and spend time every day educating people, both in the industry, as well as consumers that science, not emotion or financial gain must be the benchmark when evaluating the use of technology in food production. [More, albeit gated on Pioneer's website]
The use of bovine growth hormone to increase milk production is clearly safe and effective. But dairy producers seem to forget it doesn't deliver much utility to the ultimate customer. While is could be argued (feebly) that its use helps lower the cost of milk, the milk market is so perverted by arbitrary pricing mechanisms, economists would have a hard time proving the point. (Ring any bells with GM grain producers?)

But any fractional lowering of the cost of milk would be indistinguishable from a myriad of other market price factors, and hence, of no discernible value to consumers. Seriously, what's in it for me?

Moreover, from what I have learned talking to milk producers, much of the value of the efficiencies the practice generated were captured by Monsanto, similar to seed traits. I fully support this right, but in some economic lights this whole brouhaha could be little more than a mistake in pricing by Monsanto. Had they gone for a much lower margin, allowing producers to reaps more margin, adoption of this technology would have been wider and faster, and maybe could have forestalled customer rejection since the overwhelming bulk of the milk supply would have been rBST milk. (See also: soybeans, GM)

However, other shrewd dairy operators have discovered NOT using the hormone does offer a value to consumers. It looks like about 79 cents worth.

On my way to and from South Bend, I pass the ginormous Fair Oaks Dairy (mucho-cool website) on I-65. In that past few months their billboards are using the slogan, "Everything you want in your milk, and nothing you don't" (or something very close to that). Given the ferocious battle over what you can and can't say about milk, I thought this was brilliantly weaselly public communication.

It would be helpful too, if the dairy industry had more competition at the processor level instead of the arcane quasi-monopsonies maintained by our dairy program. But when your processor says X, you do X. And this appears to be the way dairy producers want it to stay. That's their call too, all though I would just as soon not fund it with tax dollars.

Bashing Wal-Mart is always a cheap thrill, but if you are also bashing Whole Foods for ephemeral organic claims, who's left? The buyer at Wal-Mart doesn't need to know what end of a cow is which. What he/she needs to know is retailing, and you can bet your bippy Wal-Mart has some pretty solid evidence this move is good for their bottom line.

Fellow AgWeb blogger Chris Galen adds a more realistic view, I think:
And the reason why? It’s the same as the answer to the question of why did the chicken cross the road? Because it can. Or, in this case, because they can. Retailers and processors have the ability to call the shots, and can push suppliers to provide the product they demand. It may not be fair to farmers using rBST, but when you’re the low man on the totem pole in the food supply chain, and when the clout of retailers is such that a mere five of them (Wal-Mart, Supervalu, Kroger, Safeway and Ahold) control more than half of the collective grocery marketplace, the decisions you have to make to keep your marketing opportunities open are sometimes not your own. [More of a thoughtful analysis and backstory]
As for not choosing to use rBST causing people to go hungry, that seems to be a reach. Wasn't milk cheaper before the days of rBST? Regardless, the dairy industry itself argues that prices are high because of unprecedented demand and ethanol-driven feed prices. At worst, we add a few cows to the herd to make up for lost production, and Monsanto loses a small cash cow (no pun intended - I think).

Not the end of the world either way. rBST is an incremental - not quantum - production leap.

Agriculture need to think carefully about lecturing consumers on their choices. Insisting on sound science should include the science of economics.

The dairy industry has enjoyed the support of taxpayers for years by exploiting the economic principle of widely distributed costs ("less than 1% of the federal budget" or "only XX cents per person per day") paying for highly concentrated benefits to a relative handful of producers.

The struggle over rBST illustrates a widely distributed good (slightly cheaper milk - maybe) is just as hard for consumers to get excited about in the face of a perceived risk - a concentrated cost. Most importantly, rBGH supporters could have done their homework on studies about what risks people will allow their children to endure (basically an irrational zero). This principle is widely accepted and it was curious marketers thought they could overcome it with any amount of advertising.

Some battles you win, some you lose. Only I think this battle is more of a hissy-fit. And maybe picking fights with customers isn't such a good idea in the first place.

2 comments:

BrianOH said...

John,

There is another salient point here. The rBST causes cows to be more efficient in the conversion of feed to milk, which lowers the "environmental footprint" (a concept we are all going to have to familiarize ourselves with) of milk production. This is a big deal if one believes the word sustainability has meaning.

On the other hand, opposition to the hormone can be best represented by the belief on the part of some that its presence in milk is causing young girls to enter adolescence prematurely. This, in a word, is nuts.
This conflict over milk is a good analogue for the entire debate over food/organic/industrial agriculture, etcetera. Here we have an industrial process that is clearly greener and more sustainable than the agrarian, to use your word, alternative. But the combination of cynicism, anti-corporate bias, and general elitist food shiboleths has very little counter voice in our culture. I mean, John Stossel cannot do all the heavy lifting.

I'm sorry, but "the customer is always right" just doesn't get it for me anymore.

John Phipps said...

Brian:

As a frustrated nuclear power advocate, I agree the irrational consumer is his/her own worst enemy. But what scares the bejabbers outta me are the systems proposed to override that irrationality "for their own good".

Is a scientific breakthrough really valuable if it exceeds the ability of most folks to comprehend?

Perhaps "always right" would be better phrased "is the decider".

And we know how much to expect from "deciders" now.