Source: PENNSYLVANIA STATE UNIVERSITY submitted to NRP
PRIVATE STRATEGIES, PUBLIC POLICIES, AND FOOD SYSTEM PERFORMANCE
Sponsoring Institution
National Institute of Food and Agriculture
Project Status
COMPLETE
Funding Source
Reporting Frequency
Annual
Accession No.
0212011
Grant No.
(N/A)
Cumulative Award Amt.
(N/A)
Proposal No.
(N/A)
Multistate No.
NE-505
Project Start Date
Aug 1, 2007
Project End Date
Jul 31, 2009
Grant Year
(N/A)
Program Code
[(N/A)]- (N/A)
Recipient Organization
PENNSYLVANIA STATE UNIVERSITY
208 MUELLER LABORATORY
UNIVERSITY PARK,PA 16802
Performing Department
AGRI ECONOMICS & RURAL SOCIOL
Non Technical Summary
By providing the pivotal link between agricultural producers and food consumers, agribusiness firms in the processing and retailing sectors play an increasingly important role in the U.S. food and agricultural food system. As evidenced by the rapid growth of the high-quality private label, ethnic food, and organic products, among other food trends, consumers are exerting intensified demand for products with specific attributes and inherent qualities. Food manufacturers, distributors, wholesalers, retailers, and other firms in the food marketing channel transmit these consumer signals back to agricultural producers. Industry concentration and strategic behavior by firms with considerable market power, however, can blur these signals. Understanding and analyzing strategic competition by agribusiness retailing and processing firms are vital to providing consumer and producers an accurate assessment of the food and agricultural economy. This research project aims to investigate and understand the nature of this strategic behavior so that all players in the food marketing channel - from producers to consumers - can make informed decisions.
Animal Health Component
90%
Research Effort Categories
Basic
10%
Applied
90%
Developmental
(N/A)
Classification

Knowledge Area (KA)Subject of Investigation (SOI)Field of Science (FOS)Percent
6036220301050%
6075010301050%
Goals / Objectives
1. To estimate demand systems for several different products in the United States to measure price and/or advertising impacts, vertical relations, and the degree of market power held by retailers and/or processors. 4. Develop and test models to analyze competitiveness in food markets, including fluid milk markets, wheat markets, and local food markets.
Project Methods
Objective 1. A demand system of organic and conventional dairy project will be estimated econometrically using Homescan household data collected by ACNeilsen. This econometric model will be estimated as a censored system, in a way that accounts for households that purchase zero quantities of organic projects. Objective 4. A reduced form model of private-label and branded project price competition will be estimated, again using Homescan household data. This model will show how the presence, prevalence, and penetration of branded and private label produces affect the price of organic and conventional products.

Progress 08/01/07 to 07/31/09

Outputs
OUTPUTS: In 2008, Jaenicke and a PhD student successfully estimated a censored demand system that includes organic milk. The estimated system was a four-good system that included organic milk, non-organic milk, and two other non-organic dairy. This system was applied to 2004 and 2005 data from the Nielsen Homescan data set, which contains observations of consumer food purchases for thousands of households in the U.S. The two main empirical obstacles (the data contain no price information for items not purchased, and a majority of households in the dataset did not purchase any organic dairy products) were overcome using a matching algorithm that assigned prices to non-purchasing households based on the purchases of geographically similar households. The results from this estimation are found in Chapter 1 of the completed PhD dissertation by Mitsuko Chikasada. This application is among the first censored demand system estimations for an organic food product. In 2009, Jaenicke and a PhD student jointly estimated a system of four organic milk prices: organic and non-organic branded and private label milk. A number of controlling factors, including the market shares for the four milk products, are included in the estimation. Collectively, this system show how the price of one product reacts to prices changes in the other products. This price reaction model was applied to 2004 to 2006 Homescan data. The results of this estimation can be used to predict how the price premium for organic milk (relative to non-organic milk) changes as the market share for organic milk grows. Also in 2009, Bonanno applied a relatively novel model (the Distance Metric method, or DM) to analyze the demand for functional and conventional yogurts as to understand whether functional products attract consumers with higher willingness to pay and provide larger profit margins. The Italian yogurt market is chosen as a case study because: 1) the leading yogurt manufacturers operating in this market have invested heavily in functional products; and 2) a detailed scanner database of yogurt purchases in Italy was made available by the Food Marketing Policy Center at the University of Connecticut. Results of a preliminary version of the analysis are published as part of the research report series of the Food Marketing Policy Center at the University of Connecticut. This application is among the first analysis of health-enhancing food markets via differentiated product demand models. PARTICIPANTS: This work is part of a larger region project with collaborators at the University of Massachusetts, University of Connecticut, Iowa State University, and the University of Wisconsin. This work is also part of on-going collaborations with the U.S. Department of Agriculture's Economic Research Service (ERS). Edward C. Jaenicke, Alessandro Bonanno, Mitsuko Chikasada (Ph.D. student). TARGET AUDIENCES: The target audience for this project has been peers at other land grant institutions and analysts covering the agricultural and food industries. PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.

Impacts
Three main results emerge from the estimation of the censored organic milk demand system. First, counter to expectations we find that organic milk is not more price elastic than non-organic milk. While the comparative results are very close, it is surprising to see that organic milk demand is not much more responsive to own-price changes, both demand being unit-elastic. Second, we find that organic milk demand and non-organic milk demand react very differently to price changes of the competing product. We find that the quantity demanded of conventional milk is virtually unresponsive to organic milk price increases. However, organic milk demand shows a fairly strong increase in reaction to a non-organic milk price increase. Third, we found that consumers with relatively low incomes bought as much or more organic milk than consumers with relatively high incomes. This finding represents a major shift from previous findings suggesting that the typical organic consumer is beginning to look more like the typical non-organic consumer. These results were presented at the July 2008 annual meeting of the Northeast Agricultural and Resource Economics Association in Quebec, Canada. Results for the organic milk price reaction system are still preliminary, and have not yet been finalized or presented. Two main results surface from the application of the DM method to the Italian yogurt market. First, brand loyalty is strong in the market analyzed, with the market leader (Danone) also enjoying the largest profit margins, especially from its functional products. The second result is that not all the yogurts with a functional attribute are equally successful. In particular, as consumers appear attracted to drinkable functional yogurts, whose demand is much less elastic than for other alternatives, the demand for plain functional yogurts is just as elastic as that of the conventional ones, suggesting that other product characteristics (flavors, drinkability) may contribute to the success of functional products.

Publications

  • Chikasada, M. 2008. Three Essays on Demand for Organic Milk in the U.S., Environment and Economic Growth in Japan, and Life Expectancy at Birth and Socio-Economic Factors in Japan. Ph.D. Dissertation, The Pennsylvania State University, University Park, PA. 169 pp.
  • Bonanno, A. 2009. Functional Foods as Differentiated Products. Food Marketing Policy Center, University of Connecticut, Storrs, CT. Research Report No. 113, April. 35 pp.


Progress 10/01/07 to 09/30/08

Outputs
OUTPUTS: In 2008, Jaenicke and a PhD student successfully estimated a censored demand system that includes organic milk. The estimated system was a four-good system that included organic milk, non-organic milk, and two other non-organic dairy categories (cheese, and yogurt combined with butter). This system was applied to 2004 and 2005 data from the Nielsen Homescan data set, which contains observations of consumer food purchases for thousands of households in the U.S. There were two main data and econometric obstacles to overcome: (i) data is only available for items purchased by a household and therefore the data contain no price information for items not purchased, and (ii) a majority of households in the dataset did not purchase any organic dairy products. These obstacles were overcome by using a matching algorithm that assigned prices to non-purchasing households based on the purchases of geographically similar households, and by using a quasi-maximum likelihood estimation technique. The results from this estimation are found in Chapter 1 of the completed PhD dissertation by Mitsuko Chikasada (Three Essays on 1. Demand for Organic Milk in the U.S., 2. Environment and Economic Growth in Japan, and 3. Life Expectancy at Birth and Socio-Economic Factors in Japan). This application is among the first censored demand system estimations for an organic food product. PARTICIPANTS: One Ph.D. graduate student at Penn State participated on this project and completed her dissertation in September 2008. This work is part of a larger region project with collaborators at the University of Massachusetts, Iowa State University, and the University of Wisconsin. This work is also part of on-going collaborations with the U.S. Department of Agriculture's Economic Research Service (ERS). TARGET AUDIENCES: The target audience for this project has been peers at other land grant institutions and analysts covering the agricultural and food industries. PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.

Impacts
Three main results emerge from the estimation of the censored organic milk demand system. First, counter to expectations we find that organic milk is not more price elastic than non-organic milk. While the comparative results are very close, it is surprising to see that organic milk demand is not much more responsive to own-price changes. Both types of milk are very close to being unit-elastics, where a 10 percent price increase leads to a 10 percent reduction in quantity demanded. Second, we find that organic milk demand and non-organic milk demand react very differently to price changes of the competing product. More specifically, we find that the quantity demanded of conventional milk is virtually unresponsive to organic milk price increases. However, organic milk demand shows a fairly strong increase in reaction to a non-organic milk price increase. A 10 percent increase in the non-organic milk price leads to a 7 percent (2004) or 5 percent (2005) increase in the demand for organic milk. Third, we are somewhat surprised to find that consumers with relatively low incomes bought as much or more organic milk than consumers with relatively high incomes. This finding represents a major shift from previous findings and provides some evidence that the typical organic consumer is beginning to look more like the typical non-organic consumer. These results were presented at the July 2008 annual meeting of the Northeast Agricultural and Resource Economics Association in Quebec, Canada.

Publications

  • Chikasada, M. 2008. Three Essays on 1. Demand for Organic Milk in the U.S., 2. Environment and Economic Growth in Japan, and 3. Life Expectancy at Birth and Socio-Economic Factors in Japan. Ph.D. Dissertation. The Pennsylvania State University, University Park, PA. 166 pp.


Progress 01/01/07 to 12/31/07

Outputs
OUTPUTS: To date, work on this project has centered on the estimation and analysis of consumer demand systems for categories of organic and competing non-organic products. More specifically, we focus on the demand for dairy products, which in this analysis are composed of aggregated milk, butter, yogurt, eggs, and cheese products. To estimate a demand system, we employ data from the Nielsen Homescan data set, which contains observations of consumer food purchases for thousands of households in the U.S. Econometric difficulties associated with estimating a demand system using the Homescan data include the following: (i) data is only available for items purchased by a household and therefore the data contain no price information for items not purchased, and (ii) a majority of households in the dataset did not purchase any organic dairy products. This second problem can be overcome by estimating a censored demand system, a computationally more difficult task. To overcome the first problem, we are attempting a labor-intensive technique of matching households in the dataset that shop at the same stores, and adding price information purchasing households to data on non-purchasing households. While our work on overcoming both problems is not yet complete, one output from this reporting period is a conference paper that presents preliminary estimation results from a model that ignores the censoring issue. PARTICIPANTS: Edward Jaenicke is a participant on this project. One Ph.D. graduate student at Penn State is also participating on this project. She expects to complete her dissertation in May 2008. This work is part of a larger region project with collaborators at the University of Massachusetts, Iowa State University, and the University of Wisconsin. This work is also part of on-going collaborations with the U.S. Department of Agriculture's Economic Research Service (ERS). TARGET AUDIENCES: The target audience for this project has been peers at other land grant institutions and analysts covering the agricultural and food industries.

Impacts
Based on the 2003 and 2004 AC Nielsen Homescan panel datasets, we estimate a demand system for purchases of organic and non-organic dairy products. Preliminary results show that (i) organic milk demand became more inelastic and (ii) the expenditure elasticity of organic milk decreased from 2003 to 2004. As work progresses, we expect to refine these estimates and also include the impacts of demographic factors in the demand analysis.

Publications

  • No publications reported this period