Projects Funded for Ashley Spalding
Economics Impact of the November 2018 Romaine E. coli Outbreak: Lessons for California Moving Forward
Kristin Kiesel and Ashley Spalding
Specific Objectives of Project
On November 20, 2018, health agencies in the U.S. and Canada issued a food safety alert, advising consumers, retailers, and restaurants not to eat, serve, or sell any romaine lettuce or mixed salads containing romaine due E. coli. The Leafy Greens Marketing Agreement (LGMA) and other industry produce associations joined in this call on the same day, urging an industry-wide voluntary withdrawal of all romaine lettuce in marketing channels and inventory. On November 26, the United States Centers for Disease Control (CDC) and Food and Drug Administration (FDA) updated warnings to specify avoidance of romaine lettuce harvested from central and northern California. On January 9, 2019, the CDC declared the outbreak over, and Adam Bros. Inc. farm in Santa Barbara County was identified as the source of the outbreak.
Food-safety issues capture the attention of the media and consumers. Regulators face the challenge of balancing human health and welfare against the economic consequences of alerts and recalls. While farmers, handlers, food-service firms and retailers are all affected economically by a food-safety incident, the magnitude of financial losses and their determinants and distribution have been rarely studied over the entire supply chain. We use a unique combination of public and proprietary datasets to estimate the direct and indirect effects of this highly publicized outbreak on sales of romaine as well as other leafy greens for all of these supply chain actors. We further provide an estimate of the overall social welfare loss and discuss the magnitude of economic losses, incentives faced by supply chain actors, and implications for government regulation.
Project Report/Summary of Results
We decomposed damages into those associated with changes in prices for product that was sold during the outbreak and its aftermath, and those associated with romaine that could not be harvested, processed, and sold due to the outbreak and its aftermath. USDA, Agricultural Marketing Service data on farmgate prices, proprietary wholesale price data for the food service and retail marketing chains, and Nielsen retail scanner data allowed us to estimate changes in prices and quantities along the supply chain associated with the outbreak and its aftermath. We then use these results to estimate romaine prices and quantities in the ``but-for world'' that would have unfolded had the incident not occurred. The comparison of prices and quantities in the real-world and but-for-world scenarios for growers, handlers, and retailers reveal who benefited and who lost as a consequence of the incident. Recent changes in the structure of the produce industry and data limitations led to an estimation of damages under several scenarios and whenever possible, we consider additional losses or offsetting gains in other leafy greens categories.
For both romaine leaf and hearts, our regression results indicate spot-market prices were higher through the first six weeks of the outbreak than in the “but-for world,” indicating growers with romaine that was safe to sell during the outbreak was sold at a substantial premium. Price effects were negative during the remainder of the study period for romaine hearts and through week 1 of the post-outbreak period for romaine leaf, potentially due to decreases in demand for romaine and/or increases in the supply of safe romaine as warnings were removed from various growing regions. Further regressions found positive effects for contract prices paid to growers.
Regressions estimating quantity and price effects for food service wholesalers indicate that, relative to the “but-for world,” there were large decreases in the quantity of romaine sold to food service providers in the first week of the outbreak followed by smaller decreases through week 10 of the post-outbreak period. Similar to growers, wholesalers were initially able to capture a premium for safe romaine, but premiums were both smaller and more short-lived than for growers. Average prices paid to wholesalers increased weeks 2 through 4 of the outbreak by 24% to 41%, followed by moderate decreases in price through to the end of the post-outbreak period.
On the retail side, we estimated price effects for both wholesalers and retailers and quantity effects for retailers. For wholesalers, there is a negative price shock in week 2 of the outbreak in all categories followed by nonexistent or small and positive price increases relative to a no-outbreak scenario. We found modest or nonexistent retail price effects, with the largest effects being for romaine hearts. This is consistent with the fact that retail base prices are relatively stable in the short term. We find decreases in retail sales relative to the “but-for world” associated with nearly every week of the study period. The decreases are most pronounced in week 2 of the outbreak. While decreases in sales associated with the early weeks of the outbreak can be partially attributed to retailers removing unsafe product from shelves, the persistent decreases in sales throughout the post-outbreak period indicate consumers shifted consumption away from products containing romaine.
Based on the econometric results, we estimated that total romaine industry damages range from $52.7 million (grower contact prices vary, and buyers bear all pipeline damages) to $177.1 million (grower contract prices are fixed, and handlers bear all pipeline damages). Based on information regarding the extent of pipeline damage-sharing in each channel and contract price provisions, our most representative estimate of damages is $105.3 million. Cross-commodity effects for iceberg lettuce provided some offsetting gains. Food service firms can change the composition of their orders, like consumers in the store, but unlike retailers ordering bagged salad mixes. Iceberg lettuce producers obtained an estimated $11.5 million in benefits, likely due to such substitutions.
In addition to industry losses, there were losses sustained elsewhere in the economy. Particularly, we considered the effect of the outbreak on the welfare of consumers of romaine and suppliers of inputs to the romaine industry. Our estimated additional social losses range from $48.5 million to $59.9 million depending on the elasticity of demand for romaine lettuce.
In summary, our analysis provides two striking insights. First, the greatest losses occur in the retail marketing channel at the handler-retailer level of exchange, with an overwhelming share of losses in the retail channel. Second, growers gain from the food-safety incident, netting $4.3 million in our most representative estimate. These imply that as long as LGMA membership is voluntary and some handlers choose not to join, a subset of industry players are likely to be disproportionately imposing costs on the entire industry. Second, growers, who are in almost all cases the source of a food-safety incident, do not have a direct financial incentive to improve their practices to reduce the chance of an incident.
Consumer Valuation and Economic Impacts of Certified Transitional and Organic Products
Richard Sexton and Ashley Spalding
Specific Objectives of the Project
We proposed to analyze an innovative approach—transitional organic labeling—as a way to generate price premiums for farmers in transition, and to lower economic barriers to organic conversion. In order to assess the impact of the new label, we proposed to develop a conceptual model of how this label influences the product-characteristic space and price premiums, and conduct market-level experiments to better understand consumer preferences for organic foods and willingness to pay for an organic-transition label.
Project Report/Summary of Results
A vertical differentiation model of consumer choice has been constructed to analyze consumer decision making for a product category with organic and conventional products vs. expanding the category to include organic, transitional, and conventional products, where the transitional product is viewed as having intermediate overall quality relative to the organic (high quality) and conventional (low quality) product. Analysis of the model shows that transitional organic products command a premium relative to conventional products and that the competition introduced from transitional organic products reduces slightly the premium afforded to organic products.
The model is also used to study farmers’ decisions regarding producing conventional product or undergoing conversion to organic. Results show that introduction of a transitional organic premium relative to the conventional price causes more acreage to convert to organic than in a world without transitional organic. In long-run equilibrium organic premiums are reduced due to the expanded organic supplies incentivized by the transitional organic premiums. A bottom-line conclusion is that a transitional organic certification can be a useful tool to incentivize organic conversion and help to improve the U.S. organic trade imbalance.