Projects Funded for Kristin Kiesel
Adoption and Advertising of Regulated Deficit Irrigation Technique within the Blue Diamond Cooperative
Kristin Kiesel and Sean Kiely
Specific Objectives of the Project:
This research develops a theoretical model of technology adoption at the farm level coupled with a consumer-facing advertising campaign as a means to establish environmental stewardship and meaningful product differentiation. Using increased market power and concentration in manufacturing and retailing and increased consumer demand for value-added and local foods as a starting point, we focused on the role marketing cooperatives can play in ensuring adoption of agricultural innovations even among small and medium size growers in California.
This research uses Blue Diamond, a marketing cooperative and leading and recognized consumer brand in almond production, as a case study to discuss and examine optimal advertising and cost-saving production technologies under imperfect competition.
Almonds are the second the most valuable commodity in California with a production value of $6.09 billion. California accounts for all U.S. production of almonds and 78% of worldwide production (CDFA, 2020). Blue Diamond is the largest producer in the state and as a marketing cooperative, allows roughly half of CA almond growers (about 3,500 growers) to sell their raw almonds under one label. Blue Diamond successfully markets a variety of value-added products to consumers, including roasted almonds, almond milk, nut crackers, and almond oil. Almond production is water intensive using about 40 acres-inches of water per acre annually. However, the almond industry has faced criticism for its water use over the last decade as California grapples with extreme drought. In 2015, almond production accounted for approximately 10% of California water use. In addition, irrigation is the greatest variable cost in almond production accounting for about 12-32% of annual operating costs depending on location. Regulated deficit irrigation
(RDI) is a technique that can lower water use in almond production. RDI decreases irrigation rates during the kernel-filling period inducing mild to moderate stress in the plant to limit vegetative growth without impacting fruit production. This technique can also decrease hull rot and improve hull split, can decrease irrigation and result in significant water savings at almost no difference in kernel weights.
We analyze a situation where Blue Diamond encourages its growers to adopt RDI. Adoption of this technology has a twofold effect. Adoption leads to a decrease in overall production costs, and can form the basis for meaningful product differentiation in a retail space characterized by increased concentration and product differentiation. Specifically, Blue Diamond can initiate an advertising campaign referencing the implementation of water conservation efforts and continue to position its brand as a leader in product innovation. Differentiating its products based on eco-friendly practices, especially to California consumers, can increase their margins, and allow them to incentivize adoption of the technology by growers.
Summary of Results:
We completed a draft theoretical model and reached out Blue Diamond for feedback, a discussion of a collaboration, data access and a potential empirical analysis. Focusing on a specific technology and evaluation of a targeted advertising or marketing campaign became infeasible due to data issues in general, and challenges in the implementation of RDI, however. We therefore adjusted the focus of this project to more broadly explore opportunities for product innovation and promotion of value-added products via marketing cooperatives in a proposed book chapter to be included in a forthcoming Handbook of Research on Cooperatives and Mutuals. It uses Blue Diamond's production research and marketing efforts as a case study.
In this chapter, we argue that marketing cooperatives (MCs) can have a competitive advantage over investor-owned firms (IOFs) when communicating complex product qualities where information asymmetries exist between consumers and producers. We review the existing literature and discuss opportunities for cooperatives in modern markets characterized by increased product differentiation. Marketing orders (regulated mandatory commodity research and promotion efforts organized by industry and geographic region) can support and complement cooperatives’ investments in product innovation and brand-specific advertising and their provided functions are compared and contrasted with functions provided by cooperatives. We argue that the cooperative business model can lend greater credibility and authenticity to health, sustainability, and local production claims and benefit more from the existence of marketing orders than IOFs. A discussion of the actions of the Almond Board of California and Blue Diamond illustrates how coordinated and collective producer and market research, product innovation, and complementary generic and brand-specific advertising can ensure MCs' long-term growth and success. The chapter concludes with a description of future data, and research needs to ensure that more MCs develop well-recognized consumer brands.
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 Demand and Marketing Strategies for Locally Produced Foods
Specific Objectives of the Project
California produces over 400 agricultural commodities, including high-value dairy products and meats, a third of all vegetables, and two-thirds of fruits and nuts consumed nationwide (CDFA, 2017). Situated in close proximity to this agricultural abundance are affluent metropolitan areas, uniquely positioning California to capitalize on the rapidly expanding demand for locally grown and produced foods. This project contributes to a better understanding of consumer preferences for local foods, and interdependencies with other premium attributes (such as organic). It will explore which marketing strategies are needed to establish and promote local supply-chain relationships. More specifically, conducting an in-store experiment in a specialized retailer in Sacramento will allow us to estimate how purchasing probabilities for local, value-added products are influenced by food labels and information displays at the retail level.
Project Report/Summary of Results
In collaboration with the Davis and Sacramento Natural Food Co-ops, we completed both consumer surveys and the proposed in-store labeling experiment. While the analysis of our data collected in the in-store labeling experiment in ongoing, we presented the results of our survey analysis this summer at the AEA Annual Meeting and summarized key findings in a recent ARE Update article.
The 2008 Farm Act defines local foods as those sold fewer than 400 miles from the product’s origin or within the state in which the product is produced. However, consumer perceptions of distances that define local foods range from the belief that baked goods, eggs, and produce are local only if they originate in the same city/town as where they are sold, to the beliefs that milk and dairy are local if they are produced in state, and frozen and shelf-stable goods are local as long as they are made in the U.S. Consumers paid more attention to local production than any other attributes, including avoidance of genetically modified ingredients in a recent Nielsen study comparing awareness of 16 different food-related causes, but transport miles might not be their only or even primary concern. To many consumers, local foods are defined by direct-to-consumer sales or direct distribution to local retailers in regional markets. Some associate “localness” primarily with adherence to organic and/or sustainable production practices or with small family farms. Others are motivated by a desire to ensure the livelihood and economic stability of all members of their community. Finally, consumers might simply perceive local foods to be of higher quality than other products.
Our survey analysis of consumer perceptions confirms that a local label can evoke all of these beliefs. Despite stores’ precise definitions based on mileage and a generally high consumer awareness of these definitions, we detected biases in consumer perception regarding the meaning of a local label. When consumers were asked to pick the statement most likely to be associated with a local label displayed by the store, the stores’ definitions did not dominate, and responses varied widely. In one of the two stores, 204 consumers stated that a local label most likely implied that a food item was of a higher quality and produced by a small farm or business using only organic ingredients. Across both stores, far more consumers reported stronger associations with one or more of these characteristics than the actual definition used by the stores. We also find that consumer perceptions of local labels do not compete with other value-added attributes such as organic production. Instead, consumers view these as complements and increase their stated willingness to pay.
These results in combination with our completed feasibility studies for proposed business models aimed at improving access to local markets for small food businesses and farmers supported by separate USDA Local Food Promotion Planning Grants allow us to conclude that the promotion of local foods is first and foremost relationship marketing. Local labels relying on specific, proximity-based definitions will likely not be able to communicate authentically and credibly what consumers are looking for in local foods. Rather, they restrict the geographic areas in which farmers can market their goods. In contrast, regional umbrella brands would allow farmers and small businesses operating in urban and more rural communities to preserve their unique product offerings while creating economies of scale when marketing and distributing their local foods. Our continued research in this area will be able to provide specific recommendations regarding marketing strategies for local retail stores.
Food for Thought: Can Education Affect Student Attitudes and Behavior Towards Healthier and Sustainable Food Choices?
Kristin Kiesel and Craig McMurray