Specific Objectives of the Project:
The objective of this proposal is to isolate the effect of droughts and heat on access to drinking water and drinking water quality in rural agricultural communities in the San Joaquin Valley.

Summary of Results:
A first preliminary result indicates that farmers are responding to heat and surface water scarcity through the construction of groundwater wells. We estimate that for each acre foot (AF) of reduced surface water allocations for agriculture, the annual rate of agricultural well construction increases by 46%. Using an approximated cost of $75,000 to construct an agricultural well, this translates to a back-of-the-envelope $37 million dollars invested annually in extensive-margin adaptation behavior by California farmers. Our finding that extreme heat will increase groundwater extraction brings a new data point to our understanding of how climate change will influence water resources. Our results highlight that even if water supplies remain unchanged, warmer temperatures will increase demand for groundwater, with an additional harmful degree day increasing well construction by 1.2%.

A second set of preliminary results indicates that extreme heat and reductions in agricultural surface water supplies lower the depth to the groundwater table. A 1-AF of reduced agricultural surface water allocation to every California cropland acre, lowers local groundwater levels by an additional 4 feet. An additional harmful degree day reduces groundwater levels by 0.5 inches. Declining water tables suggest that the costs of climate change may be larger in the long-run if farmers cannot avail themselves on groundwater resources.

Extreme heat and surface water scarcity also lead to domestic well failures, with a 1 AF decrease in surface water supplies and an extra HDD increasing failures by 5 and 0.2 percentage points, respectively. These results are consistent with a theoretical framework and computational hydrology model in which increased groundwater consumption among agricultural users comes at the cost of drinking water supplies through the channel of a declining water table.

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.

Specific Objectives of the Project
California’s Sustainable Groundwater Management Act (SGMA) requires local management of groundwater throughout the state. To inform water policy, this project sought to identify the impacts of groundwater restrictions on irrigated agriculture and evaluate the effectiveness of economic instruments for management. We used well-level panel data on groundwater extraction and prices from a basin in Southern California to estimate a price elasticity of demand for groundwater. Our objective was to compare welfare across policy instruments with a model that reflects the institutional realities of agriculture in California.

Project Report/Summary of Results
With the passing of SGMA, groundwater management is at the forefront of water policy debates in California. Since groundwater management will have impacts on agriculture, attention must be given to the choice of policy instrument. Our research quantifies the efficiency gains from using market-based instruments relative to command and control to manage groundwater.

A theoretical model of a groundwater market was developed to show how the magnitude and distribution of the gains from trade change as market structure varies. Market structure is a key consideration because future groundwater markets will likely be spatially isolated and the concentration of permits among a handful of buyers and sellers is likely. The exercise of market power may be a defining component of these markets due to the presence of large grower-shippers, the formation of coalitions among buyers or sellers, and/or competition among a few water agencies on a shared basin.

We find that the gains from markets are large, despite potential losses from market power. Economic surplus with trade can be over two times greater than that under command and control. The price elasticity parameter used to calibrate the model was generated with well-level panel data on groundwater extraction and prices from the Coachella Valley, CA. Simulations that vary market conditions show that results generalize to other groundwater basins.

Specific Objectives of the Project:
We sought to investigate spatial, quality, and temporal factors impacting the prices of calves and yearlings in California and other Western states, using data from satellite video auctions and a hedonic regression framework.

Project Report/Summary of Results (this will be posted on the Giannini Foundation website):
Results suggest that spatial price discounts received by Western ranchers, due to the paucity of processing capacity in the West, closely match reported shipping costs and, thus, are consistent with FOB pricing and competitive procurement. Also, this study is the first to identify the presence of temporal price premiums on average for seller-offered forward contracts at video auctions. With respect to quality attributes, this study provides the most up-to-date estimates of the marginal value associated with various quality attributes and management practices, while also finding some support for the benefits of third-party quality certification. Finally, we show that the considerable year-to-year variability in estimated valuations for value-added attributes in hedonic regression models of cattle pricing can be linked to the stage of the cattle cycle as measured by the cattle inventory. This work is updated annually when Western Video Market Auction shares data with the PIs.

Specific Objectives of the Project

The goal of this project is to investigate the methods of non-price competition utilized by food retailers and to assess the impact of spatial competition in food retailing. With unique data from the California Women, Infant and Children (WIC) Program we are able to study product offerings (e.g., brands, package sizes, etc.) of retailers. In addition, because WIC participants can only redeem Program vouchers at authorized vendors, the WIC retailer data allows us to study any and all competitors of a given authorized vendor. This will give us unique insight into spatial competition issues that heretofore have not been explored.

Summary of Results

We use reduced-form empirical models of observed market outcomes and characteristics of food retailers serving the WIC Program to study brand competition. The unique institutional features of California WIC create a competitive environment where: (a) participants' demand for WIC food products is inherently perfectly price inelastic, (b) a special class of food retailers, called A50 vendors, cater nearly exclusively to WIC participants and (c) do not compete in price. Modeling the competitive behavior of A50 vendors thus allows for natural abstraction from strategic price setting, one of the main distinguishing features of this work from other empirical studies of non-price competition. A50 vendors tend to have multiple potential competitors within a short distance of their location although there is significant variation in the measured intensity of spatial compe tition. We find that certain brand characteristics diminish the impact of having multiple competitors in close proximity. Having more of certain brand types reduces vendor attrition, the rate at which participants fail to be repeat customers at a given vendor. Contrary to the belief that food assistance-eligible consumers face limited attrition when the proximity of other A50 competitors grows. In such an environment, A50 vendors with more of certain brand types (but not others) reduce attrition, effectively minimizing the intensity of spatial competition. Therefore, in order to alleviate the effect of facing competitors, food retailers have a strong incentive to engage in brand competition.

Second, we find that vendors who carry more numerous and costly brands of certain product categories have higher shares of WIC food benefits redemptions. A50 vendors tend to carry, for example, the same leading brands of breakfast cereal, where having more brands and carrying brands with higher wholesale costs pays off in terms of market share. On the other hand, vendors carry few leading brands of fruit juice where neither quantity nor quality correlate positively to market shar e. Thus food retailers may optimally focus brand competition in specific product categories rather than competing in all.

Specific Objectives of the Project

The WIC (women, infants, and children) program provides federal grants to states to support food, health care, and nutritional education for low-income pregnant and postpartum women, infants, and young children. Because WIC operates with a fixed budget, cost containment is the primary means through which program services can be expanded to serve greater numbers of eligible participants. Foods offered under the program are provided at no charge to program participants, who thus have little incentive to be price conscious in their purchase decisions, creating the potential for WIC vendors to charge non-competitive prices for WIC food instruments (FI). Thus, the USDA Food and Nutrition Service has issued rules and WIC state agencies have sought avenues to promote competitive pricing and program cost containment. Federal rules encourage state agencies to design a vendor peer group system as a primary mechanism for cost containment. This study has two key objectives:

1. Analyze the effectiveness of the vendor peer group system in place for California WIC and the mechanism for setting maximum allowable reimbursements for FI within the peer-group system. We will recommend modifications to the existing program, as appropriate.
2. Analyze the extent to which the WIC program raises food costs for non-WIC consumers. Foods eligible for purchase und er WIC are also purchased in the open market by non-WIC consumers. These consumers' food costs will be increased to the extent that the presence of inelastic-demand WIC consumers motivates stores to charge high prices for WIC-eligible foods. These concernsare significant because for key products such as formula and certain baby foods, WIC sales comprise over half of total sales. Yet the impact of WIC on food prices has received almost no attention.

Summary of Results

We used three data sets for our analysis. (1) The entirety of redemptions made under the California WIC Program for the 29-month period from October 2009–February 2012. (2) The results from three separate surveys: a small-store survey vendors with from 1–4 registers, a large-store survey for vendors with 5 or more registers, and a survey of vendors who earn more than 50% of their food revenues from the WIC Program. (3) Weekly wholesale costs and retail prices for three large supermarket chains in Northern California and four large supermarket chains in Southern California for the time period August 2011 through May 2012. Analysis of FI redemptions and in-store pricing for register peer groups revealed large differences in pricing and program costs base d upon number of cash registers operated by a vendor. Smaller vendors not only charged much higher prices on average than larger vendors, there was also much greater dispersion of prices and FI redemption values among small stores. Simulations showed that Program cost savings could be quite substantial if small vendors were induced to achieve a performance roughly comparable to the larger vendors, 34.5% or about $37.5 million for powder formula FI and about 28.4% or $15.3 million the leading combination FI over the 29-month study period. A second simulation focused on eliminating the vendors in each peer group who charged the highest redemption values -- either the highest 5% or 10% -- and "reselling" their FI at the mean redemption rate of those vendors who remained authorized by the program. Aggregating across peer groups, the Program savings from eliminating the least competitive 5% (10%) of vendors from all peer groups ranged from 1.0 – 1.7% (2.0 – 3.4%) depending upon food instrument. The least competitive vendors in the California WIC Program are concentrated in the peer groups with 1-2 and 3-4 registers, and on average these vendors don't sell many FIs, so their removal from the program, although it represents "low - hanging fruit," has a limited impact on overall Program costs. More significant gains in cost containment may be possible by eliminating some of the more expensive products, brands, or sizes covered by the WIC program.

Specific Objectives

The purpose of our research was to examine and quantify the pricing and promotional activity of two major US supermarkets chains, Safeway and Albertsons.

Project Report

We compiled weekly data for over one year on nearly every product sold in 15 Safeway stores and nine Albertsons stores throughout the U.S., with nearly all of the stores falling west of the Mississippi River. The data include prices and, when applicable, promotions. We estimated econometrically the principal determinants of prices, promotional frequency, and promotional depth across the western United States. We also described and quantified the extent to which Safeway and Albertsons compete with one another in prices, promotions, and product offerings. We have also found important new results on the interactions between national brands and the chains' private label products that counter conventional wisdom regarding these interactions. This work is all part of Volpe's dissertation research. A complete draft of the thesis has been completed and revisions are underway.