Consumer Valuation of
rBST-free and Organic
Milk
Jeremy D. Foltz
University of Wisconsin
Dept. of Ag. &Applied Economics
Program on Agricultural Technology
Studies
Outline
Introduction:

The valuation problem of GMO labels
Price Premiums and Market Shares for
rBST-Free and Organic Milk
Determinants of Consumer Demand

Estimates of Consumer Valuation
Conclusions

What this means for the industry
Labeling and Product Introduction
Controversies about GMO-free and
organic labels


Recent Monsanto suit against Maine dairy
USDA organic label rules
Product introduction in milk market is a
labeling issue
Do Consumers benefit from the
introduction of labeled milk?
Typical Milk Labels
Unlabeled
Organic
rBST Free
A Different Approach to Consumer
Valuation Studies
Previous Research


Survey data
Experiments
Our Approach: Revealed Preference


Supermarket data on sales of milk in US by
type (organic, rBST-free, unlabeled)
260 weeks of data from 1997-2002:
Repeat purchases over time as the market
changes and matures

Aggregate data from 12 major US cities
Average Milk Price
Price by City
City Code
Organic
rBST Free
Unlabeled
MW_1
6.44
5.32
2.82
MW_2
6.23
6.15
2.51
MW_3
5.86
NE_1
5.57
4.28
2.80
SO_1
5.93
4.92
3.06
SO_2
6.43
5.92
3.02
SO_3
5.74
6.01
2.44
SO_4
5.70
5.30
3.16
WT_1
6.02
4.56
3.10
WT_2
5.98
4.22
2.58
WT_3
5.85
4.80
2.38
WT_4
5.28
3.69
3.01
Average
5.91
4.85
2.80
.
2.68
Average Market Share by City
Market Share
City Code
Organic
rBST Free
Unlabeled
MW_1
0.3735
0.4137
99.2127
MW_2
0.2345
0.0005
99.7650
MW_3
0.2466
-
99.7534
NE_1
0.8742
0.1845
98.9413
SO_1
0.2343
0.4134
99.3523
SO_2
0.0851
0.0044
99.9105
SO_3
0.4347
0.2927
99.2726
SO_4
0.2891
0.1882
99.5227
WT_1
0.8612
1.1344
98.0044
WT_2
0.1293
0.0019
99.8688
WT_3
0.0809
0.0048
99.9143
WT_4
1.0956
2.6918
96.2125
Average
0.4116
0.4846
99.1442
Labeled Milk Prices:
1997-2002
Big price increases for both rBST-free and
organic milk


Organic milk increased 29%
rBST-free milk increased 46%
Prices by Year
7
6.5
Price per Gallon
6
5.5
5
4.5
4
3.5
3
2.5
2
1996
1997
1998
Organic
1999
2000
rBST Free
2001
2002
Unlabeled
2003
Labeled Milk Market Shares:
1997-2002
Market share increases



Five fold increase for organic milk
50% increase for rBST-free milk,
Market for rBST-free peaked in 1998
Market Shares of Specialty Milk
0.9
Organic
0.8
rBST Free
0.7
Percent of Market
0.6
0.5
0.4
0.3
0.2
0.1
0
1997
1998
2000
1999
Year
2001
2002
Consumer Valuation of New
Products
Estimate consumer demand with demand
system
Calculate total benefit to consumer from
new product introductions as:


Variety Effect VE
Competitive Effect CE
Variety Effect
Benefits consumers get from having new
products in the market.
Most of benefit goes to consumers of new
products
But benefit exists even if you do not
purchase a good.
“More variety is better than less variety”
Competitive Effect
Competition from new products reduces
the prices of existing products
Competitive effect = benefit consumers
derive from lower prices
Competitive Effect Estimates
Prices decreasing with


number of brands
presence of organic and rbst free brands
Brand Introduction: an unlabeled brand
drops average price only $0.0012 per
gallon.
Effect of rbst-free and organic brand
introduction is $0.02 per gallon ( 1¢ for
each)
Variety Effect
Total variety effect of labeled milk:
17¢ per consumer per week
Ranges from


A low of 12¢
To a high of 27¢
Variety Effect
Major differences between rBST-free milk
and organic milk in the variety effect
Organic milk


very high willingness to pay
nearly 90% of variety effect)
rBST free milk:


Low willingness to pay more
Estimate that at $1 extra per gallon no
demand for rBST free milk
Yearly Value to U.S. Consumers of
rBST-Free & Organic Milk
Yearly Competitive Effect:
Yearly Variety Effect:
 Average estimate
 Minimum estimate
$130 million
$2.5 billion
$1.6 billion
Yearly Estimated Value to Consumers
$ 1.7 – $2.6 billion
More Results
Asymmetric substitution effect between
unlabeled milk and both rBST-free and
organic milks
Once you go organic you don’t go back
rBST-free “starter” or “gateway” milk

More likely to go to organic from rBST-free
Conclusions
Most of the valuation of milk labeling is
from Organic not from rBST-free


GMO free element not most important part of
consumer valuation
Organic labeling worth a lot in milk
Conclusions
Is rBST free labeling worth the cost?

To industry?
Individually?
Collectively?


To regulators?
To consumers?
Consumer Valuation of
rBST-free and Organic
Milk
Jeremy D. Foltz
foltz@aae.wisc.edu