Foresight on Food Politics

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Saturday March 24, 2018

How Wal-Mart

Food giant Walmart announced in late May it would begin requiring farms supplying its animal products to agree to meet certain standards of "humane treatment" of farm animals, including restrictions on use of antibiotics. As part of this latest move, the retailer which reportedly now controls one-fourth of the world's grocery food sales will "ask" all its U.S. fresh and frozen meat, deli, dairy and egg suppliers to watch for and report animal abuse, change buildings and management practices that crowd animals or cause avoidable pain, and write out and report on their animal-welfare policies.

Walmart's action joins those of other retailers and restaurants making similar "voluntary" demands on their suppliers. Burger King, Hyatt and Sodexo have announced they will sell eggs that come from cage-free birds only. Fast-food chain Chipotle claims it sells only “all-natural,” and “antibiotic-free” pork. McDonald’s, Applebee’s, Denny’s and Safeway are just a few of the large food buyers and sellers recently announcing they will begin or have begun to demand farmers stop using gestation crates in raising pigs.

Advocates argue all these moves come in response to growing consumer demand for better animal welfare. “Since 2013, the number of consumers who say it is important that their grocery store practice animal welfare has grown from 17 percent to 21 percent,” says the Food Marketing Institute's June 10 41st annual U.S. Grocery Shopper Trends study. A survey conducted by the American Humane Association, which audits and certifies farms for animal welfare standards, claims 93 percent of nearly 6,000 respondents said buying products from humanely raised animals is "very important," and nearly three-quarters said they would be willing to pay more for it.

But does consumer demand really support Walmart's new dictates? Should community grocers follow along? Here are three good reasons to be cautious about this emerging trend toward demands on production and marketing practices, from traceability to environmental standards to animal-welfare and other “sustainability” claims:

1. What it all means is vague

Studies prove the seemingly simple term "animal welfare" covers some complex nuances, says Belgian professor Filiep Vanhonacker, not only in objective terms but also in consumer perception. Some consumers infer animal welfare from a subjective combination of animal-welfare aspects, often clouded and colored by confusing marketing that uses imagery of pastoral farms and "happy" animals. Other consumers may take a more studied and objective approach based on specific standards, but even those can often be unsubstantiated and even contradictory. Case in point of this paradox: Walmart's announced restriction on use of antibiotics could be--and has been--argued by some experts to actually be an impediment to improving animal welfare.

All those uncertainties cloud the real consumer demand picture hiding behind those rosy studies like FMI's.

2. Evidence of any real demand is thin to nonexistent

It's important to bear in mind, Texas Tech ag economist Darren Hudson reminded economics scholars in a 2010 article, companies--like Walmart--have always tried to shape public opinion to differentiate their brands and increase consumers' willingness to pay a better price. But that kind of supply-side manipulation says little about what consumers are really willing to pay for. Hudson cites studies noting that when consumers who say they favor animal-welfare standards are asked if they still favor them if they cost more in price and taxes, their support significantly wanes. He considers the scientific literature supporting true economic impact of animal welfare to be "scant."

The fact is the economics research generally agrees that willingness-to-pay estimates are inflated, due to respondents' tendency to answer based on their own hypothetical assumptions and their unwillingness to give the politically incorrect answer to surveyors. Consumers may in fact be willing to put money on the counter for animal welfare, says Danish ag economics professor Laura Mørch Andersen, but so far it's only to a small degree. "Our results," she writes, "suggest that the stated willingness to pay observed in opinion a large extent is just cheap talk." Her work cautions retailers to consider the market for higher welfare products to be only a niche market, capable of attracting only certain consumer segments. Walmart's across-the-board requirements are precisely the opposite of the segmented and targeted marketing strategy necessary to make animal-welfare labeling profitable--particularly when you consider the consumer segments being most directly targeted, meat eaters, are the consumer segment that most value taste and related sensory attributes and consistently value them above animal-care issues.

Furthermore, it's important to consider whether consumer demand is being manufactured or inflated by interests like the growing cottage industry in certifying animal farms as humane. American Humane Association, for instance, the same "no animals were harmed in the making of this movie" non-profit that audits commercial movies, shows revenue of about a half million dollars a year and pays out about $1.7 million in expenses on its farm certification program, according to 2014 IRS documents. Although tiny by comparison to WalMart's sales, that kind of money earned from only 10 percent of all animals raised for food demonstrates at least the potential exists to create a demand for welfare auditing even absent any real consumer demand. (Note: American Humane Association did not respond to Farmer Goes to Market's request for clarification on its income and expenses derived from auditing and certifying farms.)

But perhaps the most compelling evidence that consumers say they want voluntary production constraints like Walmart's but won't pay for them comes from the biggest real-world experiment in such practices so far, says University of California at Davis economist Tina Saitone. Numerous studies demonstrate consumers routinely tell surveyors they will buy more organic foods at a price premium, yet the market share for organic in the United States has remained stalled over the last decade at only about 3 percent of food sales. Saitone calls the difference between experimental studies and the real marketplace a "vast chasm."

3. Volunteer? Maybe, but everybody pays at the end of the day

Saitone's most recent research, scheduled for publication in an upcoming issue of the American Journal of Agricultural Economics, deftly takes apart the argument that WalMart's dictates are nothing but free-market "consumer choice" giving shoppers a wider range of choices. In the case of restricting antibiotic use in animals to improve their productivity, Saitone writes in "What Happens when Food Marketers Require Restrictive Farming Practices?" the practice ends up costing all farmers on the production side and all consumers on the consumption side. In a nutshell, she observes, the problem is that most of the food produced by restrictive agreements ends up going into marketing channels in which a premium can't be captured. In other words, even though McDonalds, for instance, may buy 18 percent of a hog in terms of cuts (bacon, sausage, ham), it's not possible to raise a "partially antibiotic-free" hog. That means even though that 18 percent antibiotic-free pork may conceivably earn a premium, the remaining 82 percent that's antibiotic-free but going into conventional channels will have incurred the added cost without hope for added price premium. The same argument could be posed for WalMart's humanely-raised animals. At the end of the day, the demand by such a powerful market entity will increase costs for the entire chain, including you.

It's a reality that free-market philosopher Milton Friedman illuminated more than 40 years ago. In arguing against the then-fashionable trend for businesses to demonstrate their "social responsibilities," the economic theorist and University of Chicago professor objected to small boards of corporate directors imposing such social-justice demands on their customers. By spending somebody else's money to underwrite a general social interest, Friedman believed, big business is in effect imposing a tax by dictate that is counter to the American way. "We have established elaborate constitutional, parlimentary and judicial provisions to control these functions, to assure that taxes are imposed so far as possible in accordance with the preferences and desires of the public--after all, 'taxation with representation' was one of the battle cries of the American Revolution." By short-cutting that process, as Walmart has done, over-bearing big business appoints itself legislator, executive and jurist to decide whom to tax by how much and for what purpose. Walmart's dicates are precisely that kind of extra-governmental regulation in action.

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