THE ECONOMICS OF THE ORGANIC FOOD SYSTEM: DISCUSSION

TIMOTHY J. RICHARDS

Organic foods remain one of the fastest growing segments of the retail food market. Between 2005 and 2008, organic food sales in the U.S. rose 53% from $13.8 billion to $21.1 billion. As with any transformational product, the growth of organics has signicant implications for the traditional food supply chain, and vice versa. The papers in this session address three issues at each level of the supply chain: how organic foods drive consumers choice of store format, how distribution channels differ for organic growers, and how production processes and input costs differ between organic and conventional production. Store Format Choice Organic foods were once the domain of only specialty food stores. However, as Hsieh and Stiegert (2011) point out in the rst paper, Wal*Marts entry into the organic sector in 2006 forced all food stores to stock organics or lose trafc. The authors develop an empirical model to answer three related problems: (1) how the demand for organic products (milk and eggs) affects store-format choice, (2) how consumer heterogeneity inuences the demand for organics and store choice, and (3) how price elasticities differ between organics and conventional foods, and by store format. To answer these questions, they use Nielsen Homescan household-level data. Modeling store-format choice is not a trivial task. Because grocery shopping involves
Timothy J. Richards (trichards@asu.edu) is Marvin and June Morrison Chair of Agribusiness in the Morrison School of Agribusiness and Resource Management, Arizona State University, Mesa, AZ. This article was presented in an invited paper session at the 2011 ASSA annual meeting in Denver, CO. The articles in these sessions are not subjected to the journals standard refereeing process.

signicant xed costs, most consumers tend to choose a primary store for most of their needs, and then a secondary store for speciality items or ll-ins. Filling an entire shopping basket implies that the store choice decision is made in anticipation of the utility provided from ultimately consuming goods from multiple categories. Hsieh and Stiegert avoid the empirical issues that are involved in modeling multi-category choice by considering only two: milk and eggs. Multi-category choice models derived from a single utility-maximization problem are becoming increasingly popular in the marketing literature to address issues of store format choice, category complementarity and brand choice across categories (Seetharaman et al. 2005). Hsieh and Stiegert, however, consider store format and product (organic or conventional) choice as two separate problems so simplify the underlying problem considerably. Hsieh and Stiegert also seek to investigate the role of consumer heterogeneity in the organic purchasing decision. However, they include only observed attributes so ignore the important role played by unobserved heterogeneity. Therefore, their parameter estimates are likely to be signicantly biased if some of the unobserved elements are related to factors included in the model, such as the organic choice itself. Ultimately, however, their ndings are not surprising and conrm their hypotheses.

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Local Markets Dimitri (2011) considers the choice of distribution outlet not from a consumers point of view as in Hsieh and Stiegert, but from the perspective of the producer. She employs an important new data set gathered as a follow-on

Amer. J. Agr. Econ. 94(2): 322323; doi: 10.1093/ajae/aar107 Published on October 15, 2011 The Author (2011). Published by Oxford University Press on behalf of the Agricultural and Applied Economics Association. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com

Timothy J. Richards

The Economics of the Organic Food System: Discussion

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survey to the 2008 Census of Agriculture, the 2008 Organic Production Survey, to investigate the relationship between organic production and the use of local markets as distribution outlets.Traditionally,consumers have regarded farmers markets as a likely place to nd organic food. As the range of organic foods grows, however, the likelihood of nding a full complement of organics at a farmers market falls for the simple reason that many products cannot be grown locally. Because consumers are increasingly demanding foods produced locally, whether for environment, health, safety or political reasons, the opportunities for signicant premiums seem readily apparent. Interestingly, however, the data show that larger, more established, and presumably more sophisticated organic growers are less likely to take advantage of local channels. As larger retailers and restaurant chains compete to source top-quality organic produce, it seems logical that their rst alternative would be to nd suppliers that can provide a larger share of their needs. However, this deprives the local channel of what may be the best quality organic goods. If consumers consider local outlets to be their primary source of produce with both attributes they prefer local and organic then it may be the case that future growth of the local / organic market will be limited by lowquality produce in the preferred distribution channel. Production Costs Some of the most interesting issues regarding the organic supply chain concern the locus of market power. Determining who has pricing power, however, requires knowledge

on the relative costs of producing organic and conventional foods. Klonsky (2011) lls this void with important research into the differential costs of producing a wide range of organic and conventional crops in California. Using a carefully-constructed model of each production activity, she calculates the cost of providing fertility,weed control,pest control,disease control and other costs to each crop. Somewhat surprisingly, the total costs of producing two organic crops lettuce and strawberries are lower than the conventional alternative. Have we reached the point where retail prices for organic crops reect only differential production costs and contain no scarcity rents? Future research that answers this question is needed in determining the relative long-term protability of growing organics relative to conventional products.

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References Dimitri, C. 2011. Use of Local Markets by Organic Producers. Paper presented at ASSA Annual Meetings, Denver, CO. Jan. 79, 2011. Hsieh, M.-F. and K. Stiegert. 2011. Store Format Choice in Organic Food Consumption. Paper presented at ASSA Annual Meetings, Denver, CO. Jan. 7-9, 2011. Klonsky, K. 2011. Comparison of Resource Use and Protability for Conventional and Organic Production Systems. Paper presented at ASSA Annual Meetings, Denver, CO. Jan. 7-9, 2011. Seetharaman, P. B., S. Chib, A. Ainslie, P. Boatwright, T. Chan, S. Gupta, N. Mehta, V. Rao, and A. Strijnev. 2005. Models of Multi-Category Choice Behavior. Marketing Letters 16: 239-254.