What is it about organic milk? An experimental analysis.

In response to concerns by farmers and consumers regarding the lack of organic standards, the U.S. Department of Agriculture (USDA) implemented standards for organically produced agricultural products in October 2002, as part of the National Organic Program (NOP). The objective was to provide a set of uniform, consistent standards in addition to requiring certification by a state or private entity accredited by the USDA. Labeling standards were key, with only products that meet requirements for "100% organic" and "organic" (at least 95 % organically produced) eligible to display the voluntary USDA Organic seal. (1)

Dairy plays a prominent role in the organic sector of the U.S. food system. With sales of $2.1 billion in 2005, it was the second largest category of organic retail food sales (15%), a growth of 23.6% at a time when conventional milk sales were flat. While organic milk represents only 2.4% of total milk sales, growth in the subcategory of milk and cream accounts for over one-half of the growth in the organic dairy category (Organic Trade Association 2006). The specific standards for this category under the NOP are: (a) made from the milk of animals raised under organic management where cows are raised in a herd separate from conventional dairy cows; (b) animals are not given growth hormones or antibiotics; however, the cows can be given preventive medical care, which includes vaccines and dietary supplements such as vitamins and minerals; and (c) organic dairy cows must have access to pasture (Dimitri and Greene 2002).

Given the criteria, an important question is which attributes of organic milk are of most interest to consumers and are contributing to the increased sales. One possibility is the restriction against antibiotics. Such usage is fairly common, and necessary, on conventional dairy farms. Zwald et al. (2004) found only 5.1% of conventional dairy herds had not used antibiotics in a sixty-day period, while 90.6% of organic operations had not. (2) Concerns with the practice include animal welfare issues and evidence that some microorganisms are becoming resistant to antibiotic drugs (Mathews, Buzby, and Tollefson 2001), which may have possible effects on human health.

Evidence suggests that consumers are leery of the use of antibiotics on animals. Consumers selected antibiotic use as their third highest food technology concern after pesticides and hormones in Hwang, Roe, and Teisl (2005).

Lusk, Norwood, and Pruitt (2006) found substantial premiums for pork produced without antibiotics, while Bernard, Pesek, and Pan (2007) showed significantly lower purchase likelihood for chickens treated with antibiotics. Heiman, Just, and Zilberman (2000) found Israeli consumers preferred chickens genetically modified to prevent disease over those treated with antibiotics. Demographics may play a role in attitudes, with Nayga (1996) determining that white, male, younger, and more educated consumers believed that meat from treated animals was safer than others believed.

Another possible attribute of interest to consumers is the prohibition of the use of recombinant bovine somatotropin (rBST). This hormone, marketed under the brand name Posilac by Monsanto Corp., was approved for use on cows to increase milk production by the U.S. Food and Drug Administration (FDA) in 1993. According to the USDA, the overall percentage of cows that were given rBST was 10.1% in 1995 and increased to 22.3% in 2001 (USDA, APHIS 2003). However, use of rBST declined to 17.2% in 2007 (USDA, APHIS 2007). Still, due to animal welfare and human health concerns, several dairies opted not to use rBST. In recognition of this, in February 1994, the FDA established guidelines for the voluntary labeling of milk from cows not treated with rBST. Specifically, products should include the label: "from cows not treated with rBST" or a similar statement and the disclaimer: "No significant difference has been shown between milk derived from rBST-treated and non-rBST-treated cows."

Recent developments support the importance of understanding organic and rBST-free milk markets. In 2006, Wal-Mart announced plans to increase offerings of organic foods exposing another segment of consumers to these options. The same year, Dean Foods, the largest U.S. processor of milk products, increased sales of milk from cows not treated with rBST, at less than one-half the price of organic milk. Additionally in 2007, Starbucks Coffee Co. announced that they had begun using milk products without rBST and would expand the policy company wide.

Studies appear to justify the existence of a market for rBST-free milk. In an early auction experiment, Fox (1995) found a niche market for rBST-free labeled milk could succeed. Later surveys such as Wang et al. (1997) and Chakraborty (2005) lent further evidence in this regard. The effects of voluntary rBST-free labels on milk consumption were also examined by Kiesel, Buschena, and Smith (2005). From 1995 to 1999, they reported that approximately 10% of fluid milk in the United States was labeled rBST-free (encompassing varieties labeled as either rBST-free or organic). Their results suggested that by reducing information search costs, labeling improved the quality of information about product characteristics, leading to increased consumption of milk labeled as rBST-free, and over time consumers may alter the degree to which they adjust their purchase decisions in response to different labels for rBST-free milk.

Benefits to consumers from a differentiated milk market were also analyzed by Dhar and Foltz (2005). First, the authors' analysis of the retail price differentials found significant price premiums for organic and rBST-free milk. On average on a per gallon basis, organic milk was about $3.00 more than conventional, representing a markup of more than 100%, and rBST-free was about $2.00 more, representing a markup of over 66%. While consumers paid significantly more for rBST-free and organic milk, they derived significantly large benefits from a differentiated market, specifically greater benefits from organic milk than rBST-free. The overall objective of this research was to examine the demand relationships and willingness to pay (WTP) between conventional milk, organic milk, and two of its primary component attributes: rBST-free and no use of antibiotics. A secondary objective was to determine demographic profiles for consumers interested in each version to understand how markets may be segmented. Data to accomplish these objectives were collected in auction experiments where consumers placed bids for nonflavored, half-gallon, 2% milk for each of the above categories. Demand relationships were determined by calculating own and cross-price elasticities for the varieties, while WTP and market segmentation information was analyzed using a two-stage heteroskedastic tobit model based on demographic characteristics and subjects' beliefs about conventional milk.

Conceptual Framework

In part this study expands on literature by giving consumers a larger choice set, which could be significant in that a question for WTP studies is whether or not enough relevant alternatives are included in the design (Lusk and Hudson 2004). Melton et al. (1996) stressed the importance of experimental design and the need to consider multiple attributes in an early effort. Related findings in the nonmarket environmental valuation literature suggest that WTP measurements are biased if appropriate substitutes (or complements) are not offered as comparisons. Hoehn and Loomis (1993) and Cummings, Ganderton, and McGuckin (1994) determined that values of an environmental program, assessed in isolation, overstated its true social value. Boxall et al. (1996) found problems with contingent valuation methods due to subjects' failures to account for substitution possibilities.

Determining the set of relevant alternatives can also affect results (Cummings, Ganderton, and McGuckin 1994). Here, the set was determined by organic milk's potential substitutes or complements. As noted above, these include the two primary market alternatives, conventional and rBST-free, and the typically nonmarket but important aspect of not treated with antibiotics. The inclusion of the latter allows for insights beyond similar efforts. For example, Dhar and Foltz (2005) concluded that the value of all other attributes of organic is the difference between the worth consumers had for rBST-free and organic milk. There is danger, though, in assuming utility and WTP for component attributes are strictly additive (Louviere, Hensher, and Swait 2000). By missing potential relationships among attributes, or possibly overstating the value of organic, the possibilities for other attributes to exist in the market cannot be determined.

The issue is that the demands for individual attributes may be confounded within the classification of organic (Hudson 2007). To see this, assuming a linear function that includes price as a component, a consumer's utility for milk could be written as

(1) [U.sub.Milk] = [[rho].sub.0] + [[rho].sub.1] Price + [[rho].sub.2] Organic + X[beta]

where Price is the price of the carton of milk, Organic is a dummy variable with the value 1 if the milk is labeled as organic, and X is a vector of other characteristics (such as fat content). The organic label serves as a proxy for its component attributes, for which consumers may place varying values. Construction forces the conclusion that the sum of the utilities of these attributes is represented by [[rho].sub.2]. This may be a less than ideal proxy for reasons including substitution or complement effects among the attributes of organic, consumer heterogeneity, or lack of understanding of what organic milk entails.

If instead utility was measured for products labeled for individual attributes, more could be learned about the potential for market segmentation. Consider an expanded analysis of consumer's utility where labels exist for non-rBST and no antibiotics used

Print Get the Mag Weekly Updates