USDA Funds Purdue Study On Who Profits From New Food Policies

May 26, 2017

A Purdue University professor is getting nearly half a million dollars from the USDA to study how food policies creating new labels and certifications can affect prices and consumer choice.

The research received $483,000 from the USDA’s National Institute of Food and Agriculture this month. It seeks to answer questions about things like GMO label requirements.

“Who benefits from these policies, the consumer? Or is it the producer?” asks Purdue agricultural economist Juan Sesmero, who is leading the study.

Sesmero says there’s not much data on that topic, but an unprecedented level of variety at the grocery store is making it necessary.

“Twenty, 30 years ago… beef was beef,” he says. “And now you have, you know, 80 percent lean or 90 percent lean, grass-fed, non-grass-fed, organic, non-organic.”

A lot of that is driven by food policies, which he says tell people things they want to know.

The problem, he says, is that this creates new markets – for, say, grass-fed and non-grass-fed beef – where food producers can take advantage of consumers having so many options.

“By implementing policies that will provide that information, are we creating opportunities for food suppliers to actually just increase prices on varieties … and just charge prices that are as high as our willingness to pay?” he asks.

Sesmero wants to study the balance between consumer surplus – paying less than you’d be willing to pay for a certain product – and producer surplus – being able to charge more than you actually need to for the same thing.

To find out how different policies affect that balance, he’ll run a series of experiments beginning this fall.

Purdue students will act as farmers, food companies and shoppers, and Sesmero will have them react financially to hypothetical new regulations. He says he’ll use cash incentives to ensure he gets real responses, which might differ from researchers’ rational expectations.

“That’s the key of the contribution of economics to all of this: People are not dummies. Companies are not dummies. They react to incentives,” Sesmero says. “They change their behavior when there’s a policy, when there’s a new regulation, when there’s a tax, when there’s a subsidy.”

The question, he says, is who profits from that change in behavior.

“And then once we can understand that, we can, in fact, evaluate the impact of policies and eventually use that information for the improvement of policy design,” he says.

The USDA funding is part of $17.5 million in grants for projects to “help us understand the social and behavioral factors that inform decision-making in agriculture, which can help rural communities thrive,” said NIFA director Sonny Ramaswamy in a statement.

Farmers in those communities are also affected by choices down the supply chain, Sesmero says.

“We’re really trying to determine under what conditions farmers will get the benefits [of a policy], wholesalers or food producers will get the benefits, or the consumers will get the benefits,” he says.

But he hopes to find applications beyond just food. Sesmero says this research should be useful to any industry where policy can affect competition and choice.