USDA Releases Report on COOL, Debate starts Anew

Troy Marshall, The Seedstock Digest, 11/3/04. 

The newly released rules will now go through a 60 day comment period, refined and then published for good.  USDA did a very good job of clarifying some of the issues that were vague under the voluntary guidelines, and items that were especially problematic – things like what is the definition of processed products and changing the requirement on blended products like hamburger that would have listed each country and the percentage of product from that country, now blended products will just list the countries in alphabetical order on the label.  Plus, they did respond to retailer concerns regarding the liability issue, they will not be held liable for incorrectly labeled products if the information provided to them by their suppliers was incorrect.  The liability will shift to whatever part of the food chain where the supplier knowingly or negligently provided incorrect information.  The mandatory rules as a whole contained very few surprises essentially following the same protocol and framework that the voluntary guidelines offered with the above corrections.  There must be a verifiable and auditable paper trail, and to qualify for the label animals must be tracked throughout their production cycle.  USDA essentially established the standards that must be met, but has left the means to accomplish those standards up to the industry.  On the positive side, this should give the industry every opportunity to implement the lowest cost solution as possible.  On the negative side, it does create the possibility that different companies could have different standards (eg. theoretically Kroger could have different requirements than Wal-Mart, Tyson than Swift).  In the short term this could create some confusion and uncertainty, but in the long term should provide the industry with the most efficient system. 

Clearing up the debate about how the law should or could be interpreted by USDA will end some of the debate over COOL, but only increase the debate about whether COOL is a good or bad thing for the industry.  USDA spent considerable time looking at the expected results of the COOL law and their analysis will only intensify the debate.  This report is expected to play heavily in the current battle going on in the Senate where the fate of COOL is likely to be decided.  The Senate will decide shortly whether or not to include funding for COOL in the Ag appropriation bill, and the outcome of that vote go a long ways in determining whether COOL will be implemented or not.  The general feeling is that the Senate will likely approve funding, and that the conference committee fight will be intense with the ultimate decision probably still too close to call.  Last spring, those in Washington would have heralded the USDA report as the last word in defeating COOL, but after the discovery of BSE in a single cow in Canada, and with the election year dynamics that are taking shape the landscape has changed dramatically.  With supporters tending to be more passionate than the opposition, the odds have tilted back in favor of COOL.   (See articles on the four major topics upon which the COOL debate will focus on)

As could be expected, NCBA and NPPC feel the report just validates that the law needs to be reworked or repealed, and the supporters of COOL like R-CALF continue to feel the economic models and assumptions that USDA used were seriously flawed, and that USDA made important strides in clarifying some of the issues.     

The economics of COOL.

USDA’s analysis of the impact of COOL was a scathing indictment of its value to producers, consumers, the industry and the economy.  The analysis was overseen by a Washington D.C economist who is well respected on both sides of the aisle, Keith Collins.  Mr. Collins took a look at the cost estimate studies that had been conducted as well as consumer preference studies and then using some very sophisticated modeling techniques attempted to quantify the impact of COOL.  The analysis utilized the existing studies as a framework for their assumptions and from them derived a range with both a low-end and a high end.  The USDA study dramatically scaled back the cost estimates found in the Sparks and Texas A&M studies, and also raised the low end of their estimates from the two studies that showed minimal costs after reviewing the assumptions as they relate to USDA’s proposed rules for COOL.  USDA concluded that the most likely cost to the industry would be $1.7 billion for the first year.  The cost to producers would be minimal at $180 to $443 for producers (these figures are average costs for firms and represent the low and high end of the range that USDA used in their analysis), more significant for intermediaries at $4,048 to $50,086, and $49,581 to $396,089 for retailers.  For all commodities the range was $582 million to $3.9 billion to implement.  It is important to note that the economics for the various segments and the cost of implementation is quite different.  The cattle industry is far and away the driver in this process with USDA estimating that COOL will affect While the costs to the industry are significant USDA also estimated the cost to the U.S. economy after ten years, and this number is much smaller only costing the economy in a range of $138 to $596 million as consumer preferences and economic adjustments occur.  The effect on the overall economy is not nearly as significant as the effect on the covered economies.  Their analysis concluded that U.S. production of all the covered commodities would decline from .15% to .92% as prices would increase by .06% to .64%.  The sad reality is that as sound as indepth as the latest USDA estimate is, they still provided a very wide range with their best estimate that the actual cost would be in the middle to upper end of the range.  Simply, it is impossible to say with certainty what the costs will be, because there is still no certainty on what will evolve to meet the requirements.   Another dynamic that is hard to quantify, but must be considered is that even though it is impossible to quantify the costs of implementing COOL, the industry is also seemingly moving towards a system that will require traceback of animals and product throughout the system.  It is hard to imagine that this traceback system will not largely meet the requirements that COOL has set.  If that is the case the costs to the industry may even be larger but does it make sense to ascribe the cost to COOL?  Of course, the scaled back cost analysis used by USDA for COOL that will not provide traceability provides the industry with the unbelievably scary proposition of bearing the costs of COOL and then having to create another more detailed system in the near future.

The Debate over COOL’s effect on demand.

USDA found that consumer demand for the covered commodities would have to increase from 0.4% to 2.1 % to offset the costs to the economy of COOL as outlined in the proposed rule.  And this is the crux of the debate that will unfold.  USDA found little evidence that consumers are willing to pay a price premium for country of origin labeling. USDA also found little evidence that consumers are likely to increase their purchase of food items bearing the U.S. origin label as a result of this rulemaking. According to the USDA study, “current evidence does not suggest that U.S. producers will receive sufficiently higher prices for U.S.-labeled products to cover the labeling, recordkeeping, and other related costs. The lack of participation in voluntary programs for labeling products of U.S. origin provides evidence that consumers do not have a strong preference for country of origin.  Given that retailers and food manufacturers have the greatest incentive to be informed about what consumer’s desire, the fact that they do not currently provide country of origin information to consumers on a widespread basis suggests that they believe that the costs of labeling outweigh the returns.”  The USDA study spent considerable time explaining their reasoning behind their rejection of the consumer preference studies that have been conducted at least in their ability to estimate actual spending habits.  They pointed out that the most quoted of these studies found country of origin to be rated 8th among 17 different attributes by consumers.  “There is considerable research indicating that a majority of consumers have at least some interest in their food’s origin, and a smaller but significant proportion of consumers that have a strong desire to know where their food was produced. However, this research indicates that consumer desire for country of origin labeling stems primarily from their concerns about the safety of the food they eat. To a lesser extent, this research indicates that consumer desire for country of origin labeling stems from concerns about the quality and freshness of products and a preference to support U.S. producers. Measures of willingness to pay, however, do not necessarily translate directly into measures of what consumers would actually pay when faced with marketplace decisions.”  USDA concluded that the use of these studies to predict actual consumer behavior was flawed.  They pointed out that these studies tend to overstate what consumers are willing to pay, because they are not constrained by real world budgetary constraints.  That they are not faced with the same choices that they would face in the real world, and that the results are a function of the questions (eg. consumer responses will change depending on whether they are told the vast majority of product will be labeled as made in the USA or if only a small fraction carries the label.  You might be willing to pay $10 more per ton for hay with 19% protein until you learn that 80% of the hay being offered has 19% protein).  And lastly, these studies do not account for changes over time.   Supporters of COOL, reject USDA’s economic analysis saying that consumer preferences are being masked by the current system, and that demand will offset the costs of the program.  On a side note, USDA did ask for comments on the word slaughtered.  Regardless of which side you fall on in the COOL debate, it has to be a little disconcerting to imagine a word with such a negative connotation in the mind of consumers appearing on every single package, whether it be processed, harvested, or something else altogether the industry should find a more consumer friendly term.

The Debate over mandatory vs. voluntary.

Even more important than the debate over COOL’s effect on demand is whether or not the program should be voluntary or mandatory.  USDA’s analysis stated, “There are no significant regulatory barriers for the market to voluntarily provide credible country of origin declarations, information regarding country of origin.  There appear to be no barriers to the provision of this information other than private costs to firms in the supply chain and low expected returns. Firms that would incur private costs to provide country of origin information would also enjoy the private benefits, if any, from consumer demand for the information. Thus, from the point of view of society, market mechanisms would ensure that the optimal level of country of origin information would be provided.”  This means that if consumers will pay more for US labeled product that a voluntary system should provide it, as it does for other voluntary labeling and branding programs that the industry is openly embracing at a record pace.  Supporters of COOL dismiss this argument and instead argue that government intervention must replace the functioning of the free and competitive market place, because the marketing system is broke.  They argue consumer preferences are being masked because of the global nature of our business and that packers and retailers are benefiting from the current system that does not label meat according to its country of origin.  They argue that they are thus ignoring consumer preferences because of the global nature of their supply chain, and the fact they are focused on benefiting U.S. producers.  While this debate is heartfelt and persuasive it does not hold up to economic analysis if the packing and retailing segments are performing rationally.  True if you can sell an inferior product at the same price as a superior product that is good business, but that only works if there is no competition.  Your competitor will offer the superior product and force you to differentiate or take your business. 

COOL’s role in changing the competitive balance.

The last major debate over COOL will be its effect on competitive balance.  The USDA studies confirmed that the law would benefit poultry to the disadvantage of beef and pork as they are not subject to the requirements.  Also, the analysis raises the very serious question of whether it would provide pork an advantage over beef.  According to the USDA study while roughly 40% of beef products would fall under the labeling restrictions (product not further processed, not moving through HRI trade, and moving through qualifying retail outlets), only slightly over 15% of pork products would fall under the labeling specifications.  Additionally, the costs of implementing COOL in integrated systems will be far less than in non-integrated systems.  The general demographics and structure of the beef industry makes beef’s costs higher in relation to the other covered commodities and thus lowers our relative competitiveness.  In addition, there is concern that with such a relative small percentage of imported product moving through the system that foreign production will be directed towards the 60% of the market that is not covered.  In effect, resulting in nearly all product sold through the covered retail outlets being US product.  USDA stated, “Neither the law nor the proposed rule requires that any entity that produces or supplies covered commodities must market those commodities to retailers as defined by the law. Suppliers of covered commodities could completely avoid the requirements of this proposed rule by distributing their products through channels other than to the retailers subject to the law.”  Regardless, of your belief about consumer preferences and demand, the only result will be cost.  Admittedly, proponents of COOL argue that the HRI and processed food markets will adopt COOL as a means to gain a competitive advantage and that this redistribution of the  product through the production chain will not occur.  Of course, this is why this debate is far from over.  By making the argument that the system will pull the product through the system, it also removes the argument for the need of a voluntary vs. a mandatory program. 

The bottom line from the USDA study.

“Current evidence on country of origin labeling, however, does not suggest that U.S. producers will receive sufficiently higher farm prices for U.S.-labeled products to cover the costs of labeling. Moreover, it is even possible that producers could face lower farm prices as a result of labeling costs being passed back from retailers and processors.”  Those in support of COOL believe that the demand and cost analysis conducted by USDA are flawed and that the demand will improve to cover the costs.  They also believe that a mandatory system is required because the structure of our industry is such that packers and retailers are being rewarded for ignoring consumer preferences and that they are conspiring together to maintain this system.  Opponents of COOL, believe that a voluntary system allows consumer demands to be expressed, and that the law as written is to flawed and too expensive to result in benefiting the American cattle producer. 

Ironically, both sides are arguing for a move away from commodity beef production toward a branded, differentiated product that will increase profits.  They merely disagree on whether COOL represents the kind of brand promise that will create brand equity, and whether the benefits outweigh the costs.  The problem is that the debate has taken on a very political nature, and both sides agree that the outcome will affect producers in the pocket book the question is will it be a billion dollar fiasco or boom?  USDA’s analysis makes it clear what their conclusion was.   Proponents and opponents alike should take the time to submit their comments on the proposed rules and make their preference known to their congressman.  This is a momentous decision for the cattle industry.

On a related note, the U.S. Office of Management and Budget, sent a letter to the USDA in reaction to the detailed guidelines of the country-of-origin labeling program, which stated we remain very concerned that this program will impose enormous costs on consumers that are substantially in excess of any benefits.  Noting that, These figures indicate that this is one of the most burdensome rules to be reviewed by this Administration.  The OMB is now asking the  USDA for their views on whether the Administration should seek legislative relief to mitigate the negative impact of mandatory country-of-origin labeling.