The 2002 farm bill will be remembered as one of the most intensely fought versions of farm legislation in recent history. Fundamental ideological differences created a divide among House and Senate versions. Conferees were largely split over several key items included in their respective drafts. Politics also precipitated a large amount of posturing by the conferees. As such, conference negotiations were especially lengthy, and at times passionate, prior to final passage and subsequent approval by Congress.

Nonetheless, the 2002 farm bill contains several new provisions that may potentially have a lasting economic effect on agricultural business and the way it's conducted within the U.S. Among the most important of these is the mandate for country-of-origin labeling (COOL) of various food commodities, including beef products.

Federal law currently requires most food imports to possess designation of its respective origination point on behalf of the "ultimate purchaser;" that being defined as the last U.S. person receiving the article in the form in which it was imported (ERS, 2002). The system mandates that containers, such as boxes holding imported fruits and vegetables be labeled with country-of-origin identification upon importation to the U.S. Retailers are subsequently allowed to remove items from labeled boxes and sell loose produce without any indication as to the country-of-origin. However, produce packaged and subsequently shipped in consumer-ready types of containers (e.g., shrink-wrapped containers) must also include indication as to the country-of-origin.

The same is true for meat and poultry products: Those produced and packaged in retail containers outside the U.S. must be labeled with their respective country-of-origin. Most meat products available at the retail level, though, do not carry any type of origination mark. Despite current regulations, two primary reasons exist why many meat products carry no such designation. First, meat products may be derived from live animals imported into the U.S. and subsequently harvested. Food products subjected to processing within the U.S. are exempt if they undergo "substantial transformation." Whole muscle cuts fall into this categorization. In these cases, the processor is considered the "ultimate purchaser" and not required to label the product. Secondly, raw meat may be imported and either processed into new forms of edible products or included as an ingredient in another food product also allowing for exemption.

The 2002 farm bill makes labeling requirements more stringent by largely removing the exemptions previously outlined. It stipulates that retailers are required to inform the "ultimate purchaser" as to the country-of-origin for various commodities which now include "muscle cuts of beef, lamb and pork; ground beef, ground lamb and ground pork" along with other various agricultural commodities including fish, fruits and vegetables (ERS, 2002). Denotation may occur via a variety of means including labels, stamps, marks or some other obvious means either on the package, display or bin. Retailers will also be allowed to utilize a "U.S. country-of-origin" label. For the beef industry, the U.S. label equates to products that derive from animals that are exclusively born, raised and slaughtered in the U.S. (including animals exclusively born and raised in Alaska or Hawaii and transported for a period not to exceed 60 days through Canada to the U.S. and slaughtered in the U.S.).

The farm bill also contains provisions relative to the implementation process of new regulations and subsequent development of labeling certification. The process allows the agriculture secretary to develop plans based upon model certification programs already in existence. As an example, those models might include carcass grading systems, voluntary COOL systems previously approved and U.S. Department of Agriculture programs that are in place that facilitate specific premium programs (e.g., Certified Angus Beef). The 2002 act also provided enforcement procedures, including fines up to $10,000 for retailers willfully failing to comply. The agriculture secretary issued guidelines for voluntary labeling last fall and must disseminate have regulations in place for implementing mandatory labeling no later than Sept. 30, 2004.

Economic connotations

For the purpose of this discussion, economic implications associated with COOL will be primarily limited to a focus on the beef industry. Discussion includes analysis of the various marginal benefits promoted to be associated with the program; evaluation will also include comparison of the assorted marginal costs of the newly implemented program.

Implicit with passage of the program is the perception of potential marginal benefits. Passage occurred on the belief that U.S. consumers possess different demand curves for products, which originate in the U.S. versus those that are imported. Accordingly, the Food Marketing Institute (FMI) has reported that approximately one-third of all consumers prefer to have access to country-of-origin information; meanwhile, an additional one-third would like to have their respective domestic food labeled with some type of U.S. designation (FMI, 2002).

The General Accounting Office (GAO), though, has reported that more people request information on items such as freshness, nutrition, handling and storage and preparation recommendations than those desiring the geographical source of their food (GAO, 1996). Some also advocate the importance of COOL with respect to food safety. However, the National Academy of Sciences National Research Council (NRC, 1998) reported that: "It is by no means clear that imported food, as a class, poses greater risks than domestically produced food." What's more, labeling provides limited benefits in response to outbreak of food-borne illnesses (Robertson, 1999); those situations are often extremely complex and improper food handling, that is in no way associated with its origin, is commonly implicated in such outbreaks.

Marginal benefits associated with COOL, beyond independent analysis by the FMI, have not been well studied nor documented. Lawmakers have simply assumed that consumers desire such information and thus believe it to be important. The ensuing assumption is that consumers will subsequently derive some type of benefit from increased information about their food products.

A secondary motive among lawmakers is to provide domestic producers with a comparative advantage over their foreign competitors.

However, with respect to benefits, there exists a lack of comprehensive research. The program, once in place, may potentially indicate those assumptions to be incorrect. First, no survey has specified the additional amount that consumers would be willing to pay for such information. No direct or empirical evidence is available to indicate that a price premium brought about by COOL will be sufficient to offset the costs; nor is there any indication that those benefits, if in existence, will persist over the long term (FSIS, 2000).

Secondly, consumers may actually indicate that they prefer imported items and that risk increases steadily with time. The U.S. ethnic population is expected to rise from the current 28% of the population to 36% by 2020 -- driving demand for increasing differentiation of various food products (Blisard et al., 2002) including imported food products.

Issues surrounding the program's marginal costs are more complex. Intrinsically, regulations dictate that ultimate responsibility for accurate labeling will belong to food retailers. Costs associated with the program, for all commodities, at the retail level have been estimated to total more than $1 billion per year (FMI, 2002). These costs are primarily incurred by labeling requirements and additional segregation of product. Segregation is especially important; retailers will be forced to display similar items from different countries separately if individual items are not marked.

Furthermore, retailers will no longer be allowed to knowingly commingle product if it possesses differing origins. This can create inventory management challenges. Bin space utilization will become less efficient. Efforts will also have to be stepped up to prevent partially filled bins as they potentially possess less consumer appeal. Lastly, retailers will need to develop and maintain record keeping and tracking systems for audit verification purposes. Additional costs at the retail level include those associated with governmental agency, USDA and FDA, monitoring and enforcement estimated to be more than $100 million per year (Barto, 2002).

A final consideration pertaining to the allocation of retail costs: food marketing costs are currently rising faster than farm value of agriculture products (Davis and Stewart, 2002). That rise is primarily comprised by the effect of escalating labor expenses at the retail level (FMI, 1999). COOL, and its associated financial outflows, compound those concerns. As such, food retailers will likely prove to be especially reluctant to assume any new costs and work diligently to pass them back through the chain of production.

Thus enters consideration of marginal costs of COOL for the livestock industry. Implementing COOL also will equate to additional costs for the production sector. The primary challenge associated with COOL will be development of an individual animal identification system that assures country-of-origin source verification -- a cumbersome and expensive process. Several years ago, as a result of animal health, food safety and bio-security concerns, USDA initiated development of a mandatory identification system as part of an international effort. The program is currently in the comment and development phase. To date, discussion has indicated immense complexity in integrating such a system into the livestock production industry. Those challenges are compounded within the highly-segmented beef industry compared to other meat industries that are more vertically coordinated (Moldenhauer, 2001).

Additional considerations associated with the new labeling requirements revolve around trade relations with other countries. Despite being promoted as a consumer's right-to-know issue it is perceived among our trade partners as an intentional effort to discriminate against foreign products. That perception by our foreign trade partners is affirmed by comments offered by R-CALF chief executive officer Bill Bullard: "Whatever gains we have made with increased exports have been far outweighed by not only the direct impact cheaper imports have on our markets, but also by the increased leverage rising import volumes afford downstream industry segments to suppress domestic cattle prices" (Munday, 2002).

From an economic perspective, that sequence of logic is flawed as indicated by Kansas State agriculture economist James Mintert (1999). Proponents of a ban on cattle imports from Canada are not often swayed by arguments documenting that cattle imports are not responsible for the cattle price decline in 1998 versus 1997. Instead, they argue that U.S. cattle prices would be higher if the million plus head of Canadian cattle imports were prohibited from crossing the border into the U.S. From their viewpoint, restricting cattle imports is tantamount to reducing slaughter cattle numbers and, ultimately, reducing beef supplies. However, that position is too simplistic.

In reality, importation may actually assist with improving efficiency within the industry by leveraging economies of size. In so doing, it leads to protection of all producing entities. Furthermore, if those cost reducing efforts are effective, and are sustainable, more resources can be directed towards expanding market share (Purcell, 1999). Therefore, the goals and objectives of COOL are misguided being in direct contrast to basic economic principles; the program potentially reduces efficiency and raises the cost of doing business.

There have been concerns that the new labeling laws may not be consistent with U.S. international trade obligations. Dennis Laycraft, Canadian Cattlemen's Assn. vice president believes that the new U.S. COOL requirement "flies in the face of the World Trade Organization rules" (Munday, 2002). From a legal perspective the labeling issue has proven to be especially sensitive among NAFTA participants.

Along this line, Secretary of Agriculture Ann Veneman has informed Canadian Agricultural officials that COOL will be difficult to monitor and implement. She has suggested that beef may need to undergo consideration of being labeled as "North American" versus U.S., Canada or Mexico (AP, 2002).

To fully understand the impacts of additional costs of COOL on the beef industry it's important to offer some historical perspective of beef demand. During the 20 years preceding 1999 the beef industry struggled with domestic demand. That challenge was a result of several items of concern by the American consumer including unfavorable wellness/health perceptions of beef, product inconsistency and a lack of preparation convenience. At the same time, the pork and poultry industries were very aggressive in attacking both sides of the value equation. Both industries improved their respective perceptions among consumers while also becoming increasingly efficient. More recently, the beef industry has reversed the demand trend. Beginning in 1999, domestic beef demand has improved dramatically; 2001 resulted in expenditures of $56 billion (Cattle-Fax, 2002) -- a new record. Improved demand is partially the result of efforts to develop new products that more closely fit consumer desires (e.g., heat-and-serve products). Beef expenditures are also highly responsive to income and total expenditures (Schroeder et al., 2000) both of which have climbed progressively through the late-1990s.

Meat purchasing decisions, as with any product, are not made independently; they are made in reference to competing products (Smallwood et al., 1989). The beef industry was being forced to deal with a declining consumer base; beef's quality was declining while its relative price was increasing thus it had new challenges about its price/value relationship (Smith et al., 1996). The compelling reason for declining demand that initiated in the early 1980s in favor of pork and/or poultry had been a relative price disadvantage; its costs were disproportionately rising compared to its competitors (Barkema and Drabenstott, 1990; Johnson et al., 1989, Menkhaus et al., 1990). The most important lesson, though, of the beef industry's decline is the critical importance of closely managing its cost structure.

The manner in which marginal costs will be allocated and assumed through the livestock industry as a result of country-of-origin is still uncertain (Robertson, 1999). Given its history of relative price issues, the beef industry will need to be especially careful in monitoring costs associated with the program. Foreign competitors and competing meat sources may actually gain a competitive advantage if costs become excessive or unproductive. In that scenario, as dictated by the law of demand, quantity demanded of beef products will experience a decline. The National Cattlemen's Beef Assn. (NCBA) has appropriately entered this unchartered territory very carefully. Chandler Keys, NCBA's vice president for policy, has said that "NCBA will closely monitor the COOL program for its impact on the industry. We have concerns that a mandatory COOL program may have negative trade implications and place regulatory and economic burdens on cattle producers" (Augustson, 2002).

Summary

Success of a newly implemented COOL program will be evaluated in two distinct ways. First, based upon its ability to provide consumers with meaningful information and create value at a reasonable cost. Second, the program's capacity to provide U.S. beef producers with a comparative advantage over their foreign competitors. If consumers do not perceive additional benefits associated with labeling they will prove unwilling to incur additional costs. Failure to achieve the first will lead to automatic failure of the second. In that scenario, all costs will ultimately be passed down through the chain of production thereby cow/calf producers will be the segment bearing the burden of the system; the very ones which passage of the new law was designed to assist. Nonetheless, long-term implications of COOL are unclear. Undoubtedly, the need for such requirements will be increasingly debated as the beef industry moves through the complexities of implementation.

From an economic perspective, though, the true worth, or value, of any product can only be determined only by free and unrestricted market transactions; those in which voluntary exchanges occur between buyer and seller leading to mutual benefits derived by both parties. The very definition of voluntary exchange equates to a "positive-sum game." Conversely, mandates, remove the attributes of intentional transactions and the associated mutual benefits thereby moving the system from "positive-sum" to "zero- or negative-sum." It is that comprehension that has led NCBA's membership to adopt the following resolution related to COOL (NCBA, 2002):

Therefore be it resolved, NCBA supports voluntary labeling of U.S. beef would be a preferable market-driven approach that would be less disruptive in the market place and more efficient for the producing, retail and foodservice sectors of the beef industry.

Be it further resolved, NCBA supports the NCBA COOL Working Group's Sept. 28, 2001, recommendations, including a policy statement that NCBA should serve as a catalyst to facilitate and endorse a market driven voluntary USA beef labeling in the private sector for "born, raised and processed" USA beef.

Lastly, and most importantly, a voluntary label, Born & Raised in the USA, is already in place and available for those who wish to use it; the program is USDA-approved and allows for licensing and certification of wholesalers, retailers and food service providers (Carey, 2002). With that in mind, in more than 20 years of supermarket surveys by the Food Marketing Institute, COOL has not been requested by one consumer when asked to specifically name a way to improve their primary shopping market (FMI, 2002). From an economic perspective, the ultimate need of a mandate, or lack thereof, is best summarized by Kuchler (2002): "The people who are best informed and who have the greatest incentive to be informed about the costs and benefits of labeling are grocers, meatpackers and farmers. Their voluntary use of labels identifying U.S. producers is, at most, rare."

REFERENCES

A.P. 2002. Johnson and Thune speak out against Veneman. Associated Press State Wire. May 23, 2002.

Augustson, T. 2002. What the Farm Bill Holds For You. National Cattlemen. June-July, 2002. National Cattlemen's Beef Assn., Centennial, Colo. P. 8-11, 15.

Barkema, A. and M. Drabenstott. 1990. A Crossroads for the Cattle Industry. Economic Review. November/December 1990. P. 47-66.

Barto, D. 2002. Food fight Continues. BEEF. September 2002. P. 1.

Blisard, N., B.H. Lin, J. Cromartie and N. Ballenger. 2002. America's Changing Appetite: Food Consumption and Spending to 2020. Food Review, Spring 2002. Economic Research Service, lecture, Washington, D.C.

Carey, C. 2002. Letter to USDA Agricultural Marketing Service dated Aug. 9, 2002. Carolyn Carey, Born & Raised in the U.S., Alturas, Cal.

Cattle-Fax. 2002. Cattle Marketing Information Center. Englewood, Colo.

Davis, D. and H. Stewart. 2002. Changing Consumer Demands Create Opportunities for U.S. Food System. Food Review, Spring, 2002. Economic Research Service, USDA, Washington, D.C.

ERS. 2002. The 2002 Farm Bill: Provisions and economic implications: COOL. June 12, 2002, Economic Research Service, USDA. Washington, D.C.

FMI. 1999. Marketing Costs. Food Marketing Institute. Washington, D.C.

FMI. 2002. Mandatory Country-of-Origin Labeling. FMI Backgrounder. Food Marketing Institute, Washington, D.C.

FSIS. 2000. Mandatory Country-of-Origin Labeling of Imported Fresh Muscle Cuts of Beef and Lamb. Food Safety and Inspection Service, United States Department of Agriculture, Washington, D.C. January 2000.

GAO. 1996. GAO Analysis of 1996 survey for The Packer; a publication of the fresh produce industry. General Accounting Office, U.S. Government. Washington, D.C.

Johnson, G., J. Connor, T. Josling, A. Schmitz and G.E. Schuh. 1989. Competitive Issues in the Beef Sector: Can Beef Compete in the 1990s? Humphrey Institute Report No. 1. Hubert H. Humphrey Institute of Public Affairs, University of Minnesota, Minneapolis, Minn.

Kelley, K. 2001. Goliathan Efficiency. www.rcalf.com/editorials. Ranchers-Cattlemen Action Legal Fund, Billings, Mont., Oct. 25, 2001.

Kuchler, F. 2002. Economics of Food Labeling: Country-of-origin. In: Economics of Food Labeling. Publication AER-793. Economic Research Service, USDA, Washington, D.C. P. 30-32.

Menkhaus, D.J., R.L. Pingetzer, G.D. Whipple and R.A. Field. 1990. The influence of consumer concerns and demographic factors on purchasing patterns for beef. J. Food Distribution Research 21:55.

Mintert, J. 1999. International Beef and Cattle Trade Issues. In: White Paper on Status, Conflicts, Issues, Opportunities and Needs in the U.S. Beef Industry. Coordinated by Wayne Purcell, Research Institute on Livestock Pricing, Virginia Tech University, Blacksburg, Va. P. 49-51.

Moldenhauer, M. 2001. In: Video Proceedings: NCBA Animal Identification Symposium. San Antonio, Texas. Jan. 31, 2001. National Cattlemen's Beef Assn., Centennial, Colo.

Morgan, D. 2002. Farm Bill Bears Stamp of Senate's Prairie Power. Washington Post, May 20, 2002 Final Edition.

Munday, S. 2002. U.S. Beef in the Global Boiling Pot. Beef Today, September 2002. Farm Journal Media, Philadelphia, Pa.

NCBA. 2002. Cattle producers support voluntary producer controlled and directed COOL: cattle industry takes bold step on labeling policy at Annual Conference. NCBA News, Feb. 11, 2002. National Cattlemen's Beef Assn., Centennial, Colo.

NRC. 1998. Insuring Safe Food -- From Production to Consumption. National Research Council, Washington, D.C.

Purcell, W. 1998. Measures of Changes in Demand for Beef, Pork and Chicken, 1975-1998. Research Institute on Livestock Pricing, Virginia Tech University, Blacksburg, Va.

Purcell, W. 1999. Background. In: White Paper on Status, Conflicts, Issues, Opportunities and Needs in the U.S. Beef Industry. Coordinated by Wayne Purcell, Research Institute on Livestock Pricing, Virginia Tech University, Blacksburg, Virginia. P. 49-51.

R-CALF. 2001. R-CALF USA Position Brief: Country-of-Origin Labeling. R-CALF USA. Billings, Mont.

Robertson, R.E. 1999. Potential Implications of Country-of-Origin Labeling. Statement for the Record by Robert E. Robertson, Associate Director, Food & Agriculture Issues, Resources, Community and Economic Development Division. United States General Accounting Office. Testimony before the Committee on Agriculture, Nutrition and Forestry, U.S. Senate. May 26, 1999.

Schroeder, T., T. Marsh and J. Mintert. 2000. Beef Demand Determinants. CALF News Cattle Feeder. Colorado Springs, Colorado. March 2000. P. 18–22.

Shields, M. 2002. Weekly Analysis. Lehrer News Hour: May 3, 2002. Public Broadcasting Systems, Alexandria, Va.

Smith, G.C., J.W. Savell, H.G. Dolezal, T.G. Field, D.R. Gill, D.B. Griffin, D.S. Hale, J.B. Morgan, S.L. Northcutt and J.D. Tatum. 1996. Improving the quality, consistency, competitiveness and market-share of beef. The final report of the second blueprint for the total quality management in the fed-beef (slaughter steer/heifer) industry. National Beef Quality Audity-1995, conducted by Colorado State University, Texas A&M University and Oklahoma State University for the Industry Information Program -- National Cattlemen's Assn. on behalf of the Cattlemen's Beef Promotion & Research Board. P. 1–270.

Smallwood, D., R. Haidacher and J. Blaylock. 1989. A Review of the Research Literature on Meat Demand. In: Proceedings of the Conference on the Economics of Meat Demand. Oct. 20-21, 1986, Charleston, S.C. p. 93-124.