What’s C.O.O.L.? Implications for U.S. Producers and Consumers

1. What’s C.O.O.L.? Implications for U.S. Producers and Consumers Wendy Umberger Asst. Professor and Extension Agribusiness Economist Department of Agricultural and Resource Economics Colorado State University Midwest/Great Plains/Western Outlook Conference August 14, 2003

2. Outline • What’s COOL? • Overview • Why is it such a controversial law? • Producer and Consumer Implications • Costs • Benefits • Recent COOL Events • Future of COOL

3. What is Mandatory COOL? • Title X of the 2002 Farm Bill Amends the Agricultural Marketing Act of 1946 • “…a Retailer of a Covered Commodity Shall Inform Consumers, at the Final Point of Sale of the Covered Commodity to Consumers of the Country Of Origin Of the Covered Commodity”

4. Proponents’ Reasoning behind COOL • Consumer “right to know” • Food safety U.S. food supply is safest • Protecting the American market • Increase demand for U.S. products • Voluntary labeling will not work • Mandatory labeling program is the only way to get all segments of the food chain coordinated • Ex. Nutritional labeling • National Farmers Union, R-Calf, OCM, Consumer Federation of America, American Farm Bureau

5. Key Components of COOL • USDA must publish labeling regulations by September 30, 2004 (voluntary 10/02) • Applies to retail sales beginning 9/30/04 • Provides Secretary of Agriculture with enforcement authority • Specifically forbids Secretary of Ag. from using a mandatory identification system to verify country of origin

6. Which Commodities are Covered? • Muscle Cuts Of Beef, Pork, & Lamb • Ground Beef, Pork, & Lamb • Farm-Raised & Wild Fish • Peanuts • Perishable Ag Commodities • Fresh & Frozen Fruits & Vegetables

7. “The law was supposed to help farmers and ranchers promote a high-quality product, but I think what's evolved from that is something totally different than we want, because the expense comes back on the producer, and the liability, and it's also damaging to our export market." (NE Pork Producer) “This is the Law of Unintended Consequences.” (AMI) So Why All the Controversy?

8. The Controversy: Testimonies • 12 USDA Listening Sessions (April - June, 2003) • Help alleviate any bias by listening to all sides • Suggestions to solve the record-keeping requirement and lessen cost burden • Senate Agriculture Subcommittee on Marketing, Inspection and Promotion Hearing • April 22, 2003 • House Committee on Agriculture Hearing to Review Mandatory COOL • June 26, 2003 • http://agriculture.house.gov/hearings/testimony.htm

9. The Controversy: COOL Law Exemptions? • Ingredients In Processed Food Products • Poultry and Dairy • No Chicken, Turkey, Eggs, Milk • Food Service Establishments • Restaurants, Cafeterias • Retailers With Less Than $230,000/Year In Fruit & Vegetable Sales • Butcher Shops, Fish Markets, Small Grocers Why are some meat products exempt if “consumers have the right to know”???

10. The Controversy: Labeling of Country-of-Origin? • U.S. Origin… Meat Must Be Exclusively From Animals • Born, Raised, and Slaughtered (Processed) In U.S. Also includes beef from animals born and raised in Alaska or Hawaii (transported for no more than 60 days through Canada to the U.S. for slaughter) What about feeder animals from Canada or Mexico that are finished in U.S.?

12. Mixed Origin and Blended Origin Meat Labeling • Mixed Origin = Products with an origin that includes production steps (e.g. born, raised, slaughtered) that occurred in more than one country, including the U.S. • Ex. “Product of Canada, Raised and Slaughtered in United States” • Blended = different products of different origins that are combined for retail sales with no material change • Ex. Ground beef –“Product of Mexico, Raised and Slaughtered in U.S.A.; Product of U.S.A.; Product of Australia”

15. The Controversy: Necessary Records and Verification • Retailers must maintain records for 2 years • Suppliers must provide information about country of origin • Producers, handlers, processors, packers, importers • Verifiable (auditable) records to ensure credibility • Information must flow through market chain • Self-Certification is not sufficient • Willful violation results in up to $10,000 fine

16. Sticker or stamp all covered commodities (cc) Maintain records and a verifiable audit trail Indemnify retailer Segregate Audit Letter of intent w/ action plan by 9/30/03 Retailers requirements from Suppliers These steps will also help to fulfill your obligations of the law, which among other things requires any person engaged in the business of supplying a covered commodity to a retailer- including producers… processors and importers to provide the retailer w/ accurate country of origin information.

17. Have 3rd Party verified documentation proving where animals were born & raised Documentation costs are producers’ responsibility Sign An Affidavit verifying audit trail. Processor will conduct random audit checks Pass on any fines to producers. Shifting of Liability from Processors to Producers GIPSA deemed letters legal

18. The Controversy: Record Keeping Implications • Record requirements are unclear • What records do producers keep? • Some animals already subject to 9/30/2004 deadline • Costs dependent upon “necessary records” • Most believe these are overly burdensome • Liability and fines are transferred down production chain and ultimately producers are liable

19. Suggestions Offered • “Grandfather clause” • “Self-certification” • USDA General Counsel testified that self-certification is not sufficient “…Self-certification by producers would not provide an adequate basis … to substantiate the truthfulness of the information.” “Claims must be substantiated with data and records that will enable an agency exercising oversight to verify the truthfulness of the claim.” Nancy Bryson, USDA General Counsel, June 26, 2003. Testimony to House Committee on Agriculture.

20. Suggestions Offered • Assumption of U.S. Origin • Only identify imported animals “Responsibility for making the country-of-origin marketing claim is placed up on the retailer by the statute and the USDA has no authority to adopt regulations that place that place responsibility elsewhere.” “Covered commodities cannot be assumed by default to be products of the U.S.” Nancy Bryson, USDA General Counsel, June 26, 2003. Testimony to House Committee on Agriculture.

21. What Are the Costs? • Cost of Preserving the Identity of Animal (Covered Commodity) • Cost of Labeling the Products • Compliance Costs • Unexpected Industry Costs

22. Cost Estimates: USDA-AMS • AMS  $1.97 Billion For Recordkeeping • This Is For All Covered Commodities • Does Not Cover Other Costs To The Industries, Or Impacts On Markets Or Trade

23. Cost Estimates: Sparks / CBW Source: Andersen. R.S. and S. Kay. “COOL Cost Assessment.” Published by the Sparks/CBW COOL Consortium. April 2003. http://www.ams.usda.gov/cool/comments/cool1041.pdf.

24. Meat Industry Cost Impacts (Sparks/CBW) • An Individual Animal ID System Needed • Pork Industry: Competitive Cost Advantage • Beef Industry: Competitive Cost Disadvantage • Fish/Seafood Industry: Competitive Advantage • Food Service Sector: Competitive Advantage • Total Food Industry Cost = $3.7 to $5.6 billion • Concern that some consumers may alter their meat consumption patterns Source: Andersen. R.S. and S. Kay. “COOL Cost Assessment.” Published by the Sparks/CBW COOL Consortium. April 2003. http://www.ams.usda.gov/cool/comments/cool1041.pdf.

25. Costs Across Livestock Industries • Beef • $47-52/head • ~$0.10/pound • Pork • $3.25-$10.25/head • ~$0.075/pound • Fish and Seafood • $0.05 to $0.075/pound

26. Studies Examining Economic Impact of COOL Costs on Pork Industry • COOL Traceback system will • Increase U.S. farm-level production costs by 10% ($10.22 per head) • U.S. consumers will demand 7% less pork due to higher prices • Will reduce U.S. pork exports by creating comparative advantages for export competitors (ex. Canada) • By 2010 U.S. exports could be 50% lower • Canada increases Packing Capacity & Exports Pork instead of Hogs • U.S. net importer of of pork Source: Hayes & Meyer, January 2003 “Impact of Mandatory Country of Origin Labeling on U.S. Pork Exports

27. Other Costs: Pork Studies • Loss of over 1,000 independent farms in Midwest • Favor vertically integrated production systems • Loss of up to 5 packing plants and 8,000 jobs • Loss of economic activity to U.S. Economy > $4 bil. • Place U.S. pork producers at great financial peril due to need to indemnify • Permanent cost advantage for chicken and turkey (even if they were covered by the law) Source: Grier and Kohl, April 2003, “Impacts of U.S. Country of Origin Labeling on U.S. Hog Producers, and Testimony of Mr. Jon Caspers, National Pork Producers Council, June 26, 2003 U.S. House of Representatives

28. “Country of Origin Labeling: A Legal and Economic Analysis.” Vansickle et al., 2003 • Past Cost Estimates “Substantially Overblown” • NO Reason to Believe Consumer Demand will be Negatively Affected by Increased Costs • Cost of Record-Keeping is $69.9-$193.4 Million • 90-95% less than USDA estimated costs • Cost = less than one-tenth of a cent per pound • Regulatory Choice for Implementation of COOL should be “Presumption of U.S. Origin”

29. Potential Benefits of COOL • Mandatory COOL may be an Appropriate Policy Tool if (Golan et al, 2000): • Asymmetric information exists • Disclosure of possible negative quality attributes does not exceed the benefits • COOL increases demand for product • Increased Demand? • Market Share • Higher Price • Will Consumers Pay For Country Of Origin Information?

30. Loureiro and Umberger Extremely to Very Desirable Fresh Food Safety Inspection High Quality Lean Visual Presentation Very to Somewhat Desirable Source Assurance Beef Raised in your region of the country Consumer Research on COOL: Important Food Characteristics Umberger, Feuz, Calkins & Sitz Extremely to Very Desirable • Fresh • Food Safety Inspection • Color • Price • Leanness Very to Somewhat Desirable 9. COOL • Source Assurance • Beef Raised in your region of the country

31. Consumers’ Rationale for Preferring COOL(75 % Preferred Labeled, 22% Indifferent) • Safety and Health of Meat, 45% • U.S. better regulations and standards • Mad Cow Disease • More Information (Awareness of conditions, Identify meat if Outbreak Occurs), 32% • Support Producers 21% • Location (Prefer from certain countries, Learn about countries), 12.5% • Quality of Meat Higher in U.S., 11% • Freshness of Meat Closer to Home,4.5% Source: Umberger, W.J., D.M. Feuz, C.R. Calkins and B. Sitz. “Country-of-Origin Labeling of Beef Products: U.S. Consumers’ Perceptions.”, 2003 FAMPS Conference Paper: http://www.farmfoundation.org/projects/documents/

40. Summary of Benefits to Industry “The fact that 65% to 75% of Americans profess to be willing to pay a premium for certified U.S. origin beef does not translate into a higher price for U.S. origin beef when 89% of the steaks and roasts and 75% of the trimmings are already of U.S. origin.” Plain, R. and G. Grimes. 2003. “Benefits of COOL to the Cattle Industry.” Department of Agricultural Economics Working Paper, University of Missouri, AEWP 2003-2. Available at http://agebb.missouri.edu/mkt/cool.htm.

41. Other possible implications of COOL • Price not just a function of quality, but also: • Reliability of records • Origin status of livestock • Decreased marketability of “non-COOL” livestock • Packers’ transaction costs increase • Buy from fewer sellers • Processors dedicate plants as “U.S. only” or “Mixed Origin” • Prices paid to producers decrease • Unverified meat will go to HRI • Not necessarily highest quality

42. Other possible implications • Retailers source product only from production systems that can document COOL • Favors concentration and integration • Alliances may be at an advantage • Limit the countries they source product from – possibly to detriment of U.S. producers • Retailers move to case ready product • Retail pork & beef prices increase relative to other meats • Poultry demand increases • Beef and Pork demand declines • Beef and Pork Demand increase???

43. Livestock Producers’ Alternatives • Become a Preferred supplier by keeping a reliable and auditable set of recommended records • Inventory records that meet guidelines • Beginning and ending inventory • Purchases, sales, and deaths • Supporting materials • Feed records and bills, production records, vet and trucking bills • Standard operating procedure • How to segregate unknown from known origin animals • Request these records when purchasing livestock

44. The Controversy Continues:Recent COOL – Related Events • May 2003 Isolated BSE Discovery in Canada • Some argue that this increases need for COOL • Would COOL help if BSE occurred in U.S.? • Japan’s reaction • Must verify the origin of exports to Japan • Japanese system already has a central cattle ID base • Provide information to consumers via retail, foodservice and internet

45. The Controversy Continues:Recent COOL – Related Events • July 2003, Chicago Mercantile Exchange Proposes Amending Live Cattle Futures Contract Requirements • Now requires all cattle delivered must be “born and raised exclusively in the U.S.” • Seller must provide supporting documentation • July 2003 U.S. House voted to not fund COOL • What will the U.S. Senate Do? • Will not know until after August recess

46. What’s the Future of COOL? • Funding for implementation of current COOL law and accept USDA’s current interpretation and regulations • Deal with the outcome • Who will verify? Vets? Extension Agent? • No funding for implementation of current COOL law – Then what happens? • Amend the law (keep mandatory) • Ex. Peterson amendment • Repeal the law • Voluntary COOL?

47. U.S. Livestock ID and COOL • With Homeland Security ID seems inevitable… • Will a U.S. Livestock ID system put to rest the COOL issue? • Mandatory vs. Voluntary ID system? • Liability issue? • Who will pay?

48. Summary • Although it’s been said many times… • COOL is not a food safety issue • Consumers who value COOL do so because they think it provides additional food safety, source verification, or traceback • It does not • Regardless of the politics producers should begin to comply and keep records

49. Questions?