TSE Economist weighs in on nutrient taxes

In the most recent issue of the Toulouse School of Economics (TSE) Magazine (pg 8) features some work by Vincent Requillart and Celine Bonnet on ability of nutrient taxes (like soda taxes) to fight obesity. 

Soda and sugar taxes don't always have the anticipated effect:

“The fact that we take into account the way the industry and retailers react via their pricing decisions. Most research assumes that the tax is passed on to the consumer. There’s no reason that should be the case! Firms are not passive, they develop strategies. They can raise prices more than is strictly necessary to cover the tax or, on the contrary, reduce their profit margins so as to maintain their sales.”

The point out that the effects of a sugared-soda tax are small, and that the actual policy passed in France (taxing all sweetened drinks - even those with artificial sweeteners) would not be expected to reduce weight.

“Taxing all drinks, be they sugar-sweetened or light, is counter to health recommendations. In practical terms, the tax implemented does not reach its goal of reducing sugar consumption. It acts primarily as an instrument to increase the State’s budget revenue.”

They seem to favor voluntary arrangements between food companies and the government to reduce sugar and salt content.  Even still, in places like the UK, where such an approach has been taken, the effect appears to be virtually nil.

“Having said that, despite all the measures implemented, obesity has not been eliminated. ”

One of the challenges is the complexity of it all

“ In the case of food, defining what is good and what is bad when dealing with a large number of nutrients, is complex.What’s more, eating habits change very slowly.”

For a more in depth and academic treatment of the topic, you might check out some of the published work by these authors.

How do consumers respond to rising food prices?

That's the question asked in this working paper by Rachel Griffith, Martin O’Connell and Kate Smith.  The abstract: 

“Over the Great Recession real wages stagnated and unemployment increased. Concurrently, food prices rose sharply, outstripping growth in food expenditure, and leading to a reduction in calories purchased. This has led to concern about rising food poverty. We study British households to assess how they adjusted to changes in the economic environment. We show they switched to cheaper calories; implying food consumption was smoother than expenditure. We use longitudinal data to quantify the way households lowered their per calorie spending, and show they done this in part by increasing shopping effort, and without lowering the nutritional quality of their groceries.”

When we feel the pinch, we can substitute away from more expensive to less expensive foods.  But, we can also increase the effort we expend in finding better prices.  In short, our time is a valuable commodity that we treat like other economic goods.  

That fact was also emphasized in a paper by Broda, Leibtag, and Weinstein in the Journal of Economic Perspectives in 2009.  They used some creative methods to ask the question: do the poor pay more or less than the rich?  They write:

“In this paper, we circumvent the problems of previous studies by using a dataset that contains actual purchases of around 40,000 households collected by Nielsen. By focusing on the actual prices paid by households, we show that poor households systematically pay less than richer households for identical goods. The poor pay less in part because they shop in cheaper stores and in part because they pay less for the same goods even in the same store. This latter effect probably arises because poorer households are more likely than richer households to buy goods on sale, even in the same store. We also confirm that the poor shop more in convenience stores—where prices are 11 percent higher than in traditional grocery stores—but show that this effect is dominated by their higher share of expenditure in supercenters where prices are 10 percent lower than in grocery stores.”

Note that these authors aren't comparing apples to oranges.  They compare the prices paid by rich and poor households for exactly the same goods.  

When asked how consumers respond to higher prices or lower incomes, so often we economists refer to indifference curves and budget constrains or do a fair amount of hand-waving.  Yet, as these studies show, reality is more complex.  We can use our time to find better prices, or we can alter out consumption bundle to provide the same nutritional quality in a less expensive fashion.   

Reducing Food Insecurity

Last week, I mentioned the new USDA report on food insecurity.  I also mentioned a WSJ editorial by James Bovard arguing that food stamps don't reduce food insecurity because the number of people enrolled in food stamps has risen dramatically while food insecurity remains essentially unchanged.

I noted that we don't know the counterfactual (i.e., how much food insecurity would have changed had enrollment in food stamps not increased).  And, I also noted that there is some good academic research on the relationship on food insecurity and food stamp participation.

One of the big problems with trying to tease out the link between these two is that they are jointly determined.  That is, I may enroll in food stamps precisely because I'm food insecure. This sort of selection effect will make it look like being on food stamps is associated with food insecurity, but clearly this is just correlation, not causation.

Here is a careful paper published in the Journal of the American Statistical Association that tries to get at the issue:

“Under the weakest restrictions, there is substantial ambiguity; we cannot rule out the possibility that SNAP increases or decreases poor health. Under stronger but plausible assumptions used to address the selection and classification error problems, we find that commonly cited relationships between SNAP and poor health outcomes provide a misleading picture about the true impacts of the program. Our tightest bounds identify favorable impacts of SNAP on child health.”

One of the measures of "child health" is food insecurity, and this research seems to suggest null to positive effects of food stamp participation and child food insecurity.  

A lot of the discussion on the web related to the USDA report seems to be wrapped up in ideological baggage associated with beliefs about the desirability of cutting or expanding the food stamp program (or, for example, utilizing work requirements).  Those who would like to reduce the size and scope of the food stamp program often try to argue that food stamps do not reduce food insecurity and may actually increase it.  My view is that the best analysis doesn't support such an argument.  There may be other good reasons for reducing the size of the food stamp program, but the food security argument isn't one of them.  

Another argument I made in my previous post was that technological development that leads to lower food prices seems a comparatively good strategy for reducing food insecurity.  

As such, I was intrigued to see this white paper by Graig Gundersen at the University of Illinois on food insecurity.  One of the five drivers he discusses to reduce food insecurity is to focus on the importance of low food prices.  

He also writes, when discussing, what food groups can do (or perhaps what they shouldn't do):

“Third, they can view proposals encouraging organic foods and local foods with skepticism. While proposals to encourage, say, local food procurement by supermarkets can have ancillary benefits, these benefits do not generally extend to low-income households because they cannot afford these items. Instead, the benefits are more likely to extend to upper-income households that can afford these items. Moreover, by devoting scarce resources to encouraging the entrance of these into the food supply chain, this diverts resources away from factors that would help low-income households. ”

Food insecurity remains essentially unchanged

Yesterday the USDA Economic Research Service released a report on the prevalence of food insecurity in the U.S.  Over 14% of US households (that's 17.5 million households or 49 million people) remain food insecure, a number that hasn't much budgeted since the recession began in '07-08.

As pointed out in a Wall Street Journal editorial today, the USDA's measure of food insecurity isn't a direct measure of hunger.  Rather, the measure is derived from responses to a set of survey questions.  Respondents are shown 10 questions (18 if they have children), and if they respond "yes" more than three times to questions like, "In the last 12 months, did you or other adults in the household ever cut the size of your meals or skip meals because there wasn’t enough money for food?" then the household is classified as food insecure.  

Over at the US Food Policy blog, Parke Wilde remarks:

“In previous years, the United States solemnly adopted targets for reducing the prevalence of food insecurity from 12% (the level observed in the mid-1990s) to 6%. As my chart (based on USDA data) shows, this effort to improve U.S. food security has failed. Yet, neither Democrats nor Republicans talk much any more about any substantial realistic strategy for poverty reduction — with serious objectives, quantitative targets, and implementation steps. Though food assistance is of course important, poverty reduction is the most promising approach to improving household food security in the United States.”

James Bovard in the WSJ notes that the food insecurity results are surprising given the rise in food stamp participation over this period

“In 2013 the USDA reported that federal food programs—most notably food stamps provided by the Supplemental Nutrition Assistance Program (SNAP)—“increase food security by providing low-income households access to food, a healthful diet, and nutrition education.” But food insecurity was more widespread in 2013 (14.3%) than in 2007 (11.1%), while food-stamp recipients rose to 47 million from 26 million.”

Bovard makes an interesting and relevant observation.  However, I'm not sure that I fully agree with his characterization of the literature on the (lack of) causal relationship between food stamp participation, food insecurity, and hunger.  It could be that we would have had even higher rates of food insecurity had enrollment in food stamps not swelled.  As econ-speak: we didn't observe the counter-factual.  

A few comments I've read point out that food insecurity would likely have been lower in 2013 had we not experienced higher food prices over the last several years (particularly for protein over the past year).  That's almost certainly is true.  Just last year, two USDA-ERS researchers (two of the same people who authored the recent report on food insecurity) published a paper (which I previously discussed here) in the journal Applied Economic Perspectives and Policy showing that food stamp participants who live in areas with higher food prices are more likely to be food insecure than food stamp participants who live in areas with lower food prices.  They write:

“We find that the average effect of food prices on the probability of food insecurity is positive and significant: a one-standard deviation increase in food prices is associated with increases of 2.7, 2.6, and 3.1 percentage points in household, adult, and child food insecurity, respectively. These marginal effects amount to 5.0%, 5.1%, and 12.4% increases in the prevalence of food insecurity for SNAP households, adults, and children, respectively.”

If we want less food insecurity, one way to achieve that outcome is to have lower food prices.  How to we get lower food prices? Rain would help (but not too much rain).  The primary systematic way to achieve long-term reduction in food prices is through scientific development and technological innovation that increases agricultural productivity.    

Why are beef and pork prices so high?

There continues to be a lot of interest among consumers and the media about the causes of high beef and pork prices we've witnessed in recent months.  It is a topic I touched on a couple months ago.  I pointed to drought, previously high corn-prices, disease, and other supply side factors like technology disadoption.  This piece in at the Atlantic blog says it can't be the drought and it is a result of consumer demand.  This short post at TIME.com, says China and Japan are partly to blame.  Chris Hurt at farmdocdaily says a lot of it is unexplained.

So, what's going on?  Here is data from the Bureau of Labor Statistics, on retail meat prices (May is the last month they report).

Starting in mid 2010, prices ($/lb) for steak and ground beef started increasing, as did prices for bacon.  They swung sharply higher in the most recent months. Pork chop prices were more steady, only noticeably increasing in April and May.  Prices of boneless chicken show no apparent trend.  

The above graph shows prices in nominal terms, but when looking at a 10-year time period it might also be useful to look at the data in real (inflation adjusted) terms, as I've done in the following graph.  The general trends remain the same, except notice that in real terms, chicken breast prices have been falling, and sirloin steak prices are lower today than they were in 2004. Others, like ground beef and bacon, are higher today than they were a decade ago even after accounting for inflation.

These effects also trickle down to the markets for cattle and hogs.  For example, here is data from the Livestock Marketing Information Center (LMIC), showing that prices for slaughter cattle are today far above where they were last year or in the previous six years.

The data seem pretty clear that a lot of the price pressure results from tight cattle supplies.  Here's data from the LMIC on the cattle inventory (the total number of cattle in the US).  We have fewer cattle in the US today than was the case in the 1950s.

The same broad trend isn't necessarily true for pork, but one can see from the graph below that there is a downward trend in pork inventory since 2008, and noticeably lower supplies this year in 2014.

Holding all else constant, lower supplies will mean higher prices (with less meat around, there is increased competition for existing supplies, and people bid up the price of meat).  So, that pushes the question back on step.  Why are there are lower supplies?

I'm going to stick with my answer from a couple months ago:

“Contraction in cattle supplies can be explained by a number of factors, such as drought in the plains states that limited the amount of grass and hay available and higher feed (mainly corn) prices due to drought, ethanol policy, etc., which pushed pushed more cattle to slaughter several years ago, leading to smaller inventories today. Feed prices have now come down off their highs but cattle prices are still rising, partially because producers are holding back breeding stock to rebuild inventory.”

Yes, corn prices are today lower, but it is important to note the lags in production for cattle, and to a lesser extent pork, and to a much lesser extent poultry.  Let's say you're a cattle rancher back in 2008 and you're facing much higher corn prices and drought that limits forage and hay to feed.  What do you do?  You start selling off part of your herd.  As other ranchers make the same decision, prices initially fall but then start climbing.  Then, in 2013 corn prices start falling and drought conditions subside in many parts of the country.  So, you can feed cattle, but you don't have any excess sitting around.  In fact, if you want to capitalize on higher beef prices, you might have to forgo current profits for future profits and hold back some of your female breeding stock (further tightening supplies).  It might be another year till that new heifer is pregnant, another (almost) year till a calf is born, and another year and a half or so until you've got an animal that finally goes to the dinner table.  Of course, what I'm describing is just the biological production lag that often leads to cattle and hog price cycles.  This kind of cycle doesn't much occur with poultry because flock sizes can be changed relatively quickly, and that might explain why in the above graph, the price of chicken has been much more stable.  (On the pork side, the porcine epidemic diarrhea virus, PEDv, is also partially responsible for the smaller inventories). 

What about other explanations that are often presented for the price increases?  I agree that consumer demand remains steady, something we've found in our Food Demand Survey (FooDS).  But, it isn't increasing.  You'd have to have increasing demand for consumers to be responsible for higher prices.  

What about consumers in other countries?  Exports?  Here is data from the US Meat Export Federation on beef exports:

There was been a sharp rise in exports from 2004 to 2011, but recall that the retail price spikes we've seen started in around 2010, and over this time period, the volume of beef exports is relatively flat.

According to USDA, we only export about 10% of the value of beef produced, and much of this is North American trade between Canada, US, a Mexico.  There was a 19% increase in the volume of beef exported from 2009 to 2010 and a 20% increase from 2010 to 2011, but then a 12% reduction from 2011 to 2012 and only a 3% increase from 2012 to 2013.  China significantly increased US beef imports from 2012 to 2013, but other countries like Japan, Mexico, and Canada import more volume than China, and in fact the volume of beef imported increased more from 2012 to 2013 for Japan than for China.  So far this year, Chinese imports are down compared to last year.  [Addendum: it was brought to my attention that export data to China is shaky since the Chinese have not officially approved US beef imports; as a result, a lot of our exports to China flow through other countries, making these stats a bit difficult to interpret].  It should also be noted that we import as many lbs of beef as we export each year.  All considered, I don't see foreign demand as the driving factor in the recent run-up in beef prices.

Ultimately, the old adage is likely to hold: the cure for high prices is high prices.  The high meat prices we're seeing today will eventually encourage larger beef and pork supplies, which eventually will put downward pressure on prices.  When will that day come?  Sooner for pork than for cattle.  If you've got a better answer than that, you can prove it by getting in the market.