Policy in Action: AMS Involvement in Differentiating Food and Agricultural Markets

1
Policy in Action AMS Involvement in
Differentiating Food and Agricultural Markets

• Kenneth C. Clayton
• Agricultural Marketing Service
• United States Department of Agriculture

2
Issue as Framed

• . . . problems of asymmetric information can be
  solved either by private sector initiative . . .
  or by government intervention . . .
• A government solution may fail . . . Even a
  well-meaning government may not be able to figure
  out true consumer preferences.
• . . . the government-backed standard may be
  difficult to adapt to a new situation.

3
Agricultural Standards Context

• Agricultural commodity standards and their
  application are distinctly different things
• Standards in contemporary context include both
  traditional agricultural product commodity
  standards and agricultural production process
  standards

4
Agricultural Commodity Standards

• Relate to search attributes
• Simply language for commercial trade
• Primarily used by private sector to facilitate
  commerce
• Reduce transactions costs
• Usage may promote fairness and equity
• Benchmark for differentiated, branded products

5
Agricultural Commodity Standards - Federal
Government Application

• Find wide application in voluntary, user-pays
  grading services offered by Federal government
• Find application in private marketing claims,
  some of which are certified by Federal government
  through voluntary, user-pays certification
  services
• Find application in certain Federal government
  regulatory programs intended to 1) support
  cooperative marketing and 2) protect market
  participants from fraudulent and deceptive
  practices

6
Agricultural Production Process Standards

• Relate to credence attributes
• Private sector marketing claims increasingly
  based on verification of agricultural production
  processes
• Federal government verification sought in some
  cases
• Regulatory in certain cases
• Voluntary, user-pays verification service in most
  cases

7
Re-Framing the Issue

• What role ought government play in
  differentiating food products?
• Private market
• Government regulatory intervention
• Private market with government facilitation
  (non-regulatory)

8
Re-Framing the Issue

• What role ought government play in development of
  commodity and/or production process standards?
• What role ought government play in the
  application of commodity and/or production
  process standards?

9
Current Situation - USDA Commodity Grade Standards

• 600 product descriptions - basis for quality
  differentiation
• Developed and modified at producer, processor,
  retailer, consumer request
• Some use at retail widest application earlier in
  marketing chain
• Use not mandated by Federal government
• Mandatory application per some Federal fruit
  vegetable marketing order regulations

10
AMS Maintains Standards for 600 Commodities
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Broadening Government Role in Commodity Standards

• Industry-led consensus standards
• International standards organizations
• Development of open, digital standards

12
Current Situation - USDA Grading Services

• Continued extensive use
• Innovations in service delivery
• Instrumentation
• Automation
• Electronic certificates
• Demand for grading services as quality control by
  large firms

13
Current Situation - Certification Programs

• Rely on end product examination
• Voluntary, user-pays funded
• Specifications developed by private companies
  -often benchmark on USDA grade standards

14
AMS Certification Programs
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Benefits of USDA Grading and Certification

• Private
• Mechanism to differentiate products
• Reduced development costs
• Low cost, trained nationwide work force
• Public
• Reduced cumulative development costs
• Efficient allocation of labor resources
• Reduced entry barriers in consolidated industries

16
Current Situation - Production Process Standards

• Relate to credence attributes
• Audit of production processes rather than
  inspection of end products
• Prescriptive in 3 cases 1) organic standards,
  2) certain livestock marketing claims (e.g., no
  antibiotics, free range, grain fed), and 3)
  foreign government requirements (e.g, BEV for
  Canada, Mexico, Japan)
• Mainly, USDA assists industry in supporting their
  claims - based on adherence to ISO quality
  system protocols

17
AMS Process Verification Programs
18
Benefits of USDA Process Verification Programs

• Maintains ISO principle of separation of program
  design and verification
• Private entities develop verifiable programs to
  support marketing claims
• USDA audits programs to verify compliance
• Provides marketing cachet of USDA seal
• Provides mechanism for product differentiation
  according to credence attributes

19
What Role Ought Government Play in Development of
Commodity and/or Production Process Standards?

• USDA standards are either useful or not
• USDA standards can be reflective of true
  consumer preferences
• USDA standards provide a basis for product
  differentiation
• USDA standards can address market failure due to
  asymmetric information and reduce transactions
  costs depending on use

20
What Role Ought Government Play in Application of
Commodity and/or Production Process Standards?

• This is the more pertinent question
• Regulatory or prescriptive applications fair game
  as to whether market failure (asymmetric
  information, public good) or social welfare bases
  justified
• Voluntary, user-pays applications reduce
  transactions costs and facilitate marketing