Harmonization- a theoretical model (2nd draft)organic.usask.ca/reports/Standardization...

THE ECONOMIC IMPACTS

OF

HARMONIZING ORGANIC

STANDARDS INTERNATIONALLY

A Thesis Submitted to the College

of Graduate Studies and Research

in Partial Fulfillment of the Requirements

for the Degree of Master of Science

in the Department of Agricultural Economics

University of Saskatchewan

Saskatoon

By

ERIN N. SAWYER

© Copyright Erin Sawyer, August 2004. All rights reserved.

PERMISSION TO USE

In presenting this thesis in partial fulfillment of the requirements for a

Postgraduate degree from the University of Saskatchewan, I agree that the Libraries

of this University may make it freely available for inspection. I further agree that

permission for copying of this thesis in any manner, in whole or in part, for scholarly

purposes may be granted by the professor or professors who supervised my thesis

work or, in their absence, by the Head of the Department or the Dean of the College

in which my thesis work was done. It is understood that any copying or publication

or use of this thesis or parts thereof for financial gain shall not be allowed without

my written permission. It is also understood that due recognition will be given to me

and the University of Saskatchewan in any scholarly use that may be made of any

material in this thesis.

Requests for permission to copy or to make use of material in this thesis in

whole or part should be addressed to:

Head of the Department of Agricultural Economics

University of Saskatchewan

51 Campus Drive

Saskatoon, Saskatchewan

S7N 5A8

i

ABSTRACT

Sawyer, Erin N., M.Sc. University of Saskatchewan, Saskatoon, August 2004. The economic impacts of harmonizing organic standards internationally.Supervisor: William A. Kerr

Global trade in organic products is increasing. Organic standards are

necessary in order to prevent fraudulent claims by producers, however these same

standards can inhibit trade. Harmonization of organic standards has been suggested

as a means to promote the organic industry and enhance trade in organic products.

An examination of the economic literature illustrates the lack of research in the area

of harmonization of production and processing methods and its welfare impacts.

Many are calling for the harmonization of standards, however there has been

little economic analysis of the resulting global welfare changes. Based on a

theoretical model and simulation, it is proposed that harmonization of organic

standards internationally may not improve global welfare and in fact may cause a

decrease in demand for organic goods due to differing consumer beliefs.

A survey was conducted to determine consumer preferences for different

organic standards. Consumers were interviewed in the UK, the US and Canada. A

conjoint analysis was completed and the results were compared.

The results of the conjoint analysis indicate that there is no statistical

difference between the preferences of consumers in all three regions. Thus consumer

beliefs should not inhibit the harmonization of organic standards. However, the

theoretical model suggests that if harmonization is to be pursued that the standard

should be chosen to reflect the most lenient standard.

ii

ACKNOWLEDGEMENTS

I would like to thank Dr. William A. Kerr for his support, guidance and

encouragement during this project. I would also like to thank my committee, Simon

Weseen and Jill E. Hobbs for their contributions and assistance, and Wayne R.

Robinson, my external examiner.

I have received support from numerous other people who I would also like to

mention and thank. Dr. Nick Perdikis for his assistance in Aberystwyth. Shannon

Hall for her help in conducting the surveys in Vancouver. Sîan, Lindsay and Karen

for their assistance with the surveying in Aberystwyth. Andrea Brocklebank, my

officemate, for allowing me to test thoughts and ideas, and for being a good friend.

This project involved surveying consumers at various store fronts, I would

like to take this opportunity to thank all the stores who permitted us to conduct the

survey on their premises – Safeway at Circle and 8th (Saskatoon), Steep Hill Food

Coop Ltd. (Saskatoon), the Saskatoon Farmer’s Market, Caper’s Community Market

on 4th (Vancouver), Choices Market on 16th (Vancouver), Larry’s Market in Queen

Anne (Seattle), Puget Consumer Coop in Issaquah (Seattle), the Treehouse Organic

foodshop (Aberystwyth) and Safeway in Aberystwth.

In addition I would like to say a heartfelt thanks to Ben, my family, friends

and Ben’s family for all their support and love.

Finally, I would like to acknowledge my fellow graduate students, the faculty

and staff in the Department of Agricultural Economics at the University of

Saskatchewan for all their knowledge, support and friendship.

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DEDICATION

I would like to dedicate this thesis to my best friend and love, Ben, who has

always encouraged me to achieve my dreams.

I would also like to dedicate this thesis to my family who have always

supported me in my endeavours.

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TABLE OF CONTENTS

PERMISSION TO USE..............................................................................................i

ABSTRACT................................................................................................................ii

ACKNOWLEDGEMENTS.....................................................................................iii

DEDICATION..........................................................................................................iv

TABLE OF CONTENTS..........................................................................................v

LIST OF FIGURES..................................................................................................ix

LIST OF TABLES....................................................................................................xi

Chapter 1: Introduction...........................................................................................11.1 Background Information.................................................................................11.2 Problem Statement...........................................................................................21.3 Proposition........................................................................................................31.4 Objectives..........................................................................................................41.5 Thesis Outline...................................................................................................4

Chapter 2: Organic Certification around the Globe..............................................82.1 Introduction......................................................................................................82.2 What is Organic Farming?.............................................................................92.3 Organic Standards.........................................................................................102.4 Organic Certification.....................................................................................132.5 Certification around the World....................................................................16

2.5.1 Australia............................................................................................................................172.5.2 Canada...............................................................................................................................182.5.3 The European Union.........................................................................................................202.5.4 Japan.................................................................................................................................212.5.5 New Zealand.....................................................................................................................232.5.6 The United States..............................................................................................................242.5.7 The US vs. the EU............................................................................................................26

2.6 International Organizations..........................................................................272.6.1 IFOAM..............................................................................................................................272.6.2 Codex Alimentarius Commission.....................................................................................292.6.3 ISO....................................................................................................................................302.6.4 UN/FAO............................................................................................................................31

2.7 Conclusions.....................................................................................................31

Chapter 3: Harmonizing the Organic Industry....................................................333.1 Introduction....................................................................................................333.2 The Question of Harmonized Standards for the Organic Industry..........34

3.2.1 Current Situation...............................................................................................................343.2.2 Arguments for Harmonization..........................................................................................353.2.3 Arguments Against Harmonization..................................................................................37

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3.2.4 Government Involvement in Harmonization....................................................................393.3 The Economic Study of Harmonization.......................................................40

3.3.1 Non-Tariff Barriers to Trade.............................................................................................403.3.2 Harmonization...................................................................................................................423.3.3 Standardization..................................................................................................................463.3.4 Grading.............................................................................................................................493.3.5 The Theory of Clubs.........................................................................................................50

3.4 Conclusion......................................................................................................52

Chapter 4: Harmonization: A Theoretical Model................................................554.1 Introduction....................................................................................................554.2 The Benchmark..............................................................................................564.3 Equivalency....................................................................................................60

4.3.1 Welfare Effects with Slight Variations in Standards........................................................634.3.2 Welfare Effects with Greater Variation in Standards.......................................................674.3.3 Reversing the Standards....................................................................................................73

4.4 Harmonization................................................................................................754.4.1 Harmonization when the Importer has the Stricter Standard............................................75

4.4.1.1 Scenario 1......................................................................................................................764.4.1.2 Scenario 2......................................................................................................................824.4.1.3 Scenario 3......................................................................................................................89

4.4.2 Harmonization when Exporter has the Strict Standard.....................................................944.5 The Implications of Differing Standards.....................................................974.6 The Effects of Distribution Shape................................................................984.7 Conclusion......................................................................................................99

Chapter 5: Trade Model Simulation....................................................................1015.1 Introduction..................................................................................................1015.2 Market Demand for Organic Products......................................................102

5.2.1 Calculating Market Demand...........................................................................................1025.3 World Trade in Organic Products.............................................................1085.4 The Simulation.............................................................................................112

5.4.1 Scenario 1, Case 1...........................................................................................................1135.5 Results...........................................................................................................122

5.5.1 Scenario 1........................................................................................................................1235.5.1.1 Case 1..........................................................................................................................1235.5.1.2 Case 2..........................................................................................................................1245.5.1.3 Case 3..........................................................................................................................126



5.6 Conclusions...................................................................................................135

Chapter 6: Organic Standards and Consumers: An International Comparison..................................................................................................................................1386.1 Introduction..................................................................................................138

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6.2 Data Collection.............................................................................................1396.2.1 Survey Locations.............................................................................................................1396.2.2 Respondent Recruitment.................................................................................................141

6.3 Survey Description.......................................................................................1426.4 Results: Identifying Organic Consumers...................................................144

6.4.1 Canada.............................................................................................................................1446.4.2 United States...................................................................................................................1506.4.3 United Kingdom..............................................................................................................1566.4.4 Discussion.......................................................................................................................160

6.5 Conclusion....................................................................................................161

Chapter 7: Developing the Conjoint Model.........................................................1637.1 Introduction..................................................................................................1637.2 Analyzing Consumer Behaviour.................................................................1647.3 Conjoint Measurement................................................................................1667.4 Empirical Applications................................................................................1677.5 The Conjoint Experiment............................................................................168

7.5.1 Attribute Selection..........................................................................................................1717.5.2 Conjoint Composition.....................................................................................................1767.5.3 Conjoint Design..............................................................................................................177

7.6 Reliability and Validity................................................................................1827.7 Summary.......................................................................................................183

Chapter 8: Conjoint Results.................................................................................1848.1 Introduction..................................................................................................1848.2 Conjoint Results...........................................................................................185

8.2.1 Salad................................................................................................................................1858.2.1.1 Canada.........................................................................................................................1868.2.1.2 United States...............................................................................................................1948.2.1.3 The United Kingdom..................................................................................................2018.2.1.4 Consumer Preferences vs. National Standards (Salad)...............................................207

8.2.2 Beef.................................................................................................................................2148.2.2.1 Canada.........................................................................................................................2148.2.2.2 United States...............................................................................................................2218.2.2.3 United Kingdom..........................................................................................................2278.2.2.4 Consumer Preferences vs. National Standards (Beef)................................................2338.2.2.5 Statistical Differences between Consumers in Different Countries (Beef)................235

8.3 Implications..................................................................................................2378.4 Conclusion....................................................................................................238

Chapter 9: Summary and Conclusions................................................................2399.1 Introduction..................................................................................................2399.2 Summary of Research Findings..................................................................241

9.2.1 The Theoretical Trade Model.........................................................................................2419.2.2 Consumer Preference Analysis.......................................................................................243

9.3 Implications for the Organic Industry.......................................................2449.4 Limitations of the Research........................................................................2469.5 Areas for Further Study..............................................................................2479.6 Conclusion....................................................................................................249

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LIST OF REFERENCES......................................................................................250

APPENDIX A.........................................................................................................256

APPENDIX B.........................................................................................................270

APPENDIX C.........................................................................................................272

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LIST OF FIGURESFigure 4. 1 Autarky.........................................................................................................................57Figure 4. 2 Open Borders................................................................................................................59Figure 4. 3 Graphing the standards (importer stricter)....................................................................62Figure 4. 4 Equivalency: Importing country...................................................................................64Figure 4. 5 Equivalency: World market changes............................................................................65Figure 4. 6 Equivalency: Exporting Country..................................................................................66Figure 4. 7 Wide variation in standards...........................................................................................67Figure 4. 8 Welfare implications in the importing country when standards differ greatly.............69Figure 4. 9 World market effects when standards differ greatly.....................................................71Figure 4. 10 Exporting country when standards differ greatly......................................................72Figure 4. 11 Graphing the standards (exporter - stricter)..............................................................74Figure 4. 12 Harmonizing to the stricter standard: Demand effects in the exporting country......77Figure 4. 13 Harmonizing to the stricter standard: Supply and demand effects in the exporting

country......................................................................................................................80Figure 4. 14 Harmonizing to the stricter standard: Changes to the world price............................81Figure 4. 15 Harmonizing to the stricter standard: Changes in the importing country.................82Figure 4. 16 Harmonizing to the lenient standard: Demand effects in the importing country......84Figure 4. 17 Harmonizing to the lenient standard: Total welfare effects in the importing country. .

...................................................................................................................................85Figure 4. 19 Harmonizing to the lenient standard: Welfare effects in the exporting country.......89Figure 4. 20 Harmonizing to the median standard: Welfare effects in the exporting country......91Figure 4. 21 Harmonizing to the median standard: Welfare effects in the importing country......92Figure 4. 22 Harmonizing to the median standard: World market effects....................................93Figure 4. 23 Consumers with homogeneous tastes.......................................................................98Figure 5.1 A normally distributed population (mean = 1000, s.d.=10)........................................103Figure 5.2 Demand curve estimates (mean = 1000, s.d. =10)......................................................107Figure 5.3 Demand and supply curves in the exporting country..................................................109Figure 5.4 Demand and supply for organic products in the importing country...........................109Figure 5.5 Excess supply and demand curves for various trade scenarios...................................111Figure 5.6 Autarky......................................................................................................................114Figure 5.7 Equivalency: Changes in demand in the importing country......................................115Figure 5.8 Equivalency: World market changes.........................................................................115Figure 5.9 Equivalency:Welfare changes in the exporting country............................................116Figure 5.10 Harmonizing to the stricter standard: Changes in the exporting country..................117Figure 5.11 Harmonizing to the stricter standard: Changes to the world price............................117Figure 5.12 Harmonizing to the stricter standard: Changes to the importing country..................118Figure 5.13 Harmonizing to the lenient standard: Changes in the importing country..................119Figure 5.14 Harmonizing to the lenient standard: World market effects......................................119Figure 5.15 Harmonizing to the lenient standard: Changes in the exporting country...................120Figure 5.16 Harmonizing to the median standard: Changes in the exporting country..................121Figure 5.17 Harmonizing to the median standard: World market effects.....................................121Figure 5.18 Harmonizing to the median standard: Changes in the importing country.................122Figure 6.1 Frequency of organic purchases by Canadian consumers (n=176)...........................147Figure 6.2 Organic purchase motivators for Canadians (n=176)................................................148Figure 6.3 Frequency of organic purchases by US consumers (n=50).......................................153Figure 6.4 Organic purchase motivators for US consumers (n=50)...........................................154Figure 6.5 Frequency of organic purchases by UK consumers (n=100).....................................158Figure 6.6 Organic purchase motivations in the UK (n=100).....................................................159Figure 7.1 Conjoint analysis decision process............................................................................170Figure 7.2 Example of profile presented to survey participants.................................................180Figure 8.1 Relative Importance of Salad Attributes (Canada) (n=90)........................................187Figure 8.2 Relative importance of salad attributes by frequent consumers of organic goods

(Canada) (n= 59)........................................................................................................192

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Figure 8.3 Relative importance of salad attributes by occasional consumers of organic goods (Canada) (n=31)..........................................................................................................193

Figure 8.4 Relative importance of salad attributes (US) (n=23).................................................195Figure 8.5 Relative importance of salad attributes by frequent consumers of organic goods (US)

(n=16)..........................................................................................................................199Figure 8.6 Relative importance of salad attributes by occasional consumers of organic goods

(US) (n=9)...................................................................................................................200Figure 8.7 Relative importance of salad attributes (UK) (n=49)................................................202Figure 8.8 Relative importance of attributes for frequent purchasers of organic goods (UK Salad)

(n=34)..........................................................................................................................206Figure 8.9 Relative importance of attributes for occasional purchasers of organic goods (UK

Salad) (n=15)..............................................................................................................207Figure 8.10 Relative importance of beef attributes (Canadian) (n=80)........................................215Figure 8.11 Relative importance of beef attributes by occasional purchasers of organic goods

(Canada) (n=33)..........................................................................................................220Figure 8.12 Relative importance of beef attributes by frequent purchasers of organic goods

(Canada) (n=47).........................................................................................................220Figure 8.13 Relative importance of beef attributes (US) (n=25)...................................................221Figure 8.14 Relative importance of beef attributes by frequent purchasers of organic goods (US)

(n=18)........................................................................................................................226Figure 8.15 Relative importance of beef attributes by occasional purchasers of organic goods (US)

(n=7)..........................................................................................................................226Figure 8.16 Relative importance of beef attributes (UK) (n=48)...................................................228Figure 8.18 Relative importance of beef attributes by frequent purchasers of organic goods (UK)

(n= 23).........................................................................................................................232Figure 8.19 Relative importance of beef attributes by occasional purchasers of organic goods

(UK) (n= 25)..............................................................................................................233

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LIST OF TABLES

Table 4.1 - Welfare effects of equivalency negotiations compared to autarky.....................................73Table 4.2 - Welfare Effects of Harmonization......................................................................................96Table 5.1 - Population and Demand Intercepts (mean = 1000, s.d. =10)...........................................105Table 5.2 - Demand Curve Equations.................................................................................................107Table 5.3 - ES and ED equations........................................................................................................110Table 5.4 – Welfare results of autarky................................................................................................114Table 5.5 – Welfare effects of equivalency in the importing country................................................115Table 5.6 - Welfare results of equivalency in the exporting country..................................................116Table 5.7 – Welfare effects of harmonizing to the stricter standard for the exporter.........................117Table 5.8 – Welfare effects of harmonizing to the stricter standard for the importer........................118Table 5.9 – Welfare effects of harmonizing to the lenient standard for the importer.........................119Table 5.10 – Welfare effects of harmonizing to the lenient standard for the exporter.......................120Table 5.11 - Welfare effects of harmonizing to the median standard for the exporter.......................121Table 5.12 – Welfare effects of harmonizing to the median standard for the importer......................122Table 5.13 - Welfare results for Scenario 1, Case 1, ..............124Table 5.14 - Welfare results for Scenario 1, Case 2,................................................................................

.................................................................................................125Table 5.15 - Welfare results for Scenario 1, Case 3, ..............127Table 5.16 - Welfare results for Scenario 2, Case 1,

.................................................................128Table 5.17 - Welfare results for Scenario 2, Case 2,

..............................................................130Table 5.18 - Welfare results for Scenario 2, Case 3,


................................................................132Table 5.20 - Welfare results for Scenario 3, Case 2,


..............................................................135Table 6.1 - Comparison of Survey and Canadian Populations...........................................................145Table 6.2 - Comparison of survey and US populations......................................................................151Table 6.3 - Comparison of survey and UK populations.....................................................................157Table 7.1- Organic standard attributes and levels...............................................................................173Table 8.1 - Total Utility for the Most Preferred Attribute Combination (Profile 8)...........................188Table 8.2 - Total Utility Calculations for Remaining 7 Profiles.........................................................188Table 8.3 - Consumer Preferences in Segmented Groups (Canadian)................................................192Table 8.4 - Total utility for the most preferred attribute combination (Profile 8)..............................195Table 8.5 - Total utility calculations for remaining 7 profiles............................................................195Table 8.6 - Consumer preferences in segmented groups (US)...........................................................199Table 8.7 - Total utility for the most preferred attribute combination (Profile 8)..............................203Table 8.8 - Total utility calculations for remaining 7 profiles (UK)...................................................203Table 8.9 - Utility values for frequent and occasional consumers of organic goods..........................206Table 8.10 - Country comparisons for the salad attributes.................................................................213Table 8.11 - Total utility for the most preferred attribute combination (Profile 5)............................216Table 8.12 - Total utility calculations for remaining 7 profiles (CAN Beef).....................................216Table 8.13 - Utility values for frequent and occasional consumers of organic goods (Can Beef).....219Table 8.14 -Total utility for the most preferred attribute combination(Profile 5)..............................222

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Table 8.15 - Total utility calculations for remaining 7 profiles (US Beef).........................................223Table 8.16 - Utility values for frequent and occasional consumers of organic goods (US Beef).......225Table 8.18 - Total utility for the most preferred attribute combination (Profile 5)............................228Table 8.19 - Total utility calculations for remaining 7 profiles (UK Beef)........................................229Table 8.20 - Utility values for frequent and occasional consumers of organics (UK Beef)...............232Table 8.21 - Country comparisons for the beef attributes...................................................................236

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Chapter 1

Introduction

1.1 Background Information

The market for organic products has emerged as an important segment in the

global agricultural economy. As consumer wealth increases, so too does consumer

concern for the environment, food safety and their health. These changes in

consumer preferences have fuelled the growth of the organic industry. Currently, the

market for organic products is concentrated in the European Union (EU), the United

States (US), Canada and Japan, however, the potential for global trade in organic

products is growing.

In order for a product to be labelled “organic” it must pass through a

certification process; which ensures that specific production standards are followed.

Both organic standards and the certification procedures can differ between countries.

The certification system is necessary within the organic industry to assure the

consumer that the product they are purchasing was produced according to specified

organic standards. Difficulties, however, arise when producers attempt to trade their

products across national borders. Due to differences in organic standards and

certification systems, what is considered organic in one country may not be in

another. As a result, international trade and its benefits are inhibited.

1

Due to growing potential markets for organics internationally, the issue of

harmonized organic certification programs among countries has arisen. The

differences in standards and certification procedures can inhibit the development of

international markets and the growth of domestic industries. Producers who wish to

export their organic product may face a series of trade barriers because of the

divergence in standards. Some advocates of the organic industry have been calling

for the harmonization of organic standards and certification processes. It is believed

that harmonization will eliminate trade barriers and advance the organic industry

from its present state; however, little is known about the economic consequences of

harmonizing organic standards.

1.2 Problem Statement

The economic discussion surrounding organic products has been mainly

focused on organic labelling and supply and demand responses to organic foods.

There has also been some discussion of consumer response to the harmonization of

organic standards and the impacts of organic certification. There has not, however,

been any discernable exploration in the economic literature of the welfare

implications of harmonizing organic standards, or for that matter, of harmonization

of production and processing methods.

It is important to understand the impacts of harmonizing organic standards

on both consumers and producers in import and export markets before proceeding

with the harmonization process. Additionally, the consequences of harmonizing to

the more lenient standard, to the stricter standard or to a median standard must all be

examined.

2

In order to evaluate the welfare implications of harmonizing organic

standards, a trade model is constructed to illustrate the changes in supply and

demand if harmonization is pursued. Standards are put in place to meet consumer

demand; therefore it is assumed that standards within a country are established in

order to please the maximum number of consumers. If this standard is changed,

consumers will be dissatisfied with the product. Knowledge of consumer preferences

for organic standards will reveal whether consumers in different countries have

similar or dissimilar predilections for organic standards.

Little research has been done to determine the economic impacts of

harmonizing standards, particularly in terms of process certification schemes. This

study will address the trade and welfare implications of harmonizing organic

standards. It will also identify whether consumers around the world differ in their

preferences for organic standards.

1.3 Proposition

This thesis proposes that harmonizing organic standards and certification

processes may not be beneficial to society. Consumer preferences for their national

standard may prevent harmonization from taking place or may result in decreased

global welfare, should harmonization occur. Imports from a country perceived to

have more lenient organic standards will lower the overall value a consumer places

on the consumption of the product. Producers in the importing country may then

experience a decrease in demand due to the integration of so-called inferior organic

imports and the domestic product. The trade model developed in this thesis, along

with information regarding consumer preferences for organic standards will identify

3

which trade scenarios will be most beneficial to society as a whole, however it is

proposed that harmonization may not enhance global welfare

1.4 Objectives

To test the hypothesis, research into the trade effects of harmonizing

standards, and research to distinguish consumer preferences for organic standards,

will be conducted. This research will include a brief description of the organic

industry and the current state of certification programs; development of a theoretical

two-country trade model; and consumer research through a survey instrument. The

objective of the study is to evaluate the welfare effects of harmonizing organic

standards and of negotiating equivalency; and to determine which option is the most

welfare enhancing. By gathering information on consumer preferences for organic

standards, conclusions can be reached regarding differences in preferences among

populations. For example, significant differences may suggest harmonization across

countries will not be welfare enhancing.

1.5 Thesis Outline

The thesis will develop as follows. Chapter 2 will provide background

information on the need for certification within the organic industry and will

summarize both government and international certification programs around the

world. A description of organic farming and the recent growth trends in the industry

will be followed by a discussion of organic standards. The ability of standards and

labels to reduce transaction costs is an important concept within the organic market.

Labels and standards are necessary, if not sufficient, conditions to ensure consumer

4

faith in the industry. An overview of the certification processes in Canada, the EU,

the US, Australia, New Zealand and Japan will be provided. International

organizations have also played a role in the development of organic standards and

will be examined.

Chapter 3 provides a literature review of the research conducted in the field

of standards harmonization. With increased globalization, standardization is

becoming more common, however little economic research has been done in the

area of harmonization of production and processing methods. Instead, the majority

of harmonization literature has focused on the standardization of physical

components of products and laws. Due to the lack of research in this area, ideas will

be drawn from a wide variety of resources.

In Chapter 4, a theoretical two-country partial equilibrium trade model will

be developed. This model will be the foundation of the study. The impacts of

harmonization on demand and supply in both the importing and exporting countries

will be established and changes in welfare will be calculated. These results will be

compared with the current situation of equivalency negotiations1. The model is

developed by assuming that a population is normally distributed and that a demand

curve can be determined for every person along the distribution. The standard is set

at the mean of the distribution (where the maximum number of consumers is

satisfied). The aggregate demand is the sum of all the individual demand curves. It is

maximized at the mean and any movement away from the mean will result in a

1 Equivalency negotiations are presently occurring between countries as a means to reduce trade barriers. While standards are not identical in an equivalency agreement, they are deemed to be equivalent for the purpose of trade.

5

lower aggregate demand. Using these assumptions, the trade model can be estimated

and welfare calculated.

Chapter 5 develops the theoretical model further by empirically simulating

the impacts of equivalency negotiations and harmonization. This will be done for

several cases and over a range of values to provide a powerful illustration of the

effects. This is not an actual empirical estimation of the economic effects of these

policies for particular markets. Instead the estimations are intended to provide

insight into what may occur if standards change through the process of

harmonization. It is proposed that strong differences in consumer preferences would

not lead to welfare enhancement and hence there is a need for information on

consumer preferences. This led to the development of a consumer survey.

Chapter 6 gives a full description of the consumer survey. The different parts

of the survey are discussed along with explanations of the choice of locations and

respondents. The survey was conducted in three countries: Canada, the US and the

UK. A diverse population base was required to determine if consumers in different

countries differ significantly in their preferences for organic standards. General

attitudinal results are examined. This includes the socio-economic information

obtained from the respondents as well as their knowledge regarding the organic

industry and organic standards within their home country.

Chapter 7 describes the theoretical framework that is used to evaluate

consumer preferences for organic standards using conjoint analysis. Conjoint

analysis is based on the idea that consumers evaluate products based on the bundle

of product attributes that maximizes their utility. In the survey, consumers were

6

asked to rate products based on these attributes. This information can be used to

determine how respondents will react towards any combination of the attributes. A

brief discussion of the foundations of consumer theory will be followed by a

summary of the steps involved in conjoint measurement and in the design of this

experiment.

Chapter 8 provides the conjoint results for all three countries as well as

across segments of the populations. Using the results of the conjoint analysis, it is

possible to determine trade-offs made by respondents as well as to analyze

hypothetical products. Following the data analysis, the results will be used to test the

validity of the hypothesis.

Chapter 9 provides a summary of the results of the research. A discussion of

the conclusions is included. Further opportunities for research are presented.

7

Chapter 2

Organic Certification Around the Globe

2.1 Introduction

Many advocates for organic agriculture claim that international

harmonization of organic standards is needed in order to advance the organic

industry from its present state. They maintain that harmonization will enable greater

gains from trade and will create a truly global organic industry. In order to

understand these harmonization claims, some understanding of organic agriculture

and the current state of certification systems around the world is necessary. This

chapter will provide background information on the need for certification and will

summarize both domestic and international certification programs in various

jurisdictions.

The chapter begins with a brief discussion of organic agriculture and its

evolution. This is followed by an examination of organic standards and the role they

play. The third section of the chapter explains how certification averts market failure

and discusses both the negative and positive aspects of organic certification. The

chapter concludes with an overview of certification systems around the world,

including the role of international organizations in organic certification.

8

2.2 What is Organic Farming?

Organic farming is a production process whose goal is to promote and

enhance ecosystem health by using a balanced choice of crops and implementing

diversified crop rotation systems (Food and Agriculture Organization 2003). The

concept of organic agriculture began in the United Kingdom in the 1930s but had

only limited acceptance until the environmental movement of the 1970s (Browne et

al. 2000). After experiencing a minor boom, the organic market again dropped off

until recently when consumer fears and concerns regarding food safety and pesticide

use began to increase.

The guiding principle of organic agriculture is deeply rooted in ecological

ideals. Agricultural land is viewed as being part of an environmental system of

interconnected, living organisms (Thode Jacobsen 2002). However, organic

agriculture has also tried to progress beyond its environmental roots into the realm

of socially-just production2 (see Browne et al. 2000 for a detailed examination of the

links between organic farming and ethical trade). According to Thode Jacobsen

(2002, p.3), the aim of the organic farmer is to “support and strengthen biological

processes without using technical remedies”; in other words, the use of synthetic

chemicals is forbidden. In organic livestock production the number of animals raised

is directly correlated with the size of the farm and its ability to absorb waste (Thode

Jacobsen 2002). This enables the nutrients to be recycled through the agricultural

system and avoids degradation of the environment.

2 Socially- just production has no determinate definition but, based on the work by Browne et al., 2000, socially-just or ethical agriculture appears to have three focuses: a focus on people (i.e. workers rights and labour standards), a focus on environment with sustainable production being a key component, and a focus on animal welfare and rights.

9

The growth in organic agriculture is reflected in the rate of conversion from

conventional to organic agricultural land. Between 1995 and 2000, the total area of

organic land tripled in Western Europe and the United States (Food and Agriculture

Organization 2003). In 1999, the United Kingdom experienced a 125% increase in

the area of organic agricultural land (Food and Agriculture Organization 2003).

However, despite these dramatic increases in organic land in production, the total

sales of organic products in industrial countries were still less than 2% of total food

sales in 2000 (Food and Agriculture Organization 2003).

2.3 Organic Standards

Organic agriculture is based on a foundation of strict standards with

information pertaining to these standards being conveyed by labels. Why are

standards and labels necessary in organic production? This section attempts to

provide answers to this question. Specifically, standards and labels are discussed in

terms of the role they play in instilling confidence in consumers, lending credibility

to organic claims, providing protection to the organic industry and lowering

transaction costs.

Organic standards differ between nations and regions. Prior to the

involvement of government bodies, private organizations or farmer-based groups

would establish a set of standards with which to guide their production practices.

Generally, these standards were updated as technology and consumer demands

changed. With the involvement of governments, national standards are becoming

more prevalent. These standards can be voluntary or mandatory and most

regulations require producers to be registered with an approved, independent

10

certification body in order to label their product as “organic”. Facilitating trade is the

primary motivation for government involvement in the regulation of organic

standards.

Labels are instruments that convey information to consumers regarding

standards. In the case of organic foods, labels indicate to consumers that a product

was produced using organic techniques. Organic products are credence goods. A

credence good is one where the consumer cannot tell how the product was produced

even after purchase and consumption of the good. Labels are used to inform

consumers of the organic qualities of a product and to justify the price premium that

organic goods receive. Standards and labels can increase consumer confidence in the

organic industry and can help protect and promote the industry.

Without labels there would be no market for organic products. Labelling

allows organic goods to be segregated from their conventional counterparts. This

segregation enables producers to charge a higher price for their organically produced

goods. This price premium is necessary due to the higher costs of production

associated with producing food organically. Despite labelling and standards

requirements, there is still a possibility of mislabelling of goods by conventional

farmers, which creates a need for third party certification. Third party certification

prevents fraudulent claims and is required in order to correct the market failure that

would occur if no labels were used.

Standardization can also help reduce transaction costs. Transaction costs are

those costs that arise over the course of the business transaction. They can be

categorized into information costs, which occur ex ante to the transaction,

11

negotiation costs, which occur during the transaction and monitoring and

enforcement costs, which occur ex post. A common organic standard reduces the

monitoring costs of consumers by clearly defining the term “organic” (McCluskey

2000). If many standards prevail in a market, then consumers must spend time

determining which standard they prefer. A single standard would reduce consumer

confusion and may encourage increased participation in the organic market. These

reductions in transaction costs also apply to importers, as a single standard would

eliminate the need to verify numerous certification standards.

Organic standards differ depending on the technical, philosophical and cost

factors present in a country or region (Lohr and Krissoff 2002). Casella (1996b, p.5)

states that “organic standards reflect the needs of the groups that expressed them”, if

the needs and groups differ, then so will the standards. It is believed that organic

standards should reflect the environmental conditions of the region, therefore what

may be good for a Saskatchewan farmer may not be appropriate for a farmer in Sub-

Saharan Africa. These differences are expected by the organic industry but can limit

access to markets and inhibit international trade.

Standards and labels are necessary, if not sufficient, for the survival of the

organic industry. While a unified or national standard helps protect the term

“organic”, provide information and reduce costs to consumers, the fact that

standards differ across borders may make them difficult to harmonize. Currently,

more emphasis is placed on conferring equivalency rather than harmonization. This

allows goods from different countries to be treated equally even though standards

followed when producing those goods may not be identical. Equivalency

12

negotiations can be costly and time-consuming and the organic industry is

considering alternative means to smooth the flow of trade in organic goods.

2.4 Organic Certification

This section of the chapter discusses the need for organic certification. Both

the negative and positive aspects of certification are examined along with the

certification options available to producers. These options include private vs. public

certification and individual vs. group certification. This will lead into a discussion of

various certification programs around the world.

According to Giannakas (2002), a lack of third party certification will lead to

supply-side failures in the markets for organic foods. These failures are due, in part,

to the credence nature of organic goods. The production of organic food is more

costly than the production of conventional products, hence, if the industry is to

survive it must be able to obtain higher prices in the market. This cost differential

could entice non-organic producers to mislabel their conventional products as

organic in order to cash in on the price premiums. As well, consumers will be aware

of the possibility of mislabelling and may refrain from purchasing organic products

unless some guarantee is provided of the production methods used. Certification by

an independent body enables consumers to verify that a product conforms to specific

standards (Thode Jacobsen 2002).

There are both positive and negative issues surrounding certification.

Certification can add to the credibility of the industry and may help protect

consumers from fraudulent claims. Certification can also lead to lower transaction

costs, especially if a national accreditation body accredits certifiers. Certification

13

lowers transaction costs by reducing information asymmetry within the supply chain

(Weseen 2003). Information asymmetry occurs because, while producers have

knowledge of their production practices, processors and consumers do not.

Certification verifies organic authenticity thus reducing the ex ante search costs.

These lower transaction costs can lead to increased trade and greater opportunities

for producers.

Certification is not always positive; there are also negative consequences for

producers. In 1999, the need for certification was intensified globally as the

European Union insisted that trading nations adhere to the EU 2092/91 rules enacted

in 1993 (Mutersbaugh 2002). If exporters did not comply with EU standards then

their product could not be sold as organic in the EU. This insistence caused a

decrease in the ability of certifiers to accommodate producer interests and EU and

ISO3 certification rules now dominate the industry (Mutersbaugh 2002).

Certification is costly. Organic farmers must incur the increased costs of

having a certification body monitor their production practices (Mutersbaugh 2002).

The organic price premium is now traded off against production, certification and

organization costs (Mutersbaugh 2002). Finally, certification may lead to the

destruction of social movements that support the organic cause (Mutersbaugh 2002).

For example, some consumers are suspicious of government-run labelling and

standards programs and will resist these programs. These suspicions are due to the

perceived ability of agricultural corporations to influence government agendas.

While certification is necessary for trade, trade often implies moving organic goods

3 ISO is an international organization made up of national standards bodies.

14

great distances, which is contrary to the environmental principles that some perceive

organic farming was founded upon4.

As will be seen in the following section, certification programs have evolved

differently around the world. In countries with no national regulatory program,

producers can often choose from many different certifiers each with their own set of

standards. In countries with a national program, producers must choose among

certifiers that have been accredited through the national accreditation body, be it

private or public. Firms can also choose to be certified through foreign entities

(Lohr and Krissoff 2002). Foreign entities can include certification bodies within

importing countries or international certification organizations. In order to increase

market access for their producers, it is quite common for local certification bodies to

have partnerships with international bodies (Thode Jacobsen 2002). This partnership

allows products to flow smoothly across borders.

While most organic food is currently consumed domestically, international

trade in organic products is growing rapidly. This rapid growth has led exporters to

develop improved certification strategies in an attempt to reduce transaction costs.

According to Lohr and Krissoff (2002), these strategies include:

- using an independent local certifier accredited under the international

certification process standards of ISO guide 65 (discussed more fully

later in section 2.6.3)

- using a local branch of an accredited international certifier

4 While the principles of organic farming state that the producer should have a minimal impact on the environment, there are those farmers who produce organic food solely for export markets and thus may not share this principle.

15

- using local certifiers that have partnered with accredited international

entities

- using an international certifier or an entity in the importing country

approved for 3rd party certifications

- subcontracting to processors or distributors certified in the importing

country

Many certification agencies are accredited by a national government body or

an international organization. Accreditation ensures that the certification agency is

complying with the standards it set out to enforce. When a certification agency has

not developed its own standards, it will be accredited by an accreditor whose

standards it has adopted.

Certification systems are a necessary part of the organic agriculture industry.

Certification gives credibility to the claims made by organic producers and in doing

so increases consumer confidence in the organic industry. Without certification, it

would be difficult to verify the production practices of organic producers and the

market would collapse. There are both negative and positive aspects to organic

certification. Due to the necessity of certification, the negative issues are often

overlooked. Reducing certification costs may allow more organic producers to

operate in the industry.

2.5 Certification around the World

Certification programs, like standards, also differ around the world. This

section summarizes the different government certification systems in Australia,

Canada, Japan, New Zealand, the European Union (EU) and the United States (US).

16

These countries were chosen due to their significant role in the world organic

market.

2.5.1 Australia5

The Australian Quarantine and Inspection Service (AQIS), which is a

division of the department of Agriculture, Fisheries and Forestry Australia, oversees

organic certification in Australia. AQIS operates its organic certification program

under the legal framework provided by the Export Control Act of 1982 and the

Export Control Orders of 1997. Australia was one of the first countries to establish

national standards for organics. The National Standards for Organic and Biodynamic

Produce were published in 1992 by the Organic Product Advisory Council (OPAC).

The standards were initially implemented to regulate the export market for organics,

however, in 1998, a second edition was published and implemented that regulated

domestic production and consumption (Australian Quarantine and Inspection

Services 1998). Australia has been granted equivalency status by the EU and is on

the Article 11 list6 .

The certification procedure in Australia proceeds as follows. AQIS approves

and audits private inspection agencies. Each private inspection body submits its own

private standards or “Quality Management Manual” to AQIS who then ensures that

the standards meet the minimum requirements laid out by the National Standards. If

the standards receive the approval of AQIS, the inspection agency is registered as an

“Approved Certifying Organization” and is issued a “Quality Management 5 Information obtained from the European Commission’s 1999 Mission Report, see reference section for details.6 The Article 11 list is a list of countries and certifying agencies that have been granted equivalency by the EU. A more thorough explanation will be given later in section 2.5.3.

17

Certificate”. These certifying organizations are audited annually by AQIS; if the

body is found lacking in some area AQIS will file “Corrective Action Requests”

with the certification agent. In turn, certifying agents also inspect producers

annually, usually around the same time each year and never unannounced.

2.5.2 Canada

The organic market is expanding in Canada. Between 1989 and 1995, the

number of organic producers increased by 300% and annual market growth is

estimated to be between 15-25% (Porter, Phillips and Henry 2001). As a result of the

industry’s growth, Canada implemented a national organic standard in 1999. The

National Standard of Canada for Organic Agriculture differs from most other

government standards in that it is voluntary rather than mandatory. The Canadian

standard is based on the guidelines developed by the Codex Alimentarius

Commission for the “Production, Processing, Marketing and Labelling of

Organically Produced Foods” and the Standards Council of Canada (SCC) uses ISO

65 as its basis for accreditation (Bradley 2002). It should be noted that the Canadian

standards apply only to domestic production and there is no regulation of imported

organics.

Due to the voluntary nature of Canada’s organic standards, there has been

little movement by organic certifiers to become accredited under the national

program. The accreditation costs are high, and there are currently few benefits from

joining the national program. The base application fee is $15,000 CDN. In addition

it costs $1,000 per day for each government employee who works on documents

18

related to the application. If certifying agencies applied prior to December 31, 2003,

they were eligible to receive a 50% reimbursement up to $25,000. After a body has

been approved there is an annual fee of $9,000 plus 0.0025 multiplied by the

certification body’s gross annual revenue, with fees not to exceed $45,000 (Bradley

2002). There are approximately 45 organic certifying organizations practicing in

Canada (Agriculture and Agri-Food Canada 2002). Two provinces, Quebec and

British Columbia, have established provincial accreditation bodies. Certifiers in

these provinces must be accredited with the Certified Organic Associations of

British Columbia or the Conseil d’Accréditation du Québec. Therefore, most

certifiers in these provinces opt out of the national accreditation program due to the

additional costs and the lack of market access it provides (Weseen 2003). The

remainder of the provinces do not have regulations requiring that products labeled

“organic” abide by strict production practices.

Currently, to obtain certification in Canada7, a farmer must complete an

application form that includes specific details of the farm operation. An organic

inspector then inspects the farm. The inspector’s report is passed on to a certification

committee who reviews the file and makes a decision based on the findings. If

approved, the producer is given a producer number to be used on all bills of landing

and labels (Saskatchewan Organic Directorate 2002).

In order to become accredited by the Standards Council of Canada, the

certification body must first make an informal inquiry about becoming accredited.

The certifying body must then submit an application package. There is a pre-

7 This information is from the Saskatchewan Organic Directorate. There may be slight differences across certification bodies-both private and public, i.e. COABC and Conseil d’Accréditation du Québec.

19

assessment and then upon completion of the application the SCC notifies the

applicant of any deficiencies. An on-site assessment is conducted in order to ensure

compliance with the SCC standards. The SCC Director of Conformity Assessment

then reviews the application and decides whether or not to recommend the applicant

to the Board of Directors, with whom the final decision rests.

2.5.3 The European Union

The basic regulations for the European Union’s (EU) organic standards are

laid out in Council Regulation No. 2092/91 which was adopted in June 1991

(European Commission 2001). These standards are fashioned after the International

Federation of Organic Agriculture Movement’s (IFOAM) Basic Standards. Within

the EU, each member state must establish an inspection system that can be run by

either private or public inspection or certification bodies or both (Thode Jacobsen

2002). The Regulation gives guidelines for the production of organic crops in the

European Union (European Commission 2001). Regulation (EEC) No. 1804/1999

applies to organic livestock products (European Commission 2001). Upon

implementation of these regulations by the European Commission it became illegal

to sell non-certified organic products in the EU (Barrett et al. 2002).

There are several ways an organic exporter can sell products in the EU. The

exporter’s domestic government can establish an equivalency agreement with the

EU. Once equivalency has been negotiated, the country will be placed on the Article

11 list (granted third country status). As of July 2002, there were only 7 countries on

this list: Argentina, Australia, Czech Republic, Switzerland, Israel, New Zealand and

20

Hungary (Thode Jacobsen 2002). Until December 31st 2005, organic goods from

countries not on the article 11 list can still be imported into the EU using one of two

methods. Article 11(6) states that individual member countries have the right to

issue import permits for specific consignments from countries not on the article 11

list. Article 11(7) allows a member state to add a ‘third country inspection body’ to

the Article 11 list. This has been interpreted differently by member states, while

some claim that it implies that inspection agencies from countries not on the article

11 list can be approved, others claim that it means that only individual inspection

bodies from countries on the list can be approved (Barrett et al. 2002).

2.5.4 Japan

Japan’s organic market was estimated to be worth US $2.5 billion in retail

sales in 2000 (Food and Agriculture Organization 2003). Organic food in Japan is

classified into three categories: Naturally Grown Chickens, Organic Agricultural

Products and Organic Agricultural Products Processed Food (Japanese Ministry of

Agriculture, Forestry and Fisheries 2000a). In April 2001, the Japanese government

implemented its new organic regulations for plant-based products (Thode Jacobsen

2002). Organic products must carry the mark of the Japanese Agriculture Standard

(JAS) (Thode Jacobsen 2002). Certification bodies must become Registered

Certification Organizations (RCOs) under the Ministry of Agriculture, Forestry and

Fisheries. These RCOs certify production process managers, manufacturers, sub-

dividers and importers. RCOs are required to educate farm managers on the

21

certification and inspection process so that producers can carry out the correct

grading (Japanese Ministry of Agriculture, Forestry and Fisheries 2000a).

In order to qualify to be an inspector or certifier, one must have attained a

certain level of education within a specific field (Japanese Ministry of Agriculture,

Forestry and Fisheries 2000b). Inspectors conduct an initial inspection, as well as

annual inspections. Two or more people are required for inspections, depending on

the size of the site, whereas only one person is needed to judge the application

(Japanese Ministry of Agriculture, Forestry and Fisheries 2000b). If an applicant is

certified, the head of the Certification Organization will issue the certificate

(Japanese Ministry of Agriculture, Forestry and Fisheries 2000a). Certification is

granted for each individual field rather than the farm as a whole. Once a field is

certified, the farmer can raise organic crops (Japanese Ministry of Agriculture,

Forestry and Fisheries 2000a). Oddly, an RCO has the authority to grant certification

standing but does not have the ability to cancel it. In order to cancel a certification,

the organization must report the infraction to the Minister of Agriculture, Forestry

and Fisheries who will then take the appropriate action (Japanese Ministry of

Agriculture, Forestry and Fisheries 2000a).

It is possible for foreign bodies to become Registered Certification

Organizations. However, the organization must be in a country that has negotiated

equivalency with Japan. Both the U.S. and the EU are recognized as being

equivalent by Japan’s MAFF, the EU for organic production and certification and

the US for plant-based organic products. The EU’s standing permits certification

22

bodies to apply for direct recognition of their certification programs, while US

products can be labelled as organic in Japan (Thode Jacobsen 2002).

2.5.5 New Zealand

The organic industry in New Zealand is divided into two sectors; the first

targets the export market and the second, the domestic market (New Zealand

Ministry of Agriculture and Fisheries 1997). There are four certification bodies

within New Zealand, BioGro and AgriQuality certify large organic producers,

Aotearoa certifies small-scale organic producers and Demeter certifies biodynamic

producers (biodynamic agriculture promotes sowing, cultivation and harvesting

timed to cosmic rhythms) (US Foreign Agricultural Service 2000). Both AgriQuality

and BioGro’s certification programs are based on ISO 65 (US Foreign Agricultural

Service 2000).

BioGro’s current certification system involves an annual inspection by an

inspector8. The results of the inspection are then discussed at a meeting of regional

inspectors where decisions are made collectively regarding the certification status of

the property (New Zealand Ministry of Agriculture and Forestry 1997). The Board

of Directors can make changes to the standards at any time, however, every two

years a review is conducted and all participants are invited to submit suggested

revisions (New Zealand Ministry of Agriculture and Forestry 1997).

Until 2001, the government had little involvement with the development of

the organic industry. There were ongoing discussions with the Ministry of

8 There was little information on AgriQuality’s certification program, but as both systems are based on ISO 65, it is expected to be similar

23

Agriculture and Forestry regarding “the need for MAF Regulatory Authority

assistance in providing government to government recognition of the certifying

agencies” (New Zealand Ministry of Agriculture and Forestry 1997). As well, the

Ministry of Commerce and the certification bodies had discussed the need for

protection of the term “organic” in food labelling (New Zealand Ministry of

Agriculture and Forestry 1997).

In March 2001, MAF released a draft of their proposed official assurance

program for organic products (New Zealand Food and Safety Authority 2001). The

program is targeted at organic exports destined for the EU. In 2002, the New

Zealand Food Safety Authority launched its Assurance Programme for Organic

Products (New Zealand Food and Safety Authority 2002). In July 2002, New

Zealand succeeded in gaining third country status with the EU (Thode Jacobsen

2002). This guarantees access to the European market for New Zealand exports.

Japan is also a key market for New Zealand’s exports, and private certification

bodies are trying to create relationships with Japanese certifying organizations to

ensure New Zealand products meet the new Japanese regulations (US Foreign

Agricultural Service 2000).

2.5.6 The United States

The United States’ National Organic Program (NOP) was implemented in

2002. Its rules require all but the smallest producers and handlers (those with under

$5000 in annual sales) to be certified by a state or private accredited certification

body (Economic Research Service 2002). The United States Department of

24

Agriculture will accredit state, private and foreign organizations or persons who

comply with the NOP regulations for the production and certification of organic

agriculture (USDA 2003a).

According to the NOP, a person wishing to receive or maintain organic

certification must have an up-to-date organic production system plan, must permit

on-site inspections, must maintain all applicable records for at least 5 years, and

immediately notify their certification agent if a prohibited substance is applied

(USDA 2003b). An initial inspection is performed, followed by annual inspections

thereafter. The certification body can also conduct additional unannounced

inspections. After the initial inspection the certifying agent will notify the operator if

they have received certification. If they have not, they will receive a notice of

noncompliance or a denial of certification. If a notice of noncompliance is issued the

producer can correct the problem and reapply either with the same certification firm

or with a different agency, however, the notification of noncompliance must be

included in the application. A producer applying for certification is also able to

withdraw their application at any time. Once certified, organic certification will

continue until it is surrendered, suspended or revoked (USDA 2003b).

Since the establishment of the NOP, the US requires that all agricultural

products sold, labelled or represented as organic in the US must be certified by a

USDA accredited certifying agent, with two exceptions. First, foreign government

bodies can apply for USDA Recognition of a Foreign Governments Conformity

Assessment Program. Presently, this recognition has been granted to New Zealand’s

MAF, the Conseil d’Accréditation du Québec, the Certified Organic Associations of

25

British Columbia, UKROFS (United Kingdom Register of Organic Food Standards)

and the government of Denmark (USDA 2003c). There are ongoing negotiations to

permit additional bodies into this category. Second, USDA accreditation is not

needed if equivalency has been determined. The US is presently working to establish

equivalency with four jurisdictions: Japan, the European Union, India and Australia

(USDA 2003c).

2.5.7 The US vs. the EU

The certification processes in the US and the EU are similar; however, there

are several differences in standards that may make it difficult for equivalency to be

established. These include differences in consumer perceptions, differences in

defining terms and differences in the specificity of the standards.

The US primarily focuses on regulating the end organic product. This differs

from the EU approach of regulating the entire production process (Haniotis 2000).

US policies tend to be supply driven (i.e. demanded by the producer), while the EU

policies are driven by consumer demands. There is a great divide between consumer

perceptions of government bodies in the EU and in the US. US consumers tend to

trust the government, while recent food safety scares have led EU consumers to

become more risk averse on issues of food safety and more distrustful of the

government (Haniotis 2000).

There are also differences between production standards. The EU prohibits

growing organic and non-organic crops of the same variety on the same production

unit; the US does not. The NOP requires producers to notify certifiers immediately if

26

prohibited substances are applied; the EU does not. In order to determine what

statement can be used on the label, the US has provided clear guidelines for the

calculation of the “organicness” of the product while the EU does not (Riddle and

Coody 2002). Under the US system, at least 95% of the total ingredients must be

organic; however under EU regulations only 95% of agricultural ingredients must be

organic (Riddle and Coody 2002). This method of calculation may result in products

being labelled organic when less than 95% of the total ingredients are actually

produced organically. Finally, the EU has less specific evaluation criteria for crop

and livestock products than does the US. This lack of specificity could result in less

restrictive criteria.

2.6 International Organizations

If harmonization is the next step in the reduction of trade barriers for organic

goods, then one might expect to see international organizations playing a larger role

in the industry. Already, the International Federation of Organic Agriculture

Movements’ Basic Standards have been used in the formation of national programs

around the world. ISO Guide 65 has also contributed to the development of

certification systems in many nations. This section of the thesis examines the roles

of different international organizations in the development of the organic industry.

2.6.1 IFOAM

The International Federation of Organic Agriculture Movements (IFOAM)

was established in France in 1972. It is a non-profit organization which aims to be a

worldwide umbrella organization of the organic agriculture movement (IFOAM

27

2003). It aims to assist in the exchange of knowledge and expertise, represent the

organic movement internationally, set and revise basic standards and contribute

towards an international guarantee of organic quality (IFOAM 2003). In 1992,

IFOAM established the IFOAM Accreditation Program to accredit certifying bodies

active in certifying organic agriculture throughout the world (Commins 2002). Since

1997, this accreditation program has been run by the International Organic

Accreditation Service (IOAS) an independent accreditation non-profit organization

(Commins 2002). The IOAS is a service company and one of its stated aims is “to

make its services available to outside interested parties including government

agencies involved in the establishment of state and supranational regulations”

(Commins 2002). The IFOAM seal was launched in 1999 and designates the

accreditation status of certification bodies around the world (Commins 2002).

An IOAS inspector will visit certification bodies wishing to become

accredited through the IOAS. The inspection examines the documentation and

workplace of the certifier. Upon receipt of the inspector’s report, an accreditation

committee will be responsible for accreditation decisions and for monitoring the

continued compliance of accredited certification bodies (Commins 2002). There are

several advantages to IFOAM’s accreditation program, the IOAS is able to draw on

expertise from all over the world, it eliminates the worry about how to trust certifiers

in foreign countries and it has no territory (except organic territory) to protect

(Commins 2002).

In October 1999, IFOAM Accredited Certification Bodies signed a multi-

lateral agreement (MLA) that created a mechanism to allow acceptance of products

28

between the various certification bodies (Simmons 2002). The acceptance is based

on the fact that all bodies certified through IFOAM must have standards at least

equivalent to the IFOAM Basic Standards (Simmons 2002). All signatories of this

agreement have agreed to process request for exchanges of organic products within

48 hours. This MLA is a first step towards harmonization of organic certification

systems.

2.6.2 Codex Alimentarius Commission

The Codex Alimentarius Commission was established in 1962 as a joint

Food and Agricultural Organization (FAO)/World Health Organization (WHO)

intergovernmental body. Its objectives include protecting consumer health and

facilitating international trade in food through the harmonization of food standards

(Doyran 2002). The term Codex Alimentarius is Latin meaning food law or code.

The Codex is a consortium of scientists from all over the world who work together

to establish international standards. The Technical Barriers to Trade Agreement of

the World Trade Organization requires member countries to harmonize national

standards with international standards when they exist. There are, however,

exceptions to this provision. For example, adoption is not expected when the

international standard would be inappropriate or ineffective in the national setting

(Doyran 2002). It is understood among member countries that the WTO may use

these guidelines established by the Codex to settle trade disputes over differing

standards.

29

Two committees of the Codex Commission were responsible for developing

guidelines on the production and certification of organic products, including the

Committee on Food Labelling and the Committee on Food Import and Export

Inspection and Certification Systems (Thode Jacobsen 2002). The Codex Committee

on Food Labelling developed the Guidelines for the Production, Processing,

Marketing and Labelling of Organically Produced Foods (Food and Agriculture

Organization 2001). The purpose of these guidelines is to facilitate harmonization of

organic certification at the international level and to assist governments who wish to

create regulations for organic production (Food and Agriculture Organization 2001).

These guidelines were adopted in the 23rd session of Codex in 1999; however

livestock and livestock products were exempted from the guidelines. It was not until

the 24th session, in 2001, that guidelines concerning livestock, livestock products,

bee-keeping and bee products were included. The Principles for Food Import and

Export Inspection and Certification state that import requirements should be based

on the principles of equivalency and transparency, which are also two of the major

principles of the WTO (Food and Agriculture Organization 2001).

The development of standards for organic production and trade by Codex

could be an important step in the formation of a common understanding of the term

“organic”. With the creation of its guidelines, Codex hopes to contribute to the

harmonization of provisions for production, certification, identification and labelling

of organically grown produce and to help facilitate mutual recognition of national

certification programs (Food and Agriculture Organization 2001).

30

2.6.3 ISO

The International Organization for Standardization or ISO (which means

equal in Greek) is a worldwide federation of national standards bodies from more

than 140 countries (International Organization for Standardization 2003). It was

established in 1947 and is a non-governmental organization. Its primary goals are

“to facilitate international exchange of goods and services and to develop

cooperation in the spheres of intellectual, scientific, technological and economic

activity” (International Organization for Standardization 2003). While ISO has not

published guides or standards relating specifically to organic production, many

nations use ISO Guide 65: “General requirements for bodies operating product

certification systems”, which was implemented in 1996, when developing national

certification programs (Thode Jacobsen 2002). This cohesion helps facilitate

equivalency negotiations between countries.

2.6.4 UN/FAO

The United Nations’ Conference on Trade and Development and the Food

and Agriculture Organization have joined forces with IFOAM to create the

International Task Force of Harmonization and Equivalence in Organic Agriculture

(ITF). The first meeting of this task force was held on February 18, 2003 in

Nürnberg, Germany (International Task Force 2003). There it was determined that

the ITF will review the existing standards, regulations and conformity assessment

systems of the global organic industry (International Task Force 2003). The

examination will assess the impact that variances in organic programs may have on

31

trade in organic agricultural products, inspect the models and mechanisms of

equivalence and mutual recognition, and will determine the extent to which

international harmonization has already occurred (International Task Force 2003).

2.7 Conclusions

International organizations are playing a major role in the development of

organic standards and certification programs around the globe. Many countries and

certification bodies model their standards after those of IFOAM or ISO. This

replication creates similarities between certification systems across borders, which

should facilitate the international harmonization of organic certification. This

chapter has provided a summary of existing certification programs around the world

and has attempted to demonstrate the importance of standards and certification

programs for the organic industry. Many players within the organic industry are

calling for harmonization of certification programs. Harmonization should be made

easier given the similarities between programs.

32

Chapter 3

Harmonizing the Organic Industry

3.1 Introduction

“Harmonization is not an end in itself, rather it is a means of achieving goals such as greater efficiency or fairness” – David Leebron (1996, p.42)

There is a debate raging in organic circles: to harmonize or not to harmonize.

The goals of harmonization are simple - reduce trade barriers and lower costs to both

consumers and producers; however, achieving the goal of harmonization is a

complex process that will create losers as well as winners in the short run. How is an

optimal standard chosen? Who will it be optimal for? How will the economic losers

be compensated? What will harmonization mean for the organic industry? All of

these questions must be answered in order to understand the true consequences of

international harmonization.

There is little economic literature on the harmonization of production and

processing methods. Instead, the majority of harmonization literature focuses on the

standardization of physical components9 or laws. This chapter presents a general

discussion of the current situation in international organic markets. It gives examples

9 Physical components may include computer parts, telecommunication systems, etc.

33

of arguments both for and against harmonization of certification standards and

presents information on those international organizations involved in the

harmonization process. Following this introductory section, a review of the

economic literature relating to trade barriers, harmonization, standardization,

optimal grading and the theory of clubs is presented. The models and ideas

presented in the literature will be related back to the central issue of harmonization

of organic standards. Finally, a discussion on the economic feasibility and

desirability of harmonization concludes the chapter.

3.2 The Question of Harmonized Standards for the Organic Industry

3.2.1 Current Situation

At present, there is no harmonization of standards among countries with

organic programs. The European Union has a minimum standard that all countries

within the union must adhere to, but individual European countries are free to set

their standards at any point higher than the minimum. Internationally, some

countries have strict standards and guidelines for organic certification and trade,

while others only have standards for organic production destined for export. Still

others have no organic standards at all. In order to trade with a country that has a

national organic program, the exporter must be certified by an accreditor recognized

in the importing country, have their production standards evaluated on a case-by-

case basis or produce in a country that has an equivalency agreement with the

importing nation.

34

Equivalency implies that even though standards may not be identical in two

countries, they are sufficiently similar to be considered equal for the purposes of

trade. Standards will differ due to differences in consumer preferences, costs of

production and the physical environment within which production takes place. These

differences are expected in the organic industry and equivalency has allowed the

differences to exist without prohibiting trade. However, equivalency negotiations

can be lengthy and costly and, as a result, some advocates in the organic industry are

calling for harmonization.

3.2.2 Arguments for Harmonization

As Casella (1996a, p.119) suggests, “To trade economists, used to the idea,

that gains from exchange stem from differences between individuals and countries,

not from uniformity, the demand for harmonization sounds suspicious.” There are,

however, several compelling arguments in support of harmonization of organic

certification. Fox (1990/1991) provides three examples of problems harmonization

can correct – externalities, unnecessary transaction costs and interdependence10.

Leebron (1996) suggests that there are economies of scale to be gained from

harmonization. However, the major argument for harmonization is increased market

access through the reduction of non-tariff trade barriers, i.e. standards that prevent

trade from occurring.

10 Externalities may occur if a country’s standard imposes costs on others for which the imposing country does not have to pay. Transaction costs may be incurred if firms have to spend time ensuring the imports are equivalent to their national standard. Interdependence implies that transactions between the countries are so integrated that a variety of national standards no longer makes sense (Fox, 1990/1991).

35

The two major claims that will be examined here are those that address the

reduction of transaction costs and those that demonstrate how trade restrictions will

be decreased. With the advent of the World Trade Organization (WTO) and the

reaffirmation of the General Agreement on Tariffs and Trade’s (GATT) goal of

conversion of all non-tariff restrictions to tariffs, there has been an increased use of

standards as barriers to trade. This is due in part to increased consumer concerns

regarding food safety and the environment and also increased demand for product

information and differentiation (Roberts 1999), but also for protection of domestic

producers.

Harmonizing the organic certification process “would help limit the

unintended trade restrictive consequences of legitimate technical standards”

(Roberts 1999, p.338). Governments or private bodies can impose minimum

standard requirements that make it difficult for outsiders to access the market. This

discrimination can be seen in the requirement that Swiss chocolate producers use

imported organic milk powder from Great Britain in order to obtain an organic label

for their chocolate in the British market (Aebi 2002).

The second main argument for harmonization is the reduction of transaction

costs. Transaction costs are the costs of conducting business. They are usually

divided into three categories: information or search costs, negotiation costs and

monitoring and enforcement costs (Hobbs 1996). Information costs are those that are

incurred ex ante to a transaction. Negotiation costs occur during a transaction and

can include costs of drawing up contractual agreements, as well as other costs of

organizing transactions. Finally, monitoring and enforcement costs are those

36

incurred ex post and involve the costs of ensuring a contract is fulfilled. Weseen

(2003, p. 4) suggests that “in the context of the organic industry, transaction costs

are primarily ex ante search costs associated with verifying organic authenticity.”

When importers are faced with many different certification programs, they

must investigate each certification system to ensure it is equivalent to their own.

This investigation costs the importer time and money, and if it is too expensive, he

or she may be convinced to look for domestic substitutes. Some of the transaction

costs will be absorbed by the seller in the form of lower prices; therefore, a

reduction in these costs should prove beneficial to both buyers and sellers.

3.2.3 Arguments Against Harmonization

Harmonization of organic standards may be nearly impossible to achieve;

therefore the industry has focused its energies on harmonizing certification

processes. There are four issues that make it difficult for harmonization to occur: the

bundling of characteristics in organic products, the reluctance of policy makers to

give up sovereignty over standards, differing consumer beliefs, and the problem of

choosing the optimal certification standard. In this section of the chapter, each of

these arguments against harmonization will be discussed.

The organic industry has evolved to exclude certain types of products.

Genetically modified organisms (GMOs), crops treated with sewage sludge and

irradiated products are examples of goods that cannot be considered organic in the

US. While most of these activities/products were not originally excluded (due to the

fact that most are recent developments), modern consumers of organic food have

37

strong beliefs surrounding these new technologies and their place in the organic

market. This is representative of the “bundling” that is present in the organic

industry. GMOs may be grown without the use of pesticides in the same manner that

a non-GM crop would be. However, the concept of organic agriculture has evolved

to include and exclude a variety of types of crops that do not “fit” into the organic

mould. This bundling will differ across nations. Therefore it may be difficult for

countries to agree on a common certification standard if there are severe differences

in organic standards, e.g. GMOs permitted versus prohibited.

When nations agree to harmonize standards they give up their right to

complete sovereign control over an industry. A country can request a review of the

standards but the decision to change them must be made as a collective. In the words

of Jackson (2000, p.651): “Harmonization involves a struggle between sovereign

countries, each with their own national standards, over whether and to what extent

an international standard should apply.” It is extremely difficult to convince a

country to give up control of the fate of a domestic industry; thus the perceived

benefits must be large enough to compensate for the perceived loss.

Standards may differ because of agronomic differences, substantive

differences in consumer demands or for protectionist reasons. The major threat to

harmonization is differing consumer beliefs. Consumers’ beliefs will have

considerable influence on the development of standards for processing and

production methods. Lohr and Krissoff (2002) emphasize the idea that

harmonization of certification standards in itself is not sufficient to maximize

welfare if consumers do not accept the equivalency of domestic and foreign organic

38

goods. This may occur if consumers believe that the foreign organic industry is not

being monitored closely, thereby providing an opportunity for fraudulent claims.

Therefore it is important to investigate expected consumer response to the inclusion

of imported organic products in their domestic market. This reaction may be the key

to determining the success of harmonization of certification processes.

How is an optimal standard chosen? If we imagine standards along a

spectrum, with no standard at one end and the most strict standard at the other, it is

easy to see that countries could be found at all points along the spectrum. Therefore,

it is difficult to decide which standard should prevail. Consumer tastes will dictate

standard placement. If consumers are homogeneous then the standard should be set

to conform to their tastes, however consumers may be homogeneous within their

country but differ across borders. This would imply that there are costs and benefits

of setting a harmonized standard that can be weighed. A median point could be

chosen between the two countries’ standards; however, this ignores the relative

strengths in bargaining power between nations and the strengths of consumers’

preferences. It is likely that large modern nations who are the primary consumers of

organic products will determine the optimal standard and the less developed or

smaller nations will have to follow suit or get left behind. Does this imply

harmonization or rather a “forced feeding” of the chosen standard?

3.2.4 Government Involvement in Harmonization

There are three actors that interact in the development of a standard:

government, private firms and international standards organizations (Casella 1996b).

39

It is private firms that commence the standardization process. Casella (1996b, p.2)

goes on to suggest that “harmonization will occur ‘from the bottom’, through the

coordinated actions of private firms operating across borders, more quickly than

through treaties and bureaucrats’ interventions.” This harmonization will be a result

of businesses, some of them multinational, responding to market demand. While

national organic standards are necessary in order to promote trade and decrease

transaction costs, it is less obvious that government involvement is needed in the

harmonization process.

3.3 The Economic Study of Harmonization

Much of the literature on standardization or harmonization of standards

focuses purely on physical or technical standards and legal issues. There is little

literature on the harmonization of production and processing methods. Instead,

papers on barriers to trade, harmonization, standardization, optimal grading, and the

theory of clubs will be examined in order to adapt a theoretical model of the

economic impacts of organic harmonization.

3.3.1 Non-Tariff Barriers to Trade

Recently there has been a proliferation of non-tariff barriers to trade in world

food markets. These could be attributed to a variety of influences including

increased demand for food safety and quality, and increasing concerns regarding the

environmental effects of agricultural production (Roberts 1999). In Roberts (1999,

p.337) technical trade barriers are defined as:

40

“regulations and standards governing the sale of products into national markets which have as their prima facie objective the correction of market inefficiencies stemming from externalities associated with the production, distribution and consumption of these products”.

However, Roberts (1999) also points out that technical barriers can be welfare

enhancing for the importing country in that the barriers allow a country to achieve

health, safety quality and environmental objectives, and as a side effect, provide

protection to domestic producers. Thus harmonization may not always be the

preferred option.

In Bureau, Marette and Schiavina (1998), an economic analysis of the EU-

US trade dispute over hormone treated beef is presented. They examine situations

under autarky, analyze the effects of opening the domestic market, and investigate

the problem of multiple equilibria. Using vertical differentiation they conclude that

the effects of trade liberalization under imperfect consumer information are

ambiguous. Opening the border to foreign goods that are perceived to be of lower

quality may result in market inefficiencies and multiple equilibria. The welfare

changes depend on consumer beliefs, including the strength of their aversion to

certain qualities and the difference in production costs of foreign and domestic

goods. This framework could be used in the organic context, as differences in

standards may also lead to market inefficiencies.

Similarly, in Gaisford et al. (2001), consumers are assumed to be

heterogeneous in their preferences for genetically modified foods. There is

information asymmetry between producers and consumers, in that producers are

aware of the genetically modified properties of the product whereas consumers

cannot distinguish GM from non-GM products even upon consumption of the good.

41

Consumers are divided into two groups; the first group has no preference in regards

to non-GM foods; in the second, consumers vary in the strength of their preferences

for non-GM foods. With the introduction of GM imports there are positive price

effects and negative adverse quality effects. Resulting welfare changes are

dependent on the weight of these two effects. If the adverse quality effect outweighs

the price effect, market demand will decrease as perceived quality declines.

This paper is relevant to the current discussion of harmonization because of

the credence nature of GM foods as well as the fact that the importation of organic

goods may also have a price effect and an adverse quality effect. Those consumers

who view imported organics as inferior will experience decline in their utility from

the consumption of organics while other consumers will experience a gain due to the

lower price that is a result of increased trade.

3.3.2 Harmonization

Much of the economic literature on harmonization focuses on two themes:

legal harmonization and product standards harmonization. There is a dearth of

economic literature pertaining to harmonization of processing or production methods

or, in this case, certification. Lohr and Krissoff (2002) have attempted to fill this gap

by analyzing the consumer effects of harmonized organic standards. A partial

equilibrium trade model is used to illustrate the possible outcomes of harmonization

and the consumer welfare effects. They use six different certification scenarios to

determine the global welfare effects. First, the situation in which equivalency is not

granted is examined. Second, the products are granted equivalency and are treated as

42

homogeneous by consumers. Third, the products are granted equivalency, however

consumers perceive the exporting country’s standards as less stringent and therefore

the goods are perceived as inferior. In the fourth scenario, the exporting country’s

producers either produce specifically for export or for the domestic market and the

exported goods are treated as equals in the importing country. The fifth situation is

similar to the previous case but the goods are not treated equally by consumers.

Finally, the situation in which exporters are certified domestically but start an

educational program in the importing country is investigated. Using data on US

exports of organic wheat to Germany, Lohr and Krissoff (2002) find that the

quantity traded and net surpluses were highest when the imported goods were

treated as homogeneous, as in scenarios two and four. In order for welfare to be

maximized, consumers must accept that the imported and domestic goods are

equivalent. If this is not the case, then consumers will look for domestic labels as a

signal of quality. Contrary to what the title suggests, this paper actually analyzes the

effects of different consumer reactions to goods traded between countries that have

established equivalency. Lohr and Krissoff (2002) also stipulate that while

harmonization may reduce transaction costs, it is the acceptance level by consumers

that will determine the welfare effects.

Leebron (1996) attempts to separate justifiable harmonization claims from

non-justifiable claims. He presents reasons why laws and policies differ including

endowments, technologies, institutions and preferences. In many cases, standards are

created to achieve a public goal. These standards will have evolved from economic

conditions and will change as public perceptions and desires change. Casella (1996a,

43

p.120) states “the uniformity of standards has no necessary correlation with gains

from trade”. Rather, the convergence of national incomes due to trade will cause

standards to harmonize (Casella 1996a). She concludes that when countries have

different productivity levels the resulting trade equilibrium will be closer to the

richer country’s autarky equilibrium.

Hansson (1990) studies the economic effects when international

harmonization requires that countries change their economic policies or legislation.

He assumes that all nations have a small open economy, and that countries are either

producers of goods with high requirements (standards), low requirements

(standards) or do not produce at all. There are two types of harmonization - optional

or total. Optional harmonization requires that a product destined for export must

abide by international agreed standards, while total harmonization requires that a

product must satisfy the harmonized standards agreed upon, whether it is marketed

in the domestic country or in an importing country. A low standard is defined as a

standard that has the least costly specifications (Hansson 1990).

Countries can be divided into two groups, those with low requirements and

those with high requirements. Low requirement countries can only produce for

domestic consumption and for other low requirement countries, whereas high

requirement countries have no market restrictions (Hansson 1990). Using traditional

comparative static analysis, Hansson (1990) analyses the welfare effects of

implementing optional maximum harmonization (converting to the highest

requirements), total maximum harmonization and total minimum harmonization

(converting to the lowest requirements). He finds that when the minimum pre-

44

harmonization standards are selected, global welfare increases. When optional

maximization is chosen, welfare decreases due to the prohibition of trade between

low requirement countries and in the case of total maximization, welfare also

decreases due to the loss of low requirement products in the low requirements

countries. The price effects of harmonizing are also determined.

Ulph (1997), in a discussion on the impacts of harmonizing environmental

policy comes to similar conclusions. He finds that if countries are sufficiently

different in terms of their damage costs of environmental damage, then

harmonization cannot yield a Pareto improvement over a situation of non-

cooperation. Baghwati and Srinivasan (1996) expect that enforcement of

harmonized policies will be welfare worsening from a national and international

perspective if an optimal policy was being pursued.

The lack of economic literature on harmonization requires that other fields be

examined in order to determine the effects of harmonization on national and world

welfare. Standardization is a process by which a regulated standard is established. Its

reach may be global or national. For example, paper size is standardized around the

world, but the standard size in North American is not the same as the standard size

in Europe. In the upcoming section, standardization and its possible role in the

harmonization of organic standards will be discussed.

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3.3.3 Standardization

Policy-makers have used standards to achieve a variety of goals. As

Kindleberger (1983) remarks, standards can be used to reduce transaction costs and

to achieve physical economies that are external to the firm. Originally, however, it

was merchants who established standards in an attempt to distinguish their products

to consumers. Jones and Hudson (1996) cite the need for standards for references11,

for minimum quality levels and for interface compatibility. Kindleberger (1983)

determines that the decision of whether or not to change standards can be made by a

single decision-maker providing they have perfect information regarding costs and

benefits and that future benefits are discounted appropriately. The paper by Jones

and Hudson (1996) is concerned with the use of standards as a tool to reduce

variation in quality and the role it plays in reducing transaction costs to consumers

who are trying to assess quality but are faced with imperfect information.

Casella (1996b) has provided one of the most relevant articles to this debate

on the harmonization of organic certification standards. Her paper uses a general

equilibrium model of trade and models standards as a club good12. Variety is still

considered desirable and is still present due to different individuals engaging in

different economic activities. The idea of a central planner is used to determine the

optimum number of coalitions (or standards). In this model, a circle of unit radius

represents a single country and each individual owns one unit of the differentiated

good. The angle between two varieties is a graphic representation of the difference

between the two goods. All trade occurs at the centre of the circle and in order to 11 As in definitional material for example: currencies, weights, measures, etc. (Jones and Hudson 1996)12 A club good is a good that is shared amongst different members of a club. Membership in the club can either be exclusive or inclusive and in some instances there will be a cost to join.

46

reach it, roads must be built (the roads are representative of standards). Consumers

need the roads, but the roads can be shared by coalitions of consumers in order to

lower costs. To convert this model to a world situation, a sphere is used. The

longitudinal circles represent the various countries and the latitudinal circles

represent the differences in product variety. It is clear to see that all varieties in the

world differ, with the exception of the varieties at the poles. These two varieties are

common to all countries. One single world standard at one pole increases welfare, is

cost-saving and does not increase the distance for consumers to the centre, however,

it is unclear whether dividing the world into two hemispheres results in welfare

enhancement. The benefits of two standards are more dependent on the trade-off

between taxes and resources lost to inappropriate standards. When the number of

coalitions is greater than two it will be more difficult to agree on a choice of

standards and issues surrounding equity and distribution will arise. Mutual

recognition by governments and consumers would eliminate protectionist

motivations for national standards and may lead to cooperation by firms in the

development of international standards.

Moenius (1999) explores the ideas that country-specific standards are

barriers to trade and that internationally shared standards will promote trade. Using a

panel data set with data on country-specific and shared standards, the paper

estimates a gravity model. While the results confirm the view that international

standards are beneficial in terms of increased trade, interestingly, the results show

that country-specific standards within the manufacturing industry in the importing

country also promote trade on average. Country- specific standards within the

47

manufacturing industry reduce information costs and allow for easier contracting;

the lower information costs outweigh the adaptation costs that exporting nations

must incur to meet the importer’s standards (Moenius 1999). However, in non-

manufacturing industries like agriculture, country-specific standards will continue to

hinder trade. This is due to the fact that in non-manufacturing industries, the

products are relatively homogenous and do not have as many informational

requirements as those manufactured products (Moenius 1999). Therefore the

information cost reductions do not apply in these sectors.

Ronnen (1991) presents a different argument. He states that if production

involves fixed costs and firms compete in prices, a standard, if chosen appropriately,

will increase consumer participation in the market and will result in the selection of

higher qualities by consumers. This is in direct contrast to results by earlier

economists who claim that there will always be some consumers who are made

worse off by the introduction of a minimum quality standard (MQS) as their

preferred product is no longer available. Ronnen (1991) claims that low quality

producers will raise their qualities to meet the MQS and in doing so become close

substitutes to the high quality suppliers. This convergence in qualities results in a

price competition between the high and low quality suppliers where high quality

producers always lose and low quality producers may win if the MQS is close to the

unregulated low quality. It is unclear whether this can be used to determine an

optimal standard for organic certification, as producers will have various costs

depending on their location.

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Further along the standardization chain is the concept of grading. Grading

requires that certain standards be established for grade levels. If a product meets the

specified standards for a grade level then they attain that grade. Grading has been

widely used in agricultural products, e.g. meat, eggs, and therefore may provide

some insight into the economics of harmonizing organic standards.

3.3.4 Grading

Similarities can also be drawn between grading and standardization. There is

a distinct correlation between the establishment of optimal grading levels and the

establishment of a minimum standard. These levels are extremely important if

welfare is to be maximized but economic research has provided little discussion of

the benefits and costs of grades, their role and the establishment of grades

(Bockstael 1987). According to Bockstael (1987), most of the literature on optimal

grading focuses on maximizing producer returns. While important, in the realm of

organic trade trying to meet consumer demand is more imperative. A competitive

market would appear to provide an optimal number of grades, but if there is

collusion between producers there may need to be some regulatory involvement, as

collusion would result in too few grades and too much standardization (Bockstael

1987). Bockstael (1987) also suggests that the optimal number of grades will be

dependent on the cost of assessing the desired characteristics.

In his seminal paper, Zusman (1967) creates a model to determine sorting

and grading schemes. He suggests that the behaviour of the individual consumer and

his valuation of quality must be known first as “the relationship between product

quality and consumer behaviour is central to any theory of grading” (p.92). Zusman

49

(1967) differentiates between commodities with different quality characteristics,

treating them as different commodities. Differences in consumer values are

graphically represented by individual quality valuation functions (IQVF). The

optimal grading boundaries will be established at the intersection of the IQVFs

within the market quality valuation function. Equilibrium will prevail when the

system of IQVF’s does not induce sellers to change the system. This model could be

used to determine the optimum number of certification standards within organic

agriculture; however it may prove too difficult to determine individual IQVFs for all

consumers of organic products.

The final concept to be examined within this discussion of the economics of

harmonization is the theory of clubs. The theory of clubs refers to a model that

determines an optimal “club” size based on costs and consumption. In terms of

harmonization of organic standards, the theory of clubs may enable researchers to

determine the optimal number of member countries that subscribe to a specific

standard. In the next section of the chapter, the theory of clubs will be examined in

more detail.

3.3.5 The Theory of Clubs

Buchanan (1965) developed a general theory of clubs or consumption-

ownership-membership arrangements. The theory aims to find the club size that

optimizes cost and consumption. Provided a good is not purely a public or private

good, then the utility an individual attains from consuming the good will be

dependent on the number of other people he/she shares it with. Full equilibrium is

50

reached when the marginal benefit of an additional member equals his/her marginal

cost. Given that the good is of a finite size there is an optimal number of members,

which exists where the derivatives of the total cost and total benefit functions are

equal. There are some limitations to this theory. Its utilization is limited to an

organization where exclusion is possible and it fails to take into consideration the

added costs of negotiating agreements among members.

An applied example of this theory can be found in the work of

Andriamananjara and Schiff (2001) on regional cooperation between microstates.

Regional groupings are especially prevalent among microstates due to limited

resources, lack of bargaining power and the high cost of negotiations.

Andriamananjara and Schiff (2001) use the theory of clubs to determine when

cooperation would be chosen, what the equilibrium group size would be and what

the optimal group size would be. In their paper, the optimal group size is defined as

“the point where the total net benefit for the insiders and outsiders is maximized, or

where the marginal net benefit to the group of an extra member equals the net

benefit foregone by that new member” (p.46). Investigating the three scenarios –

open or free membership, selective membership without a fee, and selective

membership with an entry fee – it was found that open or free membership results in

a group that is too large compared with the optimum because outsiders do not

consider the negative externalities they impose. Selective membership without a fee

leads to a group size smaller than the optimum, as insiders do not consider the

potential gains for new members. Finally, selective membership with a fee generates

the socially optimal group size. In order to reach the optimal size, the payment must

51

be large enough to cover the decrease in the average net benefit that results from

adding a new member.

The theory of clubs may be useful in the context of organic certification. By

determining the optimum number of members we could then use backward

induction to calculate the number of standards needed (where a result of one would

suggest harmonization is the optimal policy). When determining the optimal size of

club the reduction of negotiation costs and the reduction of transaction costs for

firms must be considered. The addition of an extra member/country to the club may

increase the costs due to the costly demands that member may require. A club

formation may be most functional when standards are fairly similar so as to reduce

confrontation.

3.4 Conclusion

Is organic harmonization economically feasible? Desirable? A popular

rationale for standards is that the exclusion of low quality goods guarantees the

consumer a high quality product. This in turn will increase demand and raise the

price of the remaining products. However, standards can also be used to protect the

domestic industry against foreign imports. The organic industry relies on standards

to convey quality information to consumers; however, these same standards may be

preventing the advancement of the industry by restricting trade opportunities.

Harmonization is often suggested as a means of overcoming these restrictions.

Harmonization will reduce marketing costs as well as other transaction costs, but

little information is known about the costs of harmonization itself. The next step is

52

to develop a model to predict the welfare consequences and the benefits and costs of

harmonization.

It could also be questioned whether consumers desire harmonization.

Currently, consumers are resisting foreign organic products mainly due to beliefs

surrounding the stringency of foreign organic standards but also because of the

environmental effects of transporting food great distances. Lohr and Krissoff (2002)

suggest that harmonization may generate a false sense of security for producers as it

may lead to lower transaction costs but may not lead to increased sales due to

consumer rejection. Consumers may reject imported organics if they are thought to

be inferior to domestically produced products.

It has been difficult to find any economic analysis of harmonization. Indeed,

Marchant and Ballenger (1994, p.113) suggest “harmonization of processing and

production methods is the class of harmonization least likely to generate support

based on economic concepts.” They conclude that in some instances, the

establishment of a single standard may lead to exclusion of some countries from the

organic market, which in turn will lead to increased market power for some

producers. Even if it is determined that harmonization is the optimal solution for all

nations, distributing costs and benefits in an equitable manner may act as a barrier.

In order to determine if harmonization is economically desirable for the

organic industry, a model is subsequently developed that takes into consideration

both the consumer and producer effects. Standards are developed to meet consumer

demand and in some instances to protect consumers and the industry. Standards will

differ across nations according to differing consumer beliefs. The effects of

53

changing these standards to accommodate an international standard need to be

modeled to determine the costs and benefits of harmonization. Once a theoretical

framework has been developed, the organic industry will have a better

understanding of the economic consequences of harmonizing certification standards.

54

Chapter 4

Harmonization: A Theoretical Model

4.1 Introduction

Economists have largely ignored a rigorous treatment of the harmonization

of standards. Harmonization is particularly difficult to analyze in agricultural

economics where product variability is large due to the substantial role biological

parameters play in the production process. Hoos (1978) captured this problem when

he stated that, “The ambiguous status of the quality provisions derives in large part

from the lack of attention given in economic theory to the subject of quality” as cited

in Bockstael (1987, p.236). Harmonization has been widely promoted as a means to

facilitate trade in organic products. An international task force has been established

to investigate the possibility of harmonizing organic certification. As Hoos suggests

in his statement, there is little economic analysis of the effects of harmonization on

world and national welfare. This chapter develops a model to help illustrate the

economic implications of organic standards harmonization.

The chapter is divided into six sections. First, there will be a brief discussion

of international autarky, which will lead into the development of an open border, or

free trade, model. The second section will examine the idea of equivalency. The

consumer effects of equivalency will be illustrated in two situations. The first

55

situation will assume that the importing country has the stricter standard and the

second will assume that it is the exporter who is stricter. Two cases will be modeled

under two situations; first the case where the difference between standards is slight

and second, the case where it is large. The third section of the chapter will

investigate the harmonization claims made by advocates of the organic industry.

Using a two-country model, welfare effects of various standard choices will be

determined under both standards cases (importer-stricter and exporter-stricter). This

will be followed by a discussion of differing standards. More specifically, it will

examine how the degree of difference between standards will influence the changes

in consumer and producer surplus.

Throughout the chapter certain assumptions will be made regarding the

distributions of consumers’ tastes. In the fifth section of the paper, these

assumptions are relaxed. A discussion is provided of how the properties of the

distribution of consumer tastes will affect changes in demand and supply. Finally, a

concluding section summarizes the results and makes suggestions for further

analysis.

4.2 The Benchmark

Demand for organic goods is increasing in Europe, North America and

Japan. Opportunities for selling organic products internationally are arising and

firms are willing to act on those opportunities. Domestic organic standards, while

necessary to facilitate the development of an organic industry, can be a major

inhibitor of trade if they differ among countries. Currently, equivalency agreements

56

must be negotiated (among mostly developed countries) to allow the free flow of

organic goods from one country to another. Without an equivalency agreement,

many measures must be taken to ensure the quality of the organic product to the

importer. The European Union (EU) is actively involved in equivalency

negotiations13. This is, in part, due to EU legislation that will prohibit the

importation of organic foods from countries that have not established equivalency by

December 31st, 2005.

A ban on trade in organic products from all nations will result in a situation

of autarky. Autarky occurs when there is no trade between nations. In the organic

industry, autarky may also arise as a result of differing standards. In an autarky

situation, each country will have its own equilibrium price and quantity. Figure 4.1

illustrates an autarky situation, where m represents the potential importing country

and x represents the potential exporting country.

Figure 4. 1 Autarky

13 The EU is currently negotiating with the United States to develop equivalency between its Regulation 2092/92 and the US’s National Organic Program (USDA 2002). There are only 7 countries on the Article 11(1) list (those that have negotiated equivalency and are considered third countries) but the European Union imports organic products from over 90 countries with which it must establish equivalency in the near future (European Commission 2002).

Potential Exporter

Potential Importer

57

Initially, countries whose organic standards are different may be in a

situation of autarky but what if these countries were allowed to trade without any

restrictions? The case when borders are open to trade in organic products is

illustrated in Figure 4.2. It is easy to see that opening the borders to trade increases

overall welfare if differences in consumer preferences are not taken into

consideration. This assumes that the differing standards do not present a problem

and that consumers in the importing country treat domestic and imported products as

equal (an assumption that is necessary to show welfare effects of open borders but in

the context of organic products may be unrealistic).

From Figure 4.2, the welfare effects of opening the borders to trade can be

determined. Trade liberalization results in a higher price for producers and

consumers in the exporting country and a lower price for consumers and producers

in the importing country. Originally, consumer surplus was equal to area g in the

importing country, but as price falls from Pm to Pw1 with the opening of trade,

consumer surplus increases to g+h+j+k. Producers began with a surplus of area h+i

and are left with a surplus of area i. This implies an overall welfare improvement in

the importing country of area j+k. In the exporting country, consumers lose as prices

rise from Px to Pw1 and as their surplus shrinks from a+b+d to a while producer

surplus grows from c+e to b+c+d+e+f. These changes result in an overall welfare

improvement equal to the area f.

58

Figure 4. 2 Open Borders

Sx

Dx

Sm

DmPx

Qx QX

PX PMPW

QW

Pm

Qm

ES

ED

Pw1Pw1 Pw1

QsxQdxQdmQsm

Qw

Exporting Country

World Market

Importing Country

a

b

c

fde

g

h

i

j k

QM

59

Although it appears that opening borders to organic trade would have a

positive effect on global welfare, there are other factors leading to decisions to keep

foreign organics out of domestic markets. In reality, standards are not identical

across countries. If well designed, standards will please the majority of consumers

and producers involved in the organic industry within the domestic market. If

organic products from a country with very different standards are allowed to enter

the domestic market, there will be consequences for both consumers and producers.

The implications of establishing equivalency and of developing a harmonized

system will be outlined in the upcoming sections of the chapter.

4.3 Equivalency

An equivalency agreement between two countries does not imply identical

organic standards; instead it signifies an understanding between the two nations that

while their standards may differ because of agronomic differences or differences in

consumers’ preferences, they are sufficiently similar to be considered equivalent for

the purpose of trade. However, equivalency agreements are only effective if

consumers in the importing country perceive the imported organics positively, i.e.

consumers do not value the other country’s standards less than their country’s

domestic organic standards. In other words, “if both importing and exporting

countries view each other’s certification as equivalent, organic product flow is

optimized and the good is treated as homogeneous with respect to standards” (Lohr

and Krissoff 2002, p.212). If consumer perceptions of organic standards differ in

important ways, then the homogeneity assumption does not hold. Further,

60

convincing consumers that the goods are equally “organic” may not be an easy task.

According to Lohr and Krissoff (2002, p.212), “Even if standards are identical,

consumers and buyers in the importing country are likely to view imports as subject

to less stringent requirements.” Thus, while the idea of open borders between two

countries that have developed equivalency may seem ideal, it does not take into

consideration consumer response in the importing country.

Consider two countries where there are differences in the mean preferences

of consumers and standards have been established that reflect those differences. Two

normally distributed curves with the standards located at the respective means could

be imagined. The national standard is found at the point that conforms to the mean

preferences of consumers. There are also consumers whose preferences do not

correspond exactly with the standard and they will be found to the left or the right of

the mean. Moving further from the mean, consumers preferences are reflected less

and less in the standard and they would prefer some alternative standard that

coincides more closely with their tastes. The assumption that consumers are

normally distributed around the standard is used to demonstrate the welfare effects

of developing equivalency or harmonizing. Later in the chapter, the assumption of a

normal distribution will be altered and the corresponding effects will be discussed.

It is also assumed that producers in the two countries can use identical

technology. Therefore, the advantage one country has over another is based on the

agronomic and cost differences. Finally, for the moment it will be assumed that

consumers cannot differentiate between imported organics and domestic organics at

61

the point of purchase and that any products offered for sale could contain a mixture

(blend) of imported and domestic products.

In the following scenario, the importing country is assumed to have the

stricter14 standard, i.e. Sm>Sx (see Figure 4.3). The fact that the standards differ will

have consequences for the perceived quality of organic goods in the importing

country. Since it is difficult to segregate imports from domestic products once they

have entered the market, organic goods will be pooled together. The consumer

effects of importing organics from a country with less stringent standards will be

modeled first. Then the consumer effects will be examined in the situation when the

exporting country has the stricter standards.

Figure 4. 3 Graphing the standards (importer stricter)

14 A stricter standard may entail greater documentation of actions taken by the producer, longer conversion periods, a lengthier list of prohibited substances, larger buffer zones between conventional and organic farms, differences between allowable organic claims on labels, etc. A ‘stricter’ standard would generally be assumed to increase costs to producers.

QM

62

4.3.1 Welfare Effects with Slight Variations in Standards

In this scenario, the organic standards are granted equivalency by the

respective governments, however, consumers do not regard the imported organic

goods as homogenous to domestic organic products. The standards in the exporting

and importing country differ slightly and as a result the consumers in the importing

country perceive the imported organics to be of inferior quality to the domestically

produced organics. As the goods in the marketplace are blended, the overall demand

for organic goods decreases. Consumers are willing to pay less for goods that they

consider to be of inferior quality – goods that may contain foreign products. In other

words, their demand shifts to the left relative to the case when goods are

homogeneous. In the importing country, demand for organic food has declined from

Dm to Dm’ due to the perceived adverse quality of the imports (Figure 4.4). The

decline in demand leads to a decrease in excess demand, from ED to ED’ which

results in a lower world price (Pw2) (see Figure 4.5 for details). This is an adverse

quality effect. Initially consumer surplus (CS) in the importing country (Figure 4.4)

was g+m+l+n, but the decrease in price from Pw1 to Pw2 and the decrease in

demand results in a CS of g+h+j+k+n. Producers also see a decrease in their

surplus from h+i to i. Overall welfare changes in the importing country are equal to

j+k-m-l. Welfare depends on the relative sizes of areas j+k and l+m and will need to

be determined empirically.

The effects of the price decrease caused by the decline in excess demand are

also felt in the exporting country. The price decrease causes an increase in consumer

63

surplus from a to a+b+d , but it also causes a decrease in producer surplus which

changes from b+c+d+e+f+q+r to c+e+f+q as in Figure 4.6.

Figure 4. 4 Equivalency: Importing country

Pw1Pw2

Qsm’ Qsm Qdm’Qdm QM

Dm’Dm

PM

Sm

g

h

i

m

j kln

Importing Country

64

Figure 4. 5 Equivalency: World market changes

Sx

Dx

Sm

DmPx

Qx QX

PX PMPW

QW

Pm

Qm

ES

ED

Pw1Pw1 Pw1

QsxQdxQdmQsm

Qw

Exporting Country

World Market

Importing Country

Dm’

Pm’

ED’

Qw’

Pw2Pw2 Pw2

Qdx’ Qsx’Qsm’ Qdm’

QM

65

Figure 4. 6 Equivalency: Exporting Country

This situation could still be beneficial when compared with that of autarky. If

area m is smaller than area j+n+k in the importing country then trade is beneficial,

but if the reverse is true, then autarky will be an improvement. The exporting

country still experiences a gain of q over the situation of autarky and will wish to

trade (see Figure 4.6). However, if standards are further apart on the standard scale

this improvement may be eaten away by the adverse quality effect increasing the

shift in demand.

Dx

Sx

QsxQsx’

QdxQdx’

a

b

c

de

rqf

Pw1Pw2

QX

PXExporting Country

66

4.3.2 Welfare Effects with Greater Variation in Standards

In the case modeled in the previous section, the standards of the two trading

nations differed only slightly, however, there may in fact be large discrepancies

between the two standards as in Figure 4.7. For example, the United States’ National

Organic Program requires a buffer zone to prevent drift of prohibited substances

onto organic fields. The European Union’s Community Rules do not require such a

zone. This difference may be extremely important to consumers but may appear

inconsequential to negotiators who grant equivalency. What are the consequences of

establishing equivalency when the standards are vastly different? The next section of

the chapter will describe the welfare effects of opening the border to trade under

such circumstances.

0

5

10

15

20

25

30

950 1000 1050 1100

Standard

Num

ber o

f Con

sum

ers

ImporterExporter

Figure 4. 7 Wide variation in standards

67

Figure 4.8 illustrates how consumer demand will change in the importing

country when imports from countries with far less stringent standards are permitted.

Comparing this to the case where standards differ only slightly at Dm’, it can be

shown that initially CS was equal to area m+g+h+n+o+p+r but upon granting

equivalency demand changes to Dm” and price decreases to Pw3 due to a larger

adverse quality effect. The new CS at Dm” is equal to area g+h+i+k+l+n+p+q

because of consumer concerns over the stringency of the standard in the exporting

country. While the adverse quality of the imported goods affects consumer demand,

so too does the lower price. The lower price may entice some additional consumers

to purchase organic products. Producer surplus unambiguously decreases with the

decrease in demand and the lower price. At Pw2 producers received a surplus of i+j

but with the new lower price, Pw3, they find themselves only earning a surplus of j.

This leads to welfare changes equal to k+l+q-m-o-r. If the price effect is greater

than the adverse quality effect then this value should be positive; if, however, the

adverse quality effect is greater than the price effect, granting equivalency will result

in a decrease in welfare.

When this scenario is compared with that of a no-trade situation, the

importing country may be better off if they shut their borders to imports. Importing

products from a country whose standard is very different from their own causes the

importing country to lose area m+s, this loss may not be offset by the gain of area

k+l+n+p+q+r. The large difference in standards may make it detrimental to the

importing country to import organic products.

68

Figure 4. 8 Welfare implications in the importing country when standards differ greatly

The decrease in demand in the importing country has repercussions in both

the world market and the exporting country. Changing demand causes changes to the

excess demand curve which can be seen in Figure 4.9. The lowering of the world

market price to Pw3 results in welfare changes in the exporting country. Figure 4.10

demonstrates these changes. Clearly consumers gain when facing a lower price. This

Pw1Pw2

Qsm’Qsm

Qdm’Qdm QM

Dm’Dm

PM

Sm

g

hi

m

n pq

o

Importing Country

Dm’’

Pw3

Qsm’’ Qdm’’

jk l

r

s

69

can be seen by comparing the consumer surplus at Pw2 with that at the new world

price of Pw3. Consumer surplus increases from a+b+e to a+b+c+e+f+h. However,

a lower price is not beneficial to producers who face a decreasing surplus. Their

surplus decreases from c+d+f+g+h+i+j+k+l to d+g+i+k+l. The benefits to

consumers are not sufficient to offset the losses producers face and the resulting

welfare has been lowered by j. However, unlike the situation in the importing

country, the exporting country still benefits from trade. The exporting country

receives an additional gain of area l, which could not be attained if trade did not

occur. Table 4.1 outlines the welfare effects of both scenarios.

70

Figure 4. 9 World market effects when standards differ greatly

Sx

Dx

Sm

DmPx

Qx QX

PX PMPW

QW Qdm’’

ES

ED

Qsx’’Qdx’’Qw

Exporting Country

World Market

Importing Country

Dm’

ED’

Qw’

Pw2Pw2 Pw2

Qdx’ Qsx’Qsm’

Qdm’

Dm’’

ED’’

Pm’’Pw3

Qw’’

Pw3Pw3

Qsm’’

QM

71

Figure 4. 10 Exporting country when standards differ greatly

Sx

QsxQsx’

Qdx

a

bc

e

gk

jh

QX

PXExporting Country

d

Qdx’’ Qsx’’

f

i

Pw1

l

Dx

Qdx’

Pw3Pw2

72

Table 4.1 - Welfare effects of equivalency negotiations compared to autarky

Variation in Standards

Welfare changes in importing country

Welfare changes in exporting country

Overall world welfare changes

Slight Case 1: Increases if area m< area j+n+k (Figure 4.4)

Increases, area q is gained (Figure 4.6)

Unambiguously increases

Case 2: Decreases if area m> j+n+k

Increases, area q is gained

Decreases if area m>j+n+k in Figure 4.4 and q in Figure 6, increases otherwise

Large Case 1: Increases if area s+m< area n+p+k+l+q (Figure 4.8)

Increases, area l is gained (Figure 4.10)

Unambiguously increases

Case 2: Decreases if area s+m> area n+p+k+l+q

Increases, area l is gained

Decreases if area s+m> the gain of areas n+p+k+l+q in Figure 4.8 and l in Figure 4.10, increases otherwise

4.3.3 Reversing the Standards

Now assume a world in which the two trading partners’ standards are

reversed. The exporting country has set a strict standard and the importing country

has established one that is more lenient. What are the implications if the exporting

country has a stricter national standard than the importing country? Does this change

the resulting overall welfare situations?

Figure 4.11 illustrates how the standards are now organized. Note that these

changes do not affect the initial autarky situation or the situation of open borders -

they result in the same welfare effects. It could be asked how producers in the

exporting country could have lower overall costs if the standards are stricter (i.e.

73

costs are higher), however, this is easily explained once agronomic differences

between the two nations are accounted for. The exporting country has better

environmental conditions for the production of organic agriculture, has higher yields

and therefore has surplus product to export.

0

5

10

15

20

25

30

940 960 980 1000 1020 1040 1060

Standard

Num

ber o

f Con

sum

ers

ExporterImporter

Figure 4. 11 Graphing the standards (exporter - stricter)

Does this situation change the results derived previously? Will consumers in

the importing country now view the imported goods as superior to the domestic

products? Clearly, if the domestic standard in the importing country was set

appropriately, then the importing consumers will react in exactly the same way as

before. Standards are set in order to meet the demands of domestic consumers and

producers. If the standard established is the optimal standard then products produced

under any other standard will be seen as inferior. These resulting welfare changes

will be identical to those outlined in section 4.3.1.

74

4.4 Harmonization

In an attempt to facilitate international trade in organic agricultural products,

a number of parties are calling for the harmonization of organic certification

standards. This harmonization would allow individual countries to develop their

national standards but all certifiers would need to be accredited under the same

international body, eliminating the need for multiple accreditors. There is a strong

push by the International Federation of Organic Agriculture Movements, the Food

and Agriculture Organization of the United Nations and the United Nations

Conference on Trade and Development to seriously consider harmonizing organic

certification, however, there has been little research into the economic consequences

of harmonization. The next section of the chapter will illustrate the welfare

implications of harmonization and will attempt to provide some insight into the

decision to harmonize.

4.4.1 Harmonization when the Importer has the Stricter Standard

To begin, the case where the importing country has a slightly stricter

standard will be examined. In order to harmonize, a choice must be made regarding

the strictness of the standard. Since there are only two countries in the model it will

be assumed that there are three possible locations for the standard. The standard

could be placed at either the importing country’s present standard or the exporting

country’s present standard or it could be located somewhere in between the two.

Each of these possible scenarios will be modelled and discussed.

75

4.4.1.1 Scenario 1

In the first scenario, the stricter standard of the importing country is chosen.

If the international community were to harmonize to the strict standard, there would

be repercussions for both trading partners. The stricter standard would cause an

increase in the exporter’s costs of production. These increases could be due to the

loss of allowable pesticides/fertilizers or due to an increase in conversion times, etc.

The changes in the exporting country will stimulate changes in the world market,

which will, in turn, have effects in the importing nation.

Figure 4.12 illustrates the shift in demand that results from harmonizing to

the stricter standard in the exporting country. Comparing the demand effects of

harmonization with those of negotiating equivalence (Dx), it can be shown that the

new stricter standard will result in changes to both consumer and producer surplus.

At Pw1 (the equivalency price), CS equalled a+b, but as demand declines to Dx’,

the world price decreases to Pw2, resulting in a CS of b+c, a change of c-a.

Producers are also affected by the change in demand and see a fall in their surplus

from c+d+e+f+g+h+i+j+k at Pw1 to d+f+j+k at Pw2. This change results in a loss

of surplus of the area c+e+g+h+i. Overall, the national welfare in the exporting

country will decrease by a-e-g-h-i. However, the shift in demand is not the only shift

experienced by the exporting country; the supply curve will also shift as the stricter

standard means higher costs for producers.

76

Sx

Qsx Qsx’Qdx

Qdx’

a b

c e iPw2

QX

PX

Pw1

78

Dx

81

Dx’

82

jh

g k

Figure 4. 12 Harmonizing to the stricter standard: Demand effects in the exporting country

In Figure 4.13, there is a shift in both demand and supply. Demand changes

due to the imposition of a non-optimal standard, while supply shifts as a result of the

higher costs of the new standard. The supply shift is assumed to be greater than the

demand shift due to the increased costs of implying with the new standard. The

83

shifts in demand and supply cause the world price to increase from Pw1, the initial

equivalency price, to Pw2 as in Figure 4.14; however, the resulting welfare changes

become an empirical question because if the changes are minute, the price may

decrease, although a decreasing price still results in a loss to the exporting country.

Originally consumer surplus was equal to a+b+c+i+f with Dx, but the new price of

Pw2 leaves consumer surplus equal to b with Dx’. The higher prices are detrimental

to consumers, while the higher costs could drive producers out of the market. There

are two forces affecting producer surplus, price and cost. The strength of the two

forces will dictate the resulting changes in producer surplus. Producers began with a

surplus of d+e+g+h+k+l+m+n+o+p+q+r at Pw1 but end with a surplus of

c+d+f+g+i+j+k+l+q+r at Pw2. In this scenario, it appears as though the welfare of

the country decreases as the loss of area a+e+h+m+n+o+p is greater than the gain

of area j, further empirical work would provide more concrete proof. This welfare

loss occurs with only a slight variation in standards. Therefore, it can be assumed

that a larger difference between the standards of the two trading nations would result

in even greater losses.

The importing country also experiences changes due to harmonization. As

the price increases from Pw1 (equivalency price) to Pw2 (harmonization price),

consumers face a decreasing surplus while producers benefit from the higher price.

If on the other hand, the price decreased, there would be an overall welfare increase.

However, in this situation, depicted in Figure 4.15, consumer surplus changes from

g+h+j+k+l+m to g+l and producer surplus increases from i to h+i. National

welfare in the importing country decreases by area j+k+m. Harmonization to the

84

stricter standard appears to have nothing but negative consequences. Welfare

declines in both countries when this route is taken. This would suggest that

equivalency negotiations would be preferred to harmonization in this case.

Figure 4. 13 Harmonizing to the stricter standard: Supply and demand effects in the exporting country

Sx

QsxQsx’QdxQdx’

ab

c

e

g k

j

h

QX

PXExporting Country

d

f i

l

DxDx’

Sx’

mn

opqr

Pw2

Pw1

85

Figure 4. 14 Harmonizing to the stricter standard: Changes to the world price

Sx

Dx

Sm

DmPx

QX

PX PMPW

QW

Pm

Qm

ES

ED

Pw1Pw1 Pw1

QsxQdx QdmQsmQw

Exporting Country

World Market

Importing Country

Qw’

Pw2Pw2 Pw2

Qdx’ Qsx’Qdm’ QM

Dx’

Sx’

ES’

Px’

Qsm’

86

Figure 4. 15 Harmonizing to the stricter standard: Changes in the importing country

4.4.1.2 Scenario 2

In this scenario, the more lenient standard of the exporting country is chosen

as the harmonized standard. This choice causes a decrease in consumer demand in

the importing country but the lower standard will also reduce the costs of production

Pw1

Pw2

Qsm’Qsm Qdm’ Qdm QM

Dm

PM

Sm

g

h

i

j kl

m

Importing Country

87

for producers in the importing country. The degree of the shift will depend in part on

the distance between the two standards. Even if the standards are similar in most

respects there will be some consumers who may now prefer not to purchase

organics, however, decreasing the standard may capture other consumers who prefer

the lower prices and the new standard. Figure 4.16 illustrates the demand shift and

the resulting welfare implications in the importing country. Figure 4.17 shows the

welfare effects on consumers and producers in the importing country of the changes

in supply and demand, while Figure 4.18 demonstrates the effects on the world

market.

88

Figure 4. 16 Harmonizing to the lenient standard: Demand effects in the importing country

Pw1

Pw2

Qsm’Qsm Qdm

QM

Dm

PM

Smg

h

i

j

kl

Importing Country

Dm’

Qdm’

n

r

89

Figure 4. 17 Harmonizing to the lenient standard: Total welfare effects in the importing country

Pw1

Pw2

Qsm’Qsm Qdm QM

Dm

PM

Smg

h

i

j

k

l

Importing Country

Dm’

Sm’

Qdm’

q

no

s

p

rt

90

Px

PX

Pw1Pw2

91

Sx

Dx

Sm

Dm

QX

PM PW

QW

Pm

93

ES

ED

Pw1

95

Pw1

Qsx Qdx Qdm Qsm Qw

Exporting Country

World Market

96

Importing Country

Qw’

Pw2 Pw2

Qdx’ Qsx’ Qdm’QM

Qsm’

97

Sm’

Dm’

Pm’

98

ED’

99

Figure 4. 18 Harmonizing to the lenient standard: The world market effects

100

Figure 4.16 shows the effects that the shift in demand has on the importing

country. Initially, consumer surplus was equal to area g+h+l at Pw1 and with Dm

but with the shift in demand and price, the surplus changes to h+i+k+r at Pw2 and

with Dm’, a change of i+k+r-g-l. An empirical analysis must be done to determine

if this change is positive or negative. On the producer side, there is an unambiguous

loss as producer surplus decreases from i+n+j to j, a change of –i-n. Overall welfare

cannot be determined, as it will depend on the relative weights of the gain of k+r

versus the loss of g+l+n.

This leads to the case where both the supply and demand curves shift in the

importing country. In Figure 4.17, consumer surplus increases from g+h+o+p at

Pw1 and with Dm to h+i+l+q+r+s+t at Pw2 and with Dm’, however, this increase

is ambiguous as it is difficult to determine the relative sizes of the CS and PS and

further empirical analysis is required. Producer surplus decreases from i+j+n to j+k.

Overall welfare changes depend on the relative sizes of the area lost, g+n+o+p, and

the area gained, k+l+q+r+s+t. From Figure 4.17 it is difficult to determine which

area is larger. If the price effect is larger than the quality effect then harmonization

may be an improvement over equivalency agreements, however if the quality effect

is larger, then the reverse will be true.

Figure 4.19 depicts the situation in the exporting country. There, producers

experience a loss in welfare due to the price decrease; however, consumers gain for

the same reason. Consumer surplus was initially equal to a but with the lower price

increases to a+b+d. Producer surplus shrinks from area b+c+d+e+f+g+h to area

c+e+g+h. National welfare decreases by f. This implies that it would be in the

101

exporter’s best interests to negotiate equivalency rather than harmonize. When the

results from the importing and exporting country are combined it is unclear whether

global welfare decreases or increases. There is a possibility of achieving a welfare

improvement if the price effect in the importing country is greater than the adverse

quality effect. However, it is also possible that, once again, harmonization may

result in a decrease in total world welfare.

102

Figure 4. 19 Harmonizing to the lenient standard: Welfare effects in the exporting country

4.4.1.3 Scenario 3

In the third scenario, the standard is set midway between the two national

standards. This has repercussions in both countries as suppliers and consumers

Sx

QsxQsx’Qdx Qdx’

a

b

c

e gh

QX

PXExporting Country

d

Pw1

Dx

fPw2

103

adjust to the changes in the organic system. While this situation may seem the most

equitable of the three scenarios, there are complexities if the situation involves more

than two parties or if one or more parties have greater political clout than the others.

A central position may no longer be the natural choice. This choice could also be

altered if consumers are not distributed normally.

In the exporting country, a scene similar to scenario one can be set, but in

this situation, the standard is located at a midway point and therefore the shifts in

demand and supply need not be so large. The welfare effects can be analyzed by

examining Figure 4.20. Consumer demand shifts from Dx to Dx’ due to the changes

in the standard, at the same time supply shifts because of the higher costs of

production from Sx to Sx’ but both shifts are less prominent than in the previous two

scenarios. In this illustration, consumers gain as their surplus increases from a+b at

Pw1 to b+c+g at Pw2 as the area lost, a, is smaller than the area gained, c+g. This

gain depends on the respective strengths of the quality and price effects and

therefore is not unambiguous. Empirical data would provide further insight into the

resulting changes. On the other hand, producers unequivocally lose. Their surplus

decreases from c+d+e+f+g+h+i+j+k+l+m+n+o+p+q at Pw1 to d+h+j+k+o at

Pw2. This loss results in an overall welfare loss of the area a+e+f+i+l+m+n+p+q.

In the importing country, as shown in Figure 4.21, consumers gain as their

surplus increases from g+h+n+o+p to h+i+l+n+q+r+s+t. In this case, it would

appear that the price effect outweighs the quality effect and the gain of area

i+l+q+r+s+t is greater than the loss of area g+o+p, however, again this is not

unambiguous. The lower price causes a decrease in producer surplus from i+j to

104

j+k. The impacts on national welfare appear to be positive. The loss of area g+o+p

is smaller than the gain of area k+l+q+r+s+t. The world market effects are shown

in Figure 4.22.

Figure 4. 20 Harmonizing to the median standard: Welfare effects in the exporting country

Sx

QsxQsx’QdxQdx’

a

b

c

e

gk

jh

QX

PXExporting Country

d

f

il

DxDx’

Sx’

m

no

p

q

Pw1

Pw2

105

Figure 4. 21 Harmonizing to the median standard: Welfare effects in the importing country

Pw1

Pw2

Qsm’Qsm Qdm QM

Dm

PM

Smg

h

i

j

k

l

Importing Country

Dm’

Sm’

Qdm’

q

no

s t

pr

106

Figure 4. 22 Harmonizing to the median standard: World market effects

Sx

Dx

Sm

DmPx

QX

PX PMPW

QW

Pm

ES

ED

Pw1

Pw1 Pw1

QsxQdx QdmQsmQw

Exporting Country

World Market

Importing Country

Qw’

Pw2Pw2 Pw2

Qdx’Qsx’

Qdm’QM

Qsm’

Sm’

Dm’

Pm’

ED’

Sx’

Dx’

ES’

Px’

107

It is possible that harmonization could result in an increase in global welfare,

however, in order for this to occur, the gain in welfare in the importing country must

be substantial enough to offset the loss in welfare in the exporting country. If this

does occur, then harmonization would be the preferred option over equivalency

negotiations.

Does the initial distance between the standards affect the results? Even if the

standards are greatly different, we would still be faced with the same ambiguous

results, as the price effect and quality effect will still be the determinants of the

outcome. The demand effects may be more pronounced but so too will the supply

effects. However, the variance in standards may result in the depletion of the excess

demand, as suppliers in the importing country are supplying a sufficient amount to

meet the demand of their domestic consumers.

4.4.2 Harmonization when Exporter has the Strict Standard

Does reversing the standards have a significant effect on the result of the

harmonization process? The case where the exporter has the stricter standard will

now be considered. As discussed previously, the fact that the exporter has the stricter

standard does not make its exports any more desirable to the consumers in the

importing country provided that the optimal standard had already been established.

This implies that the results will be similar to those discussed in the previous

section. In fact, if the trade models are followed they will be exactly the same, only

now the roles are reversed and the losses and gains that the exporter had experienced

will now be felt by the importer and vice versa.

108

World markets will follow the same pattern regardless of whose standard is

stricter. If this model were used to determine the welfare effects of harmonization, it

would seem that in order for harmonization to cause an improvement in global

welfare, certain restrictions must be met. Specifically, if the stricter standard is

established, the welfare improvement in one country must be sufficiently large to

offset the loss in the other. If the lenient standard is chosen, the consumer reaction to

the imported product must not be too vehement. Finally, if the median point is

selected, then the gain in the importing (exporting) country must be greater than the

loss in the exporting (importing) country. These results are outlined in Table 4.2.

It could also be questioned if it would be possible to negotiate harmonization

if one country will be a loser. Why would a politician agree to harmonize if it means

lowering the national welfare in his/her home country? Under these circumstances, it

seems unlikely that harmonization would occur unless trade-offs or transfers are

made to compensate the loser.

109

Table 4.2 - Welfare Effects of Harmonization

Harmonization Choice

Welfare changes in importing country

Welfare changes in exporting country

Overall world welfare changes

Scenario 1: Stricter standard is chosen

Case 1: Decreases, area j+k+m is lost(Figure 4.15)

Decreases if area a+e+h+m+n+o+p > area j (Figure 4.13)

Unambiguously decreases

Case 2: Decreases, area j+k+m is lost

Increases if area a+e+h+m+n+o+p< area j

Increases if area j is greater then the loss of areas a+e+h+m+n+o+p in Figure 4.13 and j+k+m in Figure 4.15, decreases otherwise.

Scenario 2: Lenient standard is chosen

Case 1: Decreases if area g+n+o+p> area k+l+q+r+s+t (Figure 4.17)

Decreases, area f is lost (Figure 4.19)


Case 2: Increases if area g+n+o+p < area k+l+q+r+s+t

Decreases, area f is lost

Increases if area k+l+q+r+s+t > then the loss of areas g+n+o+p in Figure 4.17 and f in Figure 4.19, decreases otherwise.

Scenario 3: Midway standard is chosen

Case 1: Decreases if area g+o+p> area k+l+q+r+s+t(Figure 4.21)

Decreases, area a+e+f+i+l+m+n+p+q is lost (Figure 4.20)


Case 2: Increases if area g+o+p < area k+l+q+r+s+t

Decreases, area a+e+f+i+l+m+n+p+q is lost

Increases if area k+l+q+r+s+t > than the loss of areas g+o+p in Figure 4.21 and a+e+f+i+l+m+n+p+q in Figure 4.20, decreases otherwise

110

4.5 The Implications of Differing Standards

Organic standards vary around the globe. When considering a multi-country

model, it is clear that the standard level may vary for each individual country,

leaving a wide array of standards to deal with. It is not as easy to see where an

internationally harmonized standard would be located on this spectrum. The degree

to which standards differ will have a profound effect on the extent of demand and

supply curve shifts. The above models have attempted to demonstrate the welfare

impacts of varying standards. If standards are similar then the resulting shifts would

be small. Larger shifts in standards would have more serious repercussions. As was

determined, negotiating equivalency will be beneficial only when there are small

differences in standards. When the difference between the standards grows larger,

the consequences are ambiguous.

Standards are created in order to achieve a purpose; in some cases they are

protectionist in nature, while in other cases they are necessary in order to ensure the

survival of the industry. Standards differ because of natural differences in the

environment as well as differences in consumer preferences. It is difficult to prove a

case for the harmonization of organic standards based on this graphic economic

analysis. There is too much unknown information and there are very few cases of

harmonization around the world to compare with. Bhagwati and Srinivasan (1996)

suggest that if optimal policies are being pursued then diversity between standards

should be expected because of differences in consumer preferences. If differences in

standards are beneficial, it could then be expected that harmonization would, under

some circumstances, lower national and global welfare.

111

4.6 The Effects of Distribution Shape

Throughout this chapter, it has been assumed that consumers are distributed

normally around the standard. However, if this assumption is relaxed, it could have a

important effect on economic welfare. What if all consumers have homogeneous

preferences? Then instead of being normally distributed around a mean, all

consumers would be found on the mean (assuming the standard is set appropriately)

as in Figure 4.23. If consumer tastes varied across countries but were homogeneous

within a country, it may inhibit the development of a harmonized standard, as every

consumer would be unhappy with the changes.

Figure 4. 23 Consumers with homogeneous tastes

Generally, consumers are not identical and do differ in their opinions

regarding standards. That leads to the idea of a skewed distribution, where the

distribution of consumers is not symmetrical around the mean..

An asymmetric distribution may drastically alter the effects of adopting a

lower or higher standard. Consumer effects may be reduced if a large proportion of

% of people who agree with standard

Standard level S

112

consumers are located on one side of the standard. In this model, it was assumed that

the distributions were normal in shape and therefore that the optimal standard was

chosen. However, as the distribution moves away from a normal shape it would

become increasingly difficult to set an optimal standard.

Both the degree of similarity between the standards and the distribution of

consumers around the mean (or standard) will have an effect on the shifts in supply

and demand that occur when equivalency has been negotiated or when

harmonization has taken place. A greater understanding of these links will help

further our knowledge of the economics of harmonization but are beyond the scope

of this thesis.

4.7 Conclusion

As tempting as it may be to jump to conclusions regarding the outcomes in

this chapter, it is as of yet unclear whether harmonization will be economically

beneficial or detrimental to world trade in organics. While it is clear that both the

shape of consumer preference distribution and the extent of the differences in the

standards will have major ramifications on the changes in national welfare, it is less

clear which of the discussed options is superior.

It cannot be stated whether harmonization is welfare enhancing when

compared to equivalency negotiations. In some instances it would appear that

harmonizing the organic system would actually be detrimental to those it is intended

to benefit. In other cases, harmonization may be the superior choice. Regardless, it is

113

certain that further analysis is needed in order to shed more light on some of the

results provided by this chapter.

114

Chapter 5Trade Model Simulation

5.1 Introduction

In Chapter 4, a theoretical trade model was developed to illustrate the

welfare effects of harmonizing organic standards. Several aspects of the theoretical

model were ambiguous, suggesting further insights might be gained from

explanation with numerical values. This chapter sheds additional light on the

ambiguity presented by the theoretical model by simulating the impacts of

equivalency negotiations and harmonization. This will be done for several cases

over a range of values to illustrate the effects of harmonization and granting

equivalency. It is important to note that no attempt is made to provide actual

empirical estimations of the economic effects of these policies for particular

markets.

The goal of this chapter is to provide additional information as to whether

harmonization is desirable. In other words, will harmonization enhance welfare for

organic consumers and producers? Based on the theoretical model, it appears that it

does not, however, this simulation will provide numerical simulations of the

theoretical approach

101

5.2 Market Demand for Organic Products

The aggregate market demand curve is composed of each individual’s

demand curve for a product at a given price. To understand how changing a standard

from its optimum position to some alternative will affect welfare, a link between

standard placement and demand must be made. It is assumed that, contrary to the

standard assumption that consumers are homogeneous, consumers actually have

heterogeneous preferences for organic standards. This assumption is necessary to

simulate the marketplace where standards differ across countries. These differences

allow for the assumption that consumer preferences differ across countries. It is also

assumed that the population distribution is normal in appearance and that the

optimal standard in a particular country is found at the population mean. At the

mean, the largest number of consumers will have their preferences reflected in the

standard. As the standard changes, and moves away from the mean, overall

consumer demand will decrease, as the number of consumers who prefer that

standard decreases. Using these assumptions, a normal distribution was generated to

allow construction of market demand curves. These curves, along with arbitrarily set

demand and supply parameters, will be used to establish excess supply and excess

demand curves, which will provide equilibrium prices and quantities.

5.2.1 Calculating Market Demand

Using Excel, normal distributions with various means ( ) and standard

deviations (s.d.) were created. The ‘normdist’ function within Excel generates a set

of numbers that correspond to a normal distribution. The numbers generated

represent the population located at each standard possibility. The generated numbers

102

were multiplied by 1000 to approximate the location of 1000 people under the

distribution. The largest population of consumers is found at the mean of the

distribution. As one moves way from the mean, there are fewer and fewer consumers

at each standard point. Figure 5.1 shows a generated normal distribution with a mean

of 1000 and a standard deviation of 10. These parameters will be used to illustrate

the development of the trade model for the remainder of the chapter.

0

5

10

15

20

25

30

35

40

45

940 960 980 1000 1020 1040 1060

Standard

Popu

latio

n of

100

0

Figure 5.1 A normally distributed population (mean = 1000, s.d.=10)

Changing the organic standard will have effects on the aggregated market

demand curve. To calculate aggregate demand, the demand curve must be estimated

at all points under the distribution. Those consumers located at the mean have

preferences that are satisfied by the current standard (the optimal standard). These

consumers were arbitrarily assigned an inverse demand curve (hereafter referred to

as the demand curve) of . At the point 1001, one point away from the

103

mean, the demand curve is equal to ; at the point 1002, it is equal to

; at the point 999, the demand curve is again equal to

and so on. Table 5.1 shows the demand intercepts and the quantity

of people located at each point under the normal distribution (µ=1000, s.d. =10) for

the optimal standard placement (1000) and a standard located one standard deviation

from the mean (1010 or 990). The intercept was determined for all points under the

distribution until it was equal to 0 (40 points on either side of the mean for the

optimal standard).

104

Table 5.1 - Population and Demand Intercepts (mean = 1000, s.d. =10)

Standard Number of

People

Demand at

optimum

Demand at 1 s.d.

Standard Number of

People

Demand at

Optimum

Demand at 1 s.d.

960 0.01338 0 0 1001 39.6953 78 62961 0.01987 2 0 1002 39.1043 76 64962 0.02920 4 0 1003 38.1388 74 66963 0.04248 6 0 1004 36.8270 72 68964 0.06119 8 0 1005 35.2065 70 70965 0.08727 10 0 1006 33.3225 68 72966 0.12322 12 0 1007 31.2254 66 74967 0.17226 14 0 1008 28.9692 64 76968 0.23841 16 0 1009 26.6085 62 78969 0.32668 18 0 1010 24.1971 60 80970 0.44319 20 0 1011 21.7852 58 78971 0.59525 22 2 1012 19.4186 56 76972 0.79155 24 4 1013 17.1369 54 74973 1.04209 26 6 1014 14.9728 52 72974 1.35830 28 8 1015 12.9518 50 70975 1.75283 30 10 1016 11.0921 48 68976 2.23945 32 12 1017 9.40491 46 66977 2.83270 34 14 1018 7.89502 44 64978 3.54746 36 16 1019 6.56158 42 62979 4.39836 38 18 1020 5.39910 40 60980 5.39910 40 20 1021 4.39836 38 58981 6.56158 42 22 1022 3.54746 36 56982 7.89502 44 24 1023 2.83270 34 54983 9.40491 46 26 1024 2.23945 32 52984 11.0921 48 28 1025 1.75283 30 50985 12.9518 50 30 1026 1.35830 28 48986 14.9728 52 32 1027 1.04209 26 46987 17.1369 54 34 1028 0.79155 24 44988 19.4186 56 36 1029 0.59525 22 42989 21.7852 58 38 1030 0.44319 20 40990 24.1972 60 40 1031 0.32668 18 38991 26.6085 62 42 1032 0.23841 16 36992 28.9692 64 44 1033 0.17226 14 34993 31.2254 66 46 1034 0.12322 12 32994 33.3225 68 48 1035 0.08727 10 30995 35.2065 70 50 1036 0.06119 8 28996 36.8270 72 52 1037 0.04248 6 26997 38.1388 74 54 1038 0.02920 4 24998 39.1043 76 56 1039 0.01987 2 22999 39.6953 78 58 1040 0.01338 0 20

1000 39.8942 80 60

105

A spreadsheet was developed to calculate the quantities demanded at varying

price levels ($5-$80). The quantities were calculated by inverting the demand

equation in order to solve for (quantity demanded). These quantities were then

multiplied by the number of people located at each point to determine the total

amount purchased at a given price by a population with preferences for a certain

standard. The sum of the various quantities demanded at each price level by each

preference group gives the total quantity demanded at that price level by the

population. These quantities are then used to estimate an aggregated demand curve.

The aggregated demand curves are generated using the price and quantity

information above and can be graphed given an established standard.

If the standard is altered, it will move along the horizontal axis away from

the mean. As the standard moves away from the mean, fewer and fewer people will

approve of the standard. This decrease in approval can be translated into a decrease

in demand. Figure 5.2 illustrates the declining demand as the standard moves 1 and

then 2 standard deviations away from the mean.

106

Figure

5.2 Demand curve estimates (mean = 1000, s.d. =10)

As the curves are generated from a normal distribution, countries with the

same standard deviations will have the same demand curve. The same number of

consumers will be found at all points under both curves, even if the means are

different. Different variances would lead to different demand curves; however at this

stage it is desirable to maintain similar distributions (and therefore variances). Table

5.2 shows the demand curves calculated at various deviations for a population with a

mean of 1000 and a standard deviation of 10.

Table 5.2 - Demand Curve Equations

Standard Placement Demand CurveOptimal (mean) -0.004x + 64.06+/- 0.5 standard deviation -0.004x + 62.35+/- 1 standard deviations -0.004x + 56.69+/- 2 standard deviations -0.004x + 39.83

010

20304050

6070

8090

-15000 -10000 -5000 0 5000 10000 15000 20000

Quantity

Pric

eOptimal

1 s.d.2 s.d.

107

5.3 World Trade in Organic Products

The establishment of the excess supply and demand curves is necessary to

estimate the welfare changes in our theoretical model. In order to derive the excess

supply and demand curves, hereinafter called ES and ED, a supply curve for both

the importing nation and the exporting nation must be determined. In this case, the

supply curves for the importing and the exporting country were arbitrarily set and

are equal to and respectively (See Figures 5.3 and 5.4).

Using the demand and supply curves of the two trading partners, the excess supply

and demand curves can be calculated by subtracting the difference between the

quantity demanded and the quantity supplied at various price levels above or below

the country’s equilibrium price. At the world price, demand will exceed supply in

the importing country creating the ED curve; in the exporting country, supply will

exceed demand creating the ES curve. The world price and quantity traded are set at

the equilibrium point of ES and ED. Figure 5.5 illustrates the ES and ED curves for

various trade scenarios.

108

Exporting Country

0102030405060708090

-15000 -10000 -5000 0 5000 10000 15000 20000

Quantity

Pric

eOptimal1 s.d.2 s.d.

Supply

Figure 5.3 Demand and supply curves in the exporting country

Importing Country

0102030405060708090

-15000 -10000 -5000 0 5000 10000 15000 20000

Quantity

Pric

e

2 s.d.

1 s.d.optimalSupply

Figure 5.4 Demand and supply for organic products in the importing country

The slope and intercept functions within Excel were used to determine the

equations for the ES and ED curves. This function uses the data points to generate

109

an estimate for the slope and intercept of the line. Table 5.3 gives the calculated

equations.

Table 5.3 - ES and ED equations

Scenario ES EDEquivalency 0.0022x + 39.37 -0.0035x + 52.37Harm-stricter 0.0022x + 39.72 -0.0035x + 58.88Harm-lenient 0.0022x + 39.37 -0.0035x + 51.20Harm-median 0.0022x + 40.64 -0.0035x + 56.78

Using this format, 3 different scenarios were developed. In Scenario 1, both

the importer and the exporter have the same standard deviation, while their means

differ. In Scenario 2, both the means and the standard deviations differ. In Scenario

3, the standard deviations are the same, the means differ and the number of iterations

between the individual demand curves decreases by 4. This implies that people’s

preferences are stronger than they were in the case where the iterations decreased by

2. For example, someone located at standard 1001 will now have a demand curve

equal to .

110

World Market

0102030405060708090

-20000 -10000 0 10000 20000 30000

Quantity

Pric

e

ES-equivalencyED-equivalencyES-harm. stricterED-harm. stricterES-harm. medianED-harm. medianES-harm. lenientED-harm. lenient

Figure 5.5 Excess supply and demand curves for various trade scenarios

111

5.4 The Simulation

Using the framework developed above, it is possible to determine the welfare

effects of negotiating equivalency and harmonization under the 3 scenarios. The

different scenarios will examine the impacts of changing the distribution variance,

altering the means and changing the individual demand curves. A graphic

description will be provided of the case where the mean is 1000 in the exporting

country and 1010 in the importing country and the standard deviation is 10 in both

(Scenario 1, Case 1). The figures developed in the theoretical framework will be

used to illustrate the welfare effects. More specifically, the consumer and producer

surpluses for each country will be calculated. The situations of autarky, equivalency,

and harmonization to the stricter, lenient and median standard will be examined.

Following the graphic depiction of the trade effects there will be a brief discussion

of the welfare implications for each scenario and case.

Clearly, a situation of open borders with no standards would be the welfare

maximizing option for organic trade, however, due to the fact that consumer

preferences are different amongst trading partners, this option is infeasible and

therefore is not examined in the model. Without the use of standards there would be

no way for consumers to determine if the products they purchased were organic, and

demand (but not desire) for organic products would not exist. As a result, an open

border scenario is not realistic.

It is important to note that in cases where standards are harmonized or

equivalency is negotiated, it is assumed that demand and supply will shift by the

number of standard deviations necessary to reach an identical standard. For example,

in the case where the mean is 1000 in the exporting country and 1010 in the

112

importing country and the standard deviation is 10 in both, each country will have to

adjust their standard by 1 standard deviation to conform to their trading partner’s

standard. To harmonize to the median standard, the standards need only be adjusted

by 0.5 of a standard deviation.

5.4.1 Scenario 1, Case 1

In this case, the exporter’s optimal standard is located at 1000 while the

importer’s optimal standard is located at 1010. Both populations have a standard

deviation of 10. Using this information, a population distribution, demand curves

and excess supply and demand curves were determined to calculate welfare effects

of 5 different trade options. The first is the situation of autarky (no trade), the second

is equivalency negotiations, while the final three examine harmonizing to the

stricter, lenient and median standards. Figures 5.6 through to 5.18 and Table 5.4

through to 5.12 use the model developed in Chapter 4, along with the equations,

prices and quantities calculated in this chapter, to calculate consumer and producer

surpluses.

113

Figure 5.6 Autarky

Table 5.4 – Welfare results of autarky

Welfare Exporter ImporterCS 76,209.76 3,356.33PS 95,285.35 25,191.91Total Welfare 171,495.11 28,548.24

1295.88

8.5

64.06

Sx

Dx

Qx

Px

58.88

20

64.06

Sm

Dm

Qm

Pm

6173.33

39.37

Potential Exporter Potential Importer

114

Figure 5.7 Equivalency: Changes in demand in the importing country

Table 5.5 – Welfare effects of equivalency in the importing country

Figure 5.8 Equivalency: World market changes

20

Sm

Dm

Qm

Pm

56.69

Dm’

52.3744.39

30758131079.12

Pw

Importer

Welfare ImporterCS 18,911.25PS 9,914.54Total Welfare 28,825.79

ED’

Pw

Pw

52.37

39.37

2280.70

44.39

ES

58.88

ED

World Market

115

Figure 5.9 Equivalency:Welfare changes in the exporting country

Table 5.6 - Welfare results of equivalency in the exporting country

8.5

64.06

Sx

Dx

Qx

Px

6173.33

39.3744.39

4917.5 7178

Exporter

Pw

Welfare ExporterCS 48,363.61PS 128,809.21Total Welfare 177,172.82

116

Figure 5.10 Harmonizing to the stricter standard: Changes in the exporting country

Table 5.7 – Welfare effects of harmonizing to the stricter standard for the exporter

Figure 5.11 Harmonizing to the stricter standard: Changes to the world price

8.5

56.69Sx

Dx

Qx

Px

4243.33

39.72

47.12

2392.5 7724

Dx’

Sx’

18.5


Pw

Pw

39.3739.72

3361.40

47.12ES

58.88

ED

ES’

117

Figure 5.12 Harmonizing to the stricter standard: Changes to the importing country

Table 5.8 – Welfare effects of harmonizing to the stricter standard for the importer

20

64.06

Sm

Dm

Qm

Pm

904

47.12

4235

Pw


118

Figure 5.13 Harmonizing to the lenient standard: Changes in the importing country

Table 5.9 – Welfare effects of harmonizing to the lenient standard for the importer

Figure 5.14 Harmonizing to the lenient standard: World market effects

20

64.06

Sm

Dm

Qm

Pm

1373.33

43.94

3187.5

Pw

Dm’10

Sm’


ES

ED

Pw

Pw

39.37

2075.44

51.2058.88

ED’

43.94

119

Figure 5.15 Harmonizing to the lenient standard: Changes in the exporting country

Table 5.10 – Welfare effects of harmonizing to the lenient standard for the exporter


8.5

64.06

Sx

Dx

Qx

Px

Pw43.94

5030 7088

120

Figure 5.16 Harmonizing to the median standard: Changes in the exporting country

Table 5.11 - Welfare effects of harmonizing to the median standard for the exporter

Figure 5.17 Harmonizing to the median standard: World market effects

8.5

64.06

Sx

Dx

Qx

Px

62.35

13.5

46.8740.64

Sx’

Dx’

Pw

66743870

5427.78


ES

ED

Pw

Pw

40.64

2831.58

56.7858.88

ED’

46.87

ES’

121

Figure 5.18 Harmonizing to the median standard: Changes in the importing country

Table 5.12 – Welfare effects of harmonizing to the median standard for the importer

5.5 Results

The welfare implications of the three scenarios will be reported in this

section. As mentioned previously, changing the mean or the variance of a population

may alter resulting world welfare. In each scenario, three possible cases were

examined. Using the results from these estimations, some conclusions can be drawn

about the effects of harmonizing organic standards internationally.

Note that in all cases, for each standard deviation the standard was moved,

the supply curve shifted by 10. For example, if harmonizing to the stricter standard

20

64.06

Sm

Dm

Qm

Pm

1062.33

46.87

3870

Pw

Dm’15

Sm’

62.35


122

was chosen and the standards deviated from each other by 1, the supply curve would

shift from to in the exporting country as a stricter

standard implies higher costs for producers. If the standard was shifted by half of a

deviation, the supply curve would increase/decrease by 5. This was held constant for

all the scenarios and cases tested. To see if this affected the results, a case was run

where the supply curve only shifted by 5/2.5. The rankings of the trade options did

not change with the smaller shift in the supply curve, thus it was determined that the

shift in supply did not have a major effect on the results.

5.5.1 Scenario 1

In Scenario 1 the importing and exporting countries have the same variance

in their population, but their standards are not identical. Therefore, the means of the

two populations are located at different points along the standard spectrum. Three

cases were examined using these specifications.

5.5.1.1 Case 1

In Case 1, the mean was set at 1000 for the exporter and 1010 for the

importer. The standard deviations equaled 10. Table 5.13 summarizes consumer and

producer surplus and total surplus for all the trade options in Case 1. The results

indicate that, in order from most preferred to least preferred, the scenarios are ranked

as follows: harmonization to the lenient standard, harmonization to the stricter

standard, equivalency, autarky, and harmonization to the median standard. The

option with the highest world welfare is that of harmonizing to the lenient standard.

The importer would prefer to harmonize to their stricter standard and the exporter

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would prefer to negotiate equivalency. Harmonization to the lenient standard would

be the welfare maximizing option in this case.

Table 5.13 - Welfare results for Scenario 1, Case 1,

Scenario CS PSTotal

Surplus

Total between 2

nations World Exporter ImporterAutarky Exporter 76,209.76 95,285.35 171,495.11 200,043.35 4 3 5Importer 3,356.33 25,191.91 28,548.24EquivalencyExporter 48,363.61 128,809.2 177,172.82 205,998.61 3 1 4Importer 18,911.25 9,914.54 28,825.79Harmonization-stricterExporter 11,448.11 149,150.4 160,598.55 208,727.24 2 4 1Importer 35,870.45 12,258.24 48,128.69Harmonization-lenientExporter 50,601.8 125,599.4 176,201.16 219,826.88 1 2 3Importer 20,320.31 23,305.41 43,,625.72Harmonization-medianExporter 29,953.8 111,355.7 141,309.49 188,191.52 5 5 2Importer 29,953.8 16,928.23 46,882.03

5.5.1.2 Case 2

In Case 2, the importer has an optimal standard located at 1015, while the

exporter’s optimal standard remains at 1000. The standard deviation is now 15.

Table 5.14 illustrates the welfare implications for this case. The distance between

the two standards has now increased compared to Case 1. This increase implies

greater divergence between the two standards. The increased divergence changes the

order of preferred trade scenarios. As in case 1, harmonization to the lenient

standard is still the preferred option and the individual countries still prefer

harmonizing to the stricter standard (importer) and equivalency (exporter), however,

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the ranking of the scenarios based on their welfare scores has changed. The order in

terms of world welfare scores is now: harmonization to the lenient standard, autarky,

equivalency, harmonization to the median standard and harmonization to the stricter

standard. This differs from the case where the standards were initially closer

together. Therefore one can conclude that an increase in the divergence of standards

will lead to greater difficulty in harmonizing standards and negotiating equivalency,

and after the primary choice, autarky is the second best option.


Scenario CS PSTotal

Surplus

Total between 2

nations World Exporter ImporterAutarky Exporter 57,194.51 71,499.82 128,694.33 148,426 2 3 4Importer 2,321.69 17,409.98 19,731.67EquivalencyExporter 42,366.01 87,734.44 130,100.45 143,041.8 3 1 5Importer 7,469.11 5,472.24 12,941.35Harmonization-stricterExporter 3,087.61 50,086.44 53,174.05 91,055.6 5 5 1Importer 30,615.31 7,266.24 37,881.55Harmonization-lenientExporter 4,4698.2 85,088.89 129,787.09 150,911.58 1 2 3Importer 8,364.05 12,760.44 21,124.49Harmonization-medianExporter 21,092.51 74,529 95,621.51 127,808.02 4 4 2Importer 21,092.51 11,094 32,186.51

5.5.1.3 Case 3

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In Case 3, the importer has their optimal standard located at 1020, while the

exporter still remains at 1000. In this case, the standard deviation equals 20 for both

countries. As the standards get even further apart, the most favorable trade option

changes again. In Case 3, the trade scenarios are ranked as follows: autarky,

harmonization to the lenient standard, equivalency negotiations, harmonization to

the median standard and harmonization to the stricter standard (Table 5.15). The

divergence in trade standards makes it uneconomical to trade in organic products

and instead a situation of autarky is preferred. As in the previous two cases, the

importer would still prefer to harmonize to its stricter standard, while the exporter

would still prefer to negotiate equivalency agreements. The examination of the three

cases where the difference between the standards increases demonstrates that

harmonization will only be beneficial if the standards are similar to begin with. If the

standards are dissimilar it will be difficult to harmonize and world welfare will not

increase.

Scenario CS PSTotal

Surplus

Total between 2

nations World Exporter ImporterAutarky Exporter 44,501.78 55,609.54 100,111.32 114,198.06 1 3 3Importer 1,656.73 12,430.01 14,086.74 Equivalency Exporter 38,193.80 62,350.09 100,543.89 105,879.16 3 1 5Importer 2,311.25 3,024.02 5,335.27 Harmonization-stricter Exporter 308.11 31,329.00 31,637.11 63,206.42 5 5 1Importer 27,195.31 4,374.00 31,569.31 Harmonization-lenient Exporter 40,230.45 60,074.01 100,304.46 111,961.00 2 2 4Importer 2,832.20 8,824.34 11,656.54 Harmonization-median

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Exporter 14,445.31 50,523.76 64,969.07 87,291.54 4 4 2Importer 14,445.31 7,877.16 22,322.47


5.5.2 Scenario 2 In the second scenario, not only do the optimal standards differ but the

standard deviations are different as well. Again, three cases will be examined to

determine the effects of altering standards on world welfare.

5.5.2.1 Case 1

In Case 1, the optimal standard for the exporter is 1010, while it is 1020 for

the importer. The standard deviation is 5 for the exporter and 10 for the importer.

This results in the following rankings of the trade options: harmonization to the

lenient standard, autarky, equivalency, harmonization to the median standard and

harmonization to the stricter standard. Again as in the first scenario, harmonization

to the lenient standard is preferred when the standards are similar even when the

variances differ. Table 5.16 gives the welfare calculations for the different trade

options.


Scenario CS PSTotal

Surplus

Total between2 nations World Exporter Importer

Autarky Exporter 99,702.87 12,4663.9 224,366.77 252,915 2 3 4Importer 3,356.33 25,191.91 28,548.24 Equivalency Exporter 77,750.45 149,073.2 226,823.66 244,246.1 3 1 5Importer 5,173.2 12,249.25 17,422.45 Harmonization-

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stricterExporter 9,923.51 50,265.64 60,189.15 97,705.76 5 5 2Importer 21,582.45 15,934.16 37,516.61 Harmonization-lenient Exporter 80,581.51 145,618.6 226200.07 261,174.4 1 2 3Importer 12,575.11 22,399.26 34974.37 Harmonization-median Exporter 40,815.61 100,996.8 141,812.45 180,767.7 4 4 1Importer 18,210.61 20,744.64 38,955.25

5.5.2.2 Case 2

In Case 2, the standard deviations are set at 10 and 15 for the exporter and

importer respectively. The optimal standards can be found at 1000 for the exporter

and 1030 for the importer. In this situation there is a larger discrepancy between the

standards. This results in an interesting situation, where if the countries chose to

negotiate equivalency or harmonize to the lenient standard, the importer becomes

the exporter and the exporter becomes the importer, however, this then alters the

shift in demand. This role change is due to the large changes in demand that occur

because of the changes to the standards. Now the exporter (previously the importer)

has a demand curve at its optimum point, and the importer (previously the exporter)

experiences a decrease in demand due to the importation of products from a country

with a differing standard. This causes the roles to switch again, and so on15.

Inevitably, neither country will agree to trade and this results in a situation of

autarky. Keeping this in mind, the rankings are as follows: autarky, harmonization to

the median standard and harmonization to the stricter standard (neither

harmonization to the lenient standard nor equivalency negotiations will occur). The

15 A cycle would ensue with the importer and exporter changing roles. This is due to the large decrease in demand that is a result of strong consumer preferences. This is an interesting result that could be changed if the decreases in demand due to the importation of foreign organics was not so large.

128

importer would still prefer to harmonize to their stricter standard, while in this case

the exporter (who becomes the importer) would prefer autarky. Table 5.17 provides

the welfare calculations and the rankings.


Scenario CS PSTotal

Surplus

Total between 2

nations World Exporter ImporterAutarky Exporter 76,209.76 95,285.35 171,495.11 191,119.2 1 1 3Importer 2,309.98 17,314.12 19,624.1Equivalency-reverts to autarkyExporter (now importer) 76,209.76 95,285.35 171,495.11 191,119.2 1 1 3Importer (now exporter) 2,309.98 17,314.12 19,624.1Harmonization-stricterExporter 0 19,684.09 19,684.09 52,644.11 3 3 1Importer 24,500 8,460.02 32,960.02Harmonization-lenient-reverts

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to autarkyExporter (now importer) 76,209.76 95,285.35 171,495.11 191,119.2 1 1 3Importer (now exporter) 2,309.98 17,314.12 19,624.1Harmonization-medianExporter 11,809.8 24,492.25 36,302.05 56,041.94 2 2 2Importer 5,577.8 14,162.09 19,739.89

5.5.2.3 Case 3

In Case 3, the standard deviations are equal to 10 for the exporter and 20 for

the importer and the means are equal to 1000 and 1020 respectively. As with the

previous case, the importer and exporter’s roles shift when organic standards are

harmonized to the lenient standard or when equivalency negotiations take place and

thus this implies that autarky will be pursued. In this situation, autarky would be the

preferred trade option as it maximizes world welfare. Autarky is followed by

harmonizing to the median standard and harmonizing to the stricter standard. The

importer would prefer to harmonize to its own stricter standard and the exporter still

prefers autarky. Table 5.18 illustrates the surpluses and rankings for case 3.


Scenario CS PSTotal

Surplus

Total between 2

nations World Exporter ImporterAutarky

Exporter76,209.7

695,285.

35 171,495.11 185,499.5 1 1 3

Importer 1,719.4412,284.

97 14,004.41 Equivalency-reverts to autarky Exporter (now importer)

76,209.76

95,285.35 171,495.11 185,499.5 1 1 3

Importer (now exporter) 1,719.44

12,284.97 14,004.41

Harmonization-stricter Exporter 5.51 12,365. 12,370.95 34,832.8 3 3 1

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44

Importer 16,046.1

16,415.7

4 22,461.85 Harmonization-lenient-reverts to autarky Exporter (now importer)

76,209.76

95,285.35 171,495.11 185,499.5 1 1 3

Importer (now exporter) 1,719.44

12,284.97 14,004.41

Harmonization-median

Exporter29,837.8

151,710.

76 81,548.57 97,907.05 2 2 2

Importer 4,882.8111,475.

67 16,358.48

5.5.3 Scenario 3

In the third scenario, the optimal standards are still different in the two

trading countries, but the standard deviations are the same. In order to see what

occurs when consumers have strong preferences, the demand curve has been

changed. Instead of the intersection point decreasing by two at every point along the

distribution; it will now decrease by four. Changing the standard now causes a more

rapid decrease in consumer approval.

5.5.3.1 Case 1

In Case 1, the exporter’s optimal standard is located at 1000, while the

importer’s is at 1010. Both populations have a standard deviation of 5. In this

circumstance, the importer and exporter again choose autarky over harmonization to

the lenient standard or negotiating equivalency. The trade options are ranked in the

following order: autarky, harmonization to the median standard and harmonization

to the stricter standard. In this case, the exporter would prefer a situation of autarky

and the importer would prefer to harmonize to its stricter standard. Table 5.19

depicts the welfare results of the various trade options.

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Scenario CS PSTotal

SurplusTotal between

2 nations World Exporter ImporterAutarky Exporter 76,326.47 95,415.81 171,742.28 200,342.45 1 1 3Importer 3,365.87 25,234.3 28,600.17Equivalency-reverts to autarkyExporter (now importer) 76,326.47 95,415.81 171,742.28 200,342.45 1 1 3Importer (now exporter) 3,365.87 25,234.3 28,600.17Harmonization-stricterExporter 0 32,005.21 32,005.21 82,817.97 3 3 1Importer 39,205.51 11,607.25 50,812.76Harmonization-lenient-reverts to autarkyExporter (now importer) 76,326.47 95,415.81 171,742.28 200,342.45 1 1 3Importer (now exporter) 3,365.87 25,234.3 28,600.17Harmonization-medianExporter 19,687.87 65,843.56 85,531.43 124,667.72 2 2 2Importer 19,687.81 19,448.48 39,136.29

5.5.3.2 Case 2

In the second case, the population has a standard deviation of 10. The

optimal standards remain at 1000 and 1010, as in Case 1. Interestingly, in this

situation, the roles of the exporter and the importer are not reversed even though the

variance is larger (most likely due to the fact that the standards are only one

deviation apart to begin with). Instead they remain in their respective roles and

world welfare is maximized by the following trade options: autarky, harmonization

to the lenient standard, equivalency negotiations, harmonization to the median

standard and harmonization to the stricter standard. The exporter now prefers

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equivalency negotiations, while the importer still prefers harmonizing to their

stricter standard. The welfare results are illustrated in Table 5.20.


Scenario CS PSTotal

Surplus

Total between 2

nations World Exporter ImporterAutarky Exporter 40,088.58 50,093.94 90,182.52 102,371.63 1 3 3Importer 1,435.26 10,753.85 12,189.11EquivalencyExporter 33,702.05 56,977.69 90,679.74 95,340.8 3 1 5Importer 1,960.2 2,700.86 4,661.06Harmonization-stricterExporter 320 27,522.81 27,842.81 55,099.2 5 5 1Importer 23,461.25 3,795.14 27,256.39Harmonization-lenientExporter 35,616.8 54,802.81 90,419.61 101,276.43 2 2 4Importer 2,856.05 8,000.77 10,856.82Harmonization-medianExporter 13,494.01 47,262.76 60,756.77 81,078.44 4 4 2Importer 13,494.01 6,827.66 20,321.67

5.5.3.3 Case 3

In the final case, the divergence between the standards increases even

further. The exporter remains at 1000 but the importer’s optimal standard is now at

1020. The standard deviation is 20 for both countries. As in Case 1, the exporter and

importer find themselves in a never-ending cycle of decreasing demand curves and

thus will not choose to negotiate equivalency or harmonize to the lenient standard.

Instead autarky will be pursued. The rankings are similar to the previous two cases,

with autarky being the preferred trade option and harmonization to the stricter

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standard being the least preferred option. The individual countries have the same

preferences as in Case 1. Table 5.21 presents the welfare results of this case.


Scenario CS PSTotal

Surplus

Total between 2

nations World Exporter ImporterAutarky Exporter 12,306.31 15,395.29 27,701.6 29,426.44 1 1 3Importer 202.27 1,522.57 1,724.84Equivalency-reverts to autarkyExporter (now importer) 12,306.31 15,395.29 27,701.6 29,426.44 1 1 3Importer (now exporter) 202.27 1,522.57 1,724.84Harmonization-stricterExporter 0 4,238.01 4,238.01 8,890.4 3 3 1

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Importer 4,234.05 418.34 4,652.39Harmonization-lenient-reverts to autarkyExporter (now importer) 12,306.31 15,395.29 27,701.6 29,426.44 1 1 3Importer (now exporter) 202.27 1,522.57 1,724.84Harmonization-medianExporter 2,520.01 9,682.56 12,202.57 15,881.84 2 2 2Importer 2,520.01 1,159.26 3,679.27

5.6 Conclusions

There are several interesting conclusions that can be drawn from the

simulations carried out in this chapter. In the first scenario, it appears that the further

apart the standards are originally, the harder it is to harmonize. In the cases where

the standards are 10 or 15 points apart, harmonization to the lenient standard is

preferred, whereas in the case where they are 20 points apart, autarky is the best

option. Except for the situation where the optimal standards are very close together,

harmonization to the stricter standard is the worst possible option.

In the second scenario, if the difference between the standards in the two

countries is small, harmonization to the lenient standard is preferred. However as the

difference increased, as in Case 2 and 3, autarky is preferred. Again, the least

welfare enhancing option is to harmonize to the stricter standard.

In the third scenario, autarky is always the preferred option. It is clear that

the changes to the initial demand curve result in a rapid decrease in demand.

Therefore, if the standard moves away from the mean, demand will drop off quickly

and autarky is preferred.

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The results from this empirical model tend to support the hypothesis that

harmonization is not always beneficial to society. It will only be beneficial if

countries decide to harmonize to the lenient standard, and then only in certain cases.

As this is only a two-country trade model, it could be questioned how beneficial

harmonization would be in the today’s global setting? Differences between

individual country’s preferences lead us to ask what effect they may have on the

future of the world organic market. These differences may prevent harmonization

from occurring even when it could be welfare enhancing. In a world where countries

have vastly different cultural beliefs and economic incentives, it may be difficult to

harmonize to one organic standard.

This simulation results in different welfare outcomes for each participating

country. These differences are in addition to the differences in consumer preferences

that may inhibit harmonization. If one country’s national welfare will be decreased

by participating in the harmonization process, it may make negotiations difficult.

The ideal situation would be if all countries were to benefit from harmonization, but

as this simulation indicates, it is highly unlikely that this will always be the case.

Do consumers differ greatly around the world? Do their preferences for

organic standards influence their purchasing decisions? If, as it is believed,

consumer preferences do differ in different nations, then there is strong reason to

trust the results found above. Increased knowledge regarding consumer beliefs and

ideologies towards organic standards is necessary to support the conclusions of this

simulation exercise.

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Chapter 6

Organic Standards and Consumers: An International Comparison

6.1 Introduction

Organic standards around the world have evolved to be different as a result

of varying cultural beliefs, economic incentives and the physical environment.

While the major principles of organic agriculture are relatively the same among

countries, there are divergences in the specific standards that are used to produce

organic products. These differences in standards are to be expected, as standards

should reflect the desires of the group who developed them, however they can

inhibit trade.

Organic standards have been created in response to the need for consumer

assurance of the credibility of organic claims. Due to the credence nature of organic

goods, consumers require third party verification to ensure the authenticity of

products identified as organic. Organic standards can be developed by private or

public certification agencies. Both producers and consumers have played a major

role in the development of national standards; therefore the standards should reflect

their preferences.

To determine whether consumer preferences are in line with current national

organic standards, a survey was conducted in three countries – Canada, the US and

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the UK. The survey asked consumers questions regarding their frequency of organic

purchases, their motivations for purchasing organic products, socio-economic

questions and questions testing their knowledge of the organic industry. In addition,

the second section of the survey asked consumers to rate different products based on

the standards they were produced under. The responses were then analyzed using

conjoint analysis. The results of this section and a discussion of conjoint analysis

will follow in Chapters 7 and 8. This chapter will provide a full description of the

survey and the non-conjoint results.

6.2 Data Collection

The survey was conducted to gather more information on organic consumers.

To test the proposition that consumers in different countries differ in their

preferences for organic standards, the survey asked consumers to rate different

standards. This information along with the other information gathered enables a

thorough examination of the typical organic consumer in Canada, the UK and the

US. In addition, the information can be used to support our proposition that

harmonization of organic standards will not be beneficial to global welfare. If

consumers in Canada, the US and the UK prove to vary significantly in their

preferences for organic standards, it could be an indication that harmonization may

be detrimental to global welfare.

6.2.1 Survey Locations

The survey was conducted in Canada, the US and the United Kingdom in

2004. In Canada, consumers were interviewed at several stores in Saskatoon and

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Vancouver. Saskatoon was chosen as a site due to the location of the researcher at

the University of Saskatchewan. Vancouver was chosen because it has several

organic stores, a population that is considered to be relatively more health conscious

and is a target market for the Canadian organic industry. The populations in these

two cities provide a broad representation of Canadians.

In Saskatoon, surveys were conducted at three sites: the Steep Hill Food

Coop, Safeway and the Saskatoon Farmers’ Market. Steep Hill Food Coop is the

only organic store in Saskatoon. It is a cooperative, although non-members can also

shop there. It was important to the study that people who purchased organic products

be interviewed, hence the motivation for surveying at Steep Hill. In order to get a

representative sample from Saskatoon, surveys were also conducted at a Safeway

store. Here it was assumed that the majority of consumers would be non or minimal

organic purchasers, but may still have some preferences for organic standards

developed in Canada. The Saskatoon Farmers’ Market was the final site in

Saskatoon. Both organic and conventionally-produced products are sold at this

market, therefore it was expected that both non-organic purchasers and organic

purchasers would be present.

In Vancouver, surveys were conducted at Caper’s Community Market and

Choices Market. Both of these stores are in the west end of Vancouver and both

carry a large selection of organic products. Attempts were made to conduct surveys

at less specialized stores in different areas of town; however, these stores were

uncooperative.

140

Seattle was chosen as the survey location in the US due to its proximity to

Vancouver. In addition, Seattle is considered to be similar to Vancouver in that its

population is health conscious and it has a relatively large organic market. In Seattle,

surveys were completed at Larry’s Market in Queen Anne, and at the Puget

Consumers Coop (PCC) in Issaquah. Larry’s Market is a supermarket that carries

some organic goods. PCC is an organic supermarket.

It was desirable to survey consumers in the European Union (EU) to

determine if there are significant differences between consumers in the EU and

North America, the two major organic consuming continents. A contact was able to

set up survey locations in the town of Aberystwyth. Aberystwyth is a university

town located approximately half way up the west coast of Wales. The town contains

organic stores and the region has organic producers.

Surveys were conducted at two sites in Aberystwyth. Treehouse is an organic

food store located in the downtown core. The remainder of the surveying was done

at a Safeway market on the outskirts of town where a broad base of consumers could

be reached.

6.2.2 Respondent Recruitment

At all the locations customers were approached and asked if they wished to

participate in the survey. Participants were given a letter of introduction that

described the survey and provided contact information for researchers involved in

the project should they wish to receive more information or to withdraw from the

study (see Appendix A). The survey was explained verbally and then, in many cases,

141

the consumer completed it independently. In some cases, the interviewer completed

the survey with the consumer.

There was no formula for determining who would participate in the survey.

Every customer entering the store was asked to complete a survey; some chose to

participate while others did not. In this way, it was hoped that a representative

sample could be gathered. Participants had to be over the age of 18 and only one

survey per household was allowed.

6.3 Survey Description

This section of the chapter will describe the survey in detail. Explanations

will be provided on the motivations for including the different questions in the

survey. A copy of the surveys can be found in Appendix A.

The first section of the survey asked respondents to indicate the frequency of

their organic purchases. The choices were never, seldom, occasionally, frequently

and whenever possible. “Always” was not included as an option as in many cases

certain products are not available in an organic form. From these responses the

sample could be segmented by the frequency of their organic purchases.

If the participant responded that they had purchased organic products at some

point, they were then asked to state their motivations for buying organic. There were

five options available: conveniently packaged, health concerns, environmental

concerns, taste and “other”. This information can be used to determine the major

motivating factors that drive people to purchase organic food. Those participants

who had never purchased organic food were asked to indicate their reasons for not

purchasing from the following choices: price, availability, appearance and “other”.

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In order to increase purchases of organic products, producers and marketers need to

overcome these inhibiting factors.

The second section of the survey presented respondents with a stated

preference conjoint task. This analysis will be discussed in more detail in Chapter 7.

The conjoint exercise asked respondents to rate a particular organic good based on

the standards under which it was produced. The responses can be broken down to

reveal utility values for each standard. This information is used to determine whether

populations in different countries are statistically different in terms of their

preferences for organic standards.

In the final section of the survey, respondents were asked to provide socio-

economic information; they were also asked several questions to test their

knowledge of organic standards. Consumers were asked to indicate whether their

home country had a national organic standard. If they responded positively then they

were asked if they could identify the standard from the profiles provided in the

conjoint section of the survey. The responses demonstrate consumer knowledge

about organics in their domestic market. Following this, consumers were asked to

choose between three organic products, one produced in Canada, one produced in

the EU and one produced in the US. They were also asked to explain their choice.

The responses reveal whether consumers had a natural preference for domestic

organics.

Socio-economic information on gender, age, household income levels and

educational attainment was gathered. This information is used to segment the sample

of consumers. It is also useful to know who is purchasing organic food and who

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could be targeted via marketing. Information on age was not collected in Saskatoon;

these questions were added later for the remainder of the surveys.

The last part of the survey presented respondents with a series of statements.

The participants were asked to state whether they agreed with, disagreed with, or did

not know about the statement. The statements targeted the bundling aspects of

organic food and tested consumer knowledge about organic certification and

accreditation.

6.4 Results: Identifying Organic Consumers

Examinations of the age of consumers, their incomes, their education levels,

the frequency of their organic purchases and their gender will help to determine who

is purchasing organic products. The information gathered in regards to consumer

knowledge about the organic industry is used to determine what can be done to

further educate consumers on the production of organic food. A detailed analysis of

the data gathered from each country is presented below. This is followed by a

comparison of the results from the three countries and a discussion of the

implications for the organic industry. A summary of all the results not presented in

this chapter can be found in Appendix B.

6.4.1 Canada

A total of 176 surveys were collected in Saskatoon and Vancouver. Table 6.1

presents the demographic information for the participants compared with national

demographics information.

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Table 6.1 - Comparison of Survey and Canadian Populations

Age Stats. Canada

2003

Organic Study % buying organics frequently or

whenever possible in study

20-29 18.2% 8.5% 9.5%30-39 19.8% 22.3% 18.9%40-49 22.1% 29.8% 28.4%50-59 16.9% 33% 36.5%60 & over 23% 6.4% 6.8%Gender Stats.

Canada 2003


whenever possibleMale 49% 32.9% 35.2%Female 51% 67.1% 64.8%Highest level of Schooling

Stats. Canada

2003


whenever possible in study

Less than high school 34.6% 4% 2.7%High school diploma 24% 16.7% 13.6%College diploma 15.6% 20.1% 20%Technical school 11.3% 5.7% 4.5%Bachelor’s degree 10.5% 31% 35.5%Master’s degree 2.8% 14.4% 14.5%Doctorate or professional degree

1.1% 8% 9.1%

Average Family Income in 1995 dollars

Stats. Canada 1996 Organic Study$54,583 $69,281.01

Source: Adapted from Statistics Canada Internet Site (2004) and survey data

Sixty-nine percent of respondents were over the age of 40, while only 8.5%

were under 30. Female shoppers had a higher participation rate in the survey than

males. This is not surprising due to the location of the surveying, i.e. supermarkets;

the division of household labour, while changing, dictates that grocery shopping is

still predominantly a female role within the family. In addition, the time of

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surveying may have also played a role in determining the population sample

obtained. The surveys were conducted mainly in the morning and the afternoon, and

women with small children tend to stay at home more often than men.

Income levels among participants are higher than the national average. This

value may be influenced by the location of the retail outlets where surveying was

conducted. The west end of Vancouver is a particularly affluent area of Canada. In

addition, higher incomes would be expected as one would assume that those with

higher incomes might be more willing and able to purchase organic food which is

normally priced at a premium.

Educational attainment was also higher amongst participants in the survey

than the national averages. The majority of the participants (53.4%) had achieved a

bachelor’s degree or higher, while only 14.4% of the Canadian population had

obtained the same level of education. This follows from the assessment of income

levels, those people with higher education would expect to earn higher incomes and

vice versa. It may also be a result of the location of the survey as Saskatoon is

predominantly a university town.

The first question of the survey asked participants to state the frequency with

which they purchased organic products. Figure 6.1 illustrates their responses. Of

those consumers interviewed, 37.5 % stated that they purchased organic products

whenever possible. This relatively high percentage is to be expected given the focus

of the survey and the concentration on organic stores. It should not be interpreted as

representative of the general Canadian population.

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Figure 6.1 Frequency of organic purchases by Canadian consumers (n=176)

Canadians appear to be motivated by several factors when deciding whether

to buy organic goods. The predominant determinants are health concerns; which are

followed by environmental concerns and taste. Figure 6.2 illustrates the motivations

driving consumers to purchase organic products. As well as these traditional reasons,

sustainable food production, support for local farmers, ethical reasons, respect for

the earth, the belief that organic food has greater nutritional value, the non-GMO

property of organics and a desire to promote the industry were all cited as deciding

factors. Price, availability, lack of knowledge regarding organic production and

inconvenience were all reasons given by those consumers who did not normally

purchase organic food.

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%

Percentage of Consumers

WheneverPossible

FrequentlyOccasionally Seldom Never

Frequency of Organic Purchases

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0%10%20%30%40%50%60%70%80%90%

Conve

nientl

y Pack

aged

Health

Conce

rns

Enviro

nmen

tal C

oncer

ns

Taste

Other

% o

f Con

sum

ers

Figure 6.2 Organic purchase motivators for Canadians (n=176)

In terms of country of origin preferences, the majority of respondents (75%)

said that they preferred to buy Canadian products. Reasons given for this include

supporting local agriculture, less transportation of food products, which implies less

environmental damage and fresher food, and a belief in the Canadian organic

system. Some Canadian respondents (14.8%) would prefer to purchase products

from the EU as they believed that the EU had stricter standards, while only 2.8%

would choose to purchase organics from the US. This is somewhat counterintuitive

as the US is far closer in proximity than the EU and environmental damage caused

by hauling food long distances was a major concern of organic consumers.

However, there appears to be a lack of trust in the US organic system, even though

the standards in fact appear to be stricter than those of the EU as will be discussed in

Chapter 8, sections 8.2.1.4 and 8.2.2.4

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Most Canadians lacked knowledge regarding the National Standard of

Canada for Organic Agriculture. Of 174 respondents, 91 did not know whether

Canada had a national standard. Only 45 respondents responded positively, and only

1 person was able to correctly identify the national standard from the profiles

provided. Many of the respondents were unsure but believed that a national standard

existed. If a national standard is to succeed in Canada there needs to be more

consultation with, education of and communication with consumers.

In the final section of the survey, people were asked to state whether they

agreed with, disagreed with, or did not know about several statements. The

statements made claims regarding organic food and the certification of organic food.

The purpose of this section was to discover what people know about organic food

and the standards that are in place and where further clarification is needed. Refer to

the copy of the survey in Appendix A for a list of the statements.

The purpose of the first two statements – Organic food is not genetically

modified, organic food is not irradiated - is to determine whether consumers know

that organic food is non-GM and non-irradiated and to determine whether this is an

important issue. The survey results indicate that 63% of consumers are aware of the

non-GM property of organic food and 55% are also aware that organic food in

Canada is meant to be non-irradiated. The purpose of the third statement is to see

whether consumers can differentiate between locally produced food and organic

food. Seventy percent of consumers knew that organic food can come from all over

the world and that the term “local” is not analogous to “organic”. The fourth

statement evaluates knowledge of the organic livestock industry. Many consumers

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knew about the animal welfare principles of organic livestock production, although

there is still room to improve the consumer knowledge. The responses to the fifth

question indicate that consumers are aware of the differences between foods that are

labelled “natural” versus foods that are labelled “organic”.

The final four statements make claims regarding certification and

accreditation in the organic industry. In many cases consumers were not aware of

the steps that a producer must go through to sell his/her output as “organic”.

Through discussions with the interviewees, it was clear that people are interested in

learning more about the behind the scenes certification and accreditation programs

that exist in Canada. This would ensure consumer confidence in Canadian organics

as well as provide knowledge needed to make informed decisions.

6.4.2 United States

The United States is both a major consumer and producer of organic products.

Fifty consumers were interviewed in the US. From the information gathered, a

comparison can be conducted of the “typical” organic consumer in the United States

versus the average organic consumer in Canada and the UK. Table 6.2 presents the

demographic information for the US participants and, where available, national

demographics information.

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Table 6.2 - Comparison of survey and US populations

Age US Census 2000

Organic Study % buying organics

frequently or whenever

possible in study20-29 13.6% 17.6% 20%30-39 15.4% 17.6% 17.1%40-49 15.1% 21.6% 20%50-59 11.0% 27.5% 28.6%60 & over 16.2% 15.7% 14.3%

Gender US Census 2002


frequently or whenever possible

Male 48.9% 41.2% 48.6%Female 51.1% 58.8% 51.4%Highest level of schooling

US Census 2002


frequently or whenever possible

Less than grade 9 7.1% 0% 0%Grades 9-12 14% 0% 0%High school diploma 30.1% 3.9% 2.8%Some college, no degree

18.2% 25.5% 28.6%

Associate degree 7.3% 7.8% 5.7%Bachelor’s degree 15.5% 33.3% 34.3%Doctorate or professional degree

7.5% 29.4% 28.6%

Average Family Income in 2001 dollars

US Census 2002 Organic Study$57,852 $76, 549.53

Source: Adapted from US Census Internet Site (2004) and survey data

151

U.S. participants were more evenly distributed across age groups than the

Canadian sample population. The largest group of participants were those between

the ages of 50 and 59. The ratio of female to male consumers was closer to the

national average than that in Canada; however, female consumers still had a higher

participation rate in the survey than males.

Income levels among participants were much higher than the national

average. This value may be influenced by the location of the retail outlets where

surveying was conducted. In addition, higher incomes would be expected as one

would assume that those with higher incomes may be more willing and able to

purchase organic food which is normally priced at a premium. The people who

purchased organics tended to be more interested in participating in the survey.

Educational attainment was also higher amongst participants in the US

survey than the national averages. Sixty-three percent of the participants had

achieved a bachelor’s degree or higher, while only 23% of the American population

had obtained the same level of education. This may follow from the assessment of

income levels, where those people with higher education would be expected to earn

higher incomes. It may also be a result of the urban location of the stores in which

the surveys were conducted.

Figure 6.3 illustrates the frequency of organic purchases by participants. Of

those consumers interviewed, 41.2 % stated that they purchased organic products

whenever possible. Due to the small sample size and the deliberate focus of the

survey on organic stores this value is most likely not an accurate reflection of the

purchasing patterns by American consumers.

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0%5%

10%15%20%25%30%35%40%45%


WheneverPossible

Frequently Occasionally Seldom Never

Frequency

Figure 6.3 Frequency of organic purchases by US consumers (n=50)

Similar to Canadians, American respondents purchase organic products

because of health concerns. Health concerns are followed by environmental

concerns and taste. Figure 6.4 illustrates the motivations driving US consumers to

purchase organic products. In addition to these traditional reasons, support for local

agriculture, social health, a desire to escape corporate agriculture, a preference for

bulk foods, concerns for farm worker safety and quality were all cited as motivating

factors. Conner and Christy (2004) also found similar motivating factors in their

study of consumer preferences for organic food in the US. In this study, price,

availability and appearance were reasons given by those consumers who never

purchased organic food.

153

0%10%20%30%40%50%60%70%80%90%

% o

f Con

sum

ers

Figure 6.4 Organic purchase motivators for US consumers (n=50)

In terms of country of origin preferences, a slight majority of respondents

(51%) state that they would prefer to buy US products. Reasons for this included a

desire to support local agriculture, less transportation of food products, which equals

less environmental damage, fresher food and an unfamiliarity with standards in the

other countries. Surprisingly, 27.5% of respondents would prefer to purchase

products from the EU as it was believed that they had stricter standards, while only

7.8% would choose to purchase organics from Canada. Many Americans knew

about the food safety scares in the EU and therefore believed standards in the EU

would be stricter.

The majority of people interviewed were aware of the existence of the

National Organic Program. Of 51 respondents, 16 did not know whether the US had

a national standard or not, whereas 29 respondents responded positively. Only four

people were able to correctly identify the national standard from the profiles

provided. US respondents may be more knowledgeable about organic standards than

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their Canadian counterparts because the National Organic Program is a mandatory

program and caused a lot of debate in the organic industry.

Respondents in the US were very aware of the non-GM property of organic

food. Seventy-four percent knew that the definition of organic products prohibits

GMOs. They were also aware that organics are not irradiated and can be produced

all over the world. There is a need for further clarification of the definition of

organic livestock production. Most consumers were unaware that livestock is to be

raised in an animal welfare friendly manner as part of the organic principle. The

term “natural” has been used by some marketers who wish to cash in on the health

conscious consumer. The respondents (90%) appear to be aware that the term natural

is not analogous to organic and that there are differences between the production

practices.

Consumers were unclear on the certification processes in the US. Many were

unaware that an independent third party has to monitor an organic farm to ensure

producers are complying with regulations. In addition, very few people were aware

that certification agencies must be accredited by the government in order to use the

USDA organic label. Without this knowledge, many consumers may question the

validity of the organic claims. Conner and Christy (2004), in their study on

consumer preferences for organics, conclude that there needs to be additional

communication between the industry and consumers to ensure that this important

information is understood.

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6.4.3 United Kingdom

One hundred consumers completed surveys in the UK. The European Union

is not only the birthplace of organic farming but it also has the largest organic

market (Browne et al. 2000). The European Union imports organics from over 90

countries and it has been the driving force for the establishment of national organic

standards in organic producing countries (Lohr and Krissoff 2002). It was very

important to gather sample data from an EU country in order to compare the

preferences of its population with those of North Americans. Table 6.3 describes the

survey population and compares it with the demographics from the UK.

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Table 6.3 - Comparison of survey and UK populations

Age UK Census 2002

Organic Study % of frequent and whenever

possible buyers in study

Under 20 (min. 18) 2.44% 3% 0%20-29 13.11% 29% 28.1%30-39 No data 15% 15.8%40-49 No data 14 17.5%50-59 No data 27% 28.1%60 & over 20.54% 12% 10.5%Gender UK Census

2002Organic Study % of frequent or

whenever possible buyers

in studyMale 49% 44% 29.8%Female 51% 56% 70.2%Highest level of schooling

UK Census 2001

Organic Study % of frequent or whenever

possible buyers in study

School-left before 16 15.0% 7% 3.5%School-age 16 21.7% 6% 3.5%School- age 18 24.1% 12% 10.5%College 13.7% 21% 38.6%Bachelor’s degree 31% 15.8%Master’s degree 16.3% 17% 19.3%Graduate/professional degree

(total all 3 categories)

6% 8.8%

Average Family Income in 2004 poundsOrganic Study

£22,841.46

Source: Adapted from UK Statistics Internet Site (2004) and survey data

The largest group of participants were between the ages of 20 and 29 (29%),

with the 50 to 59 age group coming in a close second (27%). Aberystwyth is a

university town which may explain why a large number of respondents were in their

20s. The ratio of female to male consumers was closer to the national average than

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in Canada; however female consumers still had a higher participation rate in the

survey than males.

Income is not reported in UK censuses and therefore no information could be

reported on national average household income levels.

Participants in the survey appear to be well educated, with 54% of the

participants having achieved a bachelor’s degree or higher as compared with the

national average of 16.3% of the population having any sort of degree. This high

proportion may be due to the fact that Aberystwyth is a university town.

Figure 6.5 illustrates the frequency of organic purchases by study

participants. Of those consumers interviewed, 30.4% stated that they purchased

organic products frequently.

0%

5%

10%

15%

20%

25%

30%

35%


WheneverPossible

Frequently Occasionally Seldom Never

Figure 6.5 Frequency of organic purchases by UK consumers (n=100)

Similar to Canadians, the UK respondents purchase organic products

primarily for health reasons followed closely by taste and environmental concerns,

respectively. Figure 6.6 illustrates the motivations prompting UK consumers to

158

purchase organic products. As well as these traditional reasons, support for local

sustainable agriculture, ethical farming practices, political factors, concerns for the

health of their children, the availability of conventional products and quality were all

cited as motivating factors. Price, availability, opportunity for false claims, lack of

difference between organic and non-organic food and appearance were all reasons

given by those consumers who never purchased organic food.

0%10%20%30%40%50%60%70%80%

Con

veni

ently

Pack

aged

Hea

lthC

once

rns

Env

iron

men

tal

Con

cern

s

Tas

te

Oth

erMotivations

% o

f Con

sum

ers

Figure 6.6 Organic purchase motivations in the UK (n=100)

In terms of country of origin preferences, the majority of respondents (93%)

in the UK would prefer to buy British products. Reasons given for this include a

desire to support local agriculture, less transportation of food products, no antibiotic

use, safer products, products that are GM free and a belief that standards are higher

in the UK. Six people had no preference for country of origin. Many consumers

stated that they would never buy products from the US, which is also reflected in

statements made by Canadian consumers.

159

The majority of people interviewed were aware of the existence of UKROFS

(United Kingdom Register of Organic Food Standards). Of 99 respondents, 12 did

not know if the UK had a national standard or not, whereas 58 respondents

responded positively. No one was able to correctly identify the national standard

from the profiles provided.

UK consumers were very aware of the non-GM characteristic of organic

food. Seventy-six percent knew that organic food was meant to be GM free. They

were also aware that organic goods are not irradiated and can be produced all over

the world. Most consumers were also aware that organic livestock production was

meant to be animal welfare friendly. Ninety percent of UK consumers know that

organic and natural are not equivalent terms and cannot be used interchangeably.

Fifty-eight percent of consumers knew that organic farmers are required to

be certified by an independent third party, however, there is confusion regarding

accreditation processes in the UK. Many respondents were unaware that certifiers

also need to be accredited by a government or private accreditor. Clarification of

these practices may make European consumers more open to imports..

6.4.4 Discussion

Consumers in all three countries are mainly motivated to purchase organic

products for health and environmental reasons and because they feel the products are

better tasting. There are very few obvious differences in terms of socio-economic

information and these categories should be interpreted with caution as the

information gathered could be biased due to the survey locations.

160

Both Canadian and EU consumers appear to have a dislike for US products.

Neither group of consumers trusts the role of the US government in organic

certification and accreditation. Consumers in both countries would prefer to buy

products from one another rather than from the US.

US and EU consumers tended to have greater knowledge about organic

standards and certification procedures then their Canadian counterparts. Consumers

in the US were the most knowledgeable, with those in the EU following close

behind. Consumers in the EU were much more knowledgeable about the animal

welfare principles within organic livestock production than those consumers

interviewed in North America. However, EU consumers tended to be more skeptical

about organic farming and organic claims.

6.5 Conclusion

This chapter provided an overview of the organic survey conducted in this

thesis. The survey was conducted at a variety of locations so the hypothesis that

consumer preferences for organic standards differ across borders could be tested. In

addition, the information gathered will be used to segment the respondents

according to their purchase patterns, and their socio-economic information.

Questions regarding organic production in their domestic country help determine the

knowledge level of organic consumers regarding organic production and

certification.

The results show that the typical organic consumer in North America is not

much different than the average organic consumer in the EU. EU consumers seem to

have a better understanding of organic principles and procedures than North

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Americans. This analysis of the survey populations leads into a more detailed

analysis of consumers’ preferences for specific organic standards. Conclusions from

this analysis is used to analyse the proposition that consumers differ across nations

in terms of their preferences for organic standards and that these differences will

make harmonization of organic standards detrimental to global welfare.

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Chapter 7

Developing the Conjoint Model

7.1 Introduction

Conjoint analysis is an empirical method that allows researchers to model

consumer trade-offs between multi-attribute products (Ness and Gerhardy 1994). It

is based on the idea that a good or service can be described by the attributes that it is

composed of and that consumers make purchasing decisions based on these

attributes (Steenkamp 1987). In a conjoint study, consumers are presented with

descriptive product profiles consisting of different combinations of product

attributes and are asked to rate or rank the profiles. This data can then be analyzed to

determine the relative importance of each attribute in consumers’ preference

rankings of the full profiles. Using the calculated “part-worth” utility levels, a

market analyst can determine the underlying consumer preferences for individual

attributes within a product.

A survey was designed to gather information on consumer preferences for

various organic standards. This information is used to determine whether there are

significant differences between the preferences of consumers in the US, Canada and

the UK by conducting a conjoint analysis. Respondents were asked to rate organic

products based on the standards under which they were produced. When analyzed,

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these scores provide importance measures for individual standards. A comparison of

these measures will be done to discover whether consumers in different countries have

statistically different preferences for specific organic standards. It has been assumed that

consumers differ in their preferences for organic standards and that these differences

may inhibit the harmonization process. Conjoint analysis was chosen as the survey

method due to its ability to break down national standards into their individual

specifications.

This chapter provides a brief description of conjoint analysis and its use in this

research. It begins with a discussion of consumer behaviour theory, and then proceeds

into an examination of conjoint measurement and its validity and reliability. Previous

uses of conjoint analysis will be discussed to illustrate its applicability to this research

problem and to provide a context for the theoretical information. Finally, a thorough

explanation of how conjoint analysis is modeled and used in this study will conclude the

chapter.

7.2 Analyzing Consumer Behaviour

The Lancasterian approach to consumer choice in economics is based on the

premise that consumers maximize utility by combining utilities derived from the

properties or characteristics of goods, not from the goods themselves (Lancaster 1991;

Sanderson 2001). When making a purchasing decision, a consumer will implicitly

evaluate a good in its entirety, consider all the attributes that it is composed of, and

compare it with possible substitutes. They will then choose to purchase a product

because of the characteristics it possesses and the services it can provide (Baker and

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Burnham 2001). Lancaster (1991, p.4) claims, “The relationship between goods and the

characteristics they contain is objective and determined by the consumption

technology16”. Therefore, while different consumers may choose different goods based

on their preferences for the characteristics of that good, they are still faced with a

common consumption technology (Lancaster 1991).

In the model used in this thesis, consumer behaviour is measured using the

conjoint method. More specifically, consumer preferences for varying organic standards

will be analyzed through the use of conjoint analysis. In Hair et al. (1992, p.379), the

use of experimental design in the analysis of consumer decisions is said to have two

objectives:

1. To determine the contributions of predictor variables and their respective values to the determination of consumer preferences

2. To establish a valid method of consumer judgments that is useful in predicting the consumer acceptance of any combination of attributes, even those not originally evaluated by consumers

From the data gathered in a conjoint study, inferences can be made regarding

consumer attitudes towards products that were not included in the analysis (but that are

comprised of the same attributes). Lancaster (1991, p.5) suggests that the “demand for

goods would be derived from the demand for the properties they possess”. This implies

that predictions can be made about the potential of hypothetical products by evaluating

consumer preferences for specific attributes that make up that good or service. It is this

consumer choice model that sets the stage for the development of conjoint measurement.

Its principles provide the theoretical foundation on which conjoint analysis is based.

16 “Consumption technology defines the relationship between the preferred characteristics and the good” (Sanderson 2001, p. 39).

165

7.3 Conjoint Measurement

Demand studies based on the Lancastrian approach provide an ideal background

for conjoint analysis methodology as both are based on the premise that consumers

value products because of the combination of the characteristics or attributes that

comprise the products (Baker and Burnham 2001). Developed by Luce and Tukey in

1964 for mathematical psychology, conjoint analysis has since been widely used in

consumer marketing analyses (Anderson and Bettencourt 1993). Since the 1970s, it has

been used as a method to empirically validate how consumers make purchasing

decisions by trading off between attributes (Hair et al. 1992).

The conjoint model is based on the premise that the total utility a consumer

derives from a product can be measured by the utilities or “part-worths” of each factor

level (Ness and Gerhardy 1994). A product is made up of several factors (attributes),

and each factor may have two or more factor (attribute) levels. For example, price is

often included as a factor; its factor levels would consist of all the possible price

combinations the experimenter wishes to evaluate. Once the data has been analyzed and

the part-worths are calculated, the relative importance of the factors can be determined.

The conjoint model uses a decompositional approach, which implies that by knowing a

respondent’s overall preference for a good and knowing the good’s attributes,

preference can then be broken down to determine how much of that preference is due to

each attribute and how the value of each attribute (Hair et al. 1992). The results are

calculated at an individual level but can be aggregated to determine the preferences of a

segmented group (Hair et al. 1992).

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7.4 Empirical Applications

Since its inception, conjoint analysis has been used in marketing research and for

industrial applications (Patterson et al. 2003). Two major advantages of conjoint

analysis are that it can be used to obtain information on products that are not currently in

the market and it also allows for the analysis of heterogeneous goods (Anderson and

Bettencourt 1993). In their discussion of conjoint analysis, Hair et al.(1992) identify the

three major uses of conjoint models as segmentation, profitability analysis and market

share simulation.

There are many examples of conjoint analysis use in the economic literature.

Baker and Burnham (2001) use conjoint analysis in their paper examining consumer

response to genetically modified foods. Using a main-effects ANOVA model and

cluster analysis, they are able to divide respondents into three segments – price pickers,

safety seekers and brand buyers. They conclude that future marketing efforts should

highlight specific beneficial attributes of individual genetically modified (GM) foods

rather than focusing on the benefits and safety of biotechnology and GM products.

As in the paper by Baker and Burnahm (2001), the majority of applications of

conjoint analysis tend to concentrate on the analysis of consumer preferences for

different products (Ness and Gerhardy 1994). Ness and Gerhardy (1994) use conjoint

analysis to test consumer preferences for quality and freshness attributes of eggs.

Hussain et al. (2003) use it to evaluate the importance of certain characteristics of deer

hunting licenses in Alabama and to determine the preferred combinations of these

characteristics. Anderson and Bettencourt (1993) model preferences for fresh and frozen

salmon among buyers using a conjoint model estimated through OLS, as well as a

167

hybrid conjoint model and a maximum likelihood hybrid two-limit Tobit model. They

evaluate the performance and predictive validity of the three types of conjoint models.

They find no significant differences between the models although hybridization did

improve the overall fit (Anderson and Bettencourt 1993). Sanderson (2001) uses

conjoint analysis to determine consumer priorities for bison meat characteristics in order

to predict the potential demand for bison meat products.

7.5 The Conjoint Experiment

In this study, consumer preferences for different organic standards are evaluated

using a conjoint experiment. Conjoint analysis allows consumers to rate a product based

on the standards (attributes) it was produced under. These ratings can then be used to

compare preferences across market segments. The purpose of using conjoint analysis is

to determine whether consumer preferences for organic standards differ significantly

across countries. Differences in preferences support the proposition that harmonizing

organic standards internationally causes a decrease in world welfare.

A conjoint experiment is normally chosen when one wishes to understand how

consumers will react to specific products or product attributes, whether it be an

experiment which introduces a new product or service, or one which is attempting to

evaluate preferences for different attributes within current products. The output from the

conjoint experiment, part-worth scores for each attribute level, can be used to describe

consumer preferences for various products. Part-worth scores are estimates from the

conjoint analysis of the overall preference or utility associated with the attributes used to

describe the product (Hair et al. 1992). This section will describe the steps involved in

168

the design and implementation of a conjoint experiment. Figure 7.1 provides a step-by-

step guide to the conjoint analysis decision process.

169

Figure 7.1 Conjoint analysis decision process

Source: Hair et al. 1992, p. 387

RESEARCH PROBLEM

What are the elements of utility for the product/service/idea considered?

What are the key decision criteria involved in the choice process?

SPECIFYING FACTORS AND LEVELS

Attributes to be usedLevels for each factor

SPECIFYING THE BASIC MODEL FORM

Additive versus interactiveLinear, quadratic or separate part-worths

CREATING STIMULIFactorial design

Fractional factorial design

CHOOSING A PRESENTATION METHOD

Full profile versus trade-off

SELECTING A PREFERENCE MEASURE

Metric (ratings) versus non-metric (rank order)

SELECTING THE ESTIMATION TECHNNOLOGY

EVALUATING THE RESULTSAssessing reliability

Assessing predictive accuracy

INTERPRETING RESULTSAggregate versus disaggregate results

Relative importance of attributes

APPLYING THE CONJOINT RESULTSDefining segments

Profitability analysisChoice simulator

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7.5.1 Attribute Selection

In each conjoint experiment, the attributes or factors and the attribute or factor

levels of a product or service must be specified a priori (Fenwick 1978). The analyst

must choose factors that best differentiate between the products offered. All factors that

detract from, or add to, the overall value of a good should be included (Hair et al. 1992).

Once the factors have been chosen, the factor levels must be selected. The factors levels

should be set slightly outside of the existing values to avoid interattribute correlation17

(Hair et al. 1992). For example, if price is a factor, then the price levels should be

slightly higher and lower than the actual prices, however the values should remain

believable to maintain realism within the study. Multicollinearity between the factors

must also be avoided (Hair et al. 1992). Multicollinearity may be present if two factors

are combined unrealistically within a product. Hair et al. (1992) suggest that it is also

important to keep the number of attribute levels equal across attributes, as an attribute

with a higher number of levels may signal greater importance to the respondent.

In this organic study, two products are examined: organic bagged salad and

organic ground beef. These products were chosen as they were available in all the

investigated markets and it was thought consumers would have some familiarity with

them. For each product there were four attributes studied. In the salad survey, the four

attributes were: buffer zones to prevent substance drift onto organic fields, use of

tobacco sprays, package labelling and price. In the beef survey, the four attributes were:

source of cattle, use of fish feeds, use of antibiotics and price. These specific attributes

were chosen for several reasons. First, the standards for the attributes differed across the

US, Canada and the EU. These differences are needed in order to determine whether

17 A combination of attributes that is unrealistic or redundant (Hair et al. 1992).

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national standards reflect consumer preferences accurately. Second, it was felt that

consumers may have some understanding of these specific standards, whereas more

scientifically worded standards may have left respondents confused and unsure of how

to respond.

Price was also included as a factor. There has been some debate over the

inclusion of price as an attribute because while price adds realism to the study, it may

also be used as indicator of quality, leading to increased importance placed on the price

level of a product or service (Ness and Gerhardy 1994). However, in this instance, price

was determined to be an important part of the decision-making process. It also assisted

in demonstrating the strength of people’s preferences; if price was not important relative

to the other attributes, it could be assumed that the consumer has strong beliefs

regarding the production of organic food.

Contrary to the suggestion by Hair et al. (1992), the attribute levels were not

kept constant in this study. This was due to the desire to include a conventional price, an

organic price and a certified organic price for the products (if these prices were available

and different). However, as the attributes levels only vary by one (three attributes with

two levels and one attribute with three levels), it was felt that it would not significantly

alter the results. In addition, there are several examples in the conjoint analysis literature

where the attribute levels were not held constant (see Hobbs 1996, Hussain et al. 2003

or Steenkamp 1987) without any significant effect. The factors and factor levels are

presented in Table 7.1.

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Table 7.1- Organic standard attributes and levels

Product Attribute LevelsBagged Organic Salad Buffer zones to prevent

substance drifti) sufficient in size to prevent contaminationii) no requirements

Use of tobacco sprays as insect controls

i) allowedii) prohibited

Labelling i) word “organic” allowed in the ingredient list of products containing less than 70% organic ingredientsii) word “organic” allowed in the ingredient list of products containing between 70-95% organic ingredients

Prices i) lowii) medium iii) high

Organic Ground Beef Sources of cattle for organic meat

i) no non-organic cattle (must be raised organically from the last three months of pregnancy)ii) up to 40% of cattle can come from non-organically raised parents

Use of fish-based feeds i) fish and their products are permitted as animal feedsii) fish are not considered organic and are prohibited as animal feeds

Antibiotics i) prohibitedii) allowed when natural or homeopathic treatments do not work

Price i) lowii) mediumiii) high

Source: Author

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Buffer zones are spaces between organic and non-organic fields that are meant to

prevent the contamination of organic crops. In an examination of different national

standards, it was found that some standards had buffer zone requirements in place to

protect organic crops from drift, be it genetic or chemical. In other cases, there was no

requirement listed in the national organic standards. These two choices were the obvious

factor levels for this attribute. If survey participants were unclear on the meaning of the

term buffer zone, it was verbally explained as defined above.

In each set of organic standards, there are lists of allowable substances for

organic producers (called an permitted substance list). These substance lists cover

everything from fertility and soil amendments to non-organic additives for organic food

products (National Standard of Canada 1999). As much of the interest in organic food

may be due to the negative publicity surrounding chemical pesticides, a factor that

examines pesticide application was considered important for the study. The majority of

allowable pesticides have lengthy scientific names and were felt to be inappropriate for

survey participants. Instead, the application of tobacco sprays, a natural insecticide that

leaves no residue in the soil but is highly toxic, was included as an attribute. Many

respondents had some familiarity with the use of nicotine as a pesticide. Some had even

used it in their own gardens. Others who wished to know more about the spray were

informed of the details listed above. The choices given to survey participants for

tobacco sprays were “allowed” or “prohibited”.

Labelling standards vary widely across countries. In the US and Canadian

standards, the word “organic” can appear in the ingredient list of a product that contains

less than 70% organic ingredients. In the EU, there must be a minimum of 70% organic

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ingredients in a product for the word “organic” to appear anywhere on the package.

These two options were included as factor levels under the labelling factor. Labelling is

often a controversial topic and, hence, was expected to be an important attribute in an

organic product.

As previously mentioned, price was felt to be an important factor in the decision-

making process. Due to the fact that the survey was conducted in three countries, each

with a separate currency and measurement system, for the purposes of analysis prices

were entered into the conjoint experiment as low, medium and high. Consumers were

faced with three possibilities for price: slightly below the price level, an average price

and slightly above the price level.

In the beef survey, there were three factors chosen besides price: source of cattle,

use of antibiotics and use of fish feeds. The EU allows producers to source up to 40% of

their calves from non-organic sources, while both Canada and the US maintain that

calves must be raised organically from the last three months of gestation. These

differences were used as factor levels.

Recently, consumer concerns regarding the use of antibiotics in livestock

production have increased. Hence, having a factor that described the potential use of

antibiotics in organic livestock production was considered important for the study. Some

organic standards prohibit the use of antibiotics entirely. If an animal is sick, it can be

treated with antibiotics but it must then be removed from the herd and cannot be

marketed as organic. Other standards allow the use of antibiotic treatment. If

homeopathic and natural treatments do not work, the cow can be treated up to three

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times per year with antibiotics without losing its organic status. These two options were

chosen as factor levels.

The final attribute pertains to the use of fish feeds in the diet of organic cattle.

Fish feeds are allowed in some standards but are prohibited in others. With the recent

BSE scares, consumers are more concerned about farmers feeding livestock products

that the animals would not naturally consume; therefore consumers may have

preferences regarding the use of fish in livestock feed. Participants in the survey were

asked to rate products that either allowed the use of fish feeds or prohibited them.

7.5.2 Conjoint Composition

The composition of the conjoint model and the relationship between attribute

levels must be specified prior to estimation of the model (Ness and Gerhardy 1994).

Ness and Gerhardy (1994) state that the composition of the model defines how attribute

levels are combined to obtain an overall preference value for the various products. The

model can either be interactive or additive. The simplest and most frequently used case

is the additive model, which assumes that respondents implicitly add the part-worths of

the factor level combinations to achieve an overall evaluation of the product (Ness and

Gerhardy 1994). The interactive model also assumes that individuals implicitly add up

the part-worths to get an overall value of the good, however the combinations of

attribute levels can be more or less than their sum (Hobbs 1996). This might occur if an

attribute is rated poorly unless it is combined with another attribute, hence having an

interactive effect. For example, a consumer may value an organic good that was

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produced locally and had a slightly lower organic standard greater than a good that was

produced with a higher organic standard but was transported great distances.

Within a conjoint model there are three possible part-worth relationships: linear,

quadratic and part-worth (Ness and Gerhardy 1994). In the linear model, increasing or

decreasing the attribute level will cause utility to change proportionally (Ness and

Gerhardy 1994). This model is the most restrictive of the three (Hair et al. 1992). The

quadratic model assumes that “utility is related to the squared distance of an attribute

from a subject’s ideal point” (Ness and Gerhardy 1994). The part-worth model is the

least restrictive of the three, as no specific relationship is imposed on the attribute levels.

(Hobbs 1996).

The factors used in the survey were assumed to have negligible interactive

effects; therefore the additive model was used. As previously mentioned, the additive

model is often preferred, as the interactive model can result in low predictive power

(Hair et al. 1992). The additive model also requires fewer responses from the

interviewees and is easier to estimate (Ness and Gerhardy 1994). The part-worth

relationship was assumed for the attribute levels, as the model does not make any a

priori assumptions regarding the relationship between the attribute levels and the

utilities (Ness and Gerhardy 1994).

7.5.3 Conjoint Design

In any conjoint experiment, the analyst must decide on the appropriate number

of factors (attributes) and factor (attribute) levels. In some instances, there is a need to

include a large number of factors to ensure the validity of the study. For example, when

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testing a particular good or service, one must include all attributes/factors that create a

realistic depiction of the good or service. When a large number of factors and factor

levels are needed, the analyst must decide on the appropriate design format for the

conjoint experiment. There are two options available to the experimenter. She must

choose between a factorial design and a fractional-factorial design. In a factorial design,

the respondent is asked to evaluate all the possible combinations of attribute levels.

While this design may be the most accurate, it is a difficult task to perform if there are a

large number of attribute levels to evaluate.

In cases where there are a large number of factors or factor levels, it is

preferable to utilize a fractional-factorial design. Many computer programs today will

allow you to create an orthogonal factorial experiment. An orthogonal array is a subset

of all possible profiles (or combinations of attribute levels). The array combines each

level of one factor with each level of another factor with equal or proportional

frequencies (SPSS Inc. 1997). In a fractional-factorial design, the analyst trades off the

measurement of all possible interactive effects in order to have a smaller number of

profiles (Green 1974). The decision to use a fractional-factorial design also dictates the

use of the additive model, as it forgoes any analysis of interactive effects with the

decision to reduce the number of profiles (Sanderson 2001).

There are four factors in this conjoint experiment, three of which have two factor

levels and one that has three. This leads to a possible 24 combinations or profiles (23 x

31) for respondents to rate. In order to reduce the length of the survey, a fractional-

factorial design was used. This reduced the number of profiles to 8 with 2 hold-out

profiles. The use of hold-out profiles will be described in more detail later.

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The profiles or stimuli can be presented using one of two options – the full

profile format or the trade-off format. The full-profile format presents the individual

with all the descriptions of the products to be evaluated and then asks them to rank or

rate each concept based on their preferences (Ness and Gerhardy 1994). The trade-off

method asks individuals to compare two attributes at a time, eventually evaluating all

combinations of levels (Ness and Gerhardy 1994). The trade-off method has fallen out

of favour with researchers, as it does not reflect an actual market setting. In a real choice

setting, consumers are faced with all the attributes and their levels simultaneously, not

two at a time (Ness and Gerhardy 1994). This study uses the full-profile method. This

allows consumers to visualize all their possible choices and then rate them accordingly.

This is a more realistic depiction of an actual market as all factors are considered at the

same time (SPSS Inc. 1997).

Respondents can be asked to rank or rate the presented profiles. Rank-order

preference measures are likely to be more reliable, as some respondents find them easier

to complete, however, they are also more difficult to administer (Hair et al. 1992).

Preference ratings tend to be easier to analyze and allow conjoint analysis to be

performed by multivariate analysis (Hair et al. 1992).

Respondents in the organic study were presented with the ten profiles and then

asked to evaluate them on a preference scale of 1-10, where 1 represented the least

preferred combination of attributes and 10 the most preferred. It was thought that this

method of evaluation would reduce the length of time required to complete the survey

and be easier for respondents. For an example of the profiles presented to respondents

see Figure 7.2.

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Profile 1

Buffer Zones: Sufficient in sizeTobacco Sprays: ProhibitedLabelling: <70%Price: $3.75/200g

Least Preferred Most Preferred 1 2 3 4 5 6 7 8 9 10

Figure 7.2 Example of profile presented to survey participants

The aim of conjoint estimation is to calculate part-worths for every attribute

level. Commonly used estimation methods in conjoint analysis include Monanova,

Linmap, dummy variable regression, logit analysis and probit analysis (Ness and

Gerhardy 1994). Part-worths are utility scores for each attribute level. They are

calculated by the conjoint algorithm from scores given by respondents. These utility

scores are analogous to regression coefficients (SPSS Inc. 1997). The conjoint model

uses utility as the dependent variable and the factors as the independent variables

(Sanderson 2001). The model can be described as follows:

where = utility of product i= constant coefficient

= model coefficients or part-worths= product attributes

Part-worth estimations were calculated for all the factor levels discussed above. Chapter

8 will provide a detailed examination of the results of the regression analysis.

Once the part-worth scores are calculated, they can be used to predict consumer

preferences for products not rated in the survey. The trade-offs between attributes can

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also be determined, which may be useful to determine what price consumers are willing

to pay to avoid certain production practices. A discussion of the calculated trade-offs in

the organic research will follow.

To ensure the validity and reliability of the conjoint experiment, an evaluation of

the results should be conducted. It is important to test the accuracy of the model and to

evaluate its ability to predict consumer preferences (Hair et al. 1992). Most computer

software packages will provide the Pearson’s R and Kendall’s tau statistics upon

completion of the conjoint analysis. Pearson’s R evaluates the model’s ability to predict

preference levels by comparing the ratings of the hold-out profiles with ratings predicted

for those profiles by the model (Hobbs 1996). Kendall’s tau measures the correlation

between the observed and estimated preferences. In both cases, a value close to 1

signifies a good fit for the model. As mentioned, two hold-out profiles were used in the

organic study. These will be used to test the validity of the conjoint results.

Results of the conjoint analysis can be interpreted either in aggregate or in

disaggregate. When the results are interpreted in disaggregate, each respondent is

modeled separately, providing more accurate estimations of individual preferences. The

disaggregate method is optimal when one wishes to analyze what any one respondent

would do in a given situation. However, in some cases it is preferable to interpret the

results in aggregate, where estimations may be made at the individual level and then

combined. In this study, an aggregate model is required to measure the differences

between populations.

Once the method of interpretation has been determined, the experimenter can

differentiate between those attributes that are important to consumers and those that are

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not. Importance scores are calculated by dividing the part-worth range of an attribute by

the sum of all range values. The attribute with the largest range will be the most

important and vice versa.

Part-worth scores can be used to segment the population (Hair et al. 1992).

Those with similar part-worth values for a particular factor level can be grouped

together. The researcher can then see the characteristics of the group and its relative size

in the marketplace. The results can provide some insight into the combinations of

attributes that will generate the maximum utility for consumers. Finally, the researcher

may wish to perform different conjoint simulations. Using the data from the analysis,

the researcher can predict the market response if a standard was changed (Hair et al.

1992).

7.6 Reliability and Validity

Fenwick (1978) describes three areas that could affect the reliability and validity

of the conjoint measurements during the design stage of the conjoint experiment. First,

the selection of attributes must be carried out carefully, as the omission of important

factors or the inclusion of unimportant factors may affect the generated results. Second,

the model must be correctly specified to ensure the validity of the estimated values.

Third, if the product is too complex, ranking may be difficult for respondents and may

result in skewed values. To bypass this problem, a rating scale (as in this study, where

respondents are asked to rate products on a preference scale from 1-10) can be used so

that respondents are not required to compare every possible product combination

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(Fenwick 1978). In this study, a fractional factorial design was used to limit the number

of profiles presented to respondents.

The use of hold-out profiles also ensures the reliability and validity of the study.

The ratings given to the hold-out profiles can be compared with the predicted ratings for

these profiles based on the ratings given for the remaining profiles. If the predictions are

accurate, we would expect to see a Kendall’s tau value close to 1.00 indicating that the

model is a good fit.

7.7 Summary

Conjoint analysis is an important tool for the market analyst. It enables the

researcher to measure consumer preferences for different product attributes. The model

is based on the premise that consumer’s view goods and services as bundles of

attributes. The purchasing decision is based on these attributes and, therefore, by asking

consumers to rate products based on the factors they are composed of, the researcher can

gather part-worth utility values for each factor level, along with an importance rating for

the factor as a whole. The data can then be used to determine consumer response to

products not presented in the experiment.

In this study, consumers were asked to rate different organic products based on

the standards they were produced under. Conjoint analysis was chosen as it allows

consumers to implicitly trade-off between attribute levels to determine their optimum

product. The results will be used to support the proposition that consumers do in fact

differ in their preferences for organic standards depending on the country in which they

reside. These differences suggest a decline in global welfare, ceteris paribus, should

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harmonization of organic standards be undertaken. In other words, it is assumed that

consumers are heterogeneous across countries when it comes to organic standards. The

results should provide some insight into consumer preferences for organic standards and

will either reject or support the proposition.

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Chapter 8

Conjoint Results

8.1 Introduction

The theoretical framework for conjoint analysis was discussed in Chapter 7. This

chapter presents the conjoint results for the consumer survey regarding organic

purchases. Conjoint analysis was deemed an appropriate method of measuring consumer

preferences for organic standards, as it allows organic products to be differentiated by

the standards under which they are produced. Data could then be gathered regarding

consumer’s perceptions of specific organic standards. To learn whether consumer

preferences differ across countries, the survey was conducted at retail outlets at a

number of locations in Canada, the United States and the United Kingdom in 2004.

The results from the conjoint analysis are compiled and analyzed in this chapter.

The chapter begins with a description of the conjoint section of the survey. This is

followed by a discussion of the results for each product in each country including the

trade-offs between attribute levels within evaluated products and within hypothetical

products. The population samples from each country are examined in aggregate and then

are broken down by the frequency of organic purchases. A statistical analysis is

conducted to determine if differences in consumer preferences in different countries are

statistically significant. Finally, the implications of the results for the international

harmonization of organic standards are discussed.

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8.2 Conjoint Results

The second section of the survey asked consumers to examine one of two

products, either organic bagged salad or organic ground beef, and then to rate it based

on the standards under which it was produced. The consumer was presented with ten

possible standard combinations to evaluate. The results of the evaluations are analysed

using conjoint analysis. Conjoint analysis computes a “part-worth” utility value for each

attribute level and an assessment of the relative importance of each attribute in the

consumer’s preference rating. The part-worth utility coefficients can be used to calculate

the total utility a consumer derives from a product composed of specified attribute

levels.

Using SPSS conjoint software, the conjoint analysis was conducted using the

Ordinary Least Squares (OLS) estimation method. The analysis is based on a dummy

variable approach, where a factor level takes on a value of 1 if it is present in the

product description and 0 if it is not. The analyses were completed for all three countries

separately, first for all consumers and then in population segments divided by the

frequency of organic purchases. The results from the salad survey will be examined

first, followed by a discussion of the results from the beef survey.

8.2.1 Salad

As outlined in Chapter 7, four attributes were examined in the salad survey.

Preferences for buffer zones, tobacco sprays, labelling and price were determined via

the conjoint analysis. While it appears that the order of preferences differed across all

countries, a more detailed statistical analysis must be conducted to determine if these

185

differences are actually statistically significant. The overall results will be broken down

by country and then by consumer frequency of purchases within each country.

8.2.1.1 Canada

Ninety-four salad surveys were completed in Saskatoon and Vancouver. Of the

94, 90 were usable. This section provides the results of the conjoint analysis conducted

in Canada. The generated attribute importance values are examined. This is followed by

a thorough discussion of the calculated utility coefficients and the implicit trade-offs

made by consumers. Finally, the Canadian sample will be segmented into two groups;

those people who purchase organic food frequently and those who purchase organic

food infrequently. The conjoint results from these two groups will be compared and

conclusions will be drawn.

All of the reported importance scores are derived from the part-worth values

found in Appendix C. Importance scores are calculated by diving the part-worth range

of an attribute by the sum of all range values. As shown in Figure 8.1, Canadians

consumers felt that, relative to the other 3 attributes, the use of tobacco sprays was the

most important issue when evaluating organic bagged salad. This attribute was followed

by price, the use of buffer zones, and high labelling standards. SPSS conjoint software

generates part-worth or utility values for each attribute level. The average part-worth

estimates for Canadian respondents are outlined in Table 1 of Appendix C. The part-

worth values can be used to estimate the utility a consumer receives from each

individual product. In addition, the values can then be used to determine how consumers

trade-off between attributes.

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The Pearson’s R correlation coefficient was .982 for the group summary. The

Pearsons’ R coefficient is a measurement of the ability of the model to accurately

predict the respondent’s evaluations of the hold-out profiles. While a Pearson’s R

coefficient of 1.00 is ideal, .982 still represents a high degree of accuracy. The Kendall’s

tau coefficient is calculated separately for the eight profiles and the two hold-out

profiles. In this analysis, the Kendall’s tau coefficient equalled 1.00 in both cases,

indicating that there is a high level of correlation between the observed and predicted

preferences. In addition, this signifies that the model was a good fit.

22.77

28.85

22.4925.88

0

5

10

15

20

25

30

35

BufferZones

TobaccoSprays

Labelling Price

Impo

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ce S

core

Figure 8.1 Relative Importance of Salad Attributes (Canada) (n=90)

Utility calculations for the most preferred profile can be seen in Table 8.1. This

is followed by utility ratings for the remaining profiles in descending rank order (Table

8.2).

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Table 8.1 – Total Utility for the Most Preferred Attribute Combination (Profile 8)

Most Preferred Combination Part-worth Buffer Zones Sufficient in size 0.9944Tobacco Sprays Prohibited 1.1417Labelling 70-95% 0.8889Price Low 0.6704

Constant 4.2324Total Utility 7.9278

Source: Author’s CalculationTable 8.2 - Total Utility Calculations for Remaining 7 Profiles

Utility Calculations for 7 Profiles Rated by Respondents

Profile 5 Part-worthBuffer Zones No requirements -0.9944Tobacco Sprays Prohibited 1.1417Labelling 70-95% 0.8889Price Low 0.6704


Profile 1Buffer Zones Sufficient 0.9944Tobacco Sprays Prohibited 1.1417Labelling <70% -0.8889Price High -0.5324


Profile 7Buffer Zones Sufficient 0.9944Tobacco Sprays Allowed -1.1417Labelling 70-95% 0.8889Price Medium -0.138


Profile 2Buffer Zones Sufficient 0.9944Tobacco Sprays Allowed -1.1417Labelling <70% -0.8889Price Low 0.6704


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Profile 6Buffer Zones No requirements -0.9944Tobacco Sprays Prohibited 1.1417Labelling <70% -0.8889Price Medium -0.138


Profile 4Buffer Zones No requirements -0.9944Tobacco Sprays Allowed -1.1417Labelling 70-95% 0.8889Price High -0.5324


Profile 3Buffer Zones No requirements -0.9944Tobacco Sprays Allowed -1.1417Labelling <70% -0.8889Price Low 0.6704


Source: Author’s Calculation

By using the utility values to rank order the profiles, implicit trade-offs by

respondents can be observed. Consumers will trade-off between attribute levels when

deciding which product to purchase and consume. For example, even though, on

average, price was given the second highest importance rating, Profile 7 rated higher

than Profile 2, although Profile 7 has a medium price level and Profile 2, a low one. This

implies that price is not the only attribute with which consumers are concerned. The two

profiles are similar in that they both have buffer zones that are sufficient in size and

allow tobacco sprays, but they differ in that Profile 7 has a medium price level and

stricter labelling standards and Profile 2 has a low price level and more lenient labelling

standards. The stricter labelling standards are traded off against the increase in price.

Overall, Profile 7 has a higher incremental utility value. The higher part worth value for

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stricter labelling standards (0.8889) compared with lenient standards (-0.8889) is greater

than the negative incremental utility change of the low price (.6704) to the medium price

(-.1380). This implies that consumers, on average, were willing to pay a higher price if it

meant that labelling standards were stricter.

It is also possible to calculate utility values for additional products that were not

rated by the respondents. Comparing predicted utility values of a hypothetical product is

a good indicator of implicit trade-offs. For example, a hypothetical product with no

requirements for buffer zones, lenient labelling standards, a prohibition on the use of

tobacco sprays and a medium price level would have a total worth of :

(-.9944) + (1.1417) + (-.8889) + (.6704) + (4.2324) = 3.3528. Comparing this

hypothetical product with the product described in Profile 1, it is possible to observe the

implicit trade-offs between price and buffer zones. Profile 1 has a total utility value of

4.9472, has buffer zones that are sufficient in size, prohibits tobacco sprays, has lenient

labelling standards and a higher price. The utility gain from the decrease in price from

the high price level to the medium price level is not sufficient to cover the decrease in

utility from the loss of the buffer zones. If another hypothetical product were to be

examined with the same characteristics except with a low price level, it would be

observed that the lower price still does not make up for the loss of the buffer zones. This

signifies that consumers are concerned with the buffer zone regions on organic farms,

and are willing to pay more to have them in place.

Canadian organic consumers appear to be less price sensitive than expected. A

decrease in the standard level is never preferred to a decrease in price. Organic

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consumers purchase organic products for specific reasons, and these principles are not

compromised because of price increases.

Does this result change if consumers are divided by the frequency of their

organic purchases? By segmenting the population into two groups, conclusions can be

drawn regarding preference strength in terms of frequency of organic purchases. The

first group will consist of those consumers who stated that they purchased organic

products frequently or whenever possible, while the second group contains those

consumers who occasionally, seldom or never purchase organic goods.

The results indicate some similar preferences between frequent and occasional

purchasers. Both groups place the highest importance on the use of tobacco sprays.

However, from this point the groups diverge. It appears that frequent purchasers of

organics place the most importance on the use of tobacco sprays, followed by labelling

standards, buffer zones and then price. While those consumers who seldom purchase

organics, feel that, in order of importance, price, buffer zones and then labelling should

follow tobacco sprays (see Figures 8.2 and 8.3). As shown in Table 8. 3, those

purchasers who seldom purchase organic goods would be willing to trade off buffer

zone requirements or labelling standards for the low price level. Consumers who

purchase organics frequently are less willing to trade higher standards for lower prices.

In fact, these consumers would always prefer the higher price to a decrease in the

standard.

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Table 8.3 - Consumer Preferences in Segmented Groups (Canadian)

Attributes and levels Part-worthsfor Frequent Purchasers

AttributeImportance

(%)for

Frequent Purchasers

Part-worths for

Occasional-Never

Purchasers

AttributeImportance

(%)for Occasional

to Never Purchasers

Buffer Zones No requirements -1.1229 -.7500 Sufficient in size 1.1229 24.46 .7500 19.57Tobacco Sprays Allowed -1.1441 -1.1371 Prohibited 1.1441 27.46 1.1371 31.51Labelling <70% -1.0169 -.6452 70-95% 1.0169 24.84 .6452 18.02Prices $2.25/200g .5876 .8280 $3.75/200g -.2175 23.24 .0134 30.90 $5.25/200g -.3701 -.8414Source: Author’s Calculation

Figure 8.2 Relative importance of salad attributes by frequent consumers of organic goods (Canada) (n= 59)

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19.52

31.51

18.02

30.9

0

5

10

15

20

25

30

35

BufferZones

TobaccoSprays

Labelling Price

Impo

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core

Figure 8.3 Relative importance of salad attributes by occasional consumers of organic goods (Canada) (n=31)

It appears as though the frequency of organic purchases is correlated with a

consumer’s preference for organic standards. Consumers who seldom purchased organic

products are more concerned about price levels and less concerned about the strictness

of the standards than those who purchase organic goods frequently. This is to be

expected as consumers who seldom purchase organics may have less knowledge of

organics or may not believe that there is a substantial difference between conventional

and organic products and thus would not be wiling to pay more for the organic product.

Conversely, it also indicates that frequent purchasers have strong preferences for

organic standards. This conforms to previous expectations.

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8.2.1.2 United States

Twenty-five salad surveys were completed in the Seattle area in 2004. Twenty-

three of the surveys were completed correctly and are included in this analysis. This

section of the chapter describes the conjoint results from the salad surveys conducted in

the US. First, the calculated importance values are discussed. This is followed by a

discussion of the utility values and the trade-offs consumers make between attributes.

Finally, the population is segmented by frequency of organic purchases and these results

are examined.

Consumers in the US differ slightly from Canadians in their preferences for

organic standards. By evaluating each product in the survey, consumers are

unknowingly assigning a utility value to the attribute levels within that product. The

utility values are available in Table 2 of Appendix C and will again be used to

demonstrate the implicit trade-offs between attribute levels in both the tested and

hypothetical products. As depicted in Figure 8.4, US consumers feel that labelling is the

most important standard issue, followed by buffer zones, price and then tobacco sprays

The Pearson’s R coefficient equalled .945 for the US analysis, signifying

reasonably accurate predictions for the hold-out profiles. The Kendall’s tau coefficient

is equal to .929 for the 8 profiles, and -1.00 for the hold-out profiles. The negative

Kendall’s tau value indicates that there is discordance between the hold-out profiles and

the remaining tested profiles. This is of some concern, as it may imply a lack of

understanding of the survey by respondents.

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27.07

22.66

27.33

22.94

0

5

10

15

20

25

30

BufferZones

TobaccoSprays

Labelling Price

Impo

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ce S

core

Figure 8.4 Relative importance of salad attributes (US) (n=23)

The tested products can be ordered from most preferred to least preferred based

on the utility scores attached to the attribute levels found within the product. Table 8.4

provides the product description for the most preferred product, with Table 8.5 ranking

the remaining 7 profiles. The order of the products differs from that of the Canadian

consumers, as Americans place more importance on different attributes than their

Canadian counterparts.

Table 8.4 - Total utility for the most preferred attribute combination (Profile 8)

Most Preferred Combination Part-WorthBuffer Zones Sufficient in size 1.1739Tobacco Sprays Prohibited .6196Labelling 70-95% 1.1848Price Low 0.5652



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Table 8.5 - Total utility calculations for remaining 7 profiles

Utility Calculations for 7 Profiles Rated by RespondentsProfile 7 Part WorthBuffer Zones Sufficient 1.1739Tobacco Sprays Allowed -0.6196Labelling 70-95% 1.1848Price Medium 0.1304


Profile 5Buffer Zones No requirements -1.1739Tobacco Sprays Prohibited 0.6196Labelling 70-95% 1.1848Price Low 0.5652




Profile 1Buffer Zones Sufficient 1.1739Tobacco Sprays Prohibited 0.6196Labelling <70% -1.1848Price high -0.6957


Profile 4Buffer Zones No requirements -1.1739Tobacco Sprays Allowed -0.6196Labelling 70-95% 1.1848Price high -0.6957


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Profile 6Buffer Zones No requirements -1.1739Tobacco Sprays Prohibited 0.6196Labelling <70% -1.1848Price medium 0.1304


Profile 3Buffer Zones No requirements -1.1739Tobacco Sprays Allowed -0.6196Labelling <70% -1.1848Price low 0.5652



By examining the utility scores given to specific attribute levels, it is possible to

observe implicit trade-offs made by respondents. For example, in Profile 7 the labelling

requirements are strict (70-95%) and the price is at the medium level. Profile 7 is ranked

higher than Profile 2, even though Profile 2 has a lower price. Comparing the utility

values, the higher part-worth value for stricter labelling (1.1848) compared with the

utility value for a more lenient standard (-1.1848) outweighs the loss in utility from a

increase in price from the low price (.5652) to the medium price (.1304). Consumers are

not willing to trade-off a lower price for a lower labelling standard, even if the price was

to increase to the high level. Consumers, on average, would still prefer an organic

product with the higher price but a stricter labelling standard to one with a lenient

labelling standard but a low price, all other attributes being held constant.

To determine how consumers trade-off between buffer zones and price, a

hypothetical product was created. The hypothetical product description consists of no

tobacco sprays, no buffer zones, lower labelling standards and a low price level. It has

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an estimated total worth of: (-1.1739) + (.6196) + (-1.1848) + (.5652) + (4.4348) =

3.2609. This product can be compared with the product outlined in Profile 1, which has

the same characteristics with the exception that the price is at the high price level and

buffer zones are required. Even when the price jumps from the low level to the high

level, US consumers, on average, still prefer Profile 1 because of the requirements for

buffer zones. US respondents always prefer a higher standard except in the case of

tobacco sprays. In this case, they are willing to accept a lower standard in exchange for

a lower price if their only other option is a high standard and a high price. In all other

cases, the higher standard is preferred even if it requires paying a higher price.

Consumers in the US differ from consumers in Canada in terms of the weight of

importance placed on the different attributes. Canadians are most concerned with

tobacco sprays whereas Americans are willing to forgo a ban on tobacco sprays if a low

price can be obtained. However, in all other cases, Americans are still more concerned

about stricter organic standards than higher prices.

Different preferences may be observed if the population sample is segmented by

the frequency of their organic purchases. The utility values for the various attribute

levels can be seen in Table 8.6. Those consumers who purchase organic food frequently,

value stricter labelling standards most, followed by buffer zones, price and tobacco

controls (see Figure 8.5). Those consumers who seldom, never or only occasionally

purchase organic goods place more importance on buffer zones. Buffer zones are

followed by tobacco sprays, labelling schemes and pricing (see Figure 8.6). The

Pearson’s R coefficients for the seldom purchase group and the frequent purchase group

are .949 and .94 respectively indicating good predictive accuracy.

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Table 8.6 - Consumer preferences in segmented groups (US)

Attributes and levels Part-worthsfor Frequent Purchasers

AttributeImportance

(%)for

Frequent Purchasers

Part-worths for

Occasional-Never

Purchasers

AttributeImportance

(%)for Occasional

to Never Purchasers

Buffer Zones No requirements -1.2266 -1.0536 Sufficient in size 1.2266 26.90 1.0536 27.46Tobacco Sprays Allowed -.7422 -.3393 Prohibited .7422 21.57 .3393 25.14Labelling <70% -1.2266 -1.0893 70-95% 1.2266 28.38 1.0893 24.92Prices $1.20/5oz .5729 .5476 $1.89/5oz -.0208 23.14 .4762 22.48 $2.58/5oz -.5521 -1.0238Source: Author’s Calculation

26.9

21.57

28.38

23.14

0

5

10

15

20

25

30

Buffer Zones TobaccoSprays

Labelling Price

Impo

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ore

Figure 8.5 Relative importance of salad attributes by frequent consumers of organic goods (US) (n=16)

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27.4625.14 24.92

22.48

0

5

10

15

20

25

30


Labelling Price

Impo

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e Sc

ore

Figure 8.6 Relative importance of salad attributes by occasional consumers of organic goods (US) (n=9)

Those consumers who seldom purchase organic products are willing to accept a

lower standard for tobacco sprays if it means that the price will decrease. In every other

case, the stricter standard is preferred to a decrease in price. Consumers who purchase

organic food more frequently are very concerned with standards and it would appear

that they will not compromise standards for price. This mirrors the Canadian results

where frequent organic purchasers exhibited stronger preferences.

Similar to Canadian respondents, American consumers who purchase organic

products more frequently are less price sensitive than consumers who seldom purchase

organic goods. The preferences of the US consumers for organic standards are generally

matched by the standards in place under the National Organic Program. This result was

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also found in a study of US consumers’ preferences for organic standards conducted by

Conner and Christy (2004).

8.2.1.3 The United Kingdom

Fifty salad surveys were conducted in Aberystwyth, and of those, 49 were

usable. Respondents in the United Kingdom differed from both the American and

Canadian respondents in terms of the relative average importance of the individual

standards. As illustrated in Figure 8.7, consumers in the UK, on average, felt that the

requirement for buffer zones was the most important attribute. Buffer zones are

followed by price, labelling requirements and the use of tobacco sprays. Hence, the rank

order of attributes differs among all three countries. It is interesting to note that the

difference between the first and second most important attributes as scored by UK

consumers is much larger than between those in the US and Canadian surveys. Is this an

indication that UK consumers are more wary of pesticides than their North American

counterparts?

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30.57

20.4822.81

26.14

0

5

10

15

20

25

30

35

BufferZones

TobaccoSprays

Labelling Price

Impo

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ce S

core

Figure 8.7 Relative importance of salad attributes (UK) (n=49)

The part-worth utility values calculated for UK respondents are displayed in

Table 3 of Appendix C. These values are created by averaging all the utility values

calculated for respondents. The total utility for each profile can be calculated by

summing the relevant part-worth utility coefficients. Table 8.7 shows the most preferred

product, while Table 8.8 ranks the remaining 7 profiles. The Pearson’s R coefficient

is .971, indicating that the model has good predictive ability. The Kendall’s tau

coefficients for the profiles and the hold-outs are .929 and -1.00 respectively. Again, the

negative value suggests that the hold-outs were in discordance with the profiles. This

may imply that the model was incorrectly specified, although the positive values for the

profiles would tend to suggest otherwise.

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Table 8.7 - Total utility for the most preferred attribute combination (Profile 8)

Most Preferred Combination Part-WorthBuffer Zones Sufficient in size 1.0969Tobacco Sprays Prohibited .6327Labelling 70-95% .8214Price Low .4218



Table 8.8 - Total utility calculations for remaining 7 profiles (UK)

Utility Calculations for 7 Profiles Rated by RespondentsProfile 7 Part-WorthBuffer Zones Sufficient 1.0969Tobacco Sprays Allowed -0.6327Labelling 70-95% 0.8214Price Medium 0.1514


Profile 5Buffer Zones No requirements -1.0969Tobacco Sprays Prohibited 0.6327Labelling 70-95% 0.8214Price Low 0.4218


Profile 1Buffer Zones Sufficient 1.0969Tobacco Sprays Prohibited 0.6327Labelling <70% -0.8214Price High -0.5731




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Profile 6Buffer Zones No requirements -1.0969Tobacco Sprays Prohibited 0.6327Labelling <70% -0.8214Price Medium 0.1514


Profile 4Buffer Zones No requirements -1.0969Tobacco Sprays Allowed -0.6327Labelling 70-95% 0.8214Price High -0.5731


Profile 3Buffer Zones No requirements -1.0969Tobacco Sprays Allowed -0.6327Labelling <70% -0.8214Price Low 0.4218



From the generated utility values, some implicit trade-offs can be observed. In

most cases, higher standards are more important than price even though price was rated

the second most important attribute on average. For example, Profile 1 is a bag of

organic salad produced using buffer zones that are sufficient in size to prevent

contamination. There was also no use of tobacco sprays, the labelling requirements are

more lenient and it was priced at a high level. Profile 2 is identical except that it was

produced in a system that allows tobacco sprays and the price level is low. Even though

the price is higher in Profile 1, UK respondents still indicate a stronger preference for

this product. This is due to the fact that the loss in utility from the price decrease (from

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0.4218 to -.5731) is compensated for by the gain in utility from the prohibition of

tobacco sprays (from -0.6327 to 0.6327).

If a hypothetical product were created that contained no tobacco sprays, was

produced with a buffer zone, had high labelling standards and was priced at a medium

price level, it is easy to determine that it would be preferred to a product with more

lenient standards and a low price level, all other things being equal. The utility value for

the hypothetical product is calculated by summing the utility coefficients for each

attribute level plus the constant: (1.0969) + (.6327) + (.8214) + (.1514) + (4.4711) =

7.1735. The total utility gained from the hypothetical product is higher than that of the

product with a low price level and lenient labelling standards. The higher price is traded-

off against the stricter labelling requirements, and on average, consumers prefer the

higher labelling standard. This remains true even if the price is increased to the high

level.

If the respondents are divided into two groups based on the frequency of their

organic purchases and then analyzed, there are slight differences from the previous

results. Those consumers who purchase organic products frequently rated the attributes

on average in the following descending order: buffer zones, price, tobacco sprays and

labelling (Figure 8.8). Those consumers who seldom purchase organic products rated

the profiles in a slightly different order: buffer zones, labelling, price and tobacco sprays

(Figure 8.9). It is interesting that those consumers who seldom purchase organic goods

place less importance on price than those who purchase them frequently. Table 8.9

provides the average utility ratings for these two sub-groups.

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Table 8.9 - Utility values for frequent and occasional consumers of organic goods

Attributes and levels Part-worthsFor Frequent Purchasers

AttributeImportance

(%)For

frequent purchasers

Part-worths for occasional-

never purchasers

AttributeImportance

(%)For occasional

to never purchasers

Buffer Zones No requirements -1.2537 -.7417 Sufficient in size 1.2537 32.57 .7417 26.04Tobacco Sprays Allowed -.6507 -.5917 Prohibited .6507 21.22 .5917 18.79Labelling <70% -.7684 -.9417 70-95% .7684 19.77 .9417 29.7Prices£1.00/150g .3676 .5444£2.00/150g .1544 26.44 .1444 25.47£3.00/150g -.5221 -.6889Source: Author’s Calculation

Figure 8.8 Relative importance of attributes for frequent purchasers of organic goods (UK Salad) (n=34)

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26.04

18.79

29.7

25.47

0

5

10

15

20

25

30

35


Labelling Price

Impo

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Figure 8.9 Relative importance of attributes for occasional purchasers of organic goods (UK Salad) (n=15)

8.2.1.4 Consumer Preferences vs. National Standards (Salad)

Are consumer preferences satisfied by the current national standards in the UK,

the US and Canada? If a standard is established correctly, it should satisfy the majority

of consumers. In every survey there was one profile that reflected the national standard

of that country (although it was not identified as such to respondents). This section will

examine the differences between consumer preferences for standards and the standards

that are in place in the three countries.

The Canadian voluntary standard is that listed in Profile 1 – it requires buffer

zones to prevent contamination, it prohibits the use of tobacco sprays and the word

organic can appear in the ingredient list of products containing less than 70% organic

207

ingredients. Canadians ranked this product 3rd in the conjoint analysis. If the utility value

for the product is calculated at the medium price level, it remains in third place (5.3416),

however, if the price is decreased to low, it would move up to second (6.15).

As the US and Canadian standards for those attributes studied are identical, it is

not possible to compare the rating for the US standard, however, it is interesting that the

Canadian participants scored the EU’s standard 7th overall (when its utility was

calculated), even though many Canadians believed that the EU standard was stricter

based on a earlier question in the survey. Do the differences between the national

standard and preferences matter to Canadians? The labelling requirements scored the

lowest, in order of importance; so organic consumers may be willing to forgo the

labelling requirements for another more important issue.

The US standard is identical to the Canadian standard in terms of those attributes

studied. The profile describing the US standard was implicitly ranked 4th by American

consumers. If the utility is calculated at the medium price level, it equals 5.1739, leaving

it in fourth place. Even if the price is dropped to the low level, it remains in fourth

(5.6087). American consumers are similar to Canadians in that the majority indicated

that they believe the EU’s standards were superior to their own, however, they ranked

the product produced under the EU standards in 6th place. Labelling requirements are the

number one concern for US consumers relative to the other attributes evaluated; yet

consumer preferences do not match the national standards.

The EU’s standards can be found in Profile 4. The EU does not require a buffer

zone between organic and non-organic farms, however, it allows the use of tobacco

sprays, and the word “organic” cannot appear in the ingredient list of goods containing

208

less than 70% organic ingredients. EU consumers ranked this product 7th of the eight

profiles. If the price is changed from high to medium, it moves up one position to 6th, as

its utility is equal to 3.7143. However if the price level is changed to low, the profile

would be ranked fifth (3.9847). EU consumers rated the US/Canadian standard 4th

overall. Consumers in the UK were primarily concerned with buffer zone requirements.

The lack of these requirements in the existing EU standard begs the question if

consumers were consulted during the standardization process. Tobacco sprays were the

least important attribute for consumers, so the difference between actual consumer

preferences and the EU standard may not be as much of a concern.

The national standards for organic bagged salad did not match the stated desires

of consumers in any of the cases; however, the desires of producers must also be

considered when designing standards and this may explain some of these disparities.

The next section of the chapter will determine whether the differences in preferences are

statistically significant.

8.2.1.5 Statistical Differences between Consumers in Different Countries (Salad)

Consumers in the three countries attached different levels of importance to each

of the attributes evaluated, but are these differences significant? A statistical test must

be conducted to determine the level of statistical significance between the calculated

preferences. The Tukey method is intuitive and simple to apply. It allows for multiple

comparisons across population samples. It is applicable if the groups to be compared

consist of estimates of all pairs µi-µi’ (factor levels to compare) (Neter, Wasserman and

Kutner 1985). In other words, the attributes being compared are consistent across all the

209

test groups. It is a conservative method of comparison when sample sizes are unequal

with a confidence coefficient of at least (e.g. =.90) (Neter, Wasserman and

Kutner 1985).

The Tukey method of multiple comparisons uses a studentized range distribution

to test mean responses across a number of samples (Neter, Wasserman and Kutner

1985). With r independent observations, from a normal distribution, a mean,

and a variance of , the range for this set is equal to . An

estimate of the variance based on v degrees of freedom can be established. The

studentized range is equal to the ratio of . Values of q are tabulated and

represent the probability that a range is not more than q times as great as an independent

sample standard deviation based on v degrees of freedom (Neter, Wasserman and

Kutner 1985).

“The test establishes multiple comparison confidence limits for all pairwise

combinations” ( Neter, Wasserman and Kutner 1985, p.575). It is based on the

differences between the means of the two groups; i.e.

(8.1)

where . (8.2)

The multiple confidence limits for the comparisons are as follows:

210

The SSE is calculated in two steps. First, the square of all importance scores per

attribute per individual respondent are summed. Second, the importance scores for each

respondent in each country are summed and divided by the total number of respondents

in that country. This is an average importance score per country. The average

importance scores for all three countries are summed. This second number (sum of

average importance scores) is subtracted from the first, giving the SSE (eq. 8.5). To

calculate MSE, the SSE is divided by the total number of respondents minus the number

of countries (eq. 8.4). For example, in the case of buffer zones, the average importance

scores for each respondent for buffer zones is summed, and then squared and summed.

The first value is subtracted from the second giving the SSE for buffer zones

(145345.63), which in turn is used to determine the MSE (145345.63/162-3), where

n=162 (the total number of respondents) and r=3 (the number of populations). The MSE

is calculated and equals 914.12.

Using the average scores generated in the summary for each population group,

, can then be calculated for each pair (eq. 8.2). T was calculated by using the value

for q provided in the percentile tables in Neter, Wasserman and Kutner (1985). For 162

observations and an r value of 3, the q value is equal to approximately 3.33. Table 8.10

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provides the confidence limits at a 5% confidence coefficient for the attributes measured

in the salad survey.

With respect to the survey data, if a generated Tukey confidence interval

comparing two samples contains zero, the two samples have statistically equal mean

responses. The test is run by comparing the mean responses (importance scores) to each

attribute between the UK, Canada and the US. All of the calculated confidence limits

cover zero. Therefore, the differences between attribute scores in the different countries

cannot be considered statistically significant

212

Table 8.10 - Country comparisons for the salad attributes

Attribute/Country Comparison

Confidence Intervals

Buffer ZonesCAN vs. US -12.29CAN vs. UK -4.82US vs. UK -14.45Tobacco SpraysCAN vs. USCAN vs. UKUS vs. UKLabellingCAN vs. USCAN vs. UKUS vs. UKPriceCAN vs. USCAN vs. UKUS vs. UK

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8.2.2 Beef

The second set of surveys examined consumer preferences for standards used to

produce organic ground beef. The source of organic cattle, the use of fish feeds, the use

of antibiotics for medicinal treatment and price were the attributes included in the

profiles evaluated by survey participants. Similar to the previous section, the results of

the conjoint analysis in each country are presented. This is followed by a discussion of

the trade-offs made by consumers in each country. In addition, the populations are

segmented by the frequency of their organic purchases and then evaluated. Finally, a

statistical analysis is performed to determine if the differences in consumer preferences

across countries is statistically significant.

8.2.2.1 Canada

Eighty-two surveys on organic beef were collected across Canada. Of these, 80

were usable for the conjoint experiment. Consumers evaluated the products presented to

them and their ratings are used in the conjoint analysis to generate part-worth utility

coefficients. These part-worth utility coefficients can be used to calculate the total utility

received from a specific product. Table 8.11 presents the most preferred organic beef

product, as evaluated by Canadian consumers. The utility values for the remaining 7

profiles are described in Table 8.12. The average utility coefficients for the surveys

conducted in Canada can be found in Table 4 of Appendix B.The results indicate that

consumers in Canada are primarily concerned with the use of antibiotics in organic

cattle. Price is the second most important attribute on average, for those Canadians

interviewed. The use of fish feeds and the source of the cattle are on average ranked

214

third and fourth, respectively. Figure 8.8 illustrates the average importance ratings

generated by the conjoint analysis.

The results of the conjoint analysis can be tested for accuracy by observing the

Kendall’s tau coefficients and the Pearson’s R coefficient. For the Canadian sample, the

Pearson’s R coefficient is .977, which reflects a reasonable amount of predictive

accuracy. The Kendall’s tau coefficients for the profiles and the hold-outs are .982 and

1.00, indicating that the model was a good fit.

20.59

24.67

29.15

25.59

0

5

10

15

20

25

30

35

Source ofCattle

Fish Feeds Antibiotics Price

Impo

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Figure 8.10 Relative importance of beef attributes (Canadian) (n=80)

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Table 8.11 - Total utility for the most preferred attribute combination(Profile 5)

Most Preferred Combination Part-WorthSource of Organic Cattle No non-organic .5478Fish Feeds Prohibited .9775Antibiotics Prohibited 1.2388Price Low .6667


Source: Author’s CalculationTable 8.12 - Total utility calculations for remaining 7 profiles (CAN Beef)

Utility Calculations for 7 Profiles rated by RespondentsProfile 8 Part-WorthSource of Cattle Up to 40% non -0.5478Fish Feeds Prohibited 0.9775Antibiotics Prohibited 1.2388Price Low 0.6667


Profile 6Source of Cattle No non-organic 0.5478Fish Feeds Prohibited 0.9775Antibiotics Allowed -1.2388Price Medium -0.0552


Profile 4Source of Cattle No non-organic 0.5478Fish Feeds Allowed -0.9775Antibiotics Prohibited 1.2388Price High -0.6114


Profile 7Source of Cattle Up to 40% non -0.5478Fish Feeds Allowed -0.9775Antibiotics Prohibited 1.2388Price Medium -0.0552


216

Profile 3Source of Cattle No non-organic 0.5478Fish Feeds Allowed -0.9775Antibiotics Allowed -1.2388Price Low 0.6667


Profile 1Source of Cattle Up to 40% non -0.5478Fish Feeds Prohibited 0.9775Antibiotics Allowed -1.2388Price High -0.6114


Profile 2Source of Cattle Up to 40% non -0.5478Fish Feeds Allowed -0.9775Antibiotics Allowed -1.2388Price Low 0.6667



The utility coefficients allow the researcher to observe the trade-offs made by

the consumer. While on average, price was rated the second most important attribute, in

many cases, consumers were unwilling to forgo a higher standard for a lower price. For

example, Profile 4 is rated higher than Profile 7 even though Profile 4 is priced at a

higher price level. Profile 7 does not allow any non-organic cattle to be called organic,

whereas Profile 4 allows ranchers to source up to 40% of their cattle from non-

organically raised parents. The incremental increase in utility from the higher standards

for sourcing outweighs the decrease in utility from a higher price.

Consumers are only willing to pay a limited amount to ensure that cattle claimed

to be organic are sourced from organic farms. Consider a hypothetical situation in which

217

a product is created where the cattle were raised organically from the last three months

of gestation, fish feeds are prohibited, antibiotic use for medicinal purposes is allowed

and the price level is set at high. The utility can be calculated as follows: (.5478) +

(.9775) + (-1.2388) + (-.6114) + (4.3305) = 4.0056. If an additional hypothetical product

were examined, which had the same production standards with the exception that up to

40% of the cattle could be raised organically once they were weaned and the price level

was set to low, its utility would equal 4.1881. This is slightly higher than the previous

hypothetical case. If the price level were set to medium, as in Profile 6, consumers

would prefer this product to the one with the lower price. Therefore, while consumers

are willing to pay a certain additional amount for stricter standards, in this case, the

source of cattle was not sufficiently important to warrant paying a high price.

By dividing the population into two groups; those people who frequently

purchase organic products and those who do not, a more detailed analysis can be

conducted of preferences for organic goods. In Canada, those consumers who seldom

purchase organic beef/goods implicitly regarded the use of antibiotics as the most

important attribute. Antibiotic use was followed by price, the use of fish feeds and the

source of the organic cattle. Figure 8.11shows the relative importance of the attributes

evaluated by these consumers. Those consumers who purchase organic food more

frequently were equally concerned with the use of antibiotics; however, after antibiotic

use they were most concerned with the source of the cattle, the use of fish feeds and

finally price. Figure 8.12 illustrates their preferences.

The calculated utility that the average occasional and average frequent buyer of

organic food experiences from each attribute level is provided in Table 8.13. From these

218

values, it is apparent that those people who purchase organic food frequently would

always prefer a higher standard, even if it means a higher price level. This mirrors the

results from the Canadian salad survey. Those consumers who purchase organic foods

less frequently would also prefer higher standards; however, they are willing to give up

a stricter standard if it means a lower price level in the case of cattle sourcing.

Table 8.13 - Utility values for frequent and occasional consumers of organic goods (Can Beef)


AttributeImportance

(%)For

frequent purchasers


never purchasers

AttributeImportance

(%)For occasional

to never purchasers

Source of Cattle No non-organic .9122 .4648 Up to 40% non -.9122 24.66 -.4648 15.21Use of Fish Feeds Allowed -.9176 -1.0898 Prohibited .9176 23.35 1.0898 26.75Use of Antibiotics Allowed -1.3112 -1.1523 Prohibited 1.3112 29.38 1.1526 29.6Prices $7.00/kg .5922 .7865 $9.00/kg -.1259 22.61 -.0182 28.45 $11.00/kg -.4663 -.7682Source: Author’s Calculation

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15.21

26.7529.6 28.45

0

5

10

15

20

25

30

35

Source Fish feeds Antibiotics Price

Impo

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Figure 8.11 Relative importance of beef attributes by occasional purchasers of organic goods (Canada) (n=33)

24.6623.35

29.38

22.61

0

5

10

15

20

25

30

35

Source Fish feeds Antibiotics Price

Impo

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e Sc

ore

Figure 8.12 Relative importance of beef attributes by frequent purchasers of organic goods (Canada) (n=47)

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8.2.2.2 United States

Twenty-six respondents in the US completed the beef survey; of the 26 surveys

submitted, 25 were usable. The actual calculated utility coefficients for the attribute

levels can be found in Table 5 of Appendix B. Consumers in the US and consumers in

Canada ordered the attributes for beef production similarly, although the average

importance values did differ. Consumers in the US implicitly regard the use of

antibiotics as the most important attribute followed by price, the use of fish feeds and

the source of the calves. Figure 8.13 illustrates these implicit preferences. The Pearson’s

R coefficient for the US beef survey is equal to .969 indicating a high degree of

predictive accuracy. The Kendall’s tau coefficient is equal to 1.00 for both the 8 profiles

and the 2 hold-outs. This suggests that the model was a good fit.

Figure 8.13 Relative importance of beef attributes (US) (n=25)

221

The most preferred organic beef product was one in which the cattle were raised

organically from the last three months of gestation, there was no use of fish feeds or

antibiotics and the price was set at a low level. The calculated utility value for this

hypothetical product is shown in Table 8.14.

Table 8.14 -Total utility for the most preferred attribute combination

(Profile 5)

Most Preferred Combination Part-WorthSource of Organic Cattle No non-organic .7500Fish Feeds Prohibited .9800Antibiotics Prohibited 1.3600Price Low .7867



By examining the utility coefficients for the various attribute levels and the total

utility values for the remaining 7 profiles, the implicit trade-offs made by consumers can

be observed. Consumers will implicitly trade-off one attribute for another if the addition

of the attribute increases the product’s utility more than the loss of the other attribute.

Table 8.15 shows the calculated utility values for the remaining 7 profiles.

222

Table 8.15 - Total utility calculations for remaining 7 profiles (US Beef)

Utility Calculations for 7 Profiles rated by RespondentsProfile 8 Part-WorthSource of Cattle Up to 40% non -7500Fish Feeds Prohibited .9800Antibiotics Prohibited 1.3600Price Low .7867


Profile 6Source of Cattle No non-organic .7500Fish Feeds Prohibited .9800Antibiotics Allowed -1.3600Price Medium .0667


Profile 4Source of Cattle No non-organic .7500Fish Feeds Allowed -0.9800Antibiotics Prohibited 1.3600Price High -.8533


Profile 7Source of Cattle Up to 40% non -.7500Fish Feeds Allowed -.9800Antibiotics Prohibited 1.3600Price Medium .0667


Profile 3Source of Cattle No non-organic .7500Fish Feeds Allowed -.9800Antibiotics Allowed -1.3600Price Low .7867


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Profile 1Source of Cattle Up to 40% non -.7500Fish Feeds Prohibited 0.9800Antibiotics Allowed -1.3600Price High -.8533


Profile 2Source of Cattle Up to 40% non -.7500Fish Feeds Allowed -.9800Antibiotics Allowed -1.3600Price Low .7867



As the order of importance placed on the various attributes is the same in the US

as it is in Canada, the trade-offs are also similar. Profile 4 is still preferred to Profile 7

because of its stricter standard for cattle sourcing. The difference in price between the

medium and high price is not substantial enough to counter this. However, if a

hypothetical product were created that contained the same attributes as Profile 7 with the

exception that price was now at a low level, this product would be preferred to Profile 4,

as the gain in incremental utility due to the price decrease outweighs the loss from the

lowering of the standard.

The part-worth utility coefficients calculated for these segmented groups provide

some insight into the minds of the consumers surveyed. Table 8.16 lists the part-worth

utility coefficients. From the table, it is apparent that the group who seldom purchases

organics is always willing to accept a lower standard if it means a lower price, except in

the case of antibiotic use. Those consumers who purchase organic foods whenever

224

possible are less price sensitive. They are always willing to forgo a lower price if it

ensures that a higher standard will be achieved.

Table 8.16 - Utility values for frequent and occasional consumers of organic goods (US Beef)


AttributeImportance

(%)For

frequent purchasers


never purchasers

AttributeImportance

(%)For occasional

to never purchasers

Source of Cattle No non-organic .8611 .4643 Up to 40% non -.8611 21.61 -.4643 14.97Use of Fish Feeds Allowed -1.2500 -.2857 Prohibited 1.2500 27.15 .2857 16.44Use of Antibiotics Allowed -1.3750 -1.3214 Prohibited 1.3750 30.76 1.3214 31.03Prices $1.49/lb .7222 .9524 $2.49/lb -.0417 20.48 .3452 37.56 $3.49/lb -.6806 -1.2976Source: Author’s Calculation

The differences in preferences between consumers who purchase organics

frequently and those who seldom purchase organic food are apparent when the attribute

importance scores are examined. Respondents who purchase organics frequently are

most concerned with antibiotic use. Antibiotic use was followed closely by the use of

fish feeds followed by the source of cattle and the price. Price was the most important

attribute for those consumers who seldom purchase organics, followed by antibiotic use.

The use of fish feeds as a dietary supplement and the source of cattle were considered

fairly unimportant. Figures 8.14 and 8.15 provide a graphic illustration of these

preferences.

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21.61

27.15

30.76

20.48

0

5

10

15

20

25

30

35

Source ofCattle


Impo

rtanc

e Sc

ore

Figure 8.14 Relative importance of beef attributes by frequent purchasers of organic goods (US) (n=18)

14.97 16.44

31.03

37.56

0

5

10

15

20

25

30

35

40

Source ofCattle


Impo

rtanc

e Sc

ore

Figure 8.15 Relative importance of beef attributes by occasional purchasers of organic goods (US) (n=7)

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The rank order of the preferences between Canadian and US consumers of beef

are identical, however, this does not imply that they are statistically the same. Further

analysis of the results must be done in order to determine the statistical differences

between the two populations (see Section 8.2.2.5).

8.2.2.3 United Kingdom

In the UK, fifty consumers completed a beef survey, with 48 of the surveys

being useable. Consumers in the UK appear to have different ideas about what was of

most importance during the production of organic beef than Canadian and American

consumers. For a complete list of the utility coefficients see Table 6 in Appendix B. For

respondents in the UK, price was the most important attribute. Price was followed by

antibiotic use, fish feeds and the source of the cattle. Figure 8.16 illustrates these

preferences. The Pearson’s R coefficient for UK consumers of beef is equal to .987,

indicating the model had a high degree of predictive accuracy. The Kendall’s tau values

are calculated at .909 for the profiles and 1.00 for the hold-outs.

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Figure 8.16 Relative importance of beef attributes (UK) (n=48)

To determine the trade-offs implicitly made by consumers in evaluating the

product profiles, the calculated utility for various products are compared. Table 8.17

provides the estimated utility value for the most preferred product, while Table 8.18

provides the utility calculations for the remaining profiles.

Table 8.18 - Total utility for the most preferred attribute combination

(Profile 5)

Most Preferred Combination Part-WorthSource of Organic Cattle No non-organic .5182Fish Feeds Prohibited .6641Antibiotics Prohibited .7474Price Low .6632



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Table 8.19 - Total utility calculations for remaining 7 profiles (UK Beef)

Utility Calculations for 7 Profiles rated by RespondentsProfile 8 Part-WorthSource of Cattle Up to 40% non -.5182Fish Feeds Prohibited .6641Antibiotics Prohibited .7474Price Low .6632


Profile 6Source of Cattle No non-organic .5182Fish Feeds Prohibited .6641Antibiotics Allowed -.7474Price Medium .0226


Profile 4Source of Cattle No non-organic .5182Fish Feeds Allowed -.6641Antibiotics Prohibited .7474Price High -.6858


Profile 3Source of Cattle No non-organic .5182Fish Feeds Allowed -.6641Antibiotics Allowed -.7474Price Low .6632


Profile7Source of Cattle Up to 40% non -5182Fish Feeds Allowed -.6641Antibiotics Prohibited .7474Price Medium .0226


Profile 2Source of Cattle Up to 40% non -.5182Fish Feeds Allowed -.6641Antibiotics Allowed -.7474Price Low .6632


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Profile 1Source of Cattle Up to 40% non -.5182Fish Feeds Prohibited .6641Antibiotics Allowed -.7474Price High -.6858



Even though, on average, price is the most important attribute, there are still

cases when a higher price will be accepted in return for a stricter standard. In Profile 3,

antibiotics are allowed and the price is set at a low level. This product rates lower than

Profile 4, which prohibits antibiotics but has a higher price. This is due to the fact that

the negative incremental utility from the increased price is outweighed by the positive

utility increase from the stricter standards for antibiotic use.

There are cases where consumers are not willing to pay more to have a stricter

standard. In Profile 7, the organic beef product can be produced from cattle that were

only raised organically once they were weaned, and the price level is set at medium.

Compare this with Profile 4, which has a high price and only allows cows that were

raised organically prior to birth to be called “organic”. Profile 7 rates lower, even with

the lower price. However, if a hypothetical product is introduced, which only required

that cows be raised organically once weaned, and is priced at a low level, it would

generate a higher predicted utility than both Profile 7 and Profile 4. Its estimated utility

value is equal to: (-.5182) + (-.6641) + (.7474) + (.6632) + (4.6337) = 4.862. Therefore,

it seems that consumers are willing to accept a higher price provided they obtain a

higher standard. However, they are not willing to pass up a low price even with a lower

standard with regard to cattle sourcing.

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The final section of this analysis will examine the differences between

consumers who purchase organic products frequently and those who seldom purchase

organic food. In the UK beef survey, there were 23 consumers who claimed to purchase

organics whenever possible or frequently and 27 who claimed to purchase them never,

seldom or occasionally. Figures 8.18 and 8.19 provide a graphic depiction of the relative

importance of the attributes by frequency of organic purchases. The frequent purchasers

valued the attributes in the following order: price, source of cattle, antibiotic use and the

use of fish feeds. The infrequent purchasers of organic goods have the following

preferences: price, antibiotic use, fish feeds and source of cattle. Interestingly, the

consumers in the UK appear to be more concerned about price than any of the other

attributes. This contrasts with consumers in North America who do not appear to be as

influenced by price as much as they are by the other attributes. This may be a reflection

of the income differences between the two samples, as those consumers with lower

incomes may be more price sensitive. Table 8.20 provides the calculated utility

coefficients for the two groups.

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Table 8.20 - Utility values for frequent and occasional consumers of organics (UK Beef)


AttributeImportance

(%)For

frequent purchasers


never purchasers

AttributeImportance

(%)For occasional

to never purchasers

Source of Cattle No non-organic .8043 .2550 Up to 40% non -.8043 27.69 -.2550 13.11Use of Fish Feeds Allowed -.7609 -.5750 Prohibited .7609 18.63 .5750 23.00Use of Antibiotics Allowed -.7826 -.7150 Prohibited .7826 25.05 .7150 29.32Prices £5.15/kg .7246 .6067 £7.15/kg -.1014 28.63 .1367 34.56 £9.15/kg -.6232 -.7433Source: Author’s Calculation

27.69

18.63

25.05

28.63

0

5

10

15

20

25

30

35

Source ofCattle


Impo

rtanc

e Sc

ore

Figure 8.18 Relative importance of beef attributes by frequent purchasers of organic goods (UK) (n= 23)

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13.11

23

29.32

34.56

0

5

10

15

20

25

30

35

40

Source ofCattle


Impo

rtanc

e Sc

ore

Figure 8.19 Relative importance of beef attributes by occasional purchasers of organic goods (UK) (n= 25)

The next section of this chapter examines the statistical differences between the

attribute ratings for the beef survey. If preferences for organic beef standards are

statistically different in each country, harmonization may be a difficult option to pursue,

as consumers will reject standards that are not in line with their preferences. However, if

they prove not to be statistically different, harmonization should be easier to achieve.

8.2.2.4 Consumer Preferences vs. National Standards (Beef)

The national standards of the EU, Canada and the US, were represented by

specific profiles in the survey but were not identified as such to survey respondents. The

Canadian voluntary standard for beef production is described in Profile 4 – it requires

calves to be raised organically from the last three months of gestation, it allows the use

233

of fish feeds and it prohibits the use of antibiotics even for medicinal purposes.

Canadians rated this product 4th in the conjoint analysis. This product is initially priced

at the high price level; if the utility value for the product is calculated at the medium

price level, it moves up to third place (5.0844), and if the price is decreased even further

to low, it remains in third place (5.8063). Canadian consumers ranked the profile

describing the US standard for organic beef production first overall, while the EU

standard was 8th. Ironically, the US standards match the stated preferences of Canadian

consumers more closely than the EU standards despite the fact that many shoppers

believed the EU to have the strictest standard!

Overall, the US standard for organic beef production (Profile 5) was rated

number one by consumers in all three countries. The profile is originally set at the low

price level. If the utility is calculated at the medium price level, it equals 7.43, leaving it

in first place. However, if the price is increased to the high level, the profile drops to

second (6.51). American consumers are similar to Canadians in that they indicate in an

earlier survey question that they regard the EU’s standards as superior; however, in fact

they also ranked the product produced under the EU standards in 8th place.

The EU’s standards can be found in Profile 2. The EU standard allows up to

40% of calves to be raised organically once weaned, it allows the use of fish feeds, and

cattle ranchers may use antibiotics if homeopathic or natural treatments do not work up

to three times in one year without the cow losing its organic status. EU consumers

ranked the product produced using these standards 7th overall. If the price of this product

is changed from low to medium, it drops to eighth spot (2.7266). EU consumers rated

the Canadian standard 4th overall. The gap between EU consumer preferences and the

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EU standard is interesting. However, it is important to note that these standards are

minimum requirements and individual certification agencies can choose to implement

tighter regulations.

The US organic beef industry seems to understand what consumers are looking

for in organic beef. The EU standard does not match the preferences of those consumers

interviewed at all. Most consumers seem to think that the EU had the strictest standards

for organic production; however, it would appear that this is not the case. The next

section of the chapter will determine whether the differences in preferences between

sample populations are statistically significant.

8.2.2.5 Statistical Differences between Consumers in Different Countries (Beef)

The statistical differences between consumer preferences for organic beef are

tested in an identical fashion to those for organic salad. Using the Tukey test, it is

possible to compare the means of the three samples across all product attributes. Table

8.21 provides the Tukey confidence limits for the tested means.

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Table 8.21 - Country comparisons for the beef attributes

Attribute/Country Comparison

Confidence Intervals

Source of CattleCAN vs. US -13.26CAN vs. UK -10.84US vs. UK -14.41 Use of Fish FeedsCAN vs. USCAN vs. UKUS vs. UKAntibiotic UseCAN vs. USCAN vs. UKUS vs. UKPriceCAN vs. USCAN vs. UKUS vs. UK

236

In every case, the confidence limits include the value zero. This signifies that the

average importance scores for each country are not statistically different. In other words,

consumers have similar preferences in all three countries. The implications of these

findings are discussed in the next section of the chapter.

8.3 Implications

The thesis proposed that harmonization of organic standards may not be

beneficial to society. The trade model that was developed is based on the idea that

consumers in different countries have different preferences for organic standards, and

that these differences may inhibit harmonization. However, the results from the conjoint

study conducted in the US, Canada and the UK, indicate that the differences between

consumer preferences are not statistically significant and hence, consumers in the three

countries have similar predilections for organic standards.

These findings suggest that harmonization may be beneficial to the organic

industry. However, while consumer preferences for standards may be similar, consumer

perceptions of imported organics may also influence the effects of harmonization. Many

consumers in both Canada and the UK stated that they did not trust organics from the

US, as the perception was that the government was too involved in the organic industry,

even though the US standard for beef was preferred when utility values were calculated.

This mistrust may inhibit the establishment of harmonized standards. Education

programs designed to provide greater understanding of the US certification system to

consumers in importing countries may help overcome these perceptions.

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8.4 Conclusion

Consumers in Canada, the UK and the US do not appear to have statistically

different preferences for organic standards. Using a Tukey test, the mean relative

importance of each evaluated attribute are compared across all three countries. The

results of this test conclude that there are no statistical differences between the means.

This is an important finding as it implies that harmonization of organic standards is

attainable. Consumers in Canada, the UK and the US differ in terms of their preference

order and in terms of some of the trade-offs they were willing to make. However, these

differences are not statistically significant and therefore, preferences should not inhibit

the harmonization of organic standards.

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Chapter 9

Summary and Conclusions

9.1 Introduction

Chapter 9 summarizes the findings of the research in this thesis. It provides a

brief explanation of the motivations for the research. This is followed by a

description of the research findings and the implications for the global organic

industry and the development of the industry in Canada. The research limitations are

also discussed, along with suggestions for further areas of study.

The creation of organic standards is central to the development of the organic

industry. Due to the credence nature of organic food – consumers cannot

differentiate between organic and conventional foods even after consumption –

certification standards are established to convey information to consumers. Without

certification standards, there would be no way to segregate the organic products and

conventional counterparts in the market. Organic standards, however, can also act as

a barrier to trade. Due to agronomic, cultural and economic differences, organic

standards have developed differently around the world. When organic production

was primarily for domestic consumption this was not an issue, however with the

increased capacity for the profitable international movements of organic products,

these differences in standards can act to inhibit international transactions.

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Currently, countries are conducting equivalency negotiations to eliminate the

lengthy and costly procedures that must be followed if an firm wishes to export into a

foreign market. The EU allows the free flow of organic goods from countries with

which it has established equivalency; however, the remainder of the exporters must have

their organic practices approved with each shipment exported. In the near future this

option will no longer be available to exporters, as the EU has mandated that all countries

who wish to import organic goods into the EU must have established equivalency by

December 31st, 2005 or they will be denied access. This has caused countries without

national standards to speed up the standard development process. Presently, Canada has

a voluntary standard and is working to establish a mandatory standard. Even as this

standard is being developed, equivalency negotiations with the EU and other countries

are being pursued.

To avoid the costs and effort associated with negotiating equivalency, advocates

for the organic industry are calling for the international harmonization of organic

standards. Harmonization would require all countries to follow one set of agreed upon

standards. While harmonization has been suggested as a way to solve the trade problems

that have arisen because of differing standards, there has been little economic analysis

of its impacts on global welfare. It is widely believed that if consumers do not accept

imported organic products then there will be no benefits to harmonization.

This thesis proposes that harmonization of organic standards may not be

beneficial to world welfare. The construction of a trade model provides further insight

into this research problem. In addition, an analysis of consumer preferences for different

organic standards determines whether consumer preferences do in fact differ in some

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major markets for organic products, or whether their preferences are similar and will not

inhibit the harmonization process.

9.2 Summary of Research Findings

This thesis is comprised of two research components. The first to be examined is

a partial equilibrium trade model, which determines supply and demand shifts that occur

when equivalency negotiations and harmonization are pursued. The second research

component uses a conjoint analysis experiment to determine consumer preferences for

different organic standards. The results of this analysis are then compared for

statistically significant differences.

9.2.1 The Theoretical Trade Model

A partial equilibrium model was developed to explore the welfare effects of

autarky, equivalency negotiations and harmonization. In the case of equivalency

negotiations, two scenarios were examined: when variations in standards are slight and

when variations in standards are great. When equivalency negotiations are compared

with autarky, the resulting welfare changes are ambiguous and require further empirical

investigation.

When harmonizing, a standard must be chosen as the object of harmonization. In

this two-country trade model there were three obvious choices, to harmonize to the

lenient standard, to harmonize to the strict standard and to harmonize to the median

standard. It is important to note that these choices do not reflect the possible differences

in political strength between the countries and that realistically this will impact the

choice of standard placement. Again, the welfare effects are ambiguous, with the

241

changes depending on the relative sizes of the demand and supply shifts. To overcome

this ambiguity, a simulation model was created.

The trade model simulation uses a normally distributed population to construct

demand curves for organic goods produced under specific standards. The individual

demand curves are aggregated to form a market demand curve. The optimal standard is

located at the mean of the normal distribution (where the greatest number of consumers

is satisfied). As the standard moves away from the optimal standard, aggregate demand

decreases. Simulating changes in the demand and supply curves, welfare results were

calculated for the various scenarios. As expected, the further standards are apart the less

likely there is to be a positive effect on welfare and the more difficult it is likely to be to

harmonize. Generally, it was found that harmonization to the lenient standard was the

preferred choice, however, depending on the initial placement of the standards, autarky

may be preferred over any of the harmonization claims. This result is supported by

Hansson (1990) who also found that harmonization to the lenient standard is the optimal

harmonization choice. Equivalency negotiations followed autarky and harmonization to

the lenient standard, while harmonization to the median and the stricter standards are

always welfare decreasing. These results suggest that harmonization is only preferred to

equivalency negotiations if the countries harmonize to the more lenient standard, and

even then, autarky may yield the highest welfare. Harmonization to the median and

stricter standard never results in improved global welfare under the assumptions that

underlie the simulation exercise.

While it appears as though harmonization will only be beneficial in some

circumstances, the results are dependent on certain assumptions regarding consumer

242

preferences. If consumers do not have strong preferences for organic standards then the

assumptions made regarding shifts in demand may not hold. Instead, harmonization may

not cause any change in demand. Further research into these preferences will provide

more knowledge of the shifts in demand that were assumed in the theoretical trade

model.

9.2.2 Consumer Preference Analysis

To gather information on consumer preferences for organic standards, a survey

was conducted in three countries – the UK, the US and Canada. The survey asked

consumers to state the frequency of their organic purchases, their motivations for

purchasing organic foods, some questions regarding their socio-economic information,

and questions to test their knowledge of organic production. Consumers were also asked

to rate one of two products – organic bagged salad and organic ground beef – based on

their organic production standards. The products were chosen because of their

availability in all three markets. The ratings were then evaluated using conjoint analysis.

The conjoint experiment provides an importance rating for each attribute tested, a utility

coefficient for the attribute levels and statistics testing the goodness of fit. At the end of

each analysis is a summary of all individual respondents. The summary is used to

compare consumer preferences in different countries.

The Tukey test allows for multiple comparisons across population samples. In

this thesis it is used to compare the mean importance ratings provided from each

country. Using the Tukey method, these means are tested to determine if they are

statistically different. Confidence limits are generated for each comparison. If the limit

243

includes the value zero, then the differences in means are not statistically significant.

The results of this test indicate that the responses are not statistically different and

therefore consumers in different countries do appear to have similar preferences for

organic standards.

9.3 Implications for the Organic Industry

The results from the trade simulation suggest that harmonization may not be

beneficial to global society. If harmonization is pursued, the harmonized standard

should reflect the most lenient standard. Otherwise there will be losses to global welfare.

This result assumes that consumers actually have preferences that are matched by their

domestic standard. The results from the conjoint analysis suggest that consumer

preferences (at least in those countries studied) are not statistically different and are not

always met by the national standards. These results indicate that strong consumer

preferences should not inhibit the harmonization process.

While consumer preferences may not inhibit the harmonization process,

consumer perceptions might. Even if harmonization is achieved, consumer perceptions

regarding the certification process and regulation of organic standards in foreign

countries may diminish the gains that harmonization would bring. If consumers in

importing countries do not trust the claims made by organic exporters then there will be

no gains from harmonization.

What do these results imply for the organic industry? It appears that

harmonization is a feasible solution to the trade barriers created by organic standards.

This being said, it will be extremely difficult to negotiate a harmonized standard. While

trade theory suggests that harmonization to the lenient standard is the only way to

244

increase global welfare, convincing organic consumers in countries with stricter

standards that this will not diminish their utility may be difficult. In addition, bargaining

power between nations is not equal and will influence the negotiation process. To

demonstrate, consider the situation in Canada: the standard development process has

taken one and a half years so far and the national regulated standard is yet to be

completed. The lengthy process is due to the vast number of organizations and

individuals who wish to have their principles represented in the standards and this is

only at a national level. At the international level there would be even more parties with

vested interests in the development (or non-development) of a unified standard.

However, there has been progress made towards the development of an international

standard. IFOAM, an international organic body, has established a set of basic standards

and an accreditation body. IFOAM, the UN Conference on Trade and Development and

the UN Food and Agriculture Organization have joined forces to create an International

Task Force of Harmonization and Equivalence in Organic Agriculture. The goal of this

task force is to assess the impact that variances in organic programs may have on trade

in organic agricultural products, examine the current mechanisms for trade, i.e.

equivalence, and determine if any harmonization has already occurred (International

Task Force 2003). This is a crucial first step in the development of a harmonized

industry.

What do these results signify for Canada? If harmonization is an optimal strategy

to enhance world welfare, perhaps Canada should focus its energies on encouraging

other nations to pursue a harmonized standard rather than trying to establish its own

national standard. Or perhaps Canada should adopt an already established standard such

245

as IFOAM’s basic standards, the EU’s Regulations or the US NOP. Not only would this

reduce the costs of developing a standard, but it would also bring the international

community one step closer to achieving harmonization. Some would argue that

adopting the standards of another country would result in a loss of autonomy; however,

Canada could also be seen as having tremendous foresight into the future of the global

organic industry. If in the future it appears as though Canadian organic principles and

those of the organization it has joined with have diverged, there is nothing to deter

Canadians from developing their own standard.

9.4 Limitations of the Research

A number of potential limitations to the research should be acknowledged.

During the survey process some respondents completed the survey with the assistance of

an interviewer while others completed it independently. Those consumers who

completed the survey independently may not have had a full understanding of the

survey, which may have led to unexpected responses. In addition, Hair et al. (1992)

suggest that ranking is a preferred method to rating as it is easier for respondents to

complete and provides more flexibility during the estimation of composition rules.

The choice of standards may also have confused respondents. Tobacco sprays

and fish feeds did not appear to be well known additives, as they often required extra

explanations. This lack of knowledge may have caused consumers to focus on these

attributes more than other attributes thus skewing the results. Nevertheless, efforts were

made to describe these attributes simply and clearly in the survey.

A clear limitation of the study was the limited number of survey locations. It

would have been useful to gather additional surveys from another city in the US and in

246

the UK, however, time and cost restrictions prohibited this option. In addition, the fact

that consumers in Vancouver were only surveyed at organic stores and not at general

supermarket location may have influenced the Canadian results, although the wide range

of survey locations in Saskatoon should provide some balance.

The limited data on organic production and consumption made it difficult to

estimate demand and supply elasticities for organic production in Canada. Therefore the

simulation model is based purely on hypothetical demand and supply curves. This is a

limitation of the research, as it is impossible to know whether the actual supply and

demand curves are more or less elastic than the hypothetical model. These differences

could alter the resulting welfare changes.

9.5 Areas for Further Study

There are several areas of this research that could be advanced by further study.

Further research into other examples of harmonization of processing and production

methods could provide useful information on the positive and negative effects of the

harmonization process and the post-harmonization outcomes. A detailed exploration of

the creation of the EU minimum regulations for organic production could be used as a

model for future harmonization goals.

Additional research into consumer perceptions of imported organic goods could

be used to determine consumer response towards harmonization. More knowledge of the

consumers concerns regarding imports could highlight areas where the dissemination of

information could improve consumer perceptions of imported organics. This

information could also be used to establish education programs for consumers in

importing countries. The education programs could inform consumers of the organic

247

practices and certification processes in exporting countries and may address specific

consumer concerns.

More knowledge of the preferences of Canadian consumers and their thoughts

on adopting organic regulations that are not regulated by the Canadian government may

indicate that the development of a Canadian national standard is not necessary. Instead

the adoption of foreign organic standards may appeal to Canadians. Many respondents

in this study stated that they felt that the EU had the strictest standards; however the

consumers wished to buy local organic food rather than imported organics from the EU.

Adopting the EU’s standards would meet Canadian perceptions of strong organic

regulations; meanwhile local organic producers could continue to supply the domestic

market.

Conversely, the US standard for organic beef and salad was actually preferred by

Canadians over the EU standard (as seen in the conjoint results). If Canadian consumers

were made more aware of the US standards and certification system, perhaps Canadians

would change their view of US organics and feel more comfortable with US-certified

organics. As the US is Canada’s largest trading partner, the adoption of the NOP may

make more economic sense.

A documented list of the different organic standards around the world and the

major differences between them would help contribute to harmonization research.

Understanding the differences in standards would provide greater knowledge of the

feasibility of harmonization.

248

9.6 Conclusion

Global demand for organic products is increasing; however trade in organics is

being inhibited by differing national standards. Harmonization of organic standards has

been suggested as a means to overcome these trade barriers.

Harmonization may be beneficial to global society if the standard is chosen

appropriately. It appears that strong consumer preferences for domestic organic

standards will not hinder the harmonization process, as the research conducted as part of

this thesis has shown that there are no statistical differences between consumer

preferences in different countries. This indicates that harmonization should not be

inhibited by strong and diverging consumer preferences for what is considered more or

less “organic” in different countries.

This study has taken a first step towards understanding the economic

implications of international harmonization of organic standards. Further research into

consumer perspectives of imported organics, differences in current standards and

consumer willingness to adopt the national standards of other countries would provide

more insights into the topic of harmonization.

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Agriculture and Agri-Food Canada. 2002. Canada’s Organic Industry. http://ats-sea.agr.ca/supply/e3313.pdf

Anderson, J.L. and S.U. Bettencourt. 1993. A conjoint approach to model product preferences: The New England market for fresh and frozen salmon. Marine Resource Economics. 8:31-49.

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APPENDIX A

Code #_____

Organic Consumer Research

Dear Potential Participant:

We are inviting you to participate in a study to gather more information regarding consumer attitudes towards organic standards. The research is being conducted through the Department of Agricultural Economics at the University of Saskatchewan under the supervision of Dr. William A. Kerr. The purpose of this study is to analyze the economic impacts of harmonizing organic standards internationally. The survey itself will be used to gather information on consumer preferences regarding organic standards and their knowledge of organics. The data gathered will be aggregated in order to analyze specific market segments and to protect the anonymity of participants. The results of the study may be submitted to journals, used in presentations to the academic community and industry and used in M.Sc. thesis research. You will not be asked to identify yourself on the survey therefore guaranteeing confidentiality. You must be 18 years of age or older to participate in the study.

The survey is composed of three parts. The survey will be conducted on the spot and will take approximately 10 minutes. First, you will be given a series of sets of organic standards and asked to rate them based on your preferences. Second, you will be asked several questions that will assist us in determining consumer knowledge of the organic industry. Finally, some socio-economic questions will be asked. These questions will enable us to segment the market into groups based on income, education and gender.

There are no foreseeable risks to being involved in this project. The results will be used in aggregate rather than at the individual level. The results of the survey will be held in the office of Dr. Kerr at the University of Saskatchewan in Canada for at least five years after the study is complete.

If at any time you wish to withdraw your responses from the survey, please contact one of the researchers within seven (7) days and cite the code number located at the top of this cover letter. Your completed survey will then be withdrawn from the study and destroyed.

Submission of a completed survey will indicate your consent to participate. This also implies that the researchers may use the data gathered as is described above.

This research project was reviewed and approved by the University of Saskatchewan Advisory Committee on Ethics in Behavioural Research on (date to be added).

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If, after you have completed the survey you have any questions or concerns about the study or your rights as a participant, please contact one of the following (out of town participants may call collect):

Dr. William Kerr, Van Vliet Professor, Dept. of Agricultural Economics (306) 966-4022Erin Sawyer, M.Sc. Student, Dept. of Agricultural Economics (306) 966-4047Office of Research Services, University of Saskatchewan, (306) 966-2084

If you would like to be notified of the results or wish to receive a copy of them, please contact Dr. William Kerr.

Sincerely,

Dr. William A. KerrVan Vliet ProfessorDepartment of Agricultural EconomicsUniversity of Saskatchewan

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University of SaskatchewanDepartment of Agricultural Economics

CONFIDENTIAL Code #____

Location:________________Date:_________Time:________

This purpose of this survey is to gather information regarding consumer attitudes towards organic standards. The first part of the survey will ask questions about your familiarity with organic foods. This will be followed by 10 descriptions of organic ground beef produced under different organic standards. Finally, the survey will end with some questions on your knowledge of the organic industry.

1. How often does your household purchase organic food products? Please circle the appropriate response.

a. Neverb. Seldomc. Occasionallyd. Frequentlye. Whenever possible

2. If you have purchased organics at some time, please go to (a), if you have never purchased organics proceed to (b).

(a) If you’ve purchased organics what were your reasons? (Please circle all responses that apply)

a. Conveniently packagedb. Health concernsc. Environmental concernsd. Tastee. Other __________________

(b) If you’ve never purchased organics, what were your reasons? (Please circle all responses that apply)

a. Priceb. Availabilityc. Appearanced. Other___________________

The following pages will present you with some descriptions of organic ground beef produced under different organic standards.

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You will be asked to rate the different descriptions on a scale from 1 (least preferred) to 10 (most preferred). Below is a list of all the standard choices, please read the description and feel free to ask questions if any point needs clarification.

Description of Organic Beef Standard Attributes

Attribute: Standards:____________________ Sources of Cattle for Organic Meat 1. No non-organic cattle (must

be raised organically from last three months of pregnancy)(written as no non-organic cattle in profiles)2. Up to 40% of cattle can come from non-organically raised parents (written as up to 40% non-organic in profiles)

Use of Fish-based Feeds 1. Fish and their products are permitted as animal feeds2. Fish are not considered organic and are prohibited as animal feeds

Anitibiotics 1. Prohibited2. Allowed when natural or homeopathic treatments do not work

Prices 1. 7.25/kg2. 9.25/kg3. 11.25/kg

*The prices are a realistic reflection of prices found in supermarkets and specialty stores.

EXAMPLE:The highlighted words in the table represent a specific concern that consumers may have and the right hand side represents the standard that this particular product was produced under. Read the description of the product and then rate it based on your personal preferences on a scale from 1-10 (least preferred to most preferred).

EXAMPLE

Source: Up to 40% non-organicFish feeds: ProhibitedAntibiotics: Allowed Price: $9.25/kg

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There are 10 possible standard combinations. Please read the choices thoroughly and circle the number that corresponds to your preference level.

PLEASE TRY TO USE THE WHOLE RANGE OF THE SCALE WHEN RATING THESE CHOICES.

Organic Ground Beef:

Profile 1

Source: Up to 40% non-organicFish feeds: ProhibitedAntibiotics: Allowed Price: $11.25/kg


Profile 2

Source: Up to 40% non-organicFish feeds: AllowedAntibiotics: Allowed Price: $7.25/kg


Profile 3

Source: No non-organic cattleFish feeds: AllowedAntibiotics: AllowedPrice: $7.25/kg


Profile 4

Source: No non-organic cattleFish feeds: AllowedAntibiotics: ProhibitedPrice: $11.25/kg


Profile 5

Source: No non-organic cattleFish feeds: ProhibitedAntibiotics: ProhibitedPrice: $7.25/kg


Profile 6

Source: No non-organic cattleFish feeds: ProhibitedAntibiotics: AllowedPrice: $9.25/kg


Profile 7

Source: Up to 40% non-organic

Profile 8

Source: Up to 40% non-organic

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Fish feeds: AllowedAntibiotics: ProhibitedPrice: $9.25/kg


Fish feeds: ProhibitedAntibiotics: ProhibitedPrice: $7.25/kg


Profile 9

Source: No non-organic cattleFish feeds: ProhibitedAntibiotics: AllowedPrice: $7.25/kg


Profile 10

Source: No non-organic cattleFish feeds: AllowedAntibiotics: ProhibitedPrice: $7.25/kg


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The following section of the survey will ask some questions regarding the organic industry within Canada and as well as some socio-economic questions.

1. Does Canada have a national organic standard? (Please circle your response)

a. Yes b. No c. Don’t know

If you answered Yes to Question 1, proceed with Question 2, otherwise go to Question 3.

2. From the scenarios described on pages 3-6 can you identify the Canadian standard?

a. Yes, Scenario____ b. No

3. If you were faced with three packages of organic beef, one from the US, one from the EU and one from Canada, which would you prefer? And why?

a. EU b. CAN c. US

Why?___________________________________________________________________________________________________________________

4. Gender: □ male □ female

5. Are you the primary shopper in your household? (Please circle the correct response)

a. Yes b. No

6. Please circle your appropriate age group:a. Under 20 yearsb. 20-29 yearsc. 30-39 yearsd. 40-49 yearse. 50-59 yearsf. over 60

262

7. Household Income Level Before Taxes (per year): please circle the appropriate letter.

a. under $20,000b. $20,000-39,000c. $40,000-59,000d. $60,000-79,000e. $80,000-99,000f. $100,000-119,000g. $120,000-139,000h. $140,000-169,000i. $170,000-199,000j. over $200,000

8. Highest level of education obtained (circle one):a. Less than grade 9b. Grade 9 to 13c. High school graduated. Technical schoole. College diplomaf. Bachelor’s degreeg. Master’s degreeh. Doctorate degree

9. The following statements make claims regarding the properties of organic food. Please indicate whether you agree or disagree with each statement.

a. Organic food is not genetically modified. □ agree □ disagree □ don’t know

b. Organic food is not irradiated. □ agree □ disagree □ don’t know

c. Organic food is locally grown.□ agree □ disagree □ don’t know

d. Organic meat is produced in an animal welfare friendly manner.□ agree □ disagree □ don’t know

e. Food labeled “natural” is organic. □ agree □ disagree □ don’t know

10.The following statements make claims regarding certified organic and organic food. Please indicate whether you agree or disagree with each statement.

a. “Certified organic” products are certified by an independent third party (i.e. certification agency).

□ agree □ disagree □ don’t knowb. All organic certification agencies have been accredited by a

national government program.□ agree □ disagree □ don’t know

c. All organic food is certified.□ agree □ disagree □ don’t know

d. Certified organic food is superior to organic food.

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□ agree □ disagree □ don’t know

Thank you for your participation! Please feel free to make any comments on organic food or this survey in the space provided.

University of SaskatchewanDepartment of Agricultural Economics

CONFIDENTIAL Code #____

Location:________________Date:_________Time:________

This purpose of this survey is to gather information regarding consumer attitudes towards organic standards. The first part of the survey will ask questions about your familiarity with organic foods. This will be followed by 10 descriptions of organic salad mix produced under different organic standards. Finally, the survey will end with some questions on your knowledge of the organic industry.

3. How often does your household purchase organic food products? Please circle the appropriate response.

a. Neverb. Seldomc. Occasionallyd. Frequentlye. Whenever possible

4. If you have purchased organics at some time, please go to (a), if you have never purchased organics proceed to (b).

(a) If you’ve purchased organics what were your reasons? (Please circle all responses that apply)

a. Conveniently packagedb. Health concernsc. Environmental concernsd. Tastee. Other __________________

264

(b) If you’ve never purchased organics, what were your reasons? (Please circle all responses that apply)

e. Pricef. Availabilityg. Appearanceh. Other___________________

The following pages will present you with some descriptions of organic salad mix produced under different organic standards. You will be asked to rate the different descriptions on a scale from 1 (least preferred) to 10 (most preferred). Below is a list of all the standard choices, please read the attributes carefully and feel free to ask questions if any point needs clarification.

Attribute: Level:

Buffer Zones to Prevent Substance Drift 1. Sufficient to preventOnto Organic Fields unintended

contamination2. No requirements

Use of Tobacco Sprays as Insect Controls 1. Allowed2. Prohibited

Labelling 1. Word ‘organic’ allowed in the ingredient list of products containing less than 70% organic ingredients2. Word ‘organic’ allowed in the ingredient list of products containing between 70-95% organic ingredients

Prices 1. 2.25/200g2. 3.75/200g3. 5.25/200g

*These prices are a realistic reflection of prices found in supermarkets.

EXAMPLE: The highlighted words in the table represent a broad standard attribute and the right hand side represents the specific standard that this particular product was produced under. Read the description of the product and then rate it based on your personal preferences on a scale from 1-10 (least preferred to most preferred).

265

EXAMPLE



There are 10 possible standard combinations. Please read the choices thoroughly and circle the number that corresponds to your preference level.

PLEASE TRY TO USE THE WHOLE RANGE OF THE SCALE WHEN RATING THESE CHOICES.

Packaged salad mix

Profile 1



Profile 2

Buffer Zones: Sufficient in sizeTobacco Sprays: AllowedLabelling: <70%Price: $2.25/200g


Profile 3

Buffer Zones: No requirementsTobacco Sprays: AllowedLabelling: <70%Price: $2.25/200g


Profile 4

Buffer Zones: No requirementsTobacco Sprays: AllowedLabelling: 70-95%Price: $5.25/200g


Profile 5

Buffer Zones: No requirementsTobacco Sprays: ProhibitedLabelling: 70-95%Price: $2.25/200g

Profile 6

Buffer Zones: No requirementsTobacco Sprays: ProhibitedLabelling: <70%Price: $3.75/200g

266



Profile 7

Buffer Zones: Sufficient in sizeTobacco Sprays: AllowedLabelling: 70-95%Price: $3.75/200g


Profile 8

Buffer Zones: Sufficient in sizeTobacco Sprays: ProhibitedLabelling: 70-95%Price: $2.25/200g


Profile 9

Buffer Zones: No requirementsTobacco Sprays: ProhibitedLabelling: <70%Price: $2.25/200g


Profile 10

Buffer Zones: No requirementsTobacco Sprays: AllowedLabelling: 70-95%Price: $2.25/200g


267

The following section of the survey will ask some questions regarding the organic industry within Canada and as well as some socio-economic questions.

1. Does Canada have a national organic standard? (Please circle your response)

a. Yes b. No c. Don’t know

If you answered Yes to Question 1, proceed with Question 2, otherwise go to Question 3.

11.From the scenarios described on pages 3-6 can you identify the Canadian standard?

a. Yes, Scenario____ b. No

12.If you were faced with three packages of organic salad, one from the US, one from the EU and one from Canada, which would you prefer? And why?

a. EU b. CAN c. US

Why?___________________________________________________________________________________________________________________

13.Gender: □ male □ female

14.Are you the primary shopper in your household? (Please circle the correct response)

a. Yes b. No

15.Please circle your appropriate age group:a. Under 20 yearsb. 20-29 years

268

c. 30-39 yearsd. 40-49 yearse. 50-59 yearsf. over 60

16.Household Income Level Before Taxes (per year): please circle the appropriate letter.

a. under $20,000b. $20,000-39,000c. $40,000-59,000d. $60,000-79,000e. $80,000-99,000f. $100,000-119,000g. $120,000-139,000h. $140,000-169,000i. $170,000-199,000j. over $200,000

17.Highest level of education obtained (circle one):a. Less than grade 9b. Grade 9 to 13c. High school graduated. Technical schoole. College diplomaf. Bachelor’s degreeg. Master’s degreeh. Doctorate degree

18.The following statements make claims regarding the properties of organic food. Please indicate whether you agree or disagree with each statement.

a. Organic food is not genetically modified. □ agree □ disagree □ don’t know

b. Organic food is not irradiated. □ agree □ disagree □ don’t know

c. Organic food is locally grown.□ agree □ disagree □ don’t know

d. Organic meat is produced in an animal welfare friendly manner.□ agree □ disagree □ don’t know

e. Food labeled “natural” is organic. □ agree □ disagree □ don’t know

19.The following statements make claims regarding certified organic and organic food. Please indicate whether you agree or disagree with each statement.

a. “Certified organic” products are certified by an independent third party (i.e. certification agency).


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b. All organic certification agencies have been accredited by a national government program.

□ agree □ disagree □ don’t knowc. All organic food is certified.

□ agree □ disagree □ don’t knowd. Certified organic food is superior to organic food.


Thank you for your participation! Please feel free to make any comments on organic food or this survey in the space provided.

APPENDIX B

Table B.1 - Canada Survey ResultsDoes Canada have a

national organic standard?

Percentage of Respondents

Yes 26%No 22%

Don’t know 52%From which country

would you prefer your organic product?

US 3%Canada 76%

EU 15%No preference 4%

Table B.2 - Knowledge of Canadian RespondentsStatement Agree Disagree Don’t

Know1 62.6% 19.5% 17.8%2 55.2% 8.6% 36.2%3 21.3% 70.7% 8.0%4 56.3% 17.2% 26.4%5 4.6% 86.8% 8.6%6 65.1% 8.0% 26.9%7 20.0% 26.3% 53.7%8 9.7% 69.1% 21.1%9 28.6% 32.6% 38.9%

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Table B.3 - US Survey ResultsDoes the US have a national organic standard?


Yes 29.4%No 39.2%

Don’t know 31.4%From which country would you prefer your organic product?

US 54.2%Canada 8.3%

EU 29.2%No preference 8.3%

Table B.4 - Knowledge of US RespondentsStatement Agree Disagree Don’t

Know1 74.0% 12.0% 14.0%2 26.0% 14.0% 22.0%3 6.0% 88.0% 6.0%4 34.7% 32.7% 32.7%5 2.0% 90.2% 7.8%6 47.1% 9.8% 43.1%7 7.8% 45.1% 47.1%8 11.8% 66.7% 21.5%9 19.6% 49.0% 31.4%

Table B.5 - UK Survey ResultsDoes the UK have a national organic standard?


Yes 58.6%No 12.1%

Don’t know 29.3%From which country

would you prefer your organic product?

US 0.0%Canada 1.0%

UK 93.1%

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No preference 5.9%

Table B.6 - Knowledge of UK RespondentsStatement Agree Disagree Don’t

Know1 76.2% 10.9% 12.9%2 67.3% 9.9% 22.8%3 24.8% 71.3% 4.0%4 71.0% 10.0% 19.0%5 3.0% 90.1% 6.9%6 58.4% 9.9% 31.7%7 31.7% 28.7% 39.6%8 20.8% 58.4% 20.8%9 31.7% 36.6% 31.7%

APPENDIX C

Table C.1 - Canadian Consumer Preferences for Organic Bagged Salad StandardsAttributes and levels Estimated

Part-worthsAttribute

Importance (%)Buffer Zones No requirements -.9944 Sufficient in size .9944 22.78Tobacco Sprays Allowed -1.1417 Prohibited 1.1417 28.65Labelling <70% -.8889 70-95% .8889 23.83Prices $2.25/200g .6704 $3.75/200g -.1380 24.75 $5.25/200g -.5324

Table C.2 - US Consumer Preferences for Organic Bagged Salad StandardsAttributes and levels Estimated


Importance (%)Buffer Zones No requirements -1.1739 Sufficient in size 1.1739 27.07Tobacco Sprays Allowed -.6196 Prohibited .6196 22.66

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Labelling <70% -1.1848 70-95% 1.1848 27.33Prices $1.20/5oz .5652 $1.89/5oz .1304 22.94 $2.58/5oz -.6957

Table C.3 - UK Consumer Preferences for Organic Bagged Salad StandardsAttributes and levels Estimated


Importance (%)Buffer Zones No requirements -1.0969 Sufficient in size 1.0969 30.57Tobacco Sprays Allowed -.6327 Prohibited .6327 20.48Labelling <70% -.8214 70-95% .8214 22.81Prices $1.20/5oz .4218 $1.89/5oz .1514 26.14 $2.58/5oz -.5731

Table C.4 - Canadian Consumer Preferences for Organic Beef StandardsAttributes and levels Estimated


Importance (%)Source of Cattle No non-organic .5478 Up to 40% non -.5478 20.19Use of Fish Feeds Allowed -.9775 Prohibited .9775 24.74Use of Antibiotics Allowed -1.2388

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Prohibited 1.2388 29.83Prices $7.00/kg .6667 $9.00/kg -.0552 25.24 $11.00/kg -.6114

Table C.5 - US Consumer Preferences for Organic Beef StandardsAttributes and levels Estimated


Importance (%)Source of Cattle No non-organic .7500 Up to 40% non -.7500 19.75Use of Fish Feeds Allowed -.9800 Prohibited .9800 24.15Use of Antibiotics Allowed -1.3600 Prohibited 1.3600 30.83Prices $1.49/lb .7867 $3.49/lb .0667 25.26 $5.49/lb -.8533

Table C.6 - UK Consumer Preferences for Organic Beef StandardsAttributes and levels Estimated


Importance (%)Source of Cattle No non-organic .5182 Up to 40% non -.5182 20.10Use of Fish Feeds Allowed -.6641 Prohibited .6641 20.91Use of Antibiotics Allowed -.7474 Prohibited .7474 27.27

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Prices £5.15/kg .6632 £7.15/kg .0226 31.72 £9.15/kg -.6858

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