Potato Demand in an Potato Demand in an Increasingly Organic WorldIncreasingly Organic World

UW Extension & WPVGA Grower UW Extension & WPVGA Grower ConferenceConference

February 7, 2008February 7, 2008

Ming-Feng Hsieh, Paul D. Ming-Feng Hsieh, Paul D. Mitchell, and Kyle StiegertMitchell, and Kyle StiegertAgricultural and Applied EconomicsAgricultural and Applied Economics

University of Wisconsin-MadisonUniversity of Wisconsin-Madison

The Increasingly Organic The Increasingly Organic Marketplace Marketplace

Annual growth rate in organic food sales has Annual growth rate in organic food sales has been about 20% since 2000been about 20% since 2000

$13.8 billion in 2005, 2.5% of food sales$13.8 billion in 2005, 2.5% of food sales Wal-mart and Target have made major Wal-mart and Target have made major

moves into selling organic foodsmoves into selling organic foods Over half of organic food sales now are Over half of organic food sales now are

through conventional retailersthrough conventional retailers Farm Bill has increased funding for organicsFarm Bill has increased funding for organics

Increased certification/transition cost shareIncreased certification/transition cost share Expanded research, market data, export helpExpanded research, market data, export help

2.48%

2.19%

1.94%

1.63%

1.41%

1.22%1.06%

0.94%0.81%

0

2

4

6

8

10

12

14

16

18

20

1997 1998 1999 2000 2001 2002 2003 2004 2005

Org

anic

Fo

od

Sal

es

($ B

illio

ns)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Org

anic

Pen

etr

atio

n R

ates

(%

)

Organic Food Sales

Organic Penetration Rates

Where do potatoes fit in?Where do potatoes fit in?

Fresh fruits and vegetables the most Fresh fruits and vegetables the most commonly purchased organic foodcommonly purchased organic food 39% of organic food sales in 200539% of organic food sales in 2005 Top vegetables: lettuce, tomato, broccoli, Top vegetables: lettuce, tomato, broccoli,

onion, onion, potatopotato Retail price premiums for organic Retail price premiums for organic

potatoes are larger than for other fresh potatoes are larger than for other fresh vegetablesvegetables Potato premium averaged 75% (1999-2003)Potato premium averaged 75% (1999-2003) Other vegetables: 20%-30%Other vegetables: 20%-30%

Current Organic Price Current Organic Price PremiumsPremiums

USDA-AMS Wholesale PricesUSDA-AMS Wholesale PricesRusset Russet (70 ct (70 ct

carton)carton)Red A Red A (50 lbs)(50 lbs)

orgnorgncc

convconv prepremm

orgnorgncc

convconv prepremm

BostonBoston 34.2534.25 19.0019.00 80%80% 45.0045.00 25.0025.00 80%80%

ChicagoChicago 22.0022.00 17.0017.00 29%29% 29.5029.50 14.0014.00 111%111%

PhiladelphiaPhiladelphia 34.2534.25 17.0017.00 101%101% 45.0045.00 25.0025.00 80%80%

San San FranciscoFrancisco

27.0027.00 14.5014.50 86%86% 37.0037.00 21.0021.00 76%76%

SeattleSeattle 27.9527.95 16.5016.50 69%69% 29.5029.50 20.0020.00 48%48%

Source: Rodale Institute: Source: Rodale Institute: www.newfarm.org/opxwww.newfarm.org/opx

The IssueThe Issue

What is the effect of this growing What is the effect of this growing organic sector on potato demand?organic sector on potato demand? Is it big enough to matter yet?Is it big enough to matter yet? Which potato products are most at risk?Which potato products are most at risk?

What is the source of the large price What is the source of the large price premium for organic potatoes?premium for organic potatoes? Is it due to unusually high demand?Is it due to unusually high demand? Is it a supply (cost of production) effect? Is it a supply (cost of production) effect?

Method of AnalysisMethod of Analysis Econometric model of U.S. potato demandEconometric model of U.S. potato demand Simultaneous equations estimating price Simultaneous equations estimating price

and quantity sold in large super markets, and quantity sold in large super markets, using:using: Prices and quantities of these goods and Prices and quantities of these goods and

related goods (pasta, bread, vegetables)related goods (pasta, bread, vegetables) Income and demographics (age, race)Income and demographics (age, race) Supply effects: interest rate, various Supply effects: interest rate, various

producer price indexes, potato acreagesproducer price indexes, potato acreages

Demand SystemDemand System Seven different potato productsSeven different potato products Fresh Potato varietiesFresh Potato varieties

Russet, red, white, minor colored, organicRusset, red, white, minor colored, organic Minor colored: yellow/Yukon, blue, purple, Minor colored: yellow/Yukon, blue, purple,

fingerlings, etc.fingerlings, etc. Processed potatoesProcessed potatoes

Dehydrated and frozen & refrigeratedDehydrated and frozen & refrigerated Missing chips: snack food, not mealMissing chips: snack food, not meal

First demand system by potato varietyFirst demand system by potato variety

DataData

Aggregate quarterly (2000-2005) AC Aggregate quarterly (2000-2005) AC Nielsen large supermarket sales dataNielsen large supermarket sales data Total quantity and expenditureTotal quantity and expenditure Mac Johnson US Potato BoardMac Johnson US Potato Board

4 regions, 24 quarters = 96 4 regions, 24 quarters = 96 observations for each potato observations for each potato variety/categoryvariety/category

About 45% of domestic consumptionAbout 45% of domestic consumption About 82% of “at-home” consumptionAbout 82% of “at-home” consumption

potato chips10.00%

russet14.51%

dehydrated5.52%

red3.79%

white2.69%minor colored

1.04%

frozen & refrigerated17.38%

organic0.05%

away from home45.00%

ResultsResults

Report each effect as an “elasticity”Report each effect as an “elasticity” How responsive quantity demanded How responsive quantity demanded

is to changes in different factorsis to changes in different factors Unitless: Ratio of % changesUnitless: Ratio of % changes

Example: own price elasticity = – 0.5 Example: own price elasticity = – 0.5 means a 1% increase in own price means a 1% increase in own price decreases quantity demanded by decreases quantity demanded by 0.5%0.5%

russetrusset whitewhite redred mnr clrmnr clr organiorganicc

frzn/frzn/rfrgrfrg

dehydehy

russetrusset -1.38-1.38 -0.95-0.95 -0.16-0.16 -0.76-0.76 0.040.04 0.150.15 2.902.90whitewhite -0.11-0.11 -0.55-0.55 -0.17-0.17 0.930.93 -3.16-3.16 0.400.40 0.380.38redred -0.21-0.21 -0.29-0.29 -0.86-0.86 0.380.38 2.752.75 0.060.06 -0.13-0.13mnr clrmnr clr -0.34-0.34 0.060.06 0.020.02 -1.62-1.62 -1.52-1.52 -0.46-0.46 0.970.97organiorganicc

-0.01-0.01 -0.06-0.06 0.050.05 -0.08-0.08 -1.36-1.36 0.000.00 -0.02-0.02

frzn/frzn/rfrgrfrg

-1.69-1.69 0.510.51 -0.39-0.39 -7.43-7.43 0.050.05 -0.10-0.10 -2.76-2.76

dehydehy -1.09-1.09 -0.78-0.78 -1.55-1.55 3.863.86 -3.92-3.92 -1.45-1.45 -3.99-3.99

Own and Cross Price Own and Cross Price ElasticitiesElasticities

InterpretationInterpretation Own price elasticities are negative: price Own price elasticities are negative: price

goes up, demand goes downgoes up, demand goes down Cross price elasticities: Positive means Cross price elasticities: Positive means

substitutes, Negative means substitutes, Negative means complementscomplements

Most are negative (complements) Most are negative (complements) meaning potato varieties move togethermeaning potato varieties move together

Substitutes: Reds for organics, Russets Substitutes: Reds for organics, Russets and minor colored for dehydrated, and minor colored for dehydrated, whites for frozen/refrigeratedwhites for frozen/refrigerated

Not much significant for organicsNot much significant for organics

potato potato expndexpnd

incomincomee

rice-rice-pastapasta

breadbread fresh fresh vegveg

procd procd vegveg

foodfood

russetrusset 3.063.06 5.675.67 -15.8-15.8 6.536.53 -0.52-0.52 5.065.06 -8.30-8.30whitewhite 2.132.13 3.953.95 -11.0-11.0 4.554.55 -0.36-0.36 3.523.52 -5.78-5.78redred 1.401.40 2.592.59 -7.19-7.19 2.982.98 -0.24-0.24 2.302.30 -3.79-3.79mnr clrmnr clr 0.050.05 0.090.09 -0.24-0.24 0.100.10 -0.01-0.01 0.080.08 -0.13-0.13organicorganic 1.091.09 2.022.02 -5.63-5.63 2.332.33 -0.19-0.19 1.801.80 -2.96-2.96frzn/rfrgfrzn/rfrg 0.160.16 0.290.29 -0.81-0.81 0.330.33 -0.03-0.03 0.260.26 -0.42-0.42dehydehy -2.46-2.46 --

4.564.5612.712.7

00-5.25-5.25 0.420.42 -4.07-4.07 6.686.68

Income & Other Cross Price Income & Other Cross Price ElasticitiesElasticities

InterpretationInterpretation

If spend more money on potatoes or have more If spend more money on potatoes or have more money to spend, buy russets, whites, then redsmoney to spend, buy russets, whites, then reds Organics (and minor colored) not significantOrganics (and minor colored) not significant

Potato complements: Rice/Pasta and FoodPotato complements: Rice/Pasta and Food Potato substitutes: Bread and Processed Potato substitutes: Bread and Processed

VeggiesVeggies Dehydrated opposite all theseDehydrated opposite all these Fresh vegetable prices not affect potato Fresh vegetable prices not affect potato

demanddemand

Organic Penetration Organic Penetration ElasticityElasticity

easteast centracentrall

southsouth westwest avgavg

russetrusset -0.30-0.30 -0.45-0.45 -0.26-0.26 -0.43-0.43 -0.36-0.36

whitewhite -0.99-0.99 -0.46-0.46 -0.49-0.49 -0.58-0.58 -0.63-0.63

redred -1.63-1.63 -1.90-1.90 -1.79-1.79 -2.31-2.31 -1.91-1.91

mnr mnr clrclr

5.415.41 7.677.67 6.866.86 7.947.94 6.976.97

organiorganicc

6.276.27 8.538.53 7.677.67 9.899.89 8.098.09

MADMAD 0.810.81 0.280.28 0.180.18 0.660.66

InterpretationInterpretation

As proportion of food sales that are As proportion of food sales that are for organic foods increases:for organic foods increases: Organic potato demand increases Organic potato demand increases

greatly, as does demand for minor greatly, as does demand for minor coloredcolored

Red potato demand decreasesRed potato demand decreases Some erosion of demand for white Some erosion of demand for white

and russet potatoes as welland russet potatoes as well Typically smaller effects in south and Typically smaller effects in south and

central, larger in west and eastcentral, larger in west and east

Source of Organic Price Source of Organic Price PremiumsPremiums

Price Premium Explanatory Power: % Price Premium Explanatory Power: % VariationVariationrussetrusset whitewhite redred minorminor

Regional/Regional/SeasonalSeasonal

16.9%16.9% 28.328.3%%

20.6%20.6% 23.1%23.1%

Demand FactorsDemand Factors 19.1%19.1% 18.518.5%%

24.1%24.1% 23.0%23.0%

Supply FactorsSupply Factors 11.4%11.4% 7.7%7.7% 11.9%11.9% 10.2%10.2%

Joint Dmd/SupJoint Dmd/Sup 26.9%26.9% 23.923.9%%

14.6%14.6% 14.1%14.1%

UncontrolledUncontrolled 25.7%25.7% 21.721.7%%

28.8%28.8% 29.5%29.5%

Ratio Dmd/SupRatio Dmd/Sup 1.681.68 2.402.40 2.032.03 2.252.25

InterpretationInterpretation

More of the variation in organic potato More of the variation in organic potato price premiums can be explained by price premiums can be explained by demand factors rather than supply demand factors rather than supply factorsfactors

Strong consumer demand and retailer Strong consumer demand and retailer attention more important than attention more important than production costs and seasonal & regional production costs and seasonal & regional factorsfactors

Not saying organic insulated from laws of Not saying organic insulated from laws of supply and demandsupply and demand

Summary/ConclusionSummary/Conclusion

What is the effect of this growing organic What is the effect of this growing organic sector on potato demand?sector on potato demand? Good for specialty/premium potatoesGood for specialty/premium potatoes Cutting into demand for reds, some Cutting into demand for reds, some

evidence for whites too; russets most evidence for whites too; russets most resistantresistant

What is the source of the large price What is the source of the large price premium for organic potatoes?premium for organic potatoes? Continually strong and growing consumer Continually strong and growing consumer

demand has been the dominate sourcedemand has been the dominate source

Questions?Questions?

Paul D. MitchellPaul D. Mitchell

Office: (608) 265-6514Office: (608) 265-6514

Email: pdmitchell@wisc.eduEmail: pdmitchell@wisc.edu

Agricultural and Applied EconomicsAgricultural and Applied Economics

University of Wisconsin-MadisonUniversity of Wisconsin-Madison