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USA – GM AND ORGANIC LABELLING STUDY
28 September 2006. Source: AgBioForum (Volume 9, Number 2, Article 3)
University of Nebraska-Lincoln. Konstantinos Giannakas and Amalia Yiannaka
http://www.agbioforum.org/v9n2/v9n2a03-giannakas.htm
Agricultural biotechnology and organic agriculture: National organic standards and
labeling of GM products
The National Organic Program, introduced in 2002, has explicitly linked the markets for organic and genetically modified (GM) products through the provision that organic-labeled food should be free of GM ingredients. This paper models the demand links between the organic, GM, and conventional products and analyzes the market and welfare effects of the introduction of labels for products of biotechnology under the new organic standards.
The introduction of genetically modified products (GMPs) into the food system and the significant growth of organic agriculture are among the most notable features of the increasingly industrialized agri-food sector. They have both received considerable attention in the economics literature with the main focus being on the optimal regulatory responses as they relate to the introduction of standards for, and labeling of, genetically modified (GM) and organic food products.
Labeling of GMPs has been a contentious issue sparking an ongoing international
debate among parties holding significantly different views on the need for regulation of products of biotechnology. Whereas the United States has argued the "substantial equivalence" of first-generation GMPs to their conventional counterparts and has been opposing the labeling of such products, the European Union advocates mandatory labeling of GMPs based on its "precautionary principle" and a vocal consumer opposition rooted in concerns about the health and environmental effects of products of biotechnology.1
Regarding the organic sector, the process of establishing national standards for organic food in the United States generated a significant public response, with the dialogue among interest groups extending over a good part of the last decade. The demands for national organic standards were satisfied in 2002 with the introduction of the National Organic Program (NOP). In addition to instituting uniform standards for organic-labeled food, an important feature of NOP is that it explicitly links the markets for organic and GM products. In particular, one of the NOP provisions is that food labeled as organic should be free of GM ingredients.2
Given the credence nature of the first-generation GM products and the consequent inability of the American consumer to observe the type of the product (i.e., GM versus conventional) under the current no-labeling regime, the introduction of NOP can be expected to have important ramifications for the markets of GM, conventional, and organic food products. The reason is that under the current regulatory framework, purchase of organic products provides the main option available to consumers exhibiting a preference for non-GM food—the NOP has made the organic label equivalent to a "non-GM" label.3
Interestingly, although the maintenance of the current no-labeling regime appears advantageous for the organic sector, a number of prominent organic industry associations, such as the Organic Trade Association, advocate the introduction of labels for products of biotechnology (see http://www.ota.com/pp/otaposition/geos.html).
The objective of this paper is to model the demand links between the organic, GM, and conventional food products and systematically analyze the market and consumer welfare effects of a change in the labeling regime for products of biotechnology in the presence of NOP. In analyzing the ramifications of the introduction of labels for GMPs, the paper compares and contrasts consumer purchasing decisions and welfare under (a) no labeling and (b) mandatory labeling of GM products.
The study builds on previous work by Giannakas (2002) and Giannakas and Fulton (2002) that examine the effects of different regulatory and labeling regimes in markets for organic and GM products, respectively.4
Although these studies have examined the two markets in isolation, this paper explicitly considers the demand links between the GM and organic food product markets created by the new regulation governing the organic sector.
In analyzing the market and welfare effects of labeling the GM products in the presence of NOP, this paper explicitly accounts for differences in consumer preferences for GM, conventional, and organic food products. Consumer heterogeneity in terms of preferences for different food products is a key component in our model, and it is critical in explaining the coexistence of markets for products with different process attributes (i.e., produced through different production processes).
The rest of the paper is organized as follows. The next section presents a simple model of heterogeneous consumer preferences for GM, conventional, and organic food products. The sections following analyze consumer purchasing decisions and welfare with and without labeling of GMPs and determine the market and welfare effects of the introduction of labels for GMPs. The final section summarizes and concludes the paper.
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