Policy in Action: Policy in Action: AMS Involvement AMS Involvement in Differentiating in Differentiating

Food and Food and Agricultural Agricultural

MarketsMarketsKenneth C. ClaytonKenneth C. Clayton

Agricultural Marketing ServiceAgricultural Marketing ServiceUnited States Department of United States Department of

AgricultureAgriculture

Issue as FramedIssue as Framed

““. . . problems of asymmetric information . . . problems of asymmetric information can be solved either by private sector can be solved either by private sector initiative . . . or by government initiative . . . or by government intervention . . .”intervention . . .”

““A government solution may fail . . . Even a A government solution may fail . . . Even a well-meaning government may not be able well-meaning government may not be able to figure out ‘true’ consumer preferences.”to figure out ‘true’ consumer preferences.”

““. . . the government-backed standard may . . . the government-backed standard may be difficult to adapt to a new situation.”be difficult to adapt to a new situation.”

Agricultural Standards Agricultural Standards ContextContext

Agricultural commodity Agricultural commodity standardsstandards and their and their applicationapplication are distinctly different thingsare distinctly different things

Standards in contemporary context Standards in contemporary context include both traditional agricultural include both traditional agricultural productproduct commodity standardscommodity standards and agricultural and agricultural production production processprocess standards standards

Agricultural Commodity Agricultural Commodity Standards Standards

Relate to “search” attributesRelate to “search” attributes Simply language for commercial tradeSimply language for commercial trade Primarily used by private sector to facilitate Primarily used by private sector to facilitate

commercecommerce Reduce transactions costsReduce transactions costs Usage may promote fairness and equityUsage may promote fairness and equity Benchmark for differentiated, branded productsBenchmark for differentiated, branded products

Agricultural Commodity Agricultural Commodity Standards - Federal Standards - Federal

Government ApplicationGovernment Application Find wide application in voluntary, user-pays Find wide application in voluntary, user-pays

grading services offered by Federal governmentgrading services offered by Federal government Find application in private marketing claims, Find application in private marketing claims,

some of which are certified by Federal some of which are certified by Federal government through voluntary, user-pays government through voluntary, user-pays certification servicescertification services

Find application in certain Federal government Find application in certain Federal government regulatory programs intended to 1) support regulatory programs intended to 1) support cooperative marketing and 2) protect market cooperative marketing and 2) protect market participants from fraudulent and deceptive participants from fraudulent and deceptive practicespractices

Agricultural Production Agricultural Production Process StandardsProcess Standards

Relate to “credence” attributesRelate to “credence” attributes Private sector marketing claims Private sector marketing claims

increasingly based on verification of increasingly based on verification of agricultural production processesagricultural production processes

Federal government verification sought Federal government verification sought in some casesin some cases Regulatory in certain casesRegulatory in certain cases Voluntary, user-pays verification service in most Voluntary, user-pays verification service in most

cases cases

Re-Framing the IssueRe-Framing the Issue

What role ought government play in What role ought government play in differentiating food products?differentiating food products? Private marketPrivate market Government regulatory interventionGovernment regulatory intervention Private market with government Private market with government

facilitation (non-regulatory)facilitation (non-regulatory)

Re-Framing the IssueRe-Framing the Issue

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

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

Current Situation - USDA Current Situation - USDA Commodity Grade Commodity Grade

StandardsStandards 600 product descriptions - basis for quality 600 product descriptions - basis for quality

differentiationdifferentiation Developed and modified at producer, Developed and modified at producer,

processor, retailer, consumer requestprocessor, retailer, consumer request Some use at retail; widest application Some use at retail; widest application

earlier in marketing chainearlier in marketing chain Use not mandated by Federal governmentUse not mandated by Federal government Mandatory application per some Federal Mandatory application per some Federal

fruit & vegetable marketing order fruit & vegetable marketing order regulationsregulations

AMS Maintains Standards AMS Maintains Standards for for

600 Commodities600 Commodities

Broadening Government Broadening Government Role in Commodity Role in Commodity

StandardsStandards Industry-led consensus standards Industry-led consensus standards International standards International standards

organizationsorganizations Development of open, digital Development of open, digital

standardsstandards

Current Situation - USDA Current Situation - USDA Grading ServicesGrading Services

Continued extensive use Continued extensive use Innovations in service deliveryInnovations in service delivery

InstrumentationInstrumentation AutomationAutomation Electronic certificatesElectronic certificates

Demand for grading services as Demand for grading services as quality control by large firmsquality control by large firms

Current Situation - Current Situation - Certification ProgramsCertification Programs

Rely on end product examinationRely on end product examination Voluntary, user-pays fundedVoluntary, user-pays funded Specifications developed by private Specifications developed by private

companies -often benchmark on companies -often benchmark on USDA grade standardsUSDA grade standards

AMS Certification AMS Certification ProgramsPrograms

Benefits of USDA Benefits of USDA Grading and CertificationGrading and Certification

PrivatePrivate Mechanism to differentiate productsMechanism to differentiate products Reduced development costsReduced development costs Low cost, trained nationwide work forceLow cost, trained nationwide work force

PublicPublic Reduced cumulative development costsReduced cumulative development costs Efficient allocation of labor resourcesEfficient allocation of labor resources Reduced entry barriers in consolidated Reduced entry barriers in consolidated

industriesindustries

Current Situation - Current Situation - Production Process Production Process

StandardsStandards Relate to “credence” attributesRelate to “credence” attributes Audit of production processes rather than Audit of production processes rather than

inspection of end productsinspection of end products Prescriptive in 3 cases: 1) organic standards, Prescriptive in 3 cases: 1) organic standards,

2) certain livestock marketing claims (e.g., no 2) certain livestock marketing claims (e.g., no antibiotics, free range, grain fed), and 3) antibiotics, free range, grain fed), and 3) foreign government requirements (e.g, BEV foreign government requirements (e.g, BEV for Canada, Mexico, Japan)for Canada, Mexico, Japan)

Mainly, USDA assists industry in supporting Mainly, USDA assists industry in supporting theirtheir claims - based on adherence to ISO claims - based on adherence to ISO quality system protocolsquality system protocols

AMS Process Verification AMS Process Verification ProgramsPrograms

Benefits of USDA Process Benefits of USDA Process Verification ProgramsVerification Programs

Maintains ISO principle of separation of Maintains ISO principle of separation of program design and verificationprogram design and verification Private entities develop verifiable programs Private entities develop verifiable programs

to support marketing claimsto support marketing claims USDA audits programs to verify complianceUSDA audits programs to verify compliance

Provides marketing cachet of USDA sealProvides marketing cachet of USDA seal Provides mechanism for product Provides mechanism for product

differentiation according to credence differentiation according to credence attributesattributes

What Role Ought Government What Role Ought Government Play in Development of Play in Development of

Commodity and/or Production Commodity and/or Production Process Standards?Process Standards?

USDA standards are either useful or not USDA standards are either useful or not USDA standards can be reflective of “true” USDA standards can be reflective of “true”

consumer preferencesconsumer preferences USDA standards provide a basis for USDA standards provide a basis for

product differentiationproduct differentiation USDA standards can address market USDA standards can address market

failure due to asymmetric information and failure due to asymmetric information and reduce transactions costs depending on usereduce transactions costs depending on use

What Role Ought Government What Role Ought Government Play in Application of Play in Application of

Commodity and/or Production Commodity and/or Production Process Standards?Process Standards?

This is the more pertinent questionThis is the more pertinent question Regulatory or prescriptive applications fair Regulatory or prescriptive applications fair

game as to whether market failure game as to whether market failure (asymmetric information, public good) or (asymmetric information, public good) or social welfare bases justifiedsocial welfare bases justified

Voluntary, user-pays applications reduce Voluntary, user-pays applications reduce transactions costs and facilitate marketingtransactions costs and facilitate marketing