Working Paper Series FSWP Ming-Feng Hsieh University of Wisconsin-Madison. Paul D. Mitchell University of Wisconsin-Madison

Transcription

1 Workng Paper Seres FSWP DEMAND FOR ORGANIC AND CONVENTIONAL POTATOES Mng-Feng Hseh Unversty of Wsconsn-Madson Paul D. Mtchell Unversty of Wsconsn-Madson Kyle W. Stegert Unversty of Wsconsn-Madson We nvestgate prcng and demand ssues for four fresh potato categores (russet, red, whte, and mnor colored), organc fresh potatoes, and two processed potato categores (frozen/refrgerated and dehydrated) usng a nonlnear generalzed almost deal demand system (GAIDS) that s closed under unt scalng (CUUS). We dentfy fve major fndngs. Frst, we found lttle evdence for potato demand dfferences among the four U.S. regons n our study (east, west, north, and south). Second, ncreased consumer preferences for organc food consumpton have caused prce declnes for red, russet and mnor colored potatoes whle organc potato prces rose sgnfcantly. Thrd, whte potatoes emerged from the study as apparently the non-organc category most able to compete n an ncreasngly organcallyorented market. Fourth, potatoes as an aggregate commodty are nferor good, wth perhaps the excepton beng the mnor colored potatoes. Ffth, the potato market competes wth other carbohydrate groups. In partcular, we fnd strong statstcal support that lower bread or frozen vegetables prces mplyng reduced system expendtures on potatoes and for dehydrated potato demand beng senstve to competng carbohydrate prces. Keywords: carbohydrate, closed under unt scalng (CUUS), demographc demand factors, generalzed almost deal demand system (GAIDS), organc, potato, vegetable. Food System Research Group Unversty of Wsconsn-Madson February 2007

2 Correspondng author: Kyle W. Stegert Ths research was supported by a USDA grant to the Food System Research Group, Unversty of Wsconsn, Madson. FSRG Workng Papers are publshed wth the ntenton of provokng dscusson and helpng drve future work. The papers are formatted to conform wth other workng papers but are not formally edted. All vews, nterpretatons, recommendatons, and conclusons expressed are those of the authors and not necessarly those of the supportng or cooperatng nsttutons. Authors are lsted alphabetcally; senor authorshp s not assgned. Hseh s a Research Assstant, Mtchell s an Assstant Professor and Stegert s an Assocate Professor, all wth the Department of Agrcultural and Appled Economcs, Unversty of Wsconsn-Madson. The authors would lke to thank Bran Gould for numerous comments that asssted n the development of the research and Mac Johnson of the U.S. Potato Board for supplyng key data used for ths study. Copyrght by the authors. All rghts reserved. Readers may make verbatm copes of ths document for noncommercal purposes by any means, provded that ths copyrght notce appears on all such copes.

3 Contents Page INTRODUCTION 5 A MODIFIED GAIDS MODEL WITH PRICE AND EXPENDITURE EQUATIONS 7 DATA DESCRIPTION 10 ESTIMATION AND RESULTS 11 CONCLUDING REMARKS 15 REFERENCES 17 REVIEWER S APPENDIX 28 Tables and Fgures TABLE 1. DESCRIPTIVE STATISTICS OF VARIABLES USED FOR ESTIMATION 19 TABLE 2. NONLINEAR GAIDS PARAMETER ESTIMATES FOR EXPENDITURE SHARE EQUATIONS 20 TABLE 3. NONLINEAR GAIDS PARAMETER ESTIMATES FOR PRICE EQUATIONS 21 TABLE 4. NONLINEAR GAIDS PARAMETER ESTIMATES OF EXPENDITURE EQUATION: LN(E) 22 TABLE 5. UNCOMPENSATED OWN AND CROSS-PRICE ELASTICITIES 23 TABLE 6. EXPENDITURE, INCOME, AND OTHER CROSS-PRICE ELASTICITIES 24 FIGURE 1. ORGANIC FOOD SALES AND PENETRATION RATES IN THE U.S., FIGURE 2. AVERAGE U.S. POTATO CONSUMPTION PATTERN, FIGURE 3. CONSUMPTION TREND ON ORGANIC POTATOES IN THE U.S., TABLE A. COMPENSATED OWN AND CROSS-PRICE ELASTICITIES 30

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5 Demand for Organc and Conventonal Potatoes INTRODUCTION The U.S. organc food ndustry grew at nearly 20% annually over the past decade. The Organc Trade Assocaton (2006) reports that sales of organc foods reached $13.8 bllon n 2005 and accounted for 2.5% of total U.S. food sales (Fgure 1). Sales of organc foods through natural food channels such as Whole Foods Market and Wld Oats ncreased through much of the 1990s and peaked at 68% of total organc sales n By 2005, the market share of natural food channels had dropped to 47% of sales wth conventonal food retalers takng larger chunks of the growng market. Indeed, conventonal retalers had ncreased ther share from 33% n 1995 to about 46% n The transton of organc food dstrbuton s expected to contnue, as Wal-Mart, the naton s largest grocer, and Target have announced a major move nto marketng organc foods (Pollan, 2006; Mtchell, 2006). These and other retalers wll put downward pressure on organc food prces and help make them accessble and affordable to tens of mllons of Amercans who are currently not part of ths market. As the trend toward ncreased organc food sales contnues, understandng the market mpacts on competng food groups wll subsequently grow n mportance. Organc foods and beverages are avalable n nearly every category of food sold n the U.S. However, fresh fruts and vegetables are the most frequently purchased category of organc foods, 1 accountng for 39% of total organc food sales (Organc Trade Assocaton, 2006). Non-dary beverages and bread/grans are the second and thrd most popular categores. Among fresh vegetables, the top organc purchases are lettuce, tomato, broccol, onon, and potato. Organc prce premums vary by vegetable, wth the largest organc premums typcally for potatoes (Zhang, et al., 2006). From , the average organc potato prce was 75% hgher than the conventonal potato aggregate prce, compared to prce premums of 20%-30% for other organc vegetables (Dmtr and Greene, 2002). Ths paper nvestgates prcng and demand ssues characterzng current U.S. food at home (FAH) market for potatoes. Because potatoes are not a homogeneous good, we constructed a demand system wth a category for fresh organc potatoes, four categores of conventonal fresh potatoes (russet, whte, red, mnor-colored), and separate categores for frozen/refrgerated potatoes and for dehydrated potatoes. Organc and conventonal potato growers, processors, and retalers would beneft from an mproved understandng of the own and cross-prce elastctes among the varous types of potato products, as well as the effect of demographc factors, 1 Based on survey results, 73% of organc food purchasers make at least one purchase of a frut or vegetable per store vst (Whole Goods Market, 2004). 5

6 seasonalty, regonal dfferences, and supply shocks. For ths purpose, we estmate a nonlnear generalzed almost deal demand system (GAIDS), modfed to satsfy the closed under unt scalng (CUUS) property by approprately handlng external demand shfters (Alston, Chalfant and Pggott, 2001). We structure the model not only to evaluate the tradtonal compettve poston of organc potatoes va own- and cross-prce elastctes, but also ncluded a set of varables to capture the effects of the aggregate organc market on the demand and prcng of each potato category. Demand systems analyss typcally operates under the assumptons of expendture and prce exogenety. If ether (or both) of these assumptons does not hold, estmated parameters are based and nconsstent. Group expendture may be endogenous when household expendture allocatons are correlated between the goods of nterest and other goods outsde the group. Ths s lkely the case for our study, because demand for potatoes s correlated wth the consumpton of other carbohydrate products and vegetables (Rchards, Kagan and Gao, 1997; Zhang, et al., 2006). Because expendture data for carbohydrate products wthout potatoes were not avalable for our study, a comprehensve demand system ncludng all carbohydrate products was not feasble. To correct for probable smultanety bas on the expendture sde, we add an expendture equaton that ncludes as nstruments prce ndexes of carbohydrate products (rce, pasta, and breads) and fresh and processed vegetables. Regardng prce endogenety, Rchards, Kagan and Gao (1997) faled to reject prce exogenety n ther potato demand study. However, ther data were aggregated nto broad carbohydrate categores (potatoes, rce, bread, etc.) and ther test results are not overly surprsng, gven the ntra-store separaton of these tems n most supermarkets. In our study, the potental for sgnfcant strategc prcng behavor among the dfferent potato categores exsts. Smlarly, Dhar, Chavas and Gould (2003) found expendture and prce endogenety n a narrow, dsaggregated and dfferentated product group (branded soft-drnks). Thus, to address these ssues, n addton to the expendture equaton, we add a prce equaton for each category and ntroduce nstruments from a set of demographc translatng varables and from factors outsde the system but related to potato producton, storage and processng costs. Demand analyss of potatoes s rather sparse. 2 Gao, Rchards and Kagan (1997) developed a latent varable model to examne unobservable taste factors that mght have occurred n dfferent tme perods, usng two surveys collectng data on broad complex carbohydrate food categores (potato, bread, rce, pasta and corn). Ther key fndng shows that taste factors between the two surveys had a profound mpact on the demand for carbohydrates. Whle all own-prce elastctes were negatve and sgnfcant n both survey years, 14 of the 20 cross-prce elastctes n both 2 See Rchards, Kagan and Gao (1997) for revew of the lterature pror to

7 perods suggested carbohydrate groups were complements and the sx postve cross-prce elastctes were nsgnfcant n the latter survey perod. Rchards, Kagan and Gao (1997) used an LA/AIDS specfcaton to nvestgate the effect of relatve prces, expendtures, and a set of socoeconomc varables on starchy staple foods, ncludng fresh and frozen potatoes, rce, pasta, and breads, n a complex carbohydrate demand system. Usng data from 1970 to 1991, they found an own-prce Marshallan elastcty of 0.48 for fresh potato whle frozen potatoes exhbted postve own-prce elastcty of Estmated uncompensated cross-prce elastctes were mostly negatve and ranged from 6.46 to 0.055, once agan suggestng evdence of complementartes among these product lnes. As the authors pont out, these complementary relatonshps suggest complex carbohydrates may be companons n the dets of consumers (p. 63), though they do not suggest that these tems are purchased at the same tme. Ideally, estmatng substtuton and complementarty s best conducted usng transacton level data. Our current study comes only part-way n ths regard. Our data reman qute aggregated, but we break out fve fresh and two processed potato categores, consder quarterly consumpton perods, and allow regonal dfferences n consumpton patterns. The paper s organzed as follows. Secton 2 presents the modfed GAIDS model. Secton 3 contans an overvew of the data used n ths study. Secton 4 contans a dscusson of the estmaton process, regresson results, estmated elastctes, and key fndngs. Secton 5 provdes a summary, conclusons and drectons for future research. A MODIFIED GAIDS MODEL WITH PRICE AND EXPENDITURE EQUATIONS The AIDS model, orgnally suggested by Deaton and Muellbauer (1980), has been wdely appled to emprcal demand studes. The model s, however, not consstent wth the closed under unt scalng (CUUS) property when ncorporatng demand shfters n the tradtonal way. Parameter estmates, and thus elastctes, from an AIDS model wth demand shfters change dependng on the unts chosen for measurng quanttes. Followng a soluton suggested by Alston, Chalfant and Pggott (2001), we buld on the GAIDS model frst derved by Bollno (1987). The core of the GAIDS model s characterzed by the followng expendture share equatons: N pc E (1) w + + γ ln( p ) + β ln( E P ) where = α j j A, = 1,..., N, E E j= 1 w represents the share of good out of group expendture (E), p s the retal prce of E N j 1 good, c denotes the pre-commtted quantty of good, = E p = j c j denotes 7

8 supernumerary expendture, α, γ, and β are parameters, and P A s the prce ndex for the group of goods N (2) ln( PA ) = + α ln( p ) + γ jk ln( p j ) ln( pk ) = 1 N 1 δ. 2 N j= 1 k = 1 Satsfyng homogenety, addng-up, and symmetry requres these parameter restrctons: N (3) α = 1, β = 0, γ = 0 j, γ = γ j. = 1 N = 1 N = 1 j j j Besdes prces and expendture, demographc and/or socoeconomc varables are often ncluded n demand equatons. To mantan the CUUS property, these demand shfters ( Z 1,..., Z M ) are ncorporated to GAIDS model by makng each pre-commtted quantty a lnear functon of these shfters: M (4) c = c0 + λ mzm, = 1,..., N. m= 1 The resultng share equatons become: M = E E j = 1 p ( + ) N c m= mz 0 λ 1 m E (5) w + α + γ ln( p ) + β ln( E P ) j j A, = 1,..., N. Fnally, because expendture shares must sum to one, one of the share equatons s omtted from estmaton and ts parameters recovered usng the restrctons reported n equatons (3). As dscussed earler, prce and expendture endogenety problems can arse n demand estmaton. The standard procedure for correctng smultanety bas nvolves replacng prces and expendture n the share equatons by predcted values obtaned from the addtonal prce and expendture equatons. The prce equatons used n ths study are M (6) p = θ 0 + θ Zm Z m + θ Xl X l, m= 1 L l= 1 where { Z m} represents a set of demand shfters, and { l } X represents a set of supply shfters thought to affect good s producton costs, and the θ s are parameters. The expendture equaton s represented as a functon of per capta ncome Y, the group prce ndex P A defned by equaton (2), prces of relevant goods outsde the group ( P B = { p Bk }), and a general food prce ndex P C. For convenence, we assume a double logarthmc form: (7) ( E) = d + d ln( Y ) + d ln( P ) + d ln( p ) + d ( P ) ln 0 ln. Y A A K k = 1 Bk Bk C C 8

9 Gven the parameters estmated from the system of regresson equatons specfed by (5), (6), and (7), the assocated elastctes can be calculated (dervatons avalable on request). Each expendture elastcty s q E = = c q E E + β w. E (8) η ( 1 )( ) Eq Because aggregate ncome Y s n the expendture equaton, an ncome elastcty s avalable: q Y η = = d η = d c q E E + β w. E (9) ( 1 )( ) Y Y Yq The expendture and ncome elastctes are the same when d Y = 1,.e., when the expendture elastcty of each category s unty. 3 Smlarly, we use the expendture equaton to estmate mpacts on the demand of each potato category from the prces of goods outsde the system such as the complex carbohydrates. Specfcally, the Marshallan prce elastcty for a prce change of outsde good k s ε q p = = d η = d c q E E + β w. O k E (10) ( 1 )( ) k Bk Bk pk q The ncluson of an expendture equaton adds complexty to the tradtonal AIDS prce elastcty formulas. In partcular, the Marshallan (uncompensated) prce elastcty s (11) ε j = ( γ j w )( E E) [( β w )( E E ) d A ( 1 c q )( E E ) + β w )] ( α j + γ jk ln ( pk )) ( 1 c q )( E E ) + β w )( p jc j E) Φ j, where k Φ j equals 1 c q f = j, and 0 otherwse. Note that the Marshallan prce elastcty formulas reduce to those reported by Thompson (2004) for the AIDS model when c = c j = 0,, j and thus E = E. Also, the prce elastcty formulas further reduce to the tradtonal AIDS formulas f, along wth the prevous condtons, d Y = 1 and d A = The addton of the group expendture equaton allows for the elastcty of group expendture wth respect to ncome to be flexble, whch leads to the dstncton between expendture and ncome elastctes. 4 Hcksan (compensated) elastctes are derved by applyng the Slutsky equaton: ε j = ε j + ηw j. Estmated Hcksan elastctes for ths study are avalable from the authors. H 9

10 DATA DESCRIPTION At-home consumpton data for fresh organc and conventonal potatoes and processed potato products were drawn from AC Nelson supermarket sales data. Avalable data were at an aggregate level for four regons n the Unted States from 2000 to 2005, for a total of 96 quarterly observatons (4 regons wth 24 quarters) for each potato category. Specfcally, fresh potatoes ncluded organc and four conventonal types: russet, whte, red, and mnor colored potatoes (e.g., yellow, purple, blue). Processed potatoes were grouped nto two categores: frozen/refrgerated and dehydrated potatoes. Based on the USDA s Contnung Survey of Food Intakes by Indvduals (CSFII), about 55% of the U.S. potato crop was used for food consumed at home. Over 80% of fresh, dehydrated, and canned potatoes, plus potato chps, were sold through retalers and consumed at home. On the contrary, frozen potatoes, especally frozen French fres, are sold manly for away-from-home consumpton. 5 Fgure 2 shows the typcal composton of U.S. potato consumpton. Potato chps are a large group of processed potatoes consumed at home that are not ncluded n ths study due to data avalablty. However, ths excluson can be justfed on the grounds that potato chps belong more approprately to a snack food group rather than a close substtute for other potato products. In sum, the data used n our analyss represent the majorty of demand for fresh and processed potatoes consumed at home. Table 1 presents descrptve statstcs for the data used for estmaton. The mean value of expendture on all potato varetes across the U.S. s $2.28 per capta each quarter. The largest share of consumer expendture s russet potato wth over 30% market share. The combned expendture share of the two processed potato products s over 50% of the food away from home (FAH) market. Obvously, processed potatoes mplctly contan less raw potato nput n ther total cost structure and are probably less prce responsve to quantty or farm level cost factors. Potato consumpton patterns dffer consderably across regons. Average per capta consumpton s lowest n the western regon and hghest n the eastern regon. Compared to conventonal potatoes, consumers spent very lttle on organc potatoes. The U.S. average share of expendture spent on organc potatoes was only 0.12%. Even n the eastern regon, whch has the hghest spendng share, t s only over 0.21% on average. However, the consumpton on organc potatoes has grown rapdly over tme. As shown n Fgure 3, by the fourth quarter of 2005, consumpton of organc potatoes n the eastern regon had ncreased to 0.52% of total expendture on potatoes. Among the four seasons, we observe a consstent tendency for ncreased consumpton of fresh rather than processed potatoes n the fourth quarter. 5 CSFII data show that fast food establshments account for 67% of the frozen French fry market, followed by a 13% share for restaurants. 10

11 A set of demand shfters was selected to control for demand effects from factors other than prces and expendtures. Included s a tme trend, a collecton of regonal and seasonal dummy varables, selected soco-demographc varables for age, race, and workforce partcpaton, and a set of nteracton terms lnkng the aggregate trend n organc consumpton wth regonal dummes. The organc consumpton trend was measured by the penetraton rate of organc foods relatve to total food sales n the U.S., based on the Organc Trade Assocaton's (2006) Manufacturer Survey. These data proxy the growng nterest n organc foods due to perhaps taste, health, envronmental, or other preferental concerns. Because ths proxy varable was collected at the natonal level, the trend s nteracted wth regonal dummes to allow for varyng responses among regons. Soco-demographc varables are from the annual Statstcal Abstract of the Unted States (U.S. Census Bureau). In the prce equaton, we ncluded as nstruments prevously descrbed demand shfters, as well as a set of supply shfters. For fresh conventonal potatoes, the average U.S. potato yeld (cwt/acre) reported n Potato Statstcs (USDA/ERS) capture supply effects and a set of farmpad prce ndexes from Agrcultural Prces (USDA/NASS) are used to represent potato producton costs. Farm-pad prce ndexes nclude those for farm labor, automobles and trucks, storage, fertlzer, chemcal nputs, and the nnety-day T-bll rate. For organc potatoes, we dropped the fertlzer and chemcal prce ndexes, snce organc producton uses lttle or no such nputs, and added a machnery prce ndex and organc potato acreage to capture supply effects. Manufacturer processng costs are nstrumented by a labor and a servce prce ndex n food manufacturng, plus prce ndexes for storage, transportaton, and energy, and the nnety-day T- bll rate obtaned from the U.S. Bureau of Labor Statstcs (BLS) Producer Prce Indexes (USDL/BLS). The nstruments used n the expendture equaton nclude medan household ncome n each regon Y, the group prce ndex P A, the prces of carbohydrate substtutes P Bk, and a prce ndex for general food. The selected relevant goods used n the study are starchy staple foods, ncludng rce, pasta, and breads, as well as fresh and frozen vegetables as reported n the Consumer Prce Index (USDL/BLS). Data seres only avalable on an annual bass (e.g., organc trend, soco-demographc and ncome varables) were converted to quarterly seres usng SAS s PROC EXPAND, whch fts cubc splnes to non-mssng values to form contnuous approxmatons. Quarterly BLS prce ndexes were avalable, but only at a natonal level. These prce ndexes were assgned to all regons, assumng no sgnfcant dfference n supply costs across the country. ESTIMATION AND RESULTS The full GAIDS conssts of 14 equatons: sx budget share equatons, seven prce equatons, and one expendture equaton. The system was estmated usng SAS n two steps. Frst, predcted 11

12 values of each prce equaton (6) were estmated usng OLS. The second step s an teratve process. Usng predcted prces from the frst stage, expendture equaton (7) was estmated to predct system expendture, then, after replacng actual prces and expendture wth ther predcted values, the expendture and share equatons were estmated jontly by teratve seemngly unrelated regresson (ITSUR) wth the restrcton that that the parameters δ, α and γ n the group prce ndex P A be the same for all share equatons and the expendture equaton. Generalzed Durbn-Watson tests ndcated seral correlaton among the error terms, so we modfed the regresson system usng an autoregressve (AR) error processes for several equatons. Followng test results, an AR(1) process s used for the russet and whte potato prce equatons and an AR(4) process for the expendture equaton. For the share equatons, an AR(1) s used for organc potatoes, an AR(4) for whte and red potatoes, and an AR(2) for russet, mnor colored and frozen/refrgerated potatoes. Tables 2-4 report nonlnear GAIDS parameter estmates for the share equatons, the prce equatons, and the expendture equaton, respectvely. The nonlnear GAIDS provdes a farly good ft, as about a half of the parameter estmates are sgnfcant at a 5% or better level of sgnfcance. 6 Results generally ft theoretcal expectatons, though some parameter estmates have ncorrect sgns. Also, the organc prce equaton has relatvely low explanatory power, probably due to unobservable demand shocks, such as changes n demand preferences for organc produce over tme. Table 2 reports parameter estmates for the GAIDS share equatons. We dscuss prce components later n the context of the elastctes, but other fndngs warrant dscusson here. The tme trend was nsgnfcant for all potato categores except dehydrated, whch apparently lost market share through the 2000~2005 study perod due to factors not assocated wth any ncluded varables. Examnng the three demographc varables, race was not statstcally mportant n explanng changes for any potato category market share. However, thought not conclusve, russet potato demand may have ncreased as the percent of Caucasans ncreased n the market. As the percentage of young people (< 25 years) ncreased, the frozen/refrgerated potato market share ncreased and the dehydrated potato share decreased. As partcpaton of women n the workforce ncreased, mportant market share gans were found for russet, whte and red potatoes. These fndngs suggest a demographc profle of the market and may provde useful nformaton for potato market boards, branded processors, and other ndustry partcpants developng promotonal campagns. 6 The R 2 values reported n Table 2 from ITSUR are not bounded by zero and one and cannot be relably used as goodness-of-ft measures to compare models n GLS estmaton (Greene, 2003). 12

13 Of the 21 regonal dummes, only one was statstcally sgnfcant. If regonal dfferences are present, we could not dentfy them under our aggregaton scheme. We also ncluded regonal dummes n an nteracton term wth the growng share of organc food sales throughout the naton. Whle more statstcal sgnfcance s noted n ths group of parameters (8 of 28), the varaton was manly across potato categores and not across regons. For example, three of four nteracton terms for both whte and dehydrated potatoes were sgnfcant, but parameter estmates for both categores were n a tght range ( and , respectvely). Thus, whle we found that a growng demand for organc foods dd nfluence the demand for certan potato categores, the effect dd not dffer greatly across regons. A possble excepton s the russet potato category the eastern regon russet potato demand had a large and postve demand shft explaned by the growng trend n organc food demand. Overall, t appears whte and dehydrated potatoes have benefted from the emergence of organc foods. Interestngly, only one of the nteracton parameters n the organc potato category was statstcally sgnfcant and all were close to zero. Table 3 reports parameter estmates and standard errors for the prce equatons, as well as provdng nformaton about demographc, seasonal, and producton factors that explan potato prces. In terms of demographc effects, the percentage of young people (< 25 years) had a negatve effect on most prces, except organc and frozen/refrgerated potatoes, but the only sgnfcant effects were negatve effects on the prces of red, mnor colored and dehydrated potatoes. Race as the percentage of Caucasan n the populaton only had a sgnfcant (and postve) effect on the prce of red potatoes, whle women s workforce partcpaton rate sgnfcantly decreased the prce for whte potatoes and ncreased the prce for organc potatoes. Interestngly, based on results for the nteracton varables for the organc trend and regonal dummes, the ncreasng trend for organc food had a downward effect on all fresh non-organc potato prces all 16 coeffcents were negatve and 11 were sgnfcant. Furthermore, results for the same nteracton varables were statstcally sgnfcant and explaned hgher organc potato prces n all four regons. Though results n Table 2 show that the upward trend n organc food consumpton dd not change the market share of organc potatoes, results n Table 3 show that organc and non-organc fresh potato prces were mpacted by ths same trend n organc food demand. Interacton terms n the prce equatons also provde an nterestng story regardng whte potatoes. In Table 3, whte potato prces were negatvely mpacted by the trend n organc consumpton, but none of the coeffcents were sgnfcant. Recallng from Table 2 that the market share of whte potatoes grew as organc food consumpton ncreased, whte potatoes may be emergng as a potentally strong substtute for organc potatoes and may be a conventonal potato product that competes well wth the emergng organc market. 13

14 The average U.S. potato yeld had a negatve and statstcally sgnfcant effect on retal prces for non-organc fresh potatoes, but no statstcal mpact on explanng ether processed potato prces or fresh organc potatoes. Several farm cost varables explaned fresh potato prces, whch suggests that potato markets do respond to producton costs. Fertlzer and chemcal prce ndces were sgnfcant, but of the ncorrect sgn hgher producton costs led to lower potato prces. Ths may suggest that larger potato farmers are ndfferent to these nput prces and/or that acreage shfts nto potato producton to reduce total chemcal nput usage n other crops. Table 4 presents the parameter estmates for the expendture equaton. The double log structure allows nterpretaton of the parameters as elastctes. Three of the prce varables were sgnfcant. As the prce of bread or frozen vegetables ncreased by 1%, consumers ncreased ther expendtures on potatoes by about 1.5% and 1.8% respectvely. Also, when the aggregate potato prce ndex (P A ) rose by 1%, total expendtures rose by only 0.4%, suggestng a negatve quantty response. When ncome rose by 1%, expendtures on potatoes declned by 0.4%, mplyng that, n the aggregate, potatoes are n nferor good. Table 5 reports uncompensated prce elastctes. All own-prce elastcty estmates are negatve, wth the whte, red and mnor colored potato estmates statstcally sgnfcant. In the fresh market, the demand for mnor colored potatoes was the most prce-elastc (-2.80) followed by red and then whte potatoes. Organc and whte potatoes have nearly dentcal own-prce elastctes. Zhang, et al. (2006) found an own prce elastcty of 1.11 for organc potatoes usng scanner data between 1999 and 2003, whle our estmates mply a statstcally nsgnfcant elastcty of The two processed potato own-prce elastctes were also nsgnfcant. Based on the cross-prce elastctes, strong substtuton relatonshps exst among three fresh categores: organc, mnor colored and whte. Not surprsngly, the cross-prce elastctes show whte potatoes to be the only statstcally sgnfcant substtute category for organc and confrm our earler fndngs that these are strong substtutes. Quanttes demanded of organc potatoes are shown to be very senstve to the prce of whte potatoes, reflectng ther substtutablty and the small market share of organc potatoes. Smlar statstcally strong fndngs occurred for the cross-prce relatonshp between whte potatoes and mnor colored potatoes. Though not sgnfcant, the cross prce relatonshp between mnor colored and organc potatoes dsplayed the same pattern a 1% prce ncrease for mnor colored potatoes generated almost a 2% ncrease n the organc potato quantty demanded. Overall, the prces of whte and mnor colored potatoes ndependently and jontly have the potental to dramatcally shft the market share of organcs. As a result, organc producers, processors and retalers should pay close attenton to prcng among ths tro of products. Table 6 reports elastctes for changes n expendtures, ncome, and carbohydrate, vegetable and food prces. The frst two columns report elastcty estmates for changes n system expendtures and aggregate ncome. Increasng system expendtures leads to statstcally sgnfcant and 14

15 magnfed ncreases n the quantty of whte and dehydrated potatoes (cross-prce elastctes exceed 1.0). The elastcty of russet potato demand was postve and sgnfcant, but slghtly below 1.0. No other expendture elastctes were sgnfcant. Elastctes for natonal ncome are qute nterestng. As prevously dscussed, because the estmate of d Y n the expendture equaton was negatve and sgnfcant, the aggregate potato complex acts as a set of nferor goods. However, ths does not mply that all potato categores are nferor, whch was borne out n our results. Income elastctes for russet, whte and dehydrated potatoes were all negatve and statstcally sgnfcant. Not surprsng, dehydrated potatoes were the most senstve to ncome ncreases. The only superor (but nsgnfcant) potato category was mnor colored, whch are the most expensve conventonal fresh potato. The last fve columns of Table 6 present the demand responsveness of potatoes wth respect to prce changes of outsde goods: rce, pasta, breads, fresh and processed vegetables, and food n general. We found statstcal support mplyng that bread and processed vegetables act as substtutes to russet, whte and dehydrated potatoes. No elastcty for any other potato category was statstcally sgnfcant. CONCLUDING REMARKS We nvestgated prcng and demand ssues characterzng the U.S. food away from home (FAH) market for potatoes. We developed a demand system ncorporatng fve fresh potato categores and two processed potato categores. Four of the fresh categores were conventonally produced potato varetes (russet, whte, red, mnor colored) and the ffth category was organcally grown potatoes. The two processed potato categores are frozen/refrgerated potatoes and dehydrated potatoes. We estmated a nonlnear Generalzed Almost Ideal Demand System (GAIDS) under the assumptons of prce and expendture endogenety. The GAIDS model was modfed followng Alston, Chalfant and Pggott (2001) to satsfy the closed under unt scalng (CUUS) property, whch s approprate when ncludng demographc, seasonal, regonal and smlar demand shfters. Fve major fndngs are drawn from ths study. Frst, we dd not fnd much evdence that potato demand was dfferent across the four U.S. regons n our study (east, west, north and south). In the share equatons, only one of the 21 stand-alone regonal dummes was sgnfcant. Regonal dummes were also ncluded n the prce equatons. Some sgnfcant prce actvty was noted for red potatoes, wth decreases n the eastern and central regons and ncreases n the southern regon. Only one other coeffcent n ths group of 21 was sgnfcant. For both the prce and share equatons, each regonal dummy was nteracted wth the share of organc food sales to determne f prces and/or demand for the varous potato categores n dfferent regons reacted dfferently to the emergng organc food ndustry. Our second major fndng s that changng consumer tastes for organc food demand dd sgnfcantly mpact retal 15

16 prces for fresh potatoes. The magntude of statstcally sgnfcant prce declnes was hghest for red and russet potatoes, wth smaller declnes for mnor colored. Whte potato prces declned, but not wth statstcal sgnfcance. Prces of organc potatoes rose sgnfcantly as a result of the general upward trend n organc demand. Wth respect to the demand system market shares, whte potato and dehydrated potato market shares ncreased n response to organc trends. Thrd, several fndngs arose wth regard to the whte potato market. The market share of whte potatoes was the only conventonal fresh market potato to respond postvely to the upward trend n organc demand and t dd so wthout a correspondng prce declne. In terms of uncompensated own and cross prce elastctes, we found that both organc potatoes and mnor colored potatoes had only one statstcally sgnfcant substtuton relatonshp wth whte potatoes. Fnally, when system expendtures rse, the share of whte potatoes s statstcally shown to be the only fresh market potato to gan n market share. Thus, t appears that whte potatoes, despte ther low prce profle, compete effectvely wth the more expensve mnor colored and organc potatoes. Whte potatoes seem postoned to gan n market share relatve to other conventonal fresh market potatoes n the emergng organc-orented marketplace. The fourth fndng arose from the expendture equaton and from the system expendture and natonal ncome effects on the demand for each potato category. We found that, for the potato complex as a whole, ncreasng the overall potato prce ndex by 1% led to only a 0.4% ncrease n expendtures, whch mples that aggregate potato demand can be vewed as nelastc, whch s not surprsng gven that only two of the seven categores (mnor colored and dehydrated) had elastc own-prce elastctes. Thus, at least n an aggregate average sense, retal potato prces wll reman qute senstve to avalable supples. Expendture effects on market shares of each category are qute mxed. As system expendtures expand, we found no statstcal support for makng clams about category wnners or losers. However, whte potatoes and dehydrated potatoes seem to do better than russet and organc potatoes, and substantally better than red, mnor colored, and frozen/ refrgerated potatoes. In terms of ncome effects, we found strong statstcal support that russet, whte, and dehydrated potatoes are nferor goods. Potato marketng boards may want to ncorporate such fndngs nto ther promotonal campagns amed at mprovng the potato s market mage. Our ffth major fndng s that competng carbohydrate groups do sgnfcantly mpact the potato market. We found strong statstcal support for lower bread or frozen vegetables prces leadng to a reducton n system expendtures on potatoes. Both rce/pasta and fresh vegetables prces were not statstcally mportant n explanng expendtures. In terms of category effects, dehydrated potatoes are overwhelmngly most senstve to competng carbohydrate prces, but not frozen/refrgerated, organc, mnor colored and red potatoes. Surprsngly, the prces of fresh vegetables (whch are usually sold n close store proxmty to fresh potatoes) had no nfluence on potato category market shares. 16

17 REFERENCES Alston, J. M., J. A. Chalfant, and N. E. Pggott. "Incorporatng Demand Shfters n the Almost Ideal Demand System." Economcs Letters 70(2001): Bollno, C. A. "GAIDS: A Generalsed Verson of the Almost Ideal Demand System." Economcs Letters 23(1987): Deaton, A., and J. Muellbauer. Economcs and Consumer Behavor. Cambrdge: Cambrdge Unversty Press, Dhar, T., J.-P. Chavas, and B. W. Gould. "An Emprcal Assessment of Endogenety Issues n Demand Analyss for Dfferentated Products." Amercan Journal of Agrcultural Economcs 85(2003): Dmtr, C., and C. Greene. "Recent Growth Patterns n the U.S. Organc Foods Market." Rep. No. AIB777, Economc Research Servce, USDA, Washngton, DC, Gao, X. M., T. J. Rchards, and A. Kagan. "A Latent Varable Model of Consumer Taste Determnaton and Taste Change For Complex Carbohydrates." Appled Economcs 29(1997). Mtchell, D. "Retalers Push Wholesalers for More Organcs." The Packer November 27. Organc Trade Assocaton. "The OTA 2006 Manufacturer Survey Overvew." Organc Trade Assocaton, Greenfeld, MA, Pollan, M. "Mass Natural." The New York Tmes June 4, Rchards, T. J., A. Kagan, and X. M. Gao. "Factors Influencng Changes n Potato and Potato Substtute Demand." Agrcultural and Resource Economcs Revew 26(1997): Thompson, W. "Usng Elastctes from an Almost Ideal Demand System? Watch Out for Group Expendture!" Amercan Journal of Agrcultural Economcs 86(2004): U.S. Census Bureau. Statstcal Abstract of the Unted States. U.S. Census Bureau, Admnstratve and Customer Servces Dvson, Statstcal Compenda Branch. Onlne, Avalable at [Accessed September, 2006]. USDA/ERS. Potato Statstcs. U.S. Department of Agrculture, Economc Research Servce. Onlne, Avalable at [Accessed September, 2006]. USDA/NASS. Agrcultural Prces. U.S. Department of Agrculture, Economcs, Statstcs, and Market Informaton System. Onlne, Avalable at [Accessed September, 2006]. 17

18 USDL/BLS. Consumer Prce Indexes. U.S. Department of Labor, Bureau of Labor Statstcs. Onlne, Avalable at [Accessed September, 2006]. USDL/BLS. Producer Prce Indexes. U.S. Department of Labor, Bureau of Labor Statstcs. Onlne, Avalable at [Accessed September, 2006]. Whole Goods Market. "Organc Foods Contnue to Grow n Popularty Accordng to Whole Foods Market Survey." Whole Foods Market Reports October 21, Zhang, F., et al. "Natonal Demand for Fresh Organc and Conventonal Vegetables: Scanner Data Evdence." Selected Paper: The Amercan Agrcultural Economcs Assocaton Annual Meetng, Long Beach, CA, July 23-26, Avalable at 18

19 Table 1. Descrptve Statstcs of Varables Used for Estmaton mean values -- mean values (by regon) mean values (by quarter) -- varables Unted States East Central South West Q1 Q2 Q3 Q4 potato expendture ($) 2.28 (0.50) (as % of ncome) (0.0012) expendture shares (%) russet (5.58) red 8.43 (2.60) whte 5.98 (3.90) mnor colored 2.32 (1.56) organc 0.12 (0.13) frozen & refrgerated (6.14) dehydrated (2.46) prces ($/lb) russet 0.33 (0.0815) red 0.54 (0.0939) whte 0.34 (0.0718) mnor colored 0.61 (0.0906) organc 0.72 (0.1670) frozen & refrgerated 1.12 (0.0856) dehydrated 2.96 (0.3442) Mean Values of Explanatory Varables (Unte States) mean of annual values across regons Farm pad prce ndexes (base year ) age (% below 25) (1.40) mean of natonal values across quarters race (% whte) (3.28) labor (6.24) women partcpaton rate (%) (2.48) autos & trucks (1.92) medan ncome ($) (5132) fertlzer (18.18) average yeld (c.w.t./acre) (170301) chemcal (0.76) organc acreages (acre) 1597 (2335) 3-month t-bll rate (%) 2.78 (1.78) Producer prce ndexes (base year ) Consumer prce ndexes (base year ) mean of natonal values across quarters mean of natonal values across quarters storage (0.80) rce & pasta (3.71) machnery (7.99) bread (5.91) transport (6.44) fresh vegetables (8.96) energy (21.19) frozen vegetables (4.51) labor (food manufacturng) (3.69) food (4.66) servce (food manufacturng) (2.48) Values n parenthess are standard devatons. 19

20 Table 2. Nonlnear GAIDS Parameter Estmates for Expendture Share Equatons russet whte red mnor colored organc frozen & refrgerated dehydrated constant (c 0 ) tme trend age (% below 25) race (% whte) women partcpaton rate dummy: east dummy: central dummy: south dummy: season dummy: season dummy: season organc trend east organc trend central organc trend south organc trend west constant (α) ln(p_russet) ln(p_red) ln(p_whte) ln(p_mnor colored) ln(p_organc) ln(p_frozen & refrgerated) ln(p_dehydrated) ln(e/p A ) number of observaton R-square Durbn-Watson Statstcs Note: Estmates are n bold; standard errors are n talcs. Sngle and double astersks () denote statstcal sgnfcance at the 5% and 1% levels, respectvely. 20

21 Table 3. Nonlnear GAIDS Parameter Estmates for Prce Equatons russet whte red mnor colored organc frozen & refrgerated dehydrated constant tme trend age (% below 25) race (% whte) women partcpaton rate dummy: east dummy: central dummy: south dummy: season dummy: season dummy: season organc trend east organc trend central organc trend south organc trend west average yeld -1.2E E E E E E E E E E E E E E-07 farm labor prce ndex autos trucks prce ndex storage prce ndex month t-bll rate fertlzer prce ndex chemcal prce ndex machnery prce ndex organc acreage transportaton prce ndex energy prce ndex labor (food manufacturng) servce (food manufacturng) Observaton Adjusted R-square Durbn-Watson Statstcs Note: Estmates are n bold; standard errors are n talcs. Sngle and double astersks () denote statstcal sgnfcance at the 5% and 1% levels, respectvely. 21

22 Table 4. Nonlnear GAIDS Parameter Estmates of Expendture Equaton: ln(e) Varable Coeffcents Constant ln(income) ln(p A ) ln(p_rce-pasta) ln(p_bread) ln(p_fresh vegetables) ln(p_frozen vegetables) ln(p_food) Observatons 96 Adjusted R-square Durbn-Watson Statstc Note: Estmates are n bold; standard errors are n talcs. Sngle and double astersks () denote statstcal sgnfcance at the 5% and 1% levels, respectvely. 22

23 Table 5. Uncompensated Own and Cross-Prce Elastctes russet whte red mnor frozen & organc colored refrgerated dehydrated russet whte red mnor colored organc frozen & refrgerated dehydrated Note: Elastcty estmates (evaluated at sample means) are n bold; standard errors are n talcs. Columns represent 1 percentage change n prces; rows represent the percentage change n quantty demanded. Sngle and double astersks () denote statstcal sgnfcance at the 5% and 1% levels, respectvely. 23

24 Table 6. Expendture, Income, and Other Cross-Prce Elastctes expendture ncome rce-pasta bread fresh vegetables processed vegetables russet whte red mnor colored organc frozen & refrgerated dehydrated food Note: Elastcty estmates (evaluated at sample means) are n bold; standard errors are n talcs. Columns represent 1 percentage change n expendture, ncome, and prces (columns 3-7); rows represent the percentage change n quantty demanded. Sngle and double astersks () denote statstcal sgnfcance at the 5% and 1% levels, respectvely. 24