Link to Alexander Fedder’s Linked In profile

I am pleased to host another student guest post, this time by Alexander Fedder. This is the 29th student guest post this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link.

I thought Alex’s account of the competition between “organic” and “non-GMO” (non-genetically-modified organism) food was very interesting. I have my own comments after the text of what Alex wrote. Here is Alex:

There has long been established the struggle for market share in the food industry between traditional products and those that are considered ‘organic.’  This label itself comes with an extensive list of certifications and health standards when it comes to checking up on ingredients by the USDA.  But, as the popularity of health foods has grown, there is a new label that has come to prominence among consumers as well―non-GMO.  These products are empty in what are called ‘genetically modified organisms.’  Explicitly, these are plants and animals involved in producing ingredients used in some traditional products that have been DNA-altered by genes from other organisms, which includes viruses and bacteria.  The motivation for using these GMOs is the ability to cut down on supply side costs for large food companies.  For example, genetic modification is sometimes applied to reduce the susceptibility of corn to pesticides and pests, so that there is no contamination of final product.  The use of pesticides on the crops is considered essential by some farmers to the growing process because it allows for less loss of product.  The point is that these non-GMO companies are direct competitors in the niche natural food market with the organic companies because GMOs are perceived to be harmful for humans to consume.  Hence, an increase in demand for one of these types of food products inevitably leads to a decrease in demand for the other.  In fact, this ongoing battle back and forth seems to be fairly close when it comes to consumer perception in the overall market.  As reported by Jacob Bunge and Annie Gasparro in their Wall Street Journal article about the choice between the two for skeptical consumers, “[l]ast year, foods labeled non-GMO claimed 3.7% of total food sales in U.S. grocery stores, more than the 3.5% for organic items, according to market-research firm Nielsen NV.  About 49% of consumers polled by Nielsen called non-GMO an important factor in food-and-beverage shopping, versus 47% for organic.”  This isn’t to say anything about the particulars of the race for market share, but to highlight the nonsense and inefficiency of the entire rivalry.  Consider the perspective of the average consumer that has fairly little concern about the safety of non-organic (standard GMO) food products.  It is quite possible that this type of consumer purchases organic or non-GMO products in a sort of bandwagon effect.  But then he must choose between two relatively meaningless labels, ultimately contributing to demand for one or the other.  It is clear that as he is indifferent in regards to health standards, he will choose the cheaper option.  At the same time, many well-informed and “rational” consumers are well aware of the low probability that GMOs pose a threat, something that has been stressed by U.S. health regulators such as the FDA.  For this type of consumer, this definitely updates their choices, pushing them away from marked-up organic and non-GMO products.  And yet, these health food products continue to hold space on the shelves of grocery stores.  This is a fact that indicates that there are a significant portion of those aforementioned average consumers that are buying into the illusion, since those consumers that actually have serious concerns over safety make up such a small fraction of the market. Moreover, there is less and less incentive for health food innovation and advances in food-relevant biotechnology because these products have firmly established their place.  Accordingly, the debate over these health products is holding back productivity growth.

Not only are the resources required to differentiate such natural food labels a wasteful provision, but there is current price distortion as a result of consumers’ understanding of the subtle discrepancies between those labels in regards to certification.  The organic companies are without a doubt trying to correct this faulty consumer perception, although their motivations are up for debate.  According to the same article, Oren Holle, an organic farmer well known for his services in Bremen, Kan, commented on what he feels is a serious issue.  “While some consumers may migrate from [non-GMO products] to organic foods, Mr. Holle said he worries about ‘a perception out there that if I buy the non-GMO it’s a little less costly when you run up to the checkout counter, and it’s just about as good.”  The idea is that the organically-certified products must actually jump through many more hoops than their non-GMO counterparts, but this isn’t reflected in the prices as consumers that are buying the products believe that they are relatively substitutable with regard to health standards.  This is the other aspect of the argument that the labels are causing market inefficiency.  In fact, it ties directly into the average consumer decision that was discussed before.  The more rigorous health standards of organic foods relative to non-GMO foods almost surely indicate that the cheaper option will be the non-GMO products.  And for products that can be viewed as almost perfectly substitutable for these average consumers, the non-GMO companies will eventually win the greater share of demand.  However, this isn’t what the organic food companies claim to be concerned about.  To these firms, the fear is openly announced to be in regards to an interest in public knowledge.  Vernon Peterson, owner of Abundant Harvest Organics in Kingsburg, California, asserts, “‘[w]hen you have a confused public, it’s never good.’”  It is doubtful that these firms will actually be worried about social costs and more likely that they will be applying marketing techniques to further the notion that organic is somehow safer than non-GMO, which means that consumers who will listen should be willing to pay more for organic products.  Finally, the alternative drain on efficiency comes in when we consider that there has been extensive research to show that the organic companies themselves are a major source of funding for the fight against GMOs.  They are trying to get market share away from genetically modified food without letting food with only the label “non-GMO” take too much of that freed-up market share. 

Miles: To some extent, both “non-GMO” and “organic” are selling illusions. Having competing illusions for sale–both of which appeal to the relevant class of people–seems likely to lead to more efficiency. They can then choose the cheaper of the two illusions. Although “non-GMO” is certainly a costly illusion, I wonder if “organic” isn’t an even more expensive illusion. 

The other complicated feature of this competition is that even for people like me who have no real worries about the safety of non-organic food, I find that organic food tends to be more expensive, higher-quality food as well. It could have been labeled “craft food” or something like that, but in fact it is labeled “organic food."