Willingness to Pay for Organic Foods: a comparison between Survey Data and Panel Data from Denmark



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Willingness to Pay for Organic Foods:

A Comparison between Survey Data and Panel Data from Denmark
by

Katrin Millock (CIRED),

D)
Lars Gårn Hansen, Mette Wier, Laura Mørch Andersen (AKF, Denmark)

Contact: CIRED (EHESS-CNRS)

Jardin Tropical

45 bis, avenue de la Belle Gabrielle

94 736 Nogent-sur-Marne Cedex

France


Tel. (33) 1 43 94 73 83

Fax (33) 1 43 94 73 70



millock@centre-cired.fr


Abstract
We present a project aiming at estimating the willingness to pay for organic foods through panel data and a survey. The panel data is based on weekly reporting of household purchases by 2000 Danish households with information on their demographic and socio-economic characteristics. Detailed information on organic foods exist from 1997. A questionnaire asking consumers to distinguish and rank various food attributes will be sent out to all households in the sample in June 2002. For survey purposes, organic foods are defined as products carrying the Danish state label guaranteeing public control and certification of organic production. The food product attributes include environmental concerns, animal welfare, and food safety (health concerns). Here we present the results from the pilot study sent out in 2001 to 400 randomly chosen households, representatively distributed on geographical regions however. Among the results we note that the order of valued attributes do not differ across organic product types and that avoidance of chemicals is the highest valued attribute. We also present some preliminary estimations on purchase data in order to compare the contingent valuation results with observed willingness to pay. Both valuation methods entail uncertainty, and a comparison may indicate the magnitude of this.

1. Introduction

Demand for organic foods has increased considerably during the past decade, though organic consumption still only constitutes a few percent of total food consumption in most countries. This growth has been especially high in Denmark, which is estimated to have the highest per capita consumption in the world (Wier and Calverley, 2002). The Danish market is especially well suited for consumer analyses, because the Danish market for organic foods is relatively mature, meaning that it does not suffer seriously from the supply shortages and barriers which dominate most of the markets outside Denmark. This holds especially for organic dairy and cereal products, since these products exhibit higher budget shares than other organic products, and to a lower extent for meat products. This means, that the Danish organic market may offer information about future markets of organic foods in other countries. The well-functioning Danish market makes it possible to collect and analyse reliable data on purchases. As such data is not found in any country until recently, almost no studies on the estimation of the demand for organic foods based on actual purchases have been published previously. The few exceptions are Brombacher (1992), Glaser and Thompson (1998, 2000) and Jörgensen (2001), who all use sales data from Marketing Research Institutes from Germany, USA and Sweden, respectively. Our study distinguishes itself by being based on observations of stated as well as actual purchasing behaviour of a large number of organic as well as conventional foods. Almost all previous studies on organic foods are based solely on postulated behavior, i.e. stated willingness to pay. Several studies (Beharrell and MacFie, 1991; Bjerke, 1992; Bugge and Wandel, 1995; CMA, 1996; Coopers and Lybrand Deloitte, 1992; Drake and Holm, 1989; Fricke, 1996; Grunert and Kristensen, 1995; Jolly, 1991; Krämer et al., 1998; Misra et al., 1991; Scan-Ad, 1998) report consumer interviews about their willingness to pay for organic foods, and thus hold information on this issue. However, stated willingness to pay may not reflect revealed behaviour (Cook 1991; Kramer 1990). The literature on contingent valuation (CV) has studied the issue of strategic bias in depth. For quasi-public goods, Carson et al. (1996) undertook a large meta-study of 616 estimates from 83 studies where CV estimates were compared to revealed preference estimates for the same good. Based on the sample of 616 comparisons, the mean CV/RP ratio was 0.89. Other studies typically find that hypothetical (stated) willingness to pay exceed revealed willingness to pay (Cummings et al., 1995; Frykblom, 1997). In our particular context, Hansen and Sorensen (1993) conducted both (in-store) interviews and (in-store) experiments on purchases of organic products. When comparing results from these two different approaches, they found that elicited willingness-to-pay has a tendency to be overestimated in comparison to “real” willingness-to-pay from experiments.
2. The Danish Market

2.1. Budget shares, price premiums and growth of organic products

Figure 1 shows the development in budget shares and organic price premiums (four-weekly observations) of 3 aggregated organic products between April 1st, 1997 and December, 31st, 2000. The budget share is defined as the ratio of budget of organic on total foods, and average price premiums are calculated as the mean of individual price premiums within the group, using individual good budget shares as weights.



Figure 1. Development in market share and average price premiums for 3 aggregated organic product groups.







Dairy products hold the highest budget share, followed by cereal products. The Danish market for organic foods has been growing until recently. There is a steady upward trend in the budget shares for dairy products and cereal products (bread, flour, cereals, pasta, rice, etc) until late 1999. From the middle of 1999 and onwards, budget shares were decreasing somewhat for these two food groups. Analogously, average price premiums have decreased continuously for dairy products and cereals until the middle of 1999. From mid-1999 onwards, no clear trend in development of price premiums can be observed.

The group of ‘other foods’ (including meat, fruit and vegetables) has much lower budget shares and much higher price premiums than the dairy and cereal products do, and no clear trend can be observed.

Within the aggregated food groups, a large variation in budget shares can be observed. Table 1 shows various estimates for the 5 most established products within each food group for the period of April 1st 1997- December 31st 2000. For each product, the table shows the average budget share and the average percentage organic price premium (and the corresponding standard deviations), the average organic consumption in EURO per family per week, and the average annual growth in this weekly consumption. Milk and eggs hold equally high budget shares at 23 per cent, followed by carrots, rye bread and pasta. The lowest price premiums are observed for cereals, various dairy products, rye bread and eggs. The highest price premiums are observed within the group of other foods, for oil, carrots and onions. This group also encompasses meat products (not shown in Table 1, as no meat products reach top 5), where lamb holds the highest budget share (budget share 5.8 per cent, price premium 22 per cent), followed by minced beef (budget share 2.2 per cent, price premium 58 per cent).

During the whole period, the highest growth is experienced for products in the bread and cereal group, as many of these products have been introduced during the period 1997-2000. Consumption of organic oil, cream, cheese and potatoes have actually decreased. Carrots and onions, which have been supplied since the 1980’s, have experienced low growth rates too. Looking at annual growth rates (not shown in Table), a general pattern of decreasing growth rates can be observed for almost all food types. Until 1998, the organic consumption was still booming, but negative growth rates are observed from 1999 and onwards for many products.



A large variation (see standard deviations in the table) in average price premiums can be observed, due to variations in product types and qualities within the product group, variations due to differences in sales channels and geographical location, and variations due to differences in observation time. The lowest variation is observed for the dairy group. The highest variation is observed in the group of other foods, where there are large quality differences – for example due to seasonal variation in the quality of carrots and potatoes.

Table 1. Top 5 within each aggregated food group, April 1997 - December 2000.





Budget share

Average price premium

Average organic consumption

Average annual growth rate




(%)

Standard deviation (%)

per family per week* (EURO)

(%)

Dairy products

Milk

23.00

22.53

(2499)

0.57

8.23

Yogurt

7.30

12.87

(1936)

0.06

11.53

Cream**

6.20

13.35

(1566)

0.03

-6.40

Butter

5.60

5.62

(2409)

0.05

21.17

Cheese

2.40

22.30

(3194)

0.05

-3.47

Cereal products

Flour

13.40

50.62

(6151)

0.03

15.70

Rye bread

9.40

18.10

(3599)

0.10

12.97

Pasta

9.30

40.59

(7422)

0.02

43.77

Cereals

7.10

5.91

(3618)

0.04

8.70

Rice

6.20

53.82

(6824)

0.01

24.10

Other foods

Eggs

23.00

19.74

(4667)

0.16

9.40

Carrots

20.70

62.28

(10954)

0.05

1.27

Onions

9.00

59.32

(4685)

0.01

5.90

Oil***

6.70

115.50

(12820)

0.01

-17.60

Potatoes

6.00

43.64

(8124)

0.04

-1.60



















* The Danish Kroner/Euro rate was 743.40 on April 30, 2002.

** Includes observations from June 1st 1999 to June 1st 2000 only.

*** Includes observations from July 1st 1999 to Dec 31st 2000 only.











Please note, that price premiums are calculated from all prices, including special offers.
2.2. Is the Danish market different?

There are substantial differences between the European countries in their consumption of organic foods (Wier and Calverley, 2002; Michelsen et al., 1999) and these differences cannot be explained solely by differences in consumer preferences. Wier and Calverley (2002) argue that differences across countries are not only due to differences in consumer demand for organic foods, but also to market barriers, which prevent the potential demand being fulfilled.

Most studies show that consumers primarily buy organic food because of health considerations (CMA, 1996; von Alvensleben, 1998; Meier-Ploeger et al., 1996; Sylvander, 1995; Infood, 1997, 1998; Land, 1998; Scan-Ad, 1998; Coopers and Lybrand Deloitte, 1992; Byrne et al, 1994; Huang, 1996; Huang et al., 1990; Jolly, 1991). German consumers, for example, are very concerned about health and food safety (Kafka and von Alvensleben, 1998). Brunsoe (1996) and Brunsoe and Bredahl (1997) compare consumer segments in various European countries, and show that German consumers are more interested in organic food than Danish consumers. But the market share of organic food in Germany is considerably below the market share in Denmark where, in spite of having the world’s highest consumption of organic food per capita, consumers are not very concerned about health and food safety (Kafka and von Alvensleben, 1998).

In Denmark, consumption of organic foods was low until 1993, the general market share of organic foods being less than 1 - 2 per cent. Until 1993, the main driving force behind the expansion of the organic foods market was government subsidies and advisory services to organic farmers during the conversion period (Hamm and Michelsen, 1996). However, consumption began to increase in 1993, when supermarkets lowered the prices of organic products by 15 to 20 per cent, increased supply considerably, and initiated intensive marketing of organic products (Hamm and Michelsen, 1996).

The current Danish market fulfills three important conditions for a well-functioning market. First, in Denmark, organic foods are primarily sold through conventional supermarkets, ensuring stable supplies and promotion of organic products where most of the consumers do their shopping already. Second, Denmark has a very well functioning and trustworthy labeling and certification program. Third, price premiums for organic products are in most cases relatively low. In most other countries, at least one of these barriers is prevalent (Michelsen et al., 1999).


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