Hedonic pricing of yogurt, cheese and wine in the Canadian retail market

Have you ever thought about reasons that motivate you to buy a certain, specific type of yogurt, cheese or wine? Do you know what are the main attributes that you take under consideration while making purchasing decisions? Are you aware of how much value in monetary terms you put on each of the commodity attributes? Well, if you haven’t thought about it, most likely you are not very interested in the hedonic pricing method. On the contrary, I am very interested in this methodology and I have chosen it as a research subject of my doctoral dissertation.

 

Researches that concern hedonic pricing method of commodities have been in place since late twenties of the 20th century and they have been exercised on the variety of commodities starting from agricultural ones and ending on durables like automobiles, computers and housing. Currently in agricultural economics the most frequent use of hedonic pricing method is employed in wine economics. The most important contributors to the advancement of hedonic pricing methodology include following scientists:

  1. Frederic, V. Waugh (1927), who pursued first published hedonic pricing analysis of agricultural commodity (asparagus);
  2. Zvi Grliliches (1961), who used and advanced hedonic pricing methodology on durable goods (automobiles);
  3. Sherwin Rosen (1974), who outlined currently the most commonly used theoretical basis for the hedonic pricing method;
  4. Marc Nerlove (1995), who used hedonic pricing methodology for wine, showed its crucial shortcomings and suggested methodological improvements.

The research on yogurt, cheese and wine that is proposed under the auspicious of my doctoral dissertations will to large extent use the methodological approach in hedonic pricing method as proposed by Marc Nerlove in his work on wine from 1995. The reason for the preference of Nerlove’s approach lays in the fact that his research was pursued on Swedish wine, which at that time was supplied under government monopoly. Similar situation is currently present in Canada where all three commodities: yogurt, cheese and wine belong to the group of commodities with controlled supply. Therefore Nerlove’s methodology seems to be appropriate for hedonic pricing studies in the Canadian market.

The main objective of my PhD research idea concerns the willingness to study and model Canadian consumers’ valuation of commodities’ attributes while making purchasing decisions and faced with differentiated products like yogurt, cheese and wine.

Specifically this research plans to:

1. Identify commodity specific attributes that Canadian consumers take under consideration while making purchasing decisions e.g.:

  • organic versus conventional in case of yogurt, cheese or wine,
  • fat content, consistency, type, brand, container size in case of yogurt and cheese,
  • color, origin, sweetness, alcohol content, grape type, vintage year in case of wine etc.

2.  Construct commodity specific models (one for each commodity of interest) and assign consumers’ valuation (in monetary terms) for each identified, important commodity specific attribute. For example: this research will calculate and assign monetary values that Canadian consumers put on the fact that yogurt has a label “organic” versus “conventional” or on the fact that wine comes from “Bordeaux” versus “Mendoza” versus “Okanagan Valley” etc.
3. Use retail prices time series data on yogurt, cheese and wine to pursue a proper econometrics analysis and tests to ensure valid functional forms for models and as a consequence, unbiased estimates.
4. Form industry and policy relevant suggestions associated with obtained results. Communicate and suggest relevant, industry and policy specific development solution.
5. Advance theoretically modeling and econometrics data analysis associated with hedonic pricing methodology. Construct relevant improvements for hedonic pricing theory.

The results of this research will likely be of interest to several groups of the society:

1.  Commodity specific industries: producers (small and large scale), traders, processors and retailers:

  • Producers will be better informed about attributes valued by the purchasers of selected commodities. This will result in their ability to produce commodity specific traits that are highly valued by the purchasers in the Canadian market. This in turn will likely improve producers’ investment decisions. For example: Grape producers will be able to plant grapes’ types that consumers value the most and will diminish losses resulting from the cultivation of lower valued varieties. In addition producers will be able to correctly identify price positioning for their commodities. They will improve the control of market situation for their goods and will be able to see which types of their goods are overpriced versus underpriced, which ones need to exit or be introduced to the market.
  • Traders, retailers,  processors will diminish their costs associated with purchasing commodities with attributes that purchasers don’t value the most. Likely their sorting and repackaging costs will be lowered because they will receive commodities that possess right attributes.

2. Government of Canada

The government will be able to improve its industry specific policies and will be better prepared to encourage producers to produce commodities that have traits that are valued in the market. The agricultural Research and Development (R&D) activities will likely be targeted better. The results of this research will be important for the establishment of the long- term industry specific development strategies.

 3. Consumers

The purchasers of these commodities will be able to verify how much value in monetary terms they put on certain commodity attributes. For example: they will be able to see how in monetary terms they respond to certain labels e.g.: “organic”or  association with specific for the industry organizations like appellation (wine) etc. Such information will positively impact consumers’ conscious purchasing decisions. Consumers thanks to the estimations done via hedonic pricing method will be able to differentiate bargains from expensive purchases (good value for money versus rip-off).

 4. Science, specifically agricultural economics, marketing and agribusiness related branches

Research gap will be filled. Up to date there are no studies on  the hedonic pricing of  yogurt or cheese in the canadian retail market. While there are many studies on the hedonic pricing of wine sold in Canada, in many cases these researches  present inconsistent approach to the hedonic pricing methodology in terms of estimation procedures, significance of variables chosen for the modeling purpose, completeness and replicability of the results to the Canadian wine industry as a whole.

Surface Chemistry of Naturally Occurring Asbestos – understanding its potential health hazard

Imagine finding out that your home was surrounded by a nano-sized toxicant. You couldn’t see it but it was in the air all around you, and you and your family were breathing it in with every breath. This is unfortunately a reality for people living in communities where Naturally Occurring Asbestos, or NOA, exists. NOA is asbestos that occurs in the soil or geology of a region – it wasn’t put there by human activities.

Asbestos refers to a group of fibrous minerals once considered miraculous due to their suitability for over 3000 industrial purposes, such as insulation and building materials. However, these miraculous minerals also pose a severe health hazard. Asbestos inhalation is linked to lung cancer and mesothelioma, a highly fatal cancer of the chest cavity.

Bundles of chrysotile asbestos, 5000X

Chrysotile, the most common form of asbestos, contains oxidizing metals, such as chromium, nickel, and iron, that are linked to the negative health effects of the fibers. There have been very few studies conducted on NOA chrysotile, and the health risks remain unclear. There is currently no consensus on how hazardous NOA is, or how it should be dealt with.

Asbestos becomes less toxic when the layer containing the oxidizing metals is leached from the surface. Weathering in the natural environment may alter the surface chemistry of asbestos fibers, making them less hazardous.

One of the communities struggling to deal with NOA is the Sumas Prairie in the Lower Fraser Valley. A landslide on Sumas mountain, WA, has been dumping asbestos rock into the Sumas river since the 1970’s. The asbestos material is carried down the river as sediment and deposited on the floodplain during flood events. When the sediment dries out, it can become airborne and pose an inhalation hazard to local residents.

The Sumas River with piles of asbestos laden sediment in front of the local homes.

For my Master’s research, I examined the surface chemistry of asbestos as it moved down the Sumas River, and before and after treatment with naturally occurring acids (oxalic, HCl, and carbonic), to determine if naturally occurring acids in soils and streams are removing the surface magnesium, and thus reducing the toxicity of the asbestos.

As the asbestos moves downstream, the surface chemistry of the asbestos fibers are altered, indicating that natural weathering is likely reducing the toxic effect of the fibers.

We may be able to speed up the rate the asbestos is detoxified by covering the asbestos contaminated floodplains with organic material. Organic material naturally forms organic acids, which over time will leach the heavy metals from the fibers. The organic matter layer will also cover the asbestos material preventing it from becoming airborne. If the fibers aren’t airborne, they won’t be inhaled by residents and thus, will not pose a health hazard.

How Failures to Acknowledge the Limits to Growth Continues to Affect Rural Poverty

Recent downturns in many so called ‘developed’ economies have more people than ever second-guessing the possibilities of exponential growth and reevaluating what risk means in an increasingly globalized world economy, but ask a smallholder farmer who’s gambled on the world export market and lost and they’ll tell you that the jig has been up for a long time, we’re just now feeling the pinch.

Remember back in 2007 when your grocery bill was increased by a few notches? I remember mostly because I was studying rural development at the time and the people around me were asking themselves at the checkout counter: “could this mean higher profits for poor smallholder farmers?”. Ok, maybe first they lamented that the days of inexpensive high-quality basmati rice were gone, but they found some comfort at least in the hope that food prices were finally making the long over due turnaround before rock-bottom. We now know though that these price increases didn’t translate to better deals for smallholders, and this fact speaks volumes to the uncompetitive and volatile markets that farmers are exposed to; a microcosm of the wider economic ills that the ‘developed’ world is reeling with at the moment.

Poor smallholders have been encouraged in a variety of ways and by a great many advocates that export markets are the modern way. Proponents for outward expansion into high-value crops claim that agricultural exports can produce faster growth than in domestic demand (World Bank, 2004), that export growth contributes to the growth of non-export agriculture by providing cash income that can be used to modernize farming practices (ibid) and that agricultural trade liberalization increases overall prosperity (Mccalla & Nash, 2007)

The precarious relationship between growth, poverty reduction and food security can be seen at a basic level by the fact that “of the world’s 34 most food insecure countries, 22 had average annual growth rates of 5 to 16 percent between 2004-2006” (von Braun, 2007). Economic growth does not cure hunger and poverty on its own.

It is important to keep in mind that trade policies, incentive programs and small scale development projects directly affect the 75% of the world’s poor who live in rural areas since the vast majority of them rely on agriculture for some part of their incomes (World Bank 2008). Whether it’s cheap imports displacing their local production systems or the removal of price support systems and marketing boards, these decisions and the forms of food marketing that are encouraged by them have direct influences on poor smallholder farmers, their families and their communities.  The global price fluctuations that make us uneasy when we glance at graphs posted on news websites can mean the difference between three healthy meals a day or malnutrition for many.

Growth, it seems, is not exponential nor is it limitless. Investors and public policy makers are now learning hard lessons about market volatility and how the bottom can fall out so easily. If they’re weary about putting their investments on the line, how can we still be asking smallholder farmers to put themselves out there?

Sources:

McCalla, A. F., & Nash, J. (2007). Agricultural Trade Reform and Developing Countries: Issues, Challenges, and Structure of the Volume. In A. F. McCalla & J. Nash (Eds.), Reforming Agricultural Trade for Developing Countries Volume 1: Key Issues for a Pro-Development Outcome of the Doha Round (pp. 1-17). Washington, D.C. The World Bank

World Bank. (2004). Global Economic Prospects: Realizing the Development Promise of the Doha Agenda. Washington, D.C.

World Bank. (2008). Agriculture and Poverty Reduction. Agriculture for Development Policy Brief.

von Braun, J.. (2007). The World Food Situation: New Driving Forces and Required Actions. Washington, D.C. International Food Policy Research Institute.

The Environmental Impact of Trade in Canada – a Brief Introduction

Trade liberalization of the agricultural sector in any country often leads to three possible production effects that can affect the environment: a scale effect, a composition effect and a technique effect. In the first case, trade liberalization allows countries to reach new markets, thus increasing the overall production scale. If the country produces goods that negatively affect the environment, then trade generates pollution through this scale effect. However, trade liberalization goes both ways – other countries will now be able to sell to the newly liberalized economy. As a result, countries will tend to specialize in goods for which they have a comparative advantage, switching their product composition to goods they can produce more efficiently. If the country specializes in “dirty” (polluting) goods, then trade generates pollution through the composition effect. Finally, as a result of trade, countries might have access to new productive technology from their counterparts, and will also have incentives to improve its own productive technologies to become more competitive. If any new technology is more polluting than those used before trade liberalization, there will be a negative environmental technique effect from trade.

Trade Liberalization and the Environment in Canada: The Crop Sector

Canada joined the World Trade organization in 1995 and has signed over 11 bilateral or multilateral trade agreements ever since. Canadian crop exports have dramatically increased ever since. Between 1988 and 1998, Canadian vegetable exports (including cereals, fruits and vegetables, oil seeds, fodder and roots) increased in 47%, and between 1998 and 2008 these increased by 102%. During this period, cereals went from representing 74% of total vegetable exports in 1988 to 46% in 1998 and 44% in 2008. In contrast, oilseeds (e.g. canola, soybeans) and vegetables/roots (e.g. beans) increased its share from 16% and 5%, respectively, in 1988 to 30% and 16% in 2008.(1)

Pollution from agricultural trade – is there a case in Canada?

A case can be made for the need to study the environmental impact of crop trade liberalization in Canada, when contrasting exports with environmental changes. For example, most of Manitoba’s agricultural land in 1981 had very low levels of residual soil nitrogen (RSN), between zero and 9.9 kg N/ha.

1981 Residual Soil Nitrogen (RSN) on farmland, © 2010 Agriculture and Agri-Food Canada. All rights reserved.

In 1991, right after signing the Canada-US Trade Agreement (CUSTA), almost all of Manitoba’s agricultural land had either moderate RSN levels (between 20 and 29.9 kg N/ha) or high (30-39.9 kg N/ha) (2). By 2001, most of its land had either high RSN levels or very high (above 40 kg N/ha).

2001 Residual Soil Nitrogen (RSN) on farmland, © 2010 Agriculture and Agri-Food Canada. All rights reserved.

Exports of highly nitrogen-demanding crops also skyrocketed in this period: between 1991 and 2006, exports of vegetables/roots/tubers (including beans) increased in 122%, and exports of oilseeds (including canola and soybeans) increased in 117% during the same period. OECD reported that, in Canada, the average nitrogen requirements of soybeans are 58 kg N/tonne of crops, and dried pulses, rapeseed (canola) and beans had an average requirement of 35 kg N/tonne(3); these are the highest nitrogen-demanding crops grown in Canada in the last 30 years.

Several other factors can influence the environmental impact of crops over soil and water. However, there seems to be a clear pattern between changes in trade patterns, production decisions (crop choices) and environmental degradation across the Canadian agricultural land, which calls for further analysis at a more disaggregated level.

(1) Statistics Canada, Canadian International Merchandise Trade Database, retrieved on April 23, 2012. http://www5.statcan.gc.ca/cimt-cicm/home-accueil?lang=eng

(2) Agriculture and Agri-Food Canada, Agri-Environmental Indicators. Retrieved on February 22, 2012.

(3) OECD Stat, Environmental Performance of Agriculture in OECD countries since 1990, retrieved on February 22, 2012.