Study: Consumers will pay more for specially labeled milk

Dairy producers are getting a clear message from consumers: People read labels and many are willing to pay more for products marketed as organic or all-natural.

A new study from UW–Madison helps reveal the extent of the market for these products, how much extra people are willing to pay and the benefits derived from having specially labeled products in the marketplace.

The milk industry was one of the first to see the introduction of genetic modifications and the associated rise of organic products. In 1993, the FDA approved the artificial growth hormone rBST (recombinant bovine somatotropin). It was introduced into the milk supply in 1994, and genetically modified foods became an important issue in the U.S. food system. Would consumers put a special value on foods that were not genetically modified? How much value both for consumers and producers is gained by labeling these products?

Jeremy Foltz, assistant professor of agricultural and applied economics and extension, and Tirtha Dhar, research associate with the Food System Research Group, analyzed consumers’ actual buying behavior during a five-year period. By studying milk purchases in 12 key metropolitan markets, the researchers found that consumers pay up to $1.50 per gallon more for milk labeled rBST-free and $3 per gallon more for milk labeled organic.

Willingness to pay higher prices is not necessarily linked to income. A certain segment of the population perceives a risk to genetically modified foods and searches for alternatives. Foltz and Dhar found that a small increase in the price of standard brand milk leads many buyers to switch to specially labeled milk, such as organic. And once consumers switch to this higher-priced market, they generally do not switch back.

The market competition from the introduction of milk labeled organic or rBST-free decreased the price of standard brand milk by 2¢ per gallon. When projected to national sales, this represents approximately a $130-million-per-year benefit that consumers receive from the existence of specially labeled milk in the market – even though they may not purchase it.

Organic milk currently accounts for less than a 1 percent share of the milk market in the United States, yet it is the fastest-growing segment of the dairy industry. The rBST-free market has declined since 1998.

In July 2003, Monsanto, the chemical company that makes rBST, brought suit against a family-owned dairy in Maine that uses rBST-free labels. Monsanto claims the labels imply that the artificial growth hormone is potentially harmful. Many Wisconsin dairies also sell milk with similar labels.

“Our study clearly shows that all consumers gain significant benefits from milk labeling. Weakening the standards or outlawing them altogether, as Monsanto’s suit might do, would reduce those benefits,” says Foltz.

The research was funded by the Program on Agricultural Technology Studies (PATS) and the Food System Research Group (FSRG).