Economic Consequences of Mandated Grading and Food Safety Assurance: Ex Ante Analysis of the Federal Marketing Order

The U.S. pistachio industry, located almost exclusively in California, has grown substantially over the past thirty years and now occupies an important and growing share of the world market. In recent years, a group of growers led an initiative to establish a federal marketing order, which will work to assure consistency in the quality of California pistachios and thereby increase consumer demand and confidence in the product and enhance producer returns. The marketing order, scheduled to take force in August 2005, will establish a maximum aflatoxin tolerance level, maximum limits for defects, a minimum size requirement, and mandatory inspection and certification. The intention is to provide some quality assurance to buyers so as to offset the negative consequences of concerns over the potential for a food scare affecting pistachios, as well as to reduce the odds of an aflatoxin event and a food scare affecting pistachios, and to mitigate the consequences if an event should occur.This monograph reports the results of an ex ante assessment of the likely costs and benefits of the marketing order program. In order to assess the costs and benefits accruing to the various groups, we developed a stochastic simulation model of supply and demand for California pistachios, designed to allow us to represent the introduction of the federal marketing order for California pistachios. The study revealed that the measured benefits to producers, the nation, or the world always well exceeded the corresponding measure of costs, typically by many times. The benefit-cost ratios were generally greater than 3:1 and often greater than 6:1, which means there is substantial leeway to accommodate potential errors in assumptions and yet have favorable findings. In present value terms, the benefits to producers were estimated in the baseline scenario at $75.3 million. Sixty percent of the overall benefits, $115.9 million, would accrue to domestic consumers. These are significant values, and are large relative to the cost of compliance with the program, which is a very small amount—about half of 1 percent of the current value of domestic sales