The Economic Impacts of Food Loss and Food Waste in the Australian Apple Industry: An Equilibrium Displacement Model Approach

Abstract

<p>Food Loss and waste has been gaining awareness locally and globally across environmental, social and economic contexts. Globally, the direct and indirect costs are estimated to be around $USD 2.7 trillion. Not only does food loss and waste (FLW) represent a significant monetary loss, but there is also a loss of inputs into food that is not consumed which can be problematic for both private and public sectors. Food loss and waste can result from a range of drivers and the rates of FLW differ among value chain sectors, nations and food groups.</p> <p>Inconsistencies in the measurement of food loss and waste exist because of differences in definitions. Food loss and waste is frequently identified as edible product that is removed from the value chain, yet the final destination or end use can influence whether it is counted as FLW. For example, some definitions specify FLW to be food intended for human consumption that does not result in human consumption while other definitions do not count food not consumed by humans if it is employed by a non-food, but productive use such as animal feed or biofuel. These definitional differences can result in significant variations in FLW measurement and in estimates of its cost (Chapter 2).</p> <p>Identification of the drivers of FLW, including environmental, economic, technological and behavioural factors can help to identify key areas of concern and intervention points for strategies to reduce FLW. However, to allow for informed decisions on strategic industry investment to be made, an understanding of the distribution of the benefits and costs among industry sectors from driver-induced shocks and alternative investments is needed to facilitate efficient allocations of resources. Equilibrium Displacement Models (EDM) have commonly been used for similar purposes and provide a consistent framework for the measurement of the economic impacts of FLW. The EDM framework uses linear approximation of changes to market prices and quantities as a result of exogenous changes and only requires single point price and quantity data which are reflective of a 'representative' period of time. Changes in prices and quantities from exogenous demand and supply shocks allow for the calculations of changes in economic surplus as measures of the gross benefit or cost to the industry and the distributions of those benefits and costs among industry sectors.</p> <p>Estimates from 2018, put Australian food waste at $AUD 20 billion a year, just under ten percent of the total food industry value. Fruit and vegetables are among the food groups with the highest amounts of loss and waste. The Australian apple industry is currently facing a number of interrelated FLW challenges including climate change, labour shortages, and changing consumer preferences, in addition to existing significant volumes of loss and waste. Conservative estimates are that 40 percent of total apple production is currently lost or wasted at an annual cost of $245 million (Chapter 3).</p> <p>Investment and development strategies in the Australian apple industry are largely funded through levies paid by apple producers and collected by the Department of Agriculture and Water Recourses (DAWR). DAWR has four prioritized strategies around sustainability, profitability and increasing demand. It is important to identify the beneficiaries from targeted industry investments, such as strategies to reduce FLW, to ensure the costs associated with the levies are allocated to those that benefit. The results from an EDM that was developed of the Australian apple industry (Chapter 4) indicate that relatively small demand or supply shifts in different industry sectors that are aligned with industry priorities can deliver significant potential economic benefits to Australian apple value chain participants. On-farm productivity improvements and consumer trust in product quality are key areas with potential to deliver significant industry benefits.</p> <p>The economic impacts from current challenges confronting the Australian apple industry are assessed using the EDM specified in Chapter 4 (Chapter 5). The recent drivers of losses in apple production have been drought and bushfires and severe labour shortages resulting in unharvested fruit, all of which pose real threats to the sustainability of the Australian apple industry. The implications of these concurrent real-time issues are significant early-stage production losses that reverberate through the chain resulting in tens of AUD millions in economic surplus losses. Proactive strategies to mitigate production losses, such as the adoption of netting, are found to offer potential industry gains, particularly with producer access to a subsidised netting program. Investments in education, training and promotion of career opportunities to address labour constraints and directed investments to reduce the impacts of climate-related events are priorities for strengthening industry resilience.</p> <p>Shifting focus to the latter stages of the value chain, household and retail food waste is responsible for some of the highest rates of food removal from value chains in developed countries. Although there have been initiatives to reduce food waste at the household level there has been limited economic evaluation of the impact of food waste reduction.</p> <p>Theoretically a reduction in household waste demand will lead to an overall loss of economic surplus. There are potential gains to consumers from increased food security at lower prices however any change in consumer welfare is dependent on whether consumer surplus on food waste is included in the measurement. There are two schools of thought on this. The first argues that consumers do not receive economic surplus on wasted food and therefore should not be included in economic measurement. The counter argument is that food that is ultimately wasted represents value to consumers and can be interpreted as safety inventory or as risk mitigation by consumers.</p> <p>Separate demands for household consumption and household waste were incorporated into the EDM of the Australian apple industry to model a reduction in household waste (Chapter 6). In assuming that 28 percent of food purchased by consumers is wasted, a one percent reduction in demand for household food waste was shown to result in a potential loss of almost $AUD 1.81 million for the Australian apple industry if consumer surplus on food waste is included in surplus measurement. Excluding economic surplus on food waste from the measurement reduces the overall industry loss to $AUD 0.63 million. The results are consistent with theoretical expectations from the two schools of thought. While there are potential savings for consumers, their outcome is only positive if consumer surplus associated with household waste is excluded from surplus change measurements. For retailers and food service providers there are increases in apple waste which require additional management.</p> <p>The key message is that the overall and distributional economic impacts should be given consideration in any food waste (loss) reduction strategies. Often food waste reduction strategies are aimed at the consumer however reduction of food losses at the early stages of food value chains has the potential to deliver industry benefits. </p> <p>Further expansion of the EDM framework to incorporate outcomes beyond private value chain members to account for externalities resulting from food loss and waste is warranted for comprehensive measurement. A diagrammatic framework to account for external chain impacts is presented in Chapter 7. The premise of the framework is that suboptimal performance of a chain or network can occur due to underinvestment in "chain goods", analogous to the concept of club goods, and the presence of "chain externalities", both positive and negative. Examples of chain externalities in the context of the Australian fresh apple value chain are underinvestment in research and development, for example robotic harvesting and adoption of netting, the generation of greenhouse gas emissions, and food waste and the loss of associated chain inputs. Potential exists for collaboration between chain actors to rectify such market inefficiencies. The critical questions are whether the benefits of resolving the chain/market failures exceeds the costs.</p> <p>The results from this research highlight the vulnerability of the Australian apple industry to contemporary drivers of apple loss and waste which impose significant economic costs on the industry. Collaborative actions by chain participants can potentially help to overcome market inefficiencies and boost the resilience of the industry however prioritisation of industry strategies requires considered appraisal of the overall and distributional benefits and costs of targeted investments. Identification of the value chain stages in receipt of the largest shares of benefits or costs allows for informed decisions on the appropriation of producer levies to alternative industry investments. EDMs are valuable analytical tools in this regard and the results from this research should prove helpful in industry strategy evaluation and policy development. Extension of the EDM framework to account for externalities in a manner that is consistent with the diagrammatic framework presented in Chapter 7 is a natural extension of this work to take account of external benefits and costs. Finally, EDM is a method than can readily be applied to other industries to provide valuable information that is critical for designing food waste or loss intervention strategies.</p>