Potential Impact of Country-of-Origin Labeling on Beef Industry Structure

Nothing about COOL has been particularly simple. In fact, COOL provisions represented one of the most vigorously debated elements of the 2002 Farm Bill. Nowhere was the debate over COOL more contentious than within the beef industry. Among beef industry participants at all levels, arguments over COOL scarcely abated (and probably intensified) after the Farm Bill was passed. Predictably, much of the debate over COOL focused on how much it would cost (and who would have to pay for it). Estimating the costs of COOL became a virtual cottage industry—with estimates varying dramatically depending on assumptions related primarily to record keeping and traceability requirements. A good deal of debate also centered on the potential benefits of COOL in terms of increased consumer demand for beef. Here, as with cost estimates, it was very difficult to arrive at a consensus. In early 2004, due at least in part to the ongoing debate related to COOL costs and benefits, Congress added an amendment to the 2004 Appropriation Act that delayed mandatory COOL for an additional two years on all covered products except for fish and shellfish (for which mandatory COOL took effect as scheduled on September 30, 2004). The beef industry’s focus on COOL costs is understandable. The industry currently is ill equipped to provide the level of traceability that the USDA has consistently indicated the labeling program will require. Sorting out how much it will cost to make compliance possible is very important. But it is also somewhat surprising that an industry which has in the past seemed almost preoccupied with structural issues (e.g., packer concentration and captive supplies) has virtually ignored the potential market structure implications of COOL legislation. One vital element of the COOL legislation (as it is currently written) is that retailers are responsible not only for making sure covered products are labeled, but also for documenting that labels are accurate. This situation means that information on country of origin will have to be communicated clearly along the supply chain. In the beef industry, where the supply chain is rather long and complex, with ownership of cattle often changing several times along the way, this task may be a real challenge. One logical way to deal with that challenge is through contracting, or perhaps other forms of coordination. In this article, we discuss how country-of-origin labeling is likely to affect vertical coordination/vertical integration strategies in the beef industry. In so doing, we seek not only to inform the debate over COOL, but also to place COOL within the larger context of industrial organization issues that have been the focus of much scrutiny in the beef industry over the past twenty years. Considering COOL in this larger context may lead to a different policy outcome than from a myopic focus on the costs and/or benefits of this (or any other) individual program.