Reducing food losses in supply
In this section we examine the economic impacts of (reducing) food losses in a low-dimension partial equilibrium analysis. Figure 1 depicts the market for a food commodity,d with a standard upward sloping supply curve and a standard downward sloping demand curve. The price mechanism ensures that demand equals supply. The equilibrium is reached at point A, where the price is P0 and the quantity traded is Q0. The depicted situation is best interpreted as capturing the full supply chain from farm to fork, but concealing the various intermediate stages in supply (for example, storage, transport, processing).
Let us assume that there are losses in the production and supply of this food commodity. In such a situation, the socially optimal supply curve, or the supply curve of this food commodity that would not have these losses, lies below the original supply curve, as depicted by Supply’ in Figure 1; given the original price, P0, more can actually be produced and supplied to the market (Q2 at point B), or the original quantity, Q0, can actually be produced at a much lower cost (P3 at point C) if losses were to be absent. Note that the ‘optimal’ supply curve does not necessarily have to be parallel to the original supply curve, as the extent of losses may vary with the scale of production (and price). We abstract from this for ease of exposition.
Impacts on price, quantity and welfare
What happens if food losses in supply for the food commodity in question are tackled? Suppliers may, for example, be induced to tackle the losses because of the emergence of a new technology, which makes this possible and worthwhile, or new policies (regulations, taxes and subsidies) that penalise and stimulate reductions in food losses. The action of avoiding the losses, given the original demand curve and given the underlying motivation of doing so, would result in a lower price, P1, and a higher equilibrium quantity, Q1, in the market, as given by point D. At this new equilibrium consumers can buy more food at a lower price, resulting in a welfare gain to consumers as measured by the change in the consumer's surplus of P0ADP1. Similarly, producers can sell more, but at a lower price, resulting in a change in the producer surplus of P1D 0 - P0AP3, which is also positive. The overall welfare gain equals the sum of the change in the producer and the consumer surplus, which amounts to the area P3AD 0, the blue shaded area between the new and old supply curve and under the demand curve.
These impacts - lower equilibrium price, higher quantity of food produced and consumed, and welfare gains for both producers and consumers - seem to be in line with the qualitative literature on impacts [2, 4, 11] and are encouraging from the perspective of low-income countries, where food losses on the supply side dominate. From Figure 1, it can also be seen that the size of the impacts will depend, amongst others, on how big the losses are relative to the size of the market, which as shown, varies by type of food and country or region. Whatever the extent of the losses, in terms of quantity the size of the impact, Q0Q1, however, is much smaller than the original size of the problem, Q0Q2, which is due to the change in the price. This is in sharp contrast with how the current literature approaches impacts [10].
Reducing food waste in demand
In this section we examine the economic impacts of (reducing) food waste. Figure 2 depicts the market for a food commodity, again with the supply chain from farm to fork collapsed into a standard upward sloping supply curve and a standard downward sloping demand curve and the equilibrium at point A, where the price is P0 and the quantity traded is Q0.
Let us assume that there are losses in the consumption of this food commodity, in that consumers waste part of what they demand. In such a situation, the socially optimal demand curve, or the demand curve that would not have these losses, lies to the left of the original demand curve, as depicted by Demand’ in Figure 2; given the original price, P0, less needs to be consumed (Q2 at point B) so as to reach a certain level of utility if waste was to be absent, or the original quantity, Q0, represents a much lower value to the consumer (P3 at point C). Equivalent to the analysis on the supply side, the ‘optimal’ demand curve does not need to lie parallel to the original demand curve as the extent of waste in demand may vary with scale and price. We abstract from this for ease of exposition.
Impacts on price, quantity and welfare
What happens if food waste in demand for the food commodity in question is tackled? Consumers may, for example, be induced to tackle food waste because of a rising morale against waste, or new policies (regulations, taxes and policies) that penalise and stimulate reductions in food waste. Avoiding food waste in consumption, given the original supply curve and given the underlying motivation of doing so, would result in a lower price, P1, and a lower equilibrium quantity, Q1, in the market, as given by point D. Since producers are able to sell less and at a lower price, their welfare is negatively affected as shown by a change in the producer surplus of P1DE - P0AE = − DAP0. Taking the difference between the area under the new and old demand curve and above the new and old price respectively, P1DF - P0AG, would result in a change in the consumer surplus of P1DBP0 - BAGF, which here is negative. This would ignore, however, the fact the old demand curve encompasses waste, so that consumers only realise P0BF in value when consuming Q0 of the food commodity at a price P0; the remainder, BAGF, is lost due to wastage. The change in the consumer surplus if waste is avoided thus amounts to P1DF - P0BF = P1DPB0, which is now positive. The overall change in welfare that results equals P1DBP0 - P1DAP0 = − BDA, the red shaded area in Figure 2, which is negative.e
Whereas the equilibrium quantity goes down from Q0 to Q1, the distance Q2Q0, or BA, represented waste and was not eaten by consumers in the first place, so that actual food intake is going up from Q2 to Q1. Combined with the lower equilibrium price for food this is a positive outcome for consumers in this market, whose food security is going up. This outcome is in line with statements made by the qualitative literature on impacts [2, 4, 11] and is encouraging from the perspective of medium- and high-income countries, where food waste on the demand side is high on the policy agenda.
As before, the size of the impacts of reducing food waste in demand, in quantity terms Q0Q1, is influenced by the original size of the problem of food waste (Q0Q2) (though much smaller compared to the original size). More importantly, what is concealed in the literature, is that trade-offs occur between producers and consumers in this market, with the former being worse off, and potentially leading to negative employment effects. Reducing food waste is simply not in the interest of producers who aim to maximise profits, even if it is on commodities that are wasted.
To conclude that the overall welfare impacts of reducing food waste in demand would be negative is wrong because the analysis is still not complete. The question that remains is what consumers would do with the saved expenses on this particular food commodity, P0Q0 - P1Q1. Consumers may want to spend it now on the consumption of other commodities, and perhaps food.f In this case it would lead to a shift in the demand curve(s) of the respective commodity(ies) in the opposite direction of that depicted in Figure 2, that is, a shift to the right, leading to a higher price and quantity in the accompanying market(s) and a welfare gain in this (these) market(s) for producers and consumers. The overall welfare change(s) in this (these) respective market(s) would be positive and equivalent to the difference between the new and old demand curves and above the supply curve (if one were to take the example of Figure 2, DAGF). If consumers add the saved expenditures on previously wasted food to savings, the money could be used for consumption in future with associated utility gains then being realised.
The overall welfare impacts in the market of the food commodity in which waste is reduced and other markets combined thus depends on consumer preferences. Nonetheless, the welfare loss for producers, which occurs due to waste reduction by consumers of the food commodity in question and results in a fall in sales and price, is highly likely to be compensated for by welfare gains for producers and consumers in other markets benefiting from increased spending,g whether or not over time, because waste is avoided and resources that were previously spent on it are now put to a productive and welfare-generating use.
Varying the slope of demand and supply curves: inter-temporal effects
The outcomes, and thus, the size of the welfare effects, depend on the slope of the demand and supply curves. Assuming that the extent of food losses, respectively waste, is the same as before (that is, the shift in the supply or demand curve is of the same distance as before), and independent of scale and/or price, we can distinguish the following cases, discussed separately for the case of reducing food losses in supply and reducing food waste in demand.
Impacts on the outcomes of reducing food losses in supply
In the presence of a perfectly inelastic (that is, vertical) demand curve, the new equilibrium is at point C (same quantity, lower price), with consumers receiving all the gains from reducing food losses in the form of a lower price and a welfare gain of P0ACP3. In the presence of a perfectly elastic (that is, horizontal) demand curve, avoiding food losses in supply results in a new equilibrium at point B, where all the gains translate into an increase in the equilibrium quantity supplied and demanded (and no change in price). This results in a welfare gain to producers of P3AB 0.
Varying the slope of the demand curve thus influences the distribution of welfare gains over producers and consumers, but as shown, does in itself not lead to sign changes. With the demand for food generally being fairly inelastic, though not perfectly, the truth is likely to lie in between the two extreme cases presented.h
Similarly, if supply is perfectly inelastic (vertical supply curve), the equilibrium is at point E, resulting in a lower equilibrium price and higher equilibrium quantity compared to the analysis before. Consumers gain by P0AEP2, but producers here lose out by FEQ2Q0 - P0AFP2. The overall welfare result, however, is positive (area AEQ2Q0). Finally, a completely elastic (horizontal) supply curve results in an equilibrium at point G, whereby demand increases the most (to Q3) as the price falls the most (to P3) and all welfare gains end up with the consumers who benefit to the maximum extent possible, by area P0AGP3.
A vertical supply curve is representative of the short run, where it is generally difficult for producers of food to respond to price changes, whereas a horizontal supply curve corresponds to a long-run situation, where producers of agri-food commodities can respond and generally are price takers in a highly competitive market. The actual representation is likely to lie somewhere in between, but in the short run will be closer to being inelastic and in the long run will be more elastic.i These findings thus suggest the importance of inter-temporal effects, which are typically ignored in the literature. Specifically, overall welfare and the welfare of consumers generally goes up, whereas that of producers could go down, namely in the case of supply being relatively inelastic, that is, in the short run: the increase in sales from selling previously lost produce could be insufficient to compensate for the price decrease on existing sales. In the long run, supply of agricultural commodities is more elastic, so then welfare gains are likely to occur and most of these end up with the consumer.
Impacts on the outcomes of reducing food waste in demand
Here we ignore what happens in other markets and focus on the market of the food commodity in which waste in demand is reduced (see Figure 2). Specifically, in the presence of a perfectly inelastic (that is, vertical) demand curve, the new equilibrium is at point H, resulting in a lower equilibrium quantity, Q2, and a lower price, P2. The change in the consumer surplus would again be positive and equal to the area, P2HBP0, whereas the change in the producer surplus would be negative and equal to - P2HAP0. The resulting overall welfare loss in this market is - HAB, slightly more negative than before. In the presence of a perfectly elastic (that is, horizontal) demand curve, avoiding food waste in demand results in a new equilibrium at point I, with an even lower quantity, Q3, and price, P3. This would result in a higher welfare loss in this market for producers, equal to - P3IAP0, but no impact on consumers. Similarly, if supply is perfectly inelastic (vertical supply curve), the equilibrium is at point C, where the reduction in wastage in demand fully translates into a lower equilibrium price, P3, but has no impact on quantity. The lower equilibrium price benefits consumers by P3CBP0, but hurts producers, who suffer a maximum loss of - P3CAP0, resulting in an overall welfare loss in this market of - CAB. Finally, a completely elastic (horizontal) supply curve results in an equilibrium at point B, whereby there is only a negative impact on the equilibrium quantity, to Q2, but no impact on price, which would result in zero impact on producers and consumers in this market.
In this simple, low-dimension diagrammatic analysis of reducing waste in demand, consumer welfare generally goes up or at best remains the same, whereas producer welfare falls or at best remains the same, resulting in an overall welfare impact ranging from negative to, at best, zero in the long term if the supply of agri-food commodities would be almost perfectly elastic. As indicated before, welfare gains to producers and consumers in other markets will result if consumers decide to spend the saved expenditures on other commodities. In sum, with elasticities differing for different commodities and in the short and long run, the truth about what will happen in reality when reducing food waste will lie somewhere in between, with trade-offs occurring between consumers who benefit, and producers of the food commodity for which waste is reduced, who lose out to the benefit of other producers who gain from increased spending now or in future.
Complicating factors
We have made various simplifying assumptions to come to our findings. Below we discuss how these complicating factors may alter the results.
The extent to which food losses and/or waste are avoidable
The impacts may be much smaller if only a part of the food losses and/or waste is avoidable. Unavoidable food losses, respectively waste, are generally considered by the literature as being inedible, such as bones, skins and peelings and represent about 19% of the food lost and wasted [14]. The remainder could possibly be avoided. The FAO uses conversion factors of the same order of magnitude to determine which part of the agricultural product is edible, specifically in the range of 0.7 to 1, with the exception of fish, which has a conversion factor of 0.5 [2].
Costs of reducing food losses and/or waste
What can feasibly or cost-effectively be avoided depends not only on the benefits but also on the costs involved in reducing food losses and/or waste compared to the status quo. If there are costs involved in reducing food losses, these will have a price-increasing and quantity-reducing effect in the market for the food commodity in question, counteracting the original shift down (or to the right) that occurs when reducing food losses in supply and counteracting the observed welfare gains. The literature remains surprisingly silent on the issue of costs of reducing food losses and waste (see [4] for some anecdotal evidence), which leads to incomplete and unfounded statements on impacts. Whereas some measures to reduce food losses on the supply side, such as improved harvesting techniques by farmers or other behavioural changes (also by other actors in the supply chain), may cost relatively little, other measures, such as investments in storage facilities and improved transport (including cold chain), may cost much more. Consistent data on costs of measures to tackle food losses are hard to find, not the least because they are likely to vary with the food commodity in question, the segment of the food supply chain, and by country due to differences in, for example, the level of development, location and climatic conditions.
Similarly, the net welfare gains may be lower if there are costs involved with reducing food waste by the consumer, which counteract the original shift down (or left) that occurs when reducing food waste in demand. All in all, although behavioural change on the part of consumers to waste less food may directly cost relatively little, it may require consumers, for example, to go more often to the supermarket to buy fresh food that is better adjusted to their needs and wants, which involves time and effort. In other words the perceived or indirect cost by the consumer may still be high.
Factors causing food losses and/or waste
Food losses may themselves be explained by underlying factors, including scale of production and price. Relatively low food prices are said to be an important cause of food losses in supply and food waste in demand [2, 4, 10]. If we assume that food losses decrease with greater scale (and price), the observed impacts of reducing food losses will be greater if the market is small and the price is low. This can be depicted by supply curves with and without losses, which are increasingly converging to one another as the quantity and price increases.
If we were to assume that food waste is increasing with the amount consumed and decreasing with the price paid for food, reducing food waste results in greater impacts if the market is of reasonable size (that is, the quantity traded is high and the price is low). This can be depicted by increasingly diverging demand curves with and without waste as the quantity increases and the price decreases.
Combining aforementioned observations, thus, it may well be that from the perspective of costs and benefits it is better for agri-food producers and suppliers to allow for some food losses (at a relatively low cost) rather than to take measures (at a relatively high cost and low returns) to combat them (also suggested by [4]). Similarly, for consumers the relatively low cost (price) of food may prevent her from taking action.
Interactions within the supply chain
Another simplification is that the framework presented cannot address where the losses occur in the supply chain (primary agricultural production stage, processing stage, storage and transport stages), which is shown to vary quite a bit, as do causes and measures to tackle the losses [2, 4]. As a consequence, costs to tackle food losses may be borne in, say the beginning, of the supply chain, whereas the benefits may occur later in the chain. This and the time dimension associated with costs occurring upfront, and benefits - if any- occurring later, often impedes relevant actors to take action. Anecdotal evidence comes from farmers improving the quality of their crop or improving storage that reduces food losses, which subsequently cannot be sold since they do not have market access or as the market cannot absorb the additional quantity, or, if it can be sold it is sold to traders at a price that does not recuperate the original investment made. Another example is that of food processors making technical improvements that are negated by retailers when they withdraw food orders that were originally agreed upon. Finally, farmers are often not able to sell crops that do not meet marketing standards (for example, on shape) but are otherwise perfectly fine for human consumption, as they are not accepted by retailers and consumers [2, 4, 15].
Interactions with other markets and actors
Our analysis makes the usual ceteris paribus assumption, that is, that all else remains the same, which is highly unlikely. For example, reducing losses generally results in a lower price, which could increase demand elsewhere in the system, potentially leading to second-order effects. An example is food as feed (for example, from grains or vegetables and fruits) becoming cheaper if losses in production and supply fall, as a result of which meat demand may go up (as meat will become cheaper to produce due to lower intermediate input costs of using feed), which is less efficient in the use of resources compared to crops in that it uses relatively more water and land [16, 17]. Similarly, biofuel use may go up. Another example is that households may waste more if food becomes cheaper, undoing the positive impact of reducing food losses on the supply side. Of course, consumers under pressure from prevailing morale may also display the opposite behaviour and reduce food waste. Opening up the framework for trade, it is likely that the increased net food supply at a lower price will find its way to export markets and is able to better compete with imports, thus improving the trade balance for the food commodity in question. This does not alter the main outcomes.