AGRIFOOD

ECONOMICS

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 FIRST PART – SUPPLY AND DEMAND SPECIFITES OF AGRIFOOD SYSTEM

THE FOOD SYSTEM ..................................................................................................................................................................................................................................................... 5

THE SECTORS OF THE FOOD SYSTEM: AGRICOLTURE, FOOD INDUSTRY, RETAILING, CATERING AND FOOD SERVICES ........................................................................................ 7
THE CARATHERISTIC OF THE DIFFERENT SECTORS IN THE FOOD SYSTEM: ............................................................................................................................................................ 13
AGRICOLTURE ...................................................................................................................................................................................................................................................... 13
FOOD INDUSTRY .................................................................................................................................................................................................................................................. 20
RETAILING ............................................................................................................................................................................................................................................................ 25
CATERING AND FOOD SERVICES ......................................................................................................................................................................................................................... 29
THE SUPPLY CHAIN ANALYSIS AND PRICING .......................................................................................................................................................................................................... 30
ECONOMIC APPROCH: NEOCLASSICAL APPROCH .............................................................................................................................................................................................. 34
CONFLICT OF INTEREST IN THE FOOD SUPPLY CHAIN ........................................................................................................................................................................................ 35
MANAGERIAL APPROACHES: SUPPLY CHAIN MANAGEMENT ........................................................................................................................................................................... 37
ECONOMIC APPROCH: NEW ISTITUTIONAL ECONOMIC .................................................................................................................................................................................... 39
TRANSICTION COST ECONOMICS ........................................................................................................................................................................................................................ 41
VERTICAL COORDINATION .................................................................................................................................................................................................................................. 45
TRANSACTION GOVERNANCE IN FOOD SUPPLY CHAIN ..................................................................................................................................................................................... 47
CIRCULAR ECONOMY ............................................................................................................................................................................................................................................... 48
BIOECONOMY .......................................................................................................................................................................................................................................................... 54
FOOD CONSUMPTION ............................................................................................................................................................................................................................................. 56
QUALITY ATTRIBUTES OF FOOD PRODUCTS ........................................................................................................................................................................................................... 61
TIME PREFERENCES AND EATING BEHAVIORS ........................................................................................................................................................................................................ 63

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 SECOND PART – MAIN CHALLENGES

HUNGER ................................................................................................................................................................................................................................................................... 68
OBESITY .................................................................................................................................................................................................................................................................... 72
SUSTAINABILITY ....................................................................................................................................................................................................................................................... 75

THIRD PART - POLICIES

FOOD POLICIES AND PUBLIC INTERVENTION .......................................................................................................................................................................................................... 79

FOOD SAFETY POLICY .............................................................................................................................................................................................................................................. 80
LABELLING OF FOOD PRODUCTS ............................................................................................................................................................................................................................. 82
POLICY OF TRACEABILITY OF FOOD PRODUCTS ...................................................................................................................................................................................................... 84
FOOD QUALITY ......................................................................................................................................................................................................................................................... 86
THE COMMON AGRICULTURAL POLICY (CAP) ........................................................................................................................................................................................................ 88

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 COURSE STRUCTURE

FIRST PART – SUPPLY AND DEMAND SPECIFICITIES SECOND PART – MAIN CHALLENGES THIRD PART – POLICIES

hunger
the food system food policies and public intervention

the sectors of the food system: agriculture, food

industry, retailing, catering, and food services obesity
labeling

supply chain analysis and pricing sustainability

food safety

food consumption
traceability

food product quality attributes food quality

time preferences and eating behaviors

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 FIRST PART – SUPPLY AND DEMAND SPECIFITES OF AGRIFOOD SYSTEM

THE FOOD SYSTEM

Food system: all the activities connected to production and distribution of food products up to the final consumption. It is composed by input industries, agricultural sector,
food manufacturing, wholesale, retailing, catering and food services, final consumption.

The link among the different parts of the system are due to flows.

Why we talk about a system? There are different sectors of the food system. But why we talk about a system? Because there are different sectors (agriculture, food industries,
retailing, wholesales etc.) and each sector is composed by firms of different sizes. These companies are connected between each other; there are link between each sector too.
So, that’s the reason why we talk about a system.

These sectors are different, but they are interrelated. The agriculture produces some goods that are sold to food industry. Food industry sells to the retail and processes
goods/products from agriculture to consumers.

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These 3 sectors are connected also by flows:

• material flow (raw materials, products): different sectors need different inputs for example agriculture needs fertilizers, seeds, but they also produce outputs
(apples…). The output of agriculture become input for the processor.
• immaterial flow: is connected to information (it is very important because of consumers’ preferences). When we speak about consumption, we know that there exist
different consumers with different preferences. Preference means also different products. Information is very important in retailing, above all for supermarket => the
reason is that they are close to consumers, so they can see the behavior.
• financial flow

Short supply chain is different from long supply chain:

• Short supply chain: agriculture producer process raw material and then they sell it
• Long supply chain: agriculture is far from retailer

Agribusiness system: all the activities related to agriculture, not just food. That’s mean not just production and consumption but even other activities like production of non-
food items like flower, cotton, wood, etc. (all products from agriculture not related to food). it is more general term that includes not only activities directed to food
consumption, but also activities that use agricultural commodities to produce nonfood products (fiber system). It includes ALL the activities that use agricultural commodities.

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 THE SECTORS OF THE FOOD SYSTEM: AGRICOLTUR E, FOOD INDUSTRY, RETAILING, CATERING AND FOOD SERVICES

Let’s try to give a definition of every sectors of the food system. They have different characteristic even if they are connected.

➢ AGRICOLTURE: activities that are directed to the soil cultivation, farming, and animal husbandry. It is part of the primary sector (agriculture, fishery, forestry). →
PRIMARY SECTOR: Agriculture + fishery (that includes just wild fishes) + forestry.

➢ FOOD INDUSTRY: set of activities directed at the processing of agricultural or natural raw materials in final food products (it doesn’t matter the size of the firm, if it
transforms the agricultural or raw material, it is a good industry). => the biggest company specialized in food manufacturing is Nestlé. The majority of food come from
agriculture, in particular a lot of small firms have less than 10 employees. Then there are raw materials like water. Other products are really connected to agriculture
(like wine and olive oil)

➢ WHOLESALE AND RETAILING: set of activities directed at the transfer of food products from production plants to final selling points. We have two main selling point:
• Wholesale: business to business (B2B)
• Retailing: business to consumer (B2C) (the largest retailer in the world is Walmart. The second one is Carrefour)

➢ CATERING AND FOOD SERVICES: set of activities directed at meal preparation for consumers
• Restaurant industry (HORECA channel: Hotel, Restaurant, Café).
• Canteen industry (school, hospital, etc.)

In the food industry we have firms with different size. The biggest one worldwide is Nestle. In Italy we have big companies like Barilla and Ferrero, which are not big if we
consider the world contest. We have even really small companies. Even if the size of the company is small, they are part of the food industry.

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VOLATILITY OF AGRICOLTURE: Agriculture is quite weak compared to the other sector because agriculture is far from the consumers and because the size of firms is small and
because the products are commodity. There is a volatility of prices and the profitability for the firms is quite low. (not for all the firms in agriculture but generally speaking is
like that. For example, some wine firms have high profitability). That’s why in many industrialized countries there are a lot of specific policies to support the sector of
agriculture. Volatility is due to the instability of products in agriculture. PRICE SETTING MODES: In agriculture the products are commodities because the farmers are price
taker. The market in agriculture is similar to a perfect competition: the trends of suppliers and demands lead to a certain level of prices. These dynamics depends on evolution
of many fact at international and national level. If the prices are lower than production cost the farmer are in trouble. (for entrepreneurs is different because they are price
maker).

There are other two important concept other than the food system that we just saw:

▪ FOOD SUPPLY CHAIN: The supply chain means the pathway among agricultural production, processing, retailing and the final consumers and all the flows between
these sectors. the supply chain refers to just about one product or about a set of products (supply chain of wine, cereals and so on). so, the food system refers to all
the food in the food system. if we refer to a specific product, we talk about of supply chain or value chain. we talk about vertical steps that refer to the production of
specific production.
▪ SECTOR: here we can do a horizontal analysis. It’s a set of firms that have a similar activity, features, and provide similar goods targeting similar needs. (example:
agriculture, food industry retailing)

TO SUMMARIZE:

The food system: all the sectors (agriculture, food industry and retailing) plus all the
chain

We can divide the food system in single chain (production of pasta, selling of bread, the
processing of cheese). And then we have sectors, like agriculture, food industry and
retailing.

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THE AGRIFOOD DISTRICTS: if we introduce the space variable in the analysis of the food system, we can speak about a LOCAL SYSTEM SPECIALIZED IN SPECIFIC FOOD
PRODUCT (food district is similar to territorial cluster).

TERRITORIAL CLUSTER: it’s like a food system in a local level. (in a specific territorial geographical area). In many cases we can talk about specialties = it means specific
production for example of wine or cheese. (PDO = PRODUCTION DESIGNATION OF ORIGIN / PGI = production geographic indication).

These districts can be connected to the MARSHALL INDUSTRIAL DISTRICTS: Marshall talked about a concentration of specific industries in specific area. There are specific
characteristics of these districts:

If there are a number of firms that work in the same field in the same area there is a reduction of costs because for example, they share the same information (example the use
of the same technologies) → AGGLOMERATION ECONOMIES.

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HOW TO EVALUATE THE RELEVANCE OF FOOD SYSTEM IN THE ECONOMIC SYSTEM?

There are three main methods:

1. Based on the value added. This is the most used one. The value added is the difference between value of production minus raw material and services. In this way we
can calculate the value added of the food system. The value added in the food system is the sum of:

Then we can calculate the ratio between the value added of the food system and the GDP

2. The second method is to calculate the employments in the food system and then make the ratio between the workers in the food industry out the number of total
workers in the economic system

3. Total food consumption out of the total consumption of household

The best way is the first one because we can calculate the real economic relevance of food system at national level.

In Italy, the retailing contributes in the most part of the value added of food system. Then there is the catering sector. The incidence / weight of the food system in Italian GDP
is the 17%.

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 THE CARATHERISTIC OF THE DIFFERENT SECTORS IN THE FOOD SYSTEM:

AGRICOLTURE

Agriculture is a set of activities directed at soil cultivation, farming, and animal. Agriculture is strictly connected to the availability of

1. land and natural resources

✓ type of soil is important because of fertility
✓ flat land/hillside/mountain
✓ water availability => irrigation
✓ climate conditions
2. fixed capital (machinery) and raw materials (input like seeds and machineries and technological innovation)
3. labor => labor productivity

we mentioned productivity: it’s extremely important in all the sectors. In agriculture we can talk about:

✓ land productivity
✓ labor productivity

When we talk about PRODUCTIVITY, we start with a production function where the production (𝑞ⅈ ) is in function of fixed capital, raw materials, labors, land, and technological
level.

From this function we can calculate the MARGINAL PRODUCTIVITY and the AVERAGE PRODUCTIVITY

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For us is extremely important the average productivity which is a relation between the quantity (𝑞ⅈ ) and the factors that we use (land or labor). Indeed, in agriculture we can
calculate the land productivity and the labor productivity.

✓ LABOR PRODUCTIVITY: It’s the relation between quantity 𝑞ⅈ of single product (like corn, grapes, rice, apple) and the number of workers
✓ LAND PRODUCTIVITY: it’s the relation between the quantity 𝑞ⅈ of single product (like corn, grapes, rice, apple) and the land (hectare of land)

WHICH IS THE MOST IMPORTANT, LABOR OR LAND PRODUCTIVITY? Land productivity is extremely important, but Labor productivity is more important because is connected
to the outcome and so to the profitability of labor.

There is a strong relationship between land and labor productivity: labor productivity is equal to land productivity times land out of labor

DIFFERENCE BETWEEN PHISICAL PRODUCTIVITY, ECONOMIC PRODUCTIVITY AND ECONOMIC PROFABILITY:

✓ PHISICAL PRODUCTIVITY: It’s the quantity of production per worker or per hectare. (so, we use tones or hectare as measurement)
✓ ECONOMIC PRODUCTIVITY: we use the value of production, so the turnover. Value production per hectare multiply for hectare per worker. The value of production
depends on two factors: the quantity (endogenous variable) and price level (exogenous variable)
✓ ECONOMIC PROFABILITY: we have to cut the cost. profitability is connected to the use of indicators of profitability. We use indicators to know if the activity is
profitable or not. For example, the household income per work is an indicator of profitability. We use the value added.

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ECONOMIC PRODUCTIVITY:

1. IN AGRICULTURE THERE ARE A FEW ASPECTS VERY IMPORTANT:

✓ there is a strong price volatility for any products.
✓ Then different products have different prices level. The price depends even on the process of production
✓ We also have to remember that agriculture depend strongly to the weather condition that affect prices too. Here we use the value added.
2. INNOVATIONS: Agriculture depends even on innovation that can lead to higher productivity (in case of new technology) or it can lead to higher price (like in the case
of production of biological).
An example is the introduction of robotics in agriculture lead to saving human work cost and it can lead to higher productivity. Through drones for example we can
save labor because for example we can use drones for fertilizing. We can even use these kinds of innovations to reduce the environmental impact (for example
spreading the right amount of fertilizing). So, innovation have impacts on LABOR PRODUCTIVITY, LAND PRODUCTIVITY AND ENVIRONMENT
3. LABOR SAVING INNOVATION:
✓ Mechanization lead to reduction of human works, so a reduction of costs
4. INTENSIVE AGRICULTURE: We have a high productivity from the land (high level of value production per hectare)
EXSTENSIVE AGRICULTURE: Low level of value production per hectare

ECONOMIC PROFITABILITY: WE USE THE VALUE ADDED.

AGRICULTURE CAN HAVE TWO SOURCES OF LABOR:

✓ Employees
✓ Household: in this case the income is equal of household labor plus profit

IF I WANT TO COMPARE TWO SMALL BUSINESS THE BEST INDICATOR IS THE INCOME OUT OF LABOR. (INCOME IN TERM OF FAMILY WORKERS PER FARM)

IF I WANT TO COMPARE TWO BIG BUSINESS THE BEST INDICATOR ARE:

✓ BIOPRODUCTION PER WORKER

✓ THE VALUE ADDED PER WORKER

Agriculture is helped by government because is a weak sector. In this sense we can have the income due to the market and an income due a public support.

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MULTIFUNCTIONAL AGRICULTURAL: We mentioned that agriculture is connected to natural and agriculture landscape. OCED created the definition of multifunctional
agriculture: agriculture is important not just because produce product that can be sells in the market but it’s important even for the services that it produce to the society (like
the landscape: it’s not a natural landscape but it’s an agricultural/rural landscape) → landscape is a good externality for the society. Landscape is an immaterial goods as the
biodiversity. So, agriculture produce market goods and non-market goods. It produces a public goods.

✓ EXTERNALITY: positive or negative utility due to an economic activity. (obesity: it’s a behavior that produce a negative externality because it’s a cost for society. Like
pollution. Landscape is a good externality due to agriculture)
✓ PUBLIC GOODS: that are goods without a market like historical heritage, a natural park, a church. It’s something that we can’t buy. They have two characteristics:
▪ Non rivalrous: their use doesn’t reduce the quantity of goods that other person can use (The fact that I can see an historical church doesn’t reduce the
possibility to watch the church from other consumers)
▪ Not excludable: we can’t exclude people that doesn’t pay for the use of the same good (for example a park has some cost to maintain itself. That costs are
taken from taxes. If someone doesn’t pay taxes doesn’t mean that you can’t use the park)

PRICE SETTING MODES: In agriculture the products are commodities because the farmers are price taker. The market in agriculture is similar to a perfect competition: the
trends of suppliers and demands lead to a certain level of prices. These dynamics depends on evolution of many fact at international and national level. If the prices are lower
than production cost the farmer are in trouble. (for entrepreneurs is different because they are price maker).

AVARAGE TOTAL COST:

What happen to these thee farms if the product is wheat? For the three farm the price is the
same because wheat is a commodity.

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 1. If the price is the blue line:
▪ Price is over the costs: that’s a good condition
▪ Who can have the biggest advantage in terms of profits? Farms number 3, because the
distance between the level of price and the level of cost is higher than the other farms
2. If the price is the green line:
▪ For the farmer number 1 the level of the price is the same of the level of the costs (costs
are the same than revenues), so he is in trouble
3. If the price is the yellow line:
▪ For the farmer 1 and 2 the price is below average costs, that’s means that they have
negative profits.
▪ They have two option: wait until the price change or change the commodities they
produce
▪ Farmer 3 still have profits, even if less than before

Firms in agriculture are price taker so they have to accept the prices: if the prices are high there is more
profit

PROFIT FOR UNIT OF PRODUCT: It’s the difference between prices and average costs

So:

▪ If the price is over the costs → there is profit

▪ If the price is the same of the cost → there are no gains and no losses
▪ If the price is lower, then the cost → there are losses

When there are negative trends for prices (price decreasing) is a bad situation for every farm but every single farm has different situation, so the decreasing of prices means
different things for each farmer. Just the most competitive farms can remain in the market.

IF MANY FARMS HAVE TO CLOSE IS A PROBLEM JUST FOR ENTREPRENEURS OR EVEN FOR THE SOCIETY? If there are less farmer there will be less food production which can
be a problem for the market (because less products means higher prices). Then there is even a problem for other issue like biodiversity, landscape because there will be
abandoned land (negative impact on environment). That’s why there are policies that support the farmer.

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WHICH ARE THE MAIN MOTIVATIONS OF PRICE VOLATILITY IN AGRICULTURE?

In the last decades, the commodity market there were a huge volatility due to:

▪ Increase or decrease of petrol price which affect the production (fertilizers are connected to petrol for example, as pesticides)
▪ Demand for the biofuel: biofuel production needs huge amount of land that is taken from the production of food
▪ Changes in Asiatic consumption patterns: for agriculture, the changes in income lead to strong change in consumption pattern. There is an increase of demand for the
food products. There is a problem/conflict related to the land: use the land for biofuel or food production?
▪ Low R&D in agriculture and yield stability
▪ Low stocks
▪ Macroeconomic issues and financial speculation: low or high value of dollars for example
▪ Drought
▪ Export restriction
▪ Climate condition

There are different drivers that can explain the volatility of agriculture products. The market of agriculture is very mobile.

WHICH ARE THE MAIN CONSEGUENCES OF VOLATILITY IN AGRICULTURE?

1. FOR FARMERS:
▪ If the price is over the costs, there is profit
▪ If the price is the same of the cost, there are no gains and no losses
▪ If the price is lower, then the cost there are losses
2. FOR CONSUMER IN INDUSTRIALIZED COUNTRIES
▪ Even if there is strong volatility in the row material, there will be some volatility even in the final products. The volatility will be less strong in the final
products because the cost of production depends also on other factors. So, it’s not a big issue
3. FOR CONSUMERS IN DEVELOPING COUNTRES
▪ It’s a big issue because the incomes are low. So, if there is a change in price it’s a huge problem to access food. So, the major effect of agriculture volatility is
in developing countries

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THE SHORT FOOD SUPPLY CHAIN IN AGRICULTURE:

We can define a short supply chain when there is a short distance from producer and consumers. In the last decade, the short supply chain has played a very important role for
some farm: it’s an important innovation in agriculture. It’s an innovation for the marketing of farms. Short supply chain includes a quite range of production, distribution, and
consumption configurations. The idea is that the farm not only produce the raw material but also process the raw material and sell them or can adopt a restaurant activity. All
the steps of supply chain are run in a specific farm. There are different configurations like:

▪ Farmer markets or open markets ▪ Collective farmers’ shops

▪ Shop at farm level ▪ Kilometro zero (Italian example)
▪ Community supporting agriculture
The short supply chain is an important role just for some. Why? Depends on the condition of location (touristic area vs isolated area for example). If a farmer opens his short
supply chain in an isolate place there are small chance that he sells something. In a city even if there are many short supply chains there are still chances that a farm sells a lot
of problem because they can be known from people and target their needs (so they can differentiate based on costumers needs),

There are overlap between the concept of short supply chain and direct sales:

WHICH ARE THE FACTORS THAT INFLUENCES CONSUMER PREFERENCES OF SHORT SUPPLY CHAIN?

▪ Lower number of steps from production to consumption → higher degree of freshness (sensorial and nutrition proprieties)
▪ Higher transparency on products of origin: there is a direct relation with producer.
▪ Higher level of trust of products because the origin is clear, so the level of trust is increased
▪ Lower prices
▪ Support to the small business

WHICH ARE THE BENEFITS FOR THE FARMER IN THE SHORT SUPPLY CHAIN?

▪ They can increase the value added: the farmers don’t sell the raw material, but the final product and they became PRICE MAKER (the PROFABILITY INCREASE A LOT)
▪ Direct relation with final costumers that means higher trust and sale stability. They know the preferences of consumers and they can target their production to target
their needs
▪ Increase product quality and liability
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 FOOD INDUSTRY
The food industry is a set of activities directed at the processing of agricultural or natural raw material in final food products direct to consumer. The most of raw material are
coming from agriculture. There are less raw materials that come from nature like water, salt etc. Some soft drinks the relation with agricultural is very weak. In other final
products like beer, cheese, meat, fish wine the link between agriculture and final products is really close.

We start from the production function is similar to the one we analyzed for agriculture but here there is no land. Here the quantity (𝑞ⅈ ) depends on fixed capital (buildings,
machinery and so on), raw materials, labor, and a certain level of technology that can be very high or very low, depending on the kind of production.

We have DIFFERENT SIZES OF COMPANIES in the food industry: HOW CAN I MEASURE THE SIZE OF A COMPANY?

▪ From the quantity of production: for example, how much pasta is produced from a company? Barilla that is a big industry a lot, a small business that produce a specific
kind of pasta produce less pasta than barilla, but it’s still in the market.
▪ The turnover: that means the total sale of the company (it takes in account even prices)
▪ Number of employees

It’s better the turnover to understand the size of an industry but it’s easier to calculate the number of employees. So, we can classify the size of an industry from the number of
employees:

▪ Micro industries are the once with less than 10 employees

▪ Small industries are the one with a number of employees between 10 and 49
▪ Medium industries are the once with a number of employees between 50 and 249
▪ Big industries are the once with more than 250 employees

In the production function we can talk about a certain LEVEL OF TECHNOLOGY: there are some companies that apply industrial processing and other industries that apply really
low technology. That can be used to classify industries:

▪ INDUSTRIAL PROCESS (LARGE COMPANIES): It means high level of capital and low level of labor (in industrialized countries labor is the production function more
expensive. So, the goal is to reduce the level of labor, but to do it we need capital to invest in technology) → capital intensive. We can see this concept using an
isoquant curve in which the quantity of production is the same, and we just change the level of labor and capital. If we want to increase the level of production, we
have to increase the level of capital or labor. The goal is to reduce the cost of production to be able to reduce the price and reach a higher level of selling. What about
the quality of production? The quality is not extremely high because in the food industry the quality is connected to the small business.
▪ SMALL BUSINESS PROCESS: they are labor intensive and low level of capital. Most of the process are based on the labor. The quality is high. Here the prices are high.
(in the food industry the entrepreneurs are price maker). They target the person that have high willingness to pay.

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 We can see this concept here in the isoquant curve which means that the quantity of
production is the same, we just change the level of labor and capital. If we want to increase
the level of production, we have to increase the level of capital or labor.

Small and industrial business have different cost of production and different quantity of production. They have even different prices. They can stay in the same market because
they target different needs of persons.

PRODUCTIVITY: quantity out of labor.

In food production the firm are price maker: if there is a variation in price can be decided by a single firm and they can differentiate the products.

PRODUCT DIFFERENTIATION:

In the food industry the products are differentiated but which are the steps for differentiation? It’s a matter of research to understand the attribute that are in line with the
preference and needs of customers. The products have to have different attributes from the other firms.

▪ Intrinsic characteristics: qualitative products attributes

▪ Extrinsic characteristics: label, certifications
▪ Brand (individual brand like industrial -barilla- and private labels -pasta esselunga- / collective brand like pdo - protective designation of origin, pgi – protective
geographical indication). Price can be differentiated for pasta esselunga but not for barilla.
▪ Advertising: differentiate a product is not easy.

How price of a specific product is made? A few factors influence the prices

▪ qualitative characteristic
▪ production cost
▪ price of substitute/alternative products
▪ willingness to pay

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THERE ARE DIFFERENT COMPETITIVE STRATEGIES:

▪ price competition strategy: sell produce at the price at a lower price than competitor (if can reach cost leadership that means reach the lower price)
▪ non price competition: it’s the opposite of the previous one. It means to reach a higher strategy. The strategy is based on differentiation (convenience like for time)
▪ focus: focus just on specific market, target, or particular segment of consumer

When we design a new product there is a PRODUCT LIFE CYCLE (with four steps):

It’s difficult to create an innovative product in the food sector and consumer. If the new product is accepted than there is an expansion (more sales) than a stabilization and
then they experience a decline. (for coca cola or Nutella, we are still in the phase of stabilization, not in decline yet).

CATEGORY/BRAND: Categories are like biscuits and then I can specify the brand → Nutella and Coca-Cola are brands that become a category.

Food industry trend of the turnover of the food industry: food industry increased the turnover till 2008 (till the crises) and after the crisis started again to grow

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 DEMAND ELASTICITY:

ELASTICITY, DEMAND, PRICES: Elasticity is "product specific" → it is linked to specific products (elasticity depends on single
product):
The elasticity is the index that can analyze the reaction of the demand if:
• If the good is a primary necessity (like pasta) this good have a reduced elasticity (elasticity
• the prices increase or decrease ˂ 1). The increase of income does not change much the demand of the good.
• the income increases or decrease • If the good is not s primary necessity (ex. organic food, champagne, Barolo) it can have
high elasticity (elasticity> 1). The increase in income can vary the demand of the good.

WHAT IS THE ELASTICITY FOR THE FOOD PRODUCTS?
If the elasticity is above 1: elasticity is high
If the elasticity is below than 1: elasticity is low
The vast majority of food products are considered prime necessities → elasticity is linked to the
single product.
INCOME ELASTICITY:
As the income changes, the demand for the product varies. In the case of primary necessities,
elasticity is reduced, in the sense that if my income increases twice, the demand for food does not
increase twice (Maybe it increases a little but not proportionally).

VALUE ADDED: it’s the value production (turnover) minus the cost of production (materials and services). In the European food industry from 1995 to 2014 we can see an
increase of value added. The relation/ratio between turnover and value added is about 25% → that’s means that the cost of raw material and services (cost of production) is
75/80%

WHICH SECTOR IS MORE IMPORTANT IN TERMS OF TURNOVER, VALUE ADDED,

EMPLOYEES AND NUMBER OF COMPANIES?

• TURNOVER: meat product represents the most important subsector in the food
industry in Europe in term of turnover
• VALUE ADDED:
• NUMBER OF EMPLOYEES:
• NUMBER OF COMPANIES: the bakeries are the most important sector in terms
STRATEGY FOR THE FOOD INDUSTRY:
of number of companies
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In the Food industry there is a sort of equilibrium between small and big firms in the market, because they can adopt different strategies to remain in the market. In retailing
there is a higher competition from the large supermarket so it’s more difficult to remain in the market for the small firms.

Dual branding: A dual branding strategy addresses the problem of using only one brand name for a new product launch. After the successful launch of the first new product by
a parent brand, marketers are able to launch other new products under other sub-brand names in the future to meet different consumer needs.

WEAKNESS OF FOOD INDUSTRY:

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 RETAILING
Wholesale and retailing refer to the set of activities directed at the transfer of food products from production plants to final selling points. It can be divided in two subsectors:

✓ Wholesale: it’s an activity business to business (B2B) → a wholesaler can connect food industry with another retailer (small business) or with restaurants,
catering, food services and so on.
✓ Retailing: it’s an activity business to consumer (B2C) → it represents a connection between a food industry and the final consumer. In the retailing there are very
large companies (supermarkets, hypermarkets, international companies like carrefour) and many small shops specialized in specific category of food (bakery,
dairy, meet, vegetable, and fruit and so on).

Both of the two subsectors are producing services for the food system in general and for the food industry in specific.

Wholesale and retailing represent the subsector with the highest value added in the food system and particularly retailing is located just close to the final consumer which is a
favorable position because allow the retailers to have more information about the consumers trends.

If we think about the elasticity of the food products respect to the price: the retailer can reduce the price of a product and he can measure the reaction of the consumer. The
reaction can be high (buy more production cause the price is lower or buy less production cause the price is higher). Many things can be done to see/measure the consumer
behaviors. That’s a huge advantage for retailers because they have an overview of consumer behaviors.

The retailing is composed by small business and large business: in industrialized countries the large retailers (supermarket and hypermarkets) represent the large majority of
the retailers. In Italy:

✓ about 60% of household consumption is done in supermarkets and hypermarkets (in USA and UK is the 80%, in Germany is the 70%)
✓ 6% in corner stores (mini markets)
✓ 24% in traditional shops
✓ 4% in discount shops
✓ 6% in open air markets

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So, supermarkets and hypermarkets play an important role. But what supermarket means? The definition of supermarket is related to the commercial area: a supermarket
should have a commercial area from 400 to 2500 𝑚2 . From 1970 we can see a huge growth of the number of supermarkets, a growth of their average area and a growth of
employee which works in supermarkets. Why supermarkets were so successful? There are three main reasons:

✓ Advantage of self-services (cost reduction) → the self-services can lead to a reduction of the total cost of supermarket. It’s the single consumer inside the store that
make the choices, which reduce the number of works in the store. The cost of labor in small market is higher because every costumer is served by a worker. So, the
self service allows a reduction of costs.
✓ De-specialization (many products) → in a supermarket we can find many kinds of products, for example all the type of food product and for each category different
brands. We can also find fresh products and many private labels. That’s convenient for the consumers.
✓ Financial advantages (high cash availability) → the consumer pay cash, but the supermarkets pay the suppliers after 1 or 2 months. It is a financial advantage.

When we talk about hypermarkets the commercial area is higher than supermarkets: a hypermarket should have a commercial area greater than 2500 𝑚2 . There was a high
growth in trends in hypermarket in the last 50 years. Even in the hypermarkets there is a strong de-specialization and financial advantages. Of course, there is a huge offer of
products.

In the food industry there is a sort of structural equilibrium between large and small companies because they can differentiate the strategies and so the big and small
companies can focus on specific strategies. Small business can focus on a set of strategies like food quality, specialties, private labels and so on. Different are the strategies for
the large companies in the food sector. That’s why there is a sort of structural equilibrium.

In the retailing is completely different and there isn’t a structural equilibrium because the traditional shops are really in trouble. In the industrialized countries there is a
reduction of traditional shops due to the advantage of the supermarkets (cost reduction, de-specialization and so on). Supermarkets can have reduction of costs due to the
huge number of products. In the small business the costs are higher. For this reason, the prices of small shops are higher respect to supermarkets. So, there is a strong
competition between traditional shops and supermarkets and due to this competition, there is a decree of traditional shops which are no longer able to stay in the market. We
can see these problems in every city even here in Italy. In the last few months, the situation is changed a bit due to the coronavirus situation since people prefer to go in small
shops where there are less people. In general, small shops have to find new strategies and increase the value added to remain in the market. The growth of large retailer and
reduction of small shops lead to a lack of structural equilibrium. Small shops have to adapt their strategies.

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IMPORTANCE OF PRIVATE LABLES: we already talked about the role of private labels in the food sector and particularly in the retailing sector. Private labels also include a
relation between supermarket and a company in the food industry or supermarket and farms, depends on the products. In the future, the number of private labels will increase
a lot because there are two elements of private labels which are extremely important:

✓ For the retailers, private labels are a business because the profitability of a product sold through the private labels line (through a label belong to the supermarket)
has a higher profitability respect the profitability of a product which has an industrial label.
✓ For the consumer, the private labels are a guarantee, because the supermarket can guarantee some standards related to food security and quality for those specific
products which have their label. So, the private labels mean for the consumer that the supermarket guarantee for quality and safety standards. That’s a problem for
example if a specific brand has a problem of safety once, because it can damage the image and the trust. The decrease or the loss of image is higher for the private
labels respect to a brand: if we buy a product at carrefour and there is a problem of food safety, the consumer will be afraid about all the products of carrefour which
lead to a loss of reputation. If a supermarket has a lot of private labels is a problem if the costumers lose their reputation.

Private labels can have the retailer’s brand (the name of Esselunga, Auchan, Carrefour, Coop and so on) and they provide a higher margin of profitability than industrial brand.
Some supermarkets have even some private labels with other names like “smart” line at esselunga. Why do they provide a higher margin? Because usually the producers are
not the supermarkets (with a really few exception). Usually the producer of the products which are sold with private labels are produced by farms, cooperatives of farms,
industrial producer. There are specific contracts which link the retailers with the industrial producers, where there are specific guidelines for the process of the products.
Supermarkets just add their labels to the final products. So, supermarkets don’t have to pay for the costs related to research and development, marketing, or advertising:

✓ Research and development: supermarkets are not looking for innovative products, but they just follow the leader products (they make some change, but they just
follow the characteristics of leader products). The industry has to produce something new, not the supermarkets.
✓ Marketing: supermarkets have the feedback just putting products on the shells → if the products have a good packaging, they are well presented, and they have good
prices the feedbacks will be positive. Supermarkets just need a few strategies of marketing (for example reducing the prices to facilitate the sale of products).
✓ Advertising: large industrial brands need more advertising compared to private labels products.

Since the private label products don’t have those kinds of expenses, the costs of those products are lower than industrial brand products and the marginal profitability of the
private label products is higher. But the retailer has to guarantee the quality and the safety of products.

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QUALITY STANDARDS DIFFUSION: we already talked about quality standards which retailers guarantee with private labels. But, for example, what about fruits and vegetables?
A retailer can buy fruits and vegetables from many countries, but supermarkets are adopting some general framework standards that can guarantee the quality and safety of
products even for the control quality change for fresh products. There are even international standards for specific products like trackability for meat and fish for example.
Supermarkets use global standards like Global Gap. (GLOBALGAP → Companies wishing to apply for certification of their products are required to comply with the
requirements and obligations set out in the Standard, to submit a specific application for certification). There are also other kind of trends like centralized procurement:
retailers tend to take part to collective organizations to jointly buy products, maintaining their autonomy.

Typical assortment in supermarkets → there is a large variety of products:

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 CATERING AND FOOD SERVICES

It’s a set of activities directed at meal preparation for consumers. We are not talking about the processes (like in food industry) or to home consumption (related to retailing)
but to the meals preparation, so related to eating out. There are two main subsectors which are very different:

✓ HORECA CHANNEL: hotels, restaurants, and cafés. The companies are oriented to satisfy the needs of each single consumer. They provide services to individual
consumers. They provide services to eating out. In the last two decades we saw a large growth of HORECA. But we have to distinguish between restaurants and fast
food, which offer different services. The willingness to pay is higher at restaurants compare to the fast foods. Another aspect important is the growth of medium and
large chains, particularly the franchising system: for some brands (like McDonald’s), every single point/fast food/restaurant belong to the entrepreneur (not to the
holding company).
✓ CANTEEN INDUSTRY: it’s really different from HORECA because it’s oriented to a specific group of people (students, people in the hospital, conference and so on).
There is a strong concentration of work during the meals. There is a diffusion of specialized services firms which prepare the meals and then move the meals where
there are the groups of people. Now the preparation of meals is centralized, and it’s not anymore auto produced (in the past the preparation of the meals was onsite,
now is centralized). Moreover, there is also the option to use the voucher or tickets for the consumption of the meals. In the canteen industry is very focused on the
price because the willingness to pay is low. So, the costs have to be maintained low because the willingness to pay is low. Even the margin profitability is low. So, in
the canteen industry one of the main problems is the management of the costs. (the difference between the price that someone pay for a meal is not much higher
than the cost for the preparation of that meal, that’s why the profit and the management of the costs is difficult). In the canteen industry: in the past the process of
production of meal was auto production, in the location where they were served and consumed. Now, there is centralized and then transported. Now, there is even a
different technology: precooked meals. It’s really difficult to balance quality and price (especially in some sector like in school canteens). In hospitals people might
need different needs linked to different pathologies, so, often the meals are prepared on site.

Which are the main features of canteen industry?

✓ Low level of concentration which means that there are some large companies and many small companies.
✓ The operators can be private costumers (quality might be higher and even the prices) or public costumers.
✓ The main costs are labor costs (up to 60%) and raw material costs

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 THE SUPPLY CHAIN ANALYSIS AND PRICING

To define in a proper way a chain, we can say that a chain is a set of three or more organizations directly involved in the upstream and downstream flows of products, services,
finances, information and/or knowledge from a source to a costumer. The supply chain links many business entities, such as supplier, manufacturer, transporter, distributor,
retailer, and the customers themselves.

The three main component in a supply chain are:

✓ THE FOCAL COMPANY which is the company that play the most important role in the supply chain
✓ THE SUPPLIER which supply the focal company
✓ THE COSTUMER

The three companies are involved in streams (movement):

✓ THE DOWNSTREAM FLOWS are the movements from suppliers to costumers

✓ THE UPSTREAM FLOWS are the movements from customers to suppliers

The focal company, suppliers and customers are the direct chain members. They are the main structure of the supply chain. Particularly the focal company play an important
role and is the main point of the chain. All the companies can interact with the focal company directly or indirectly through suppliers and customers. The focal company,
suppliers and customers are the three primary members in the supply chain then there are other members which are supporting members. So, we can distinguish between:

✓ Primary members: companies which carry out the value adding activities in the supply chain to produce a specific output for a particular costumer
✓ Supporting members: companies which provide resources, knowledge, utilities, assets, for the primary members of the chain.

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We can see this description in the following picture:
In the food supply chain, we can have for example:

INPUT
(supplier of seeds, FOOD FINAL
FARMERS RITAILING
fertilizer and so INDUSTRY CONSUMER
on)

The supporting members are for example are:

✓ the external laboratories (for chemical analysis, research and development, the analysis to guarantee the safety and quality, and so on)
✓ the logistic suppliers (to guarantee the movements and the transport of the goods)
✓ financial providers
✓ market research

So, the primary members and supporting member are playing different roles.

When we speak about food supply chain, we can see that for a single processor we can have several farmers which are the supplier of the processor. We can also have
different distributors and retailers: it’s a really complex structure / organization which can be called the CHAIN NETWORK. We can talk about the chain network in any supply
chain (not just in the food system), and it refers to a chain which have a complex structure.

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FUNCTIONING OF THE CHAIN:

We have different flows which are interrelated even if they are different. We have flows of:

✓ PRODUCTS: the product flow represents the value-added movement and transformation: along the supply chain there is an increase of value added, so, from supplier,
focal company, to costumers and final consumer, for each step there is an increase of value added of the product (for example, if we analyze the supply chain of wine
we have the suppliers which are the farmer that produce the grapes; than we have focal company which produce the wine with an increase of value added due to the
processing of grapes in wine; then we have the distribution / retailing where the wine is sold in specialized shops or supermarkets and there is an increase of value
added in the sense that the final consumers can choose a bottle of wine which meets his preferences). Along the supply chain there is an increase of value added due
to the different steps and processing of raw materials in final products and also to the distribution of final products. The flows of products are the flows of value added
along the supply chain from raw materials to consumers. Traditionally the movements of products are downstream: from suppliers to costumers. The product flows
activities included transportation, logistic, inventory, maintenance of quality, conversion in final products and so on. Products flows cover the raw material, work in
progress, finished products and so on.
✓ SERVICES: the services flows represent the organizations being involved in the upstream and downstream flow of services. Traditionally the services flow is very tightly
tied to product flow. Service flow activities include pest control, waste disposal, quality certification, laboratory testing, marketing support, market research, external
research and development. So, those services are intangible, but they can provide value added.
✓ FINANCIAL: the financial flow generally moves in the reverse direction of the value-added activities. Financial flow activities include credit terms, payment schedules,
consignment and title ownership arrangements, sharing financial performance information across the stages or processes and participants in the chain. The financial
flow indicates the payment in exchange of products, services and information.
✓ INFORMATION: the information flow represents the bi-directional exchange of information among chain members. The information coming from the final consumer
are extremely important to understand consumer needs, trends, demand changing and so on. The retailing is very close to the final consumers, so the retailers can get
those kinds of information from the final consumer and adapt the assortment in line with final consumer. But all the members of supply chain have to adapt to those
change, so the information along the supply chain is extremely important (to share consumer preferences, needs and so on). Information flow activities include
forecast, purchase orders, shipping and inventory information, status of delivery, technical information, information about new technologies, management system,
legal requirements, demand, product information (price, quality, etc.), consumer requests. The movement of information are upstream and downstream flow
(upstream flows information is from final consumer to farmers. Downstream flows information can be exchange between farmers and processors, or between
processor and retailers). Some important type of informations are validity of claim (traceability, transparency like GMO free, organic products, PDO/PGI) quality
(different quality standards) and food safety
✓ KNOWLEDGE: in the supply chain knowledge the knowledge is bi-directional which means that there is an exchange of knowledge among chain members. Knowledge
flow activities include networking, seminars, participation in research projects, training, provision of food safety, quality management/sustainability standards,
methods requirements etc. must understand how to make more money by sharing information/knowledge than by holding it. Result: better practice, wider scale of
thinking, “tighter” chain etc.

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So, we have different kind of flows: the supply chain is not just an exchange of products (services, financial, information, knowledge)

There are different theoretical approaches in the supply chain analysis:

✓ ECONOMIC APPROACHES: we will focus on economic approaches. In particular we can distinguish between:
o Neoclassical theory
o New institutional economics
✓ MANAGERIAL APPROACHES:
o Supply chain management
o Organization theory (individual)
✓ BEHAVIORAL APPROACHES
✓ SOCIOLOGICAL APPROACHES

We will analyze the economic approaches and managerial approaches

Oliver Williamson → theory of transaction cost economics

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 ECONOMIC APPROCH: NEOCLASSICAL APPROCH
In the neoclassical theory there isn’t a specific analysis of the supply chain because neoclassical theory considers different companies as different enterprises which have a
specific aim that is maximize profits. (it doesn’t matter if one is a supplier, another one is a focal company or a costumer: the aim of a company is always to maximize the
profits). In the supply chain the maximization of profit implies a reduction of costs and the reduction of costs have an effect on the revenues of the supplier. EXAMPLE: If the
focal company want to buy the raw materials from a supplier, the focal company want to maximize the profits and it implies the reduction of the costs. The reduction of costs
implies the reduction of the price of raw material which the focal companies has to buy from suppliers. So, for the focal company has the aim to maximization the profits,
which implies the reduction of the costs that means the reduction of costs of raw materials. What about the suppliers? For the suppliers is exactly the opposite. The suppliers
aim is to maximize the profits which means maximizing the revenues. To maximize the revenues the suppliers has to maximize the prices/selling. So, there is a conflict of
interest, because the focal company wants to minimize the costs of raw materials (minimize the price of raw materials) while the supplier wants to maximize the price/selling
of raw materials to maximize their revenues to maximize the profits. The same is in the relationship between the focal company and the costumers: focal company want to
maximize the price of final products while costumers wants to minimize the price to maximize their profits.

Following the neoclassical approach in the supply chain, all the members/agents of the chain behave independently and there is a conflict of interest.

For example: if we have three companies/firms called i, j and k where:

✓ i is the supplier: i would like to maximize the profits which implies the maximization of costs/selling of raw material (but j wants to reduce the cost of raw materials)
✓ j is the focal company: j would like to maximize the profits minimizing the total costs (including the raw materials). The minimization of total cost implies the
minimization of the revenues of the supplier (but supplier want to maximize his revenue)
✓ k is the costumer: k would like to maximize the profits and minimize the revenues of j (but j wants to maximize his revenue)

That’s the description of the conflict of interest among the agents of the supply chain. How the conflict of interest is solved? To solve this conflict is necessary to reach an
equilibrium in the market price. When the equilibrium price is reached, then there will be the transaction. (if the supply chain in national the equilibrium is a domestic
equilibrium. If the companies in the supply chain are located internationally than there will be an international equilibrium to reach to allow the transactions). The transaction
can be allowed when the companies in the supply chain agree a certain price for a certain goods.

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 CONFLICT OF INTEREST IN THE FOOD SUPPLY CHAIN
In food supply chain there are different levels of competition and different levels of market structure. There are different steps:

• the first step is the relation between the input aggregate and farming (agriculture)
• Agriculture: between agriculture and food industry there is a different market structure. In agriculture the market structure is based on perfect competition (almost
perfect competition) and farmers are price taker because they can’t decide the prices and they can’t differentiate the products which are homogeneous. Farmer are
the suppliers of food industry which buy the products from farmers. The processor (food industry) represent the demand. The price is established normally from
international/national markets. This is a typical commodities market where the products are homogeneous.
Food Industry: in the food industries there are small and big companies. There is an equilibrium between the companies. Small and big companies both produce final
products which are differentiated and that’s why processor (companies in food industry) are price makers. There are different level of price making: if the product is
really differentiated and there is a strong brand image, it’s possible to differentiate a lot the products and so decide the price (price establish by the company which
imply a strong loyalty to the company). If the products are not much differentiated the price can’t be strongly decided.
That’s the difference between agriculture and food industry.
• Another step is represented by the exchanges between the food industry and retailing where the food industry is the supplier and the retailing is the costumer (the
demand is represented by the retailing). Retailing and food industry are both price maker and also here, there are different level of price making. We can rely the
ability of establish the price when we go in a supermarket and we try to buy a product, or we go in a discount or in a traditional shop, where we can see really
different prices for the same products. → Different kind of retailing are able to establish different prices for the same products.
In the case of private labels, the ability of establish the prices is very high because the single company can establish the price of the products: that’s means the degree
of price making is very high. Currently, in the supermarkets there are different kind of private labels: very cheap lines of private labels which are safe but with low
quality. Then there are private label lines which are intermediate and then premium or top private label lines which have higher quality and obviously higher prices. In
this step where there are exchanges between food industry and retailing, both are price makers, but there is a strong vertical competition and a greater market
power of retailers compared to food industry (particularly supermarket, hypermarket, respect the food industry).
• In the last step there are the consumers: here we are in the final market. The suppliers are the retailers and the final demand is represented by the consumers. The
second step (agriculture + food industry) is a market of commodities, the third step (food industry + retailing) is a market of differentiated goods. In the two steps
there is a different structure of the market. The last step (fourth step) of course has a market of differentiated goods. There are different market power level and
different competition: who has the grater/maximum power level in the food chain? The stronger position (market power) is hold by retailers. → retailers, because
they have direct info from consumers and are able to adapt strategies on consumer preferences. They can also impose their strategies to food industry and
agriculture. Which is the weakest part in the food supply chain? The farmers and the agriculture sector in general because for farmers is really difficult to stay in the
market and have high profitability for three main reason: they are small, products are commodities and they are price takers. For that reason, in many developed
countries there are policies to support them. (in European Union for example there is the “common agricultural policy” – CAP – which provide a specific payment to
the farmers. In United States there is the “farm bill” which is a sort of insurance to guarantee the price of products. That’s to prevent the price volatility).

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 Final consumers don’t have any price power which means that they can’t decide or change any price. They just have different willingness to pay and different
preferences: through their preferences they can influence the market. The power of consumers are the choices.

CONFLIT OF INTEREST IN THE FOOD SUPPLY CHAIN: the conflict of interest in the food supply chain is more complicate because as we mentioned, farmers are price taker, food
industry and retailers are price market, but retailers have a stronger market power. So, their ability of establish and adopt strategies is stronger, as their power to establish
prices respect agriculture sector and food industry. That’s means that there is a strong vertical competition and a greater market power of retailers (particularly supermarkets
and hypermarkets, not the small shops). Beside the conflict of interest there are also other elements that we have to take in account like:

✓ Characteristics of agriculture
✓ Food industry can differentiate the products and reach the premium prices
✓ Retailers, and in particular supermarkets and hypermarkets, are the agent which have the highest market power

This complex situation leads to a PRICE ASYMMETRY: that’s means that the transmission of the prices along the supply chain is not symmetric. If we consider the price for
example of wheat along the supply chain, we can see that the price of wheat for farmers is different from the price of wheat for retailers. That’s due of the processing of the
product, but also to an asymmetric price transmission along the supply chain. Even for fresh products (like salad) is very different at the stage of farmers and retailing due to
different market power along the supply chain.

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 MANAGERIAL APPROACHES: SUPPLY CHAIN MANAGEMENT
We saw that all the companies are independent, and they act in the market trying to maximize the profits and the prices. In the supply chain management, the idea is different:
the supply chain management try to modify the independence of the single company and coordinate all the activities to create a higher value for the final consumers. The
supply chain manager tries to coordinate all the activities of the different agents of the supply chain, to coordinate the activities to create a higher value for the final consumer.
That’s the best way to manage the logistic activities for a better manage of the supply chain. The idea is to coordinate all the activities, the logistic, stocks, flows to create the
highest value added for the final customer. So, the SUPPLY CHAIN MANAGEMENT (SCM) is the integrated planning, coordination and control of all logistical business processes
and activities in the supply chain (SC).

✓ Planning is a fundamental part for the supply chain management, even to understand which are the actors/the agents that we want to involve in the supply chain, and
which kind of activities we want to involve in this organization.
✓ Coordination of activities, logistic, stocks, and so on
✓ Control that all the steps works well

That’s implies that all the business along the supply chain work together and communicate efficiently and so they are joint responsible for delivering a product to consumer
demands.

The aim of the supply chain management is to deliver superior consumer value at lower cost to the supply chain as a whole, while satisfying the requirements of other
stockholders (in particular suppliers, focal company and consumers) in the supply chain. The aim is to improve competitiveness of the value chain as a whole.

Deliver superior consumer value at lower cost through the planning, coordination and control to improve competitiveness of the value chain as a whole.

If it’s possible to plan, coordinate and control the processing and all the activities along the supply chain (especially the logistic of the supply chain) than it’s possible to increase
the value that is offered to the final consumers. In this way there is a shift from a traditional SUPPLY CHAIN to the VALUE CHAIN. The structure of the chain is the same (from
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producer to final consumers going through processor, distributors and retailers) but in the VALUE CHAIN, at each step, there is a higher creation of value through the
interrelated activities (through planning, coordination and control which means that activities are correlated and generate value). All the agents of the supply chain can reach a
common goal, and the ultimate goal is to deliver the maximum value to the final consumer/end user in a specific market sector.

The application of supply chain management can lead to a VALUE CHAIN which a chain more organized (planning, coordination and control), a chain that increase the value
of the product and reduce the costs. The value chain is a new design of the supply chain where is possible to apply a better planning, coordination and control to lead in a
better value to the final consumer/end user in a specific market sector. Value chain is still part of linear economy even if is close to the concept of circular economy.

The firs one is a traditional supply chain which is producer oriented and all the agent are
independent. (we can see the consumer that pull the supply chain). supply push means
producer oriented.

In the second one we can see a value chain where all the activities are designed to
guarantee the maximum value for the consumer and to do so it’s important to understand
the needs of consumer. All the activities are coordinate to reach the maximum value to
reach a better value. So, it’s consumer oriented. demand pull means consumer oriented.

How the shift from a supply chain to a chain value works in practice? Usually there is a leader of the value chain which dispose the rules to make possible the shift to a chain
value organizing a plan which involve all the participants of the chain (suppliers, retailers and costumers). Usually the leader is the focal company or a retailer.

The supply chain management can help a lot the supply chain to improve the efficiency. The advantages of the supply chain management can be:

✓ Improve productivity and efficiency

✓ Reduce inventories
✓ Reduce costs
✓ Develop, maintain and manage profitable relationship with costumers/suppliers and other business partners
✓ Understand what makes value for the final costumers

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 ✓ Deliver better services and enhanced economic value to costumers

ECONOMIC APPROCH: NEW ISTITUTIONAL ECONOMIC

This is the most important approach which we analyze. It refers to the transaction cost analysis. In the “new institutional approach” we will see different prospective which are
based on bounded rationality of agents and consumer, imperfect information and opportunistic behavior.

• What “bounded rationality” means? Bounded rationality is the idea that in decision-making, rationality of individuals is limited by the information they have, the
cognitive limitations of their minds, and the finite amount of time they have to make a decision. That’s connected to human rationality and elaborate a huge quantity
of informations.
• What “imperfect information” means? Imperfect information refers to the situation where buyers and/or sellers do not have all of the necessary information to make
an informed decision about the price or quality of a product. The term imperfect information simply means that not all the information necessary to make an
informed decision is known to the buyers and/or sellers. It’s possible to have all the informations but it takes time and time is scares: it’s a sort of income, how
allocate my time → if I spend time to get all the informations, I won’t have time for other things. Time is an important variable in our life.
Asymmetric information is the condition where one party, either the buyer or the seller, has more information about the quality or price of the product than the other
party. In either case (imperfect or asymmetric information) buyers or sellers need remedies to make more informed decisions. Common example of asymmetric
information occurs in the labor market. Workers are knowledgeable about their skills, industriousness, and productivity. Employers, in contrast, have limited
information about the quality of prospective workers. Another good example is the insurance market. Insurers often have less information about the risks taken by
their clients, and in fact, insurance may alter a person's behavior.
• What “opportunistic behavior” means? This is a consequence of imperfect information. Opportunistic behavior is an act or behavior of partnership motivated by the
maximization of economic self-interest and occasioned loss of the other partners. Examples: make false promises, misrepresenting intentions, reneging on
agreements, or changing the terms of a deal to benefit themselves.

Approaches of new institutional economics:

✓ Information economics (Akerlof, 1970): The economic theory of asymmetric proposes that an imbalance of information between buyers and sellers can lead to
market failure. The theory proposes that an imbalance of information between buyers and sellers can lead to market failure. Market failure, to economists, means an
inefficient distribution of goods and services in a free market, in which prices are determined by the law of supply and demand.
✓ Theory of incomplete contract (Grossman and Hart, 1968): This refers to economic contracts that do not explicitly mention the terms and conditions under which
future issues between the contracting parties may be decided. In fact, it is argued that most contracts by their very nature are incomplete as the parties cannot

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 possibly foresee all possible future contingencies and have perfect solutions to deal with them. Further, both parties may voluntarily decide to renegotiate the
contract in the future, thus making current terms void.
✓ Principal-agent theory (Jensen and Mackling, 1976 – Holmstrom, 1979): The principal-agent theory is a conflict in priorities between a person or group and the
representative authorized to act on their behalf. An agent may act in a way that is contrary to the best interests of the principal. It can occur in any situation in which
the ownership of an asset, or a principal, delegates direct control over that asset to another party, or agent. The principal-agent theory is a conflict in priorities
between the owner of an asset and the person to whom control of the asset has been delegated. The problem can occur in many situations, from the relationship
between a client and a lawyer to the relationship between stockholders and a CEO. Resolving a principal-agent problem may require changing the system of rewards
in order to align priorities or improving the flow of information, or both.
✓ Propriety right theory (Coase, 1960 – Alchian and Demsetz, 1972): how a resource or economic good is used and owned. Resources can be owned by (and hence be
the property of) individuals, associations, collectives, or governments. Property rights of an economic good has four components: the right to use the good, the right
to earn income from the good, the right to transfer the good to others, alter it, abandon it, or destroy it (the right to ownership cessation), the right to enforce
property rights. In economics, property is usually considered to be ownership (rights to the proceeds generated by the property) and control over a resource or good.
✓ Transaction costs economics (Williamson, 1985, 1996): Transaction cost economics is understood as alternative modes of organizing transactions that minimize
transaction costs. Transaction cost theory posits that the optimum organizational structure is one that achieves economic efficiency by minimizing the costs of
exchange. The theory suggests that each type of transaction produces coordination costs of monitoring, controlling, and managing transactions. Williamson has
defined transaction costs broadly as the costs of running the economic system of firms. He has argued that such costs are to be distinguished from production costs
and that a decision-maker can make a choice to use a firm structure or source from the market by comparing transaction costs with internal production costs. Thus,
cost is the primary determinant of such a decision.

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 TRANSICTION COST ECONOMICS

In the supply chain there are many transactions since supply chain is the organization of transaction. So, we will use a lot the last approach of “transaction cost economics”. For
Williamson the idea is that the transaction cost can affects the form of governance of transactions in the supply chain: depending on the kind of transactions we can have
different forms of governance of transactions, that means different forms of organization of the supply chain management. The idea of Williamson is to find the best
organization of the supply chain in terms of transaction cost analysis. So, transaction costs can affect the form of transactions which are market, contracts and vertical
integration. Depending on the transaction is better to base those transaction on market, contract or vertical integration. (the forms of transaction are market contract or
vertical integration).

• Which is the objective of transaction cost economic? Choose which is the best efficient governance form for all the transaction. The three main forms are market,
contract and vertical integration.
• What “vertical integration” means? That the same company is the supplier and also the costumers. The same company operate in different steps of the supply chain.
For example, if a producer of wine has land for the production of grapes and also have the factory to processing and produce the wine, that’s an example of vertical
integration.
• Which is the most efficient governance form for the transaction? The best governance depends on the transaction cost minimization.

Transaction cost definition: transaction costs are not production cost:

• Production costs are connected of use of raw materials, capital, labor, transportation, advertising, land and all the other costs of production.
• Transaction costs are costs connected to the use of the market. If the market is efficient (if the market is working well) the transaction costs are very low. Market is a
good form of governance for transaction: we don’t need other form of transaction if market is working well, because the costs are very low. But if the market is not
working well the transaction costs are high, so, the agents need to use other form to reduce the transaction costs. Other form to use are contract or vertical
integration, but not market. If the use of the market lead to high cost, because in the market there is a strong information asymmetry or opportunistic behavior, in this
case is better to use other governance forms like contract or vertical integration. There are three main transaction costs which are costs connected to the use of the
market, and they are not costs of production:
o Information costs: these costs appear when we have to make some analysis of the market to choose for example which is the agent you want to do the
agreement/transaction with. Information costs are related to information which we can get about the market: the agents, the structure, the products of the
market. For example, if we have to buy bread, do we need a lot of information about bread? We do not need so much information about it. To buy food
products we need a bit more informations just if we have for example some intolerances. But if we need to buy a car, is it the same? Of course not. To buy a
car we need to take information about different kind of cars, options, methods of payments and so on. So, to buy a car takes time. To buy a car there are
higher information costs compared to buy bread, where there are less information costs. Another example related to supermarket: a supermarket would like
to design a new line or a new private label for biscuits with particular nutritional propriety and also particularly sustainability standards. As we already said,

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 the products where the supermarket put its own private labels are not produced by supermarkets itself, but there is a sort of agreement with an external
company/processor which produce the products where the supermarket add its labels. In the case of the biscuit of our example is the same: the biscuits are
produced by an external company. In this case the supermarket has to choose which is the best company to produce the biscuits with the characteristic that
the supermarket wants. When the supermarket found a few possible producers, has to check between them is the best one. Those kind of information takes
time to be discovered and time is a cost.
o Negotiation costs: negotiation is important especially is some field. For example, if I want to buy bread negotiation is not so important, but if I want to buy a
house or a company is very important. Even in the example we saw for the information costs, if a supermarket has to find a producer for a new line of
biscuits, negotiations are important because it’s necessary to write a contract with the supplier and in the contract there will be all the features, like which
kind of raw material will be used, how producer has to produce the biscuit, what agreement will be used to guarantee the food safety, which kind of
insurance will be used for the quality of the final product, the agreement for the delivery, the price, the quantity and so on. Negotiation costs are usually high,
especially in the case of private labels.
o Monitoring costs: using the same example of the biscuit, monitoring costs means for example to check if the supplier behave well according of the standards.

We have to keep in mind that if the transaction costs are low we can use the market form, otherwise we have to use another form like contracts or vertical integration. We also
have to keep in mind that transaction costs are also affected from some characteristics which are:

• Frequency (recurring, occasional): if a customer buys a product every day there is a strong relationship between the two agents (buyer and seller). If there is a high
frequency the transaction costs are reduced.
• Uncertainty: if the uncertainty is high, the transaction costs are high because a seller has to be sure about the characteristics of product and its standards before he
sells that specific products.
• Asset specificity (unspecific, mixed or idiosyncratic investment): for some transactions, the two parts/agent need to do some investments which are connected to
the transaction. If we use again the example of a supermarket which would like to design a new line or a new private label for biscuits with particular nutritional
propriety and also particularly sustainability standards is: for sustainability the supermarket has to ask to the processor to adapt his technology and make some
investment. These are specific investment which are request to the supplier for the transaction. So, if the supplier wants to sell his product to the supermarket has to
adapt to these conditions.

We saw transaction costs, which have some characteristic and as a result of we have different form of governance inside the supply chain:

• Transaction can be based on Market if the transaction costs are low. There are two agents exchanging products in an equilibrium price.
• Transactions can be based on contracts which are called Hybrid forms (in Williamson paper). Contracts are called hybrid forms because are in the middle. Contracts
decide some arrangements between the agents which connect them for a period of time. In the market the relation between the two agents finish as soon as the
exchange of the products is done. With contracts there could be for example an agreement for 6 months.
• Transaction can be based on Hierarchy if the transaction costs are high. Hierarchy means vertical integration which is for example the same company that produce
raw material and final products. So, the transactions are in the same company.

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If the supermarket wants to produce organic products, those are production costs or transaction costs? In this case the supplier has to adopt in the production process organic
raw materials → those are production costs. Information, negotiation and monitoring are connected to Transaction costs (they are connected to the negotiation between the
supermarket and the supplier when they agree the raw materials, the preparation and so on).

In the yellow part we can see the transaction characteristics, in the green part we can see the transaction costs and in
the blue part we can see the types of governances.

We start analyzing the transaction costs theory from the transaction characteristic, keeping in mind the example of
the private labels.

• If the asset specificity is very low, the two agents don’t have to adopt particular investments for transacting.
If asset specificity is low imply that transaction costs are also low.
• If asset specificity is high, like for example for private labels where is required to make investments, change
procedures, adapt the technology, and so on, then the transaction costs are high too.
❖ If uncertainty is high also the transaction costs are high because we are not sure about the characteristic of
products, if we can trust the partners and so on.
➢ if the frequency is very high then the transaction costs are very low because the frequency allow the trust
between the partners.

So, in the end if we have high transaction costs and high asset specificity then the market is not a good system for
transactions.

If the transaction costs are high and the assets specificity are high and also the uncertainty is high, the market is not a
good system for transactions: it’s better hybrid forms or hierarchy (vertical integration) because the transaction costs
are extremely high.

Example: In the private labels the transactions are always based on contracts, so based on hybrid forms, not in
markets. Because the system is very complex (quality and safety standards have to be respected for example as other
things).

If asset specificity is low, uncertainty is low, maybe frequency is high, then the transaction costs are low and so in this
case the market is the best solution. We don’t need other kind of solutions for transactions.

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 This is the curve that Williamson designed. There are governance costs (ordinate axes) and
asset specificity (abscissa axes). We can see three lines:

➢ The firs one is the market m(k). When the asset specificity increases, also the costs of
use of the market increases.
➢ The second one is the hybrid forms x(k)
➢ The third one is hierarchy h(k). When there is high asset specificity and when costs of
governance are very high.

CONFLICT OR COORDINATION IN THE FOOD SUPPLY CHAIN

We mentioned in the neoclassical model that in the food supply chain there is a strong price conflicts, because all the firms have a private goal. But as the focal company deals
with other businesses, such as suppliers or buyers, is the simultaneity of competition and cooperation possible? So, is the combination of private and common goals possible?
Yes, it’s possible for example:

➢ Vertical integration (wine supply chain or short supply chain or cooperative there is a combination of private and common goals).
➢ Private labels supply chains: there is an advantage for the supermarkets but also the partners in the supply chain can have an advantage in the private labels supply
chain because otherwise they choose another way to sell their products. It’s important to have good suppliers, so the supermarkets will try to share their profits with
partners (particularly with processors or farmers). Private goals can be joint with common goals.
➢ Adoption of standards like food safety, quality and sustainability standards: common goals are together with private goals.
➢ Logistic: also here there is a more efficiency in the supply chain if common and private goals go together.

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 VERTICAL COORDINATION

If it’s possible to reach some common goals together with private goals, it’s important to talk about of vertical coordination: inside the supply chain is possible to adopt the
vertical coordination. But what does vertical coordination mean? Vertical coordination is a set of tools or ways to manage exchanges in supply chain, coordinating strategic
behaviors and increasing the efficiency of the supply chain. It’s similar to the concept of supply chain management. Supply chain management is more connected to the behave
of the leader while vertical coordination is more general (different tools with the same goals). Coordination is different from cooperation which means just collaboration
between the agents. Coordination is also different from governance, which is the way of making the exchanges. Governance is based on market, hybrid forms and hierarchies.

If we look with the prospective of vertical coordination, in the food chain there are different type of transactions:

• Market: we can think about of:

o spot market for many agricultural raw materials (wheat, soy, corn etc.).
o commodity exchange means an organization or exchange commodities (mainly agriculture products). In the word the most famous example of exchange of
commodities is in Chicago and another one in New York.
o Future markets: it’s possible to sell products that are not in the market yet. The wheat is ready in June, but it’s possible to make a contract to sell wheat
which is not already ready, deciding the price before the wheat will be ready. That is a guarantee for the risk of price volatility.
o Fruit and vegetable: every city in the world there are a quite big market of fruit and vegetables.
• Hybrid forms:
o Contracts: for example for private labels
o Agreements
o Inter professional agreements: for example for the milk price between the industrial processor and the farmers.
o Standards: application of standards for safety, quality, sustainability and so on.
• Hierarchies: it means that the same company operate in different steps of the supply chain
o Vertical integration
o Cooperatives

In these transactions, what about the degree of vertical

coordination?

• Vertical coordination is low in the spot market

• Vertical coordination is high in vertical
integration
• In the middle we talk about contracts,
standards, organic, private labels and a bit more 45
about cooperatives.
CLASSIFICATION OF THE STANDARDS:

Standards are very important especially in the supply chain and they are growing. Several voluntary standards are present within food supply chain. Such standards can be
classified in different ways, mainly depending on the object of the analysis.

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 TRANSACTION GOVERNANCE IN FOOD SUPPLY CHAIN

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 CIRCULAR ECONOMY

What is circular economy? The concept of circular economy differs from the idea of linear economy. The linear economy is based on the idea of “take, make, waste” while
circular economy’s goals are to minimize waste during production, and minimize in the best way renewable resources and energy.

Definition of circular economy: an economy which is restorative and regenerative by intention and design. It aims to maintain the utility of products, components and
materials, and retain their value for as long as possible as well as to minimize waste. → the first time that someone tried to define circular economy was the “Ellen MacArthur
Foundation” in 2013 with this definition of circular economy.

What “an economy which is restorative and regenerative by intention and design” means? In a circular economic system we don’t want exploit natural resources more than
we did, and we also want an economic process which is able to use resources and make them regenerative for the environment. The idea is to maintain the utility of each
product as long as possible, using it for a longer time than we are used to. That is also possible designing every product from the beginning, in a way that enable us to exploit
the life cycle of the product for a longer time. The design (called eco design) is important also because we will be able to use the products and the single component and
material of the product, for other uses after the first life cycle. It means that we have something, we use it util it no longer services purposes, and then we can just decompose
the single product into component and material and then we can use them again for different purpose for example, or if we are talking about natural material , they can be
returned to nature safely with no pollution or reducing gas emissions. The cycle of each product has to be less costly in terms of natural resources and natural sustainability,
and they has to be longer in every single use.

In the circular economy:

• the concept of “end of life” is replaced with the concept of restoration.

• We have a shift from natural resources (fossil fuel basically) to renewable resources (renewable energy is the base of circular economy).
• In a circular economy the use of toxic chemicals are eliminated. It helps to reuse of every single component.
• Circular economy aims for the elimination of waste through the superior design of materials, products, system, business models.

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PRINCIPLES OF CIRCULAR ECONOMY:

• Design out waste: waste doesn’t exist because products are designed and optimized for a cycle of disassembly and reuse. Basically, we don’t have to dispose the raw
materials to the landfill because this is polluting and a waste of energy and resources. From the very beginning we can design each component, process, material,
good, in a way that make it reusable for more than one life cycle: that’s called eco design.
• Consumable is different from durable: in a circular economy we have consumable products and durable products.
o Consumable products are mainly made of biological materials which are non-toxic and sometimes beneficial and can be safely returned to the biosphere.
o Durable products are made by technical materials which cannot be returned to the biosphere: these goods have to be designed from the beginning to be
reused.
• Energy has to be renewable: the energy required to fuel the economic system needs to come from renewable resources to reduce dependency from fossil fuels and
increase system resilience.

Those principles represent the key and drive to four main processes of VALUE CREATION: the value creation is defined by the “Ellen MacArthur Foundation” as power, so we
basically have four powers. If we respect these four powers then we can create value and maintain the value of each single component as long as possible:

• The power of the inner circle: it refers to minimizing the use of resources and also to make the reuse of every single component as short as possible: for example, if I
have a product and I don’t want to dispose it after the first life cycle, then I have to design it in a way that it can be reused or refurbished or remanufactured in a very
few technical processes to be able to re-enter the product faster in the economic process. These allow me to save energy, time, labor and capital. Here we refers
mainly to biological components, so the consumable once.
• The power of circling longer: it refers to the technical materials and nutrients of a products which can’t be returned to the biosphere. Since we can’t easily return
them to biosphere we have to make them as durable as possible. We need to maximize the number of consecutive life cycle that these products are usable for, and
we can make longer each life cycle. Here we refers mainly to technical components.
• The power of cascaded use: it refers somehow to the power of inner circle. The power of cascaded use refers to diversifying the use across the value chain. If we have
a material or a component which is firstly made to accomplish a specific thing, after the first life cycle we can’t use it as it is, but we have to find a way to reuse it in
another process, or use it to produce something else or to accomplish a different things. For example, when cotton clothing is reused first as secondhand apparel,
then crosses to the furniture industry as fiber fill in upholstery, and the fiber fill is later reused in stone wool insulation for construction. Another example is H&M,
which is collecting clothes that people dispose, to construct isolation panel. This is a way to use products until the very end of their life.
• The power of pure circle: it refers to the fact that all uncontaminated materials are the best which we can actually employ in a circular economic process. This is why
they don’t pollute by nature and they can also improve the overall efficiency of the process because they are nontoxic. They can also be used for more than one time;
they are less polluting than other materials and they can improve the value of the product that we include in a circular economic process.

Basically with these four power/ways we can create value in a circular economic process. Basically we can reduce/eliminate waste (first principal), reduce as much as we can
the use and extraction of natural resources. Then we can improve the life cycle of each products. The goal is to reduce as much as possible our dependency from fossil fuel and
use as much as possible what we produce for as long as possible.

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The “Ellen MacArthur Foundation” proposed this graphic representation of a circular economy. The green and the blue color are referring to the two type of goods which we
mentioned before: biological nutrients in the green part and the technical nutrients in the other side (blue part).

• Green part (biological nutrients): the biological nutrients enter the production process and they are transformed by manufacturer for example and then they are
distributed by service providers to the final consumers for consumption. Consumers consume these goods and then a small part of these components go in the landfill
or to produce energy. But in most cases instead going out from the process, they just reenter the process and they can be transformed again and used to produce
energy, biogas and then return to the biosphere. They can also be restorative for the soil in some cases. In this case they can be a source to produce new commodities
like food or can be used to feed animals and so on. They reenter again in the transforming process.
• Blue part (technical nutrients): the technical nutrients are nutrients which can’t return to the biosphere (produced with non-biological nutrients, like metals for
example). They enter the production system, they are transformed in final products and then distributed to the final users. In this case we talk about users not
consumers because there is a distinction between usable products (which are the usable and durable products – in the blue part) and consumable products (which are
the biological one – in the green part). So, in the blue part we can find the usable and durable products are not just consumed and disposed, but even used and reused
as many times as possible.

The concept of RECYCLE is quite different in linear economy and circular economy. In the circular economy the process of recycling aim to maintain the value of the product as
much as possible, while in the linear economy the concept is to take, make, use and dispose the product. After the disposal we can recycle the single components but the
recycle of single materials produce a value which is much lower than the one we have in origin. With a circular economy process, thanks to the design and the four powers we
talked about earlier, the value of the recycling process is able to maintain the same value of the product. So, we don’t lose value of the single components while recycling.

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WHY WE SHOULD MOVE FROM LINEAR TO CIRCULAR ECONOMY?

• The world population is projected to grow to 9 billion by 2050 → it will be a problem of sustainability because we need to provide what it will be necessary for a
growing population without extracting more resources because it’s not sustainable. We have to improve our economy and our production system, otherwise we won’t
be able to respond to the growing demand and the needs of future generations.
• Not also the population is projected to grow, but also prosperity is projected to grow especially in some countries like China and India, where the middle class will
grow and will require more resources increasing the demand.
• In the illustration in the right we can see all the average prices of four different commodities which are indicated below the graph (food, non-food agricultural items,
metals and energy). This is a mathematical average calculated based on the McKynsey commodity price index. These average prices are referring to a period from the
beginning of the twentieth century (1900) up to 2010. What we can see is that in the last century the prices of those commodities was basically constantly declining.
We had a growth around 1970 due to the price shock of oil (oil shock) which was an historical fact. But in general we can say that the prices of commodities are
declining constantly. In 2000 we can see that there is a reverse trend in the commodity prices which are increasing constantly, and it seems that this trend won’t
reverse again. Based on the fact that especially in some developing country both population and prosperity are growing, the commodity prices will increase constantly
because the demand is growing but there are not enough resources for everyone, unless we change our economic models.

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 Another problem is represented by volatility of prices: here we are still referring to the same commodities as
before (food, non-food agricultural items, metals and energy). From 2000 to 2011 the volatility of prices is
increasingly rising, but the trend is still the same even today. The prices are rising more from 2000 then in
the past century. Why is this a problem for producing activities in every sector? Because the increasing
volatility in prices is exposing producers and consumers to higher risks. Another problem is that since we are
extracting more and more resources and fossil fuel, they are becoming scares. In order to be able to extract
the same amount of natural resources and fossil fuel we will need much more technological improvement
and it will be more difficult to extract them: those things also affect the prices of commodities. The fact that
the extraction can be more difficult leads to an extra rising of the volatility of prices because the difficulty is
unpredictable. There are many factors which we have to consider in order to produce and to be able to
satisfy the needs of future generations in a sustainable way (both in economic and environmental terms).

Circular economy is needed because we need to become more sustainable otherwise we won’t have enough
resources. That’s the key point.

KEEP AMERICA BEAUTIFUL CAMPAIN: Keep America Beautiful is a nonprofit organization founded in 1953 in Connecticut. The main goal of this nonprofit organization was to
promote the so called “beautification” of America, because they were saying that the increasing pollution and littering were a huge problem and so their aims were the
prevention, educational programs, in order to increase a higher responsibility in citizens regarding mainly litter prevention and waste reduction. “keep America Beautiful”
became very popular with this campaign (https://www.youtube.com/watch?v=j7OHG7tHrNM). The final sentence in the video was: “people started pollution; people can end
it”. It was a very emotional campaign and it was made in propose to catch the public attention. They were trying to aware people on important problems. This example was
considered one of the biggest and spectacular “green washing” activity of the history: what “green washing” means? “green washing” is when a company or an activity try to
cover something bad (like pollution or use of non-sustainable process) claiming the commitment for the environment and sustainability. “keep America Beautiful” was
considered a “green washing” example because it was founded by the two main can producers in the US. The cans were increasing a lot the littering. This campaign was made
in the same period in while the State of Virginia was trying to introduce a tax on single use can. So “keep America Beautiful” wanted to avoid this tax, introducing this
sustainability campaign in order to distract the attention and block the tax proposal. They actually made it and that’s why the campaign became popular and it is used as an
example. Green washing is a big problem nowadays. We can consider “green washing” a sort of marketing activity. Green washing is different from fraud: fraud is illegal while
green washing is legal.

This example lead us to the fact that we are moving quite fast at least in term of commitment to the circular economy, to a more sustainable way of producing goods and
preserving natural resources and so on. It’s not just a matter of economy or to produce in a circular economic way, but in this historical moment we also need a cultural
change where everyone has to be aware, committed and involved to the sustainable cause. To be successful a circular economic process needs to involve firms, consumers and
also politic. Because up to now politics and policy making are not sustain the shift to a circular economy. Actually in Italy and more in general in Europe there is not a specific
policy framework for circular economy and bioeconomy.
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Let’s see some example of food industries which decided to commit to circular economy:

• DANONE: they tried in France to establish a virtuous circle in which they collect organic waste instead dispose it and they reuse it to produce energy. The majority of
their partner (48 out to 54 farmers in their supply chain) collect the organic waste and they create a huge plant of methanizer which is able to transform the organic
waste into biogas. They are now able to produce an amount of biogas which correspond to the annual consumption of 1500 citizens. They can use biogas in domestic
use reducing emission of CO2.
• PEPSICO: they have the goal to completely reduce their waste by 2025. We can find their progress on their website. They are making huge investments to conserve
energy and raw materials. They already were able to achieve this goal in 25 manufacturing facilities around the world. Now they want to achieve the goal in all the
manufacturing facilities they have by 2025. If we think about how many brands are part of a multinational like PepsiCo, we can understand how huge this commitment
can be in terms of sustainability. PepsiCo decided to commit through the managing system.
• NESTLÉ: They are trying to involve their employee: instead to modifying the way they produce they try to aware their employee promoting the reduction of waste. In 6
months they were able to reduce the waste by 30%. Even in this case if we think about the dimension of a multinational like Nestlé we can realize how impacting their
actions can be.

Those are not a case of “green washing” because it’s a matter of fact that they have a commitment.

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 BIOECONOMY
Definition: Bioeconomy is any set of economic activities relating to the invention, development, production and use of biological products and processes.

What distinguish bioeconomy from any other kind of economy? The fact that bioeconomy is based on bio components which are used in each economic activities and
processes.

Bioeconomy include even the production of renewable biological resources, not just the use of biological resources to produce new goods or energy. It also involve the
conversion of biological material into food, feed and other biobased products. So, it is a set of economic activities which are all based on the use of biomasses, biomaterials and
biocomponents. The main resources derive from agriculture, forestry, fisheries, food. It also involves the paper production and the energy industry.

In 2014 the bioeconomy value, in terms of economic impact, was around the 9% of total economy in Europe and with total economy we mean the total economy in terms of
employment and revenues. The 9% is a low percentage if we think about all Europe. But the biomass which we use, and we employ in the bioeconomy system is around the
25% of total material flow: we have 25% of total material flow which is dedicated to the bioeconomy and this only produces the 9% of total economy in terms of revenues and
employment. So, a huge amount of bioresources are used to produce not so much. The efficiency of bioeconomic processes and bioeconomy itself are not optimal. We need to
improve processes and we need to reduce the use of biomasses. There is also a controversial issue: we are using biomasses most of the time for non-food purposes. Most of
the time we use for example sugar cane or corn to produce bioplastic, which is a non-food good. If we want to be sustainable this is not a real sustainable approach.

Why are bioeconomy and circular economy conceptually linked?

• The use in bioeconomy of biomass, bioproducts and biocomponents is circular by nature

• The circular economic principals were formulated after a careful study of how nonlinear system work in nature: in nature nothing is wasted, and everything has a
function even in the end of first life cycle. Based on this observation the Ellen MacArthur Foundation conceptualized the circular economic system. Bioeconomy is very
similar concept if we think about the nature. Bioeconomy is circular by nature.
• Both wants to reduce the dependency from fossil fuel and natural resources.

Problems:

• There is not a framework of policies which can create a synergy between circular and bioeconomy. They are still viewed as two separated things. In this way the
system can’t be efficient.
• At least in Europe we don’t have a legal framework for bioeconomy and circular economy: we just have some policy packages which are not real laws but just policy
guidelines that try to stimulate the countries to invest in bioeconomy and circular economy through incentives for example. The fact that there are no law is a problem
for two reasons:
o Not having a law make any action voluntary: if there aren’t enforcement, any action towards sustainability is just voluntary. The process toward sustainability
is going slower than if we had some law in that direction.

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 o The policy packages that we have now for bioeconomy and circular economy are not close to each other: they are separate and just recently, in 2018,
European Union thought to start merging those policy to make them more complementary and efficient.

EUROPEAN UNION POLICY FRAMEWORK:

• The first political action which European Union made for Bioeconomy was in 2012 and it was the “European Union’s Bioeconomy strategy”. It was just a framework to
stimulate knowledge, development, research and innovation on the conversion of renewable biological resources into products and energy. The goals of this action
were:
o Ensuring food security
o Managing natural resources
o Mitigate climate change
o Create jobs and foster innovation
The “European Union’s Bioeconomy strategy” focused on 3 main points:
o Developing new technologies and processes for the bioeconomy in order to make the process more efficient: the emphasis was on new biomaterials (mainly
biochemicals and bioplastics) as well as on developing processing for the conversion of biomass into those biomaterials.
o Developing markets and competitiveness in bioeconomy sector
o Pushing policymakers and stakeholders to work more closely together.
• The European Union circular economy action plan: the first policy packages is again more a guideline more than a mandatory law and it was made in 2015. This was all
centered on try to foster circular economy, providing guidelines for firms in order to operate with a circular economic logic. The main focus were the production,
consumption and waste management since one of the main goals is to reduce waste to zero. It provide incentives for circular product design and production and for
stimulating consumption of products with lower environmental impacts. The “European Union circular economy action plan” focus mainly on five areas:
o Plastic
o Food waste
o Critical raw materials (use of new materials and resources)
o Construction and demolition waste
o Biomass and biobased products: this is a package of actions which for the first time try to merge bioeconomy and circular economy
o There is also a focus on innovation, investment, horizontal measures and monitoring

What exist now is not enough, we need a policy framework which merge bioeconomy and circular economy, policy guidelines, something more specific.

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 FOOD CONSUMPTION

SINGLE DEMAND AGGREGATED DEMAND

Which are the main drivers of the single demand (the quantity, the trends of single demand)? The quantity requested for a The aggregated demand is the sum of the demand of all the
single goods depends on (the main drivers are): single consumer. So, if I want to analyze the demand of a
country like Italy I have to sum the demand of all the single
• Prices of goods
consumer in Italy to have the total demand.
• Price of substituted goods
• Income The aggregated demand depends on:
• Quality preferences parameters (quality aspects of the products) • Single demand: the same equation we saw before
based on the prices of goods, the price of
substituted goods, the income and the quality
preferences parameters (quality aspects of the
products).
• Demographic growth: if there is a significant
growth of population we can expect an increase of
demand
• Income distribution in the population: how the
income is distributed in the population which can
affect the aggregated demand.
• Age segmentation of population: every segment
Connected to this concept there is the concept of elasticity and elasticity depends on what I want to measure: of the population have different needs, so for
For example, if I want to measure how the prices affect the quantity, the elasticity is called direct elasticity and it is the relation example if the majority of the population are kids,
between the quantity respect the price variation: they have specific needs which are different from
the older population. if the majority of the
𝛥𝑞
𝛴=| | population are old people the demand change.
𝛥𝑝
With normal goods if there is a decrease of price the quantity will increase and if the price increase the quantity decrease. But if
we talk about prime necessity goods like food when the price decrease the quantity won’t increase so much. The prime
necessity goods don’t have a high elasticity. So, every product have a different elasticity. Food have low elasticity (<1). Other
products have high elasticity (>1).
We can also talk about the elasticity respect the substitute products or respect income. In case we talk about the elasticity
respect the income we have to analyze what happen to the quantity request by consumer when there is a variation of income.
Again when we talk about prime necessity goods like food, even if there is an increase of the income the quantity of prime
necessity goods won’t increase much. If there is a growth in the income maybe the consumer change the quality of the food
products which he/she buy but the quantity remain almost the same. It’s different for example for champagne which is in the
food category but it’s not a prime necessity good. Most of the food products are prime necessity goods.

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FOOD CONSUMPTION

About food consumption we can distinguish two large categories. The demand is divided in these two main categories:

• Home consumption: people purchase food products for home consumption. So, they buy the products at supermarkets, markets or in the specialized and traditional
shops (small shops). It is related to the retailing. Which are the characteristics of home consumption?
o Nowadays the demand is stable because particularly in the developed country we reached the point of saturation: we have enough food and there are some
physiological limits. After the second world war the demand increased significantly because of the increase of development and income. But now in
industrialized countries the demand is stable. We need to keep in mind that even today in the industrialized countries there are some segments of population
which don’t have enough food because of poverty, but in general the demand is stable.
o There is a decreasing of demands respect to total demand (other goods): other goods are increasing and the role of the food products in percent decrease in
total consumption because the demand of other products increase more quickly respect food products. Food represent a basic need, so if we have an
increase of income, of course it also affect the food products, but it affects more other goods. The increase of income maybe allow people to buy better
quality food but not more quantity of food.
o Low income elasticity: prime necessity goods have low elasticity (<1)
• Eating out: eating out has completely different characteristics respect the home consumption. Eating out is the HORECA channel (hotels, restaurants and cafes).
Which are the characteristics of eating out?
o Very dynamic demand: because people love to go out for eating. In Italy there are many restaurants which means that people go often out. The demand is
very sensible to the price and income.
o Increasing with total consumption: The demand for eating out is increasing. This increase is in line with the total demand, so we can see an increase of total
demand and total consumption.
o High income elasticity: the willingness to pay for eating out is quite high.

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TRENDS OF FOOD CONSUMPTION IN ITALY

Real prices: it means that the data don’t include inflation rate. As we can see from the graph we have data from 1970 to 2014.

• The green part refers to general food (home consumption). We can see that there is an increase of expenditures in total consumption. The real prices increase until
2008 when there was a crisis. After 2008 also food consumption decreased.
• The orange part refers to beverages. We can see that beverages consumption are more or less the same.
• The blue part refers to eating out. We can see that it was quite low around the 1970ish but then it increased a lot.

Nominal/current prices: it means that the data include inflation rate. As we can see from the graph we have data from 2000 to 2014.

• The green part refers to general food (home consumption). We can see that after 2008 we have stable trends for food consumption at home and not a decrease. With
nominal price is not possible to see the decrease of the demand of home consumption.
• The orange part refers to beverages. We can see that is more or less the same.
• The blue part refers to eating out. We can see that there is an increase.

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INCIDENCE OF FOOD CONSUMPTION ON TOTAL DEMAND

As we can see from the graph we are analyzing data from 1970 to 2008. We can see the incidence (%) of household expenditures for food products on the total expenditure.
We can compare the previous data with the total consumption of the household. What we can say is that:

• In 1970 the expenditure of food consumption, including home consumption and eating out, more or less reached the 40% of total expenditure. It means that 40% of
total expenditure of the household was for food products. In 1970 around 35% was the part of the food demand due to the food consumption, including the
beverages.
• In 2008 the situation was completely different: the % of total expenditure is around 23%. Home consumption was around 15% including beverage.

Why there is a reduction in percentage of total demand even if we saw previously that home consumption and eating out increased a lot? This is due to the fact that household
switched the choices from food to other products and services (like traveling, cars and other goods and services). We saw an increase of the demand of food products in the
past especially which is almost stable now. But if we compare the expenditure of food, percentage of total consumption decreased a lot from 35% to 15%. If we just consider
the part of eating out we can see an increase of percentage of total consumption.

To resume: there are two different segments of demand which are home consumption and eating out. Home consumption represents the stable part of the demand even if
is the major part (around 70 – 75% of the demand). The elasticity respect to income is quite low. In the other side we have the eating out segment which is most dynamic
part of the demand where the elasticity is quite high. If we analyze the consumption in terms of real price we see an increase of the demand in the past, then a stabilization
and then a decrease around 2008 for home consumption. While eating out increased a lot. But if we analyze the incidence of expenditures for food on total expenditures of
household, we can see over the time a reduction of this value in percentage, so in relative value. Even if we saw this decrease in percentage this is due the home
consumption, because the trends of eating out is in line with the other trends of household. If we analyze the incidence, so the relation between food consumption and
total consumption, we always see a decrease of the line: even if the food consumption is increasing, the incidence of the total consumption decreases overtime due to the
fact that the total consumption grow more than the food consumption, because the food consumption represent a basic needs. so if we became richer (income is greater)
the part of our income dedicated to other consumption then food, increase more than the expenditures of food products. Due to this fact the percentage of food products
respect of total consumption decrease. Eating out increase in line with the total consumption because it has a strong elasticity respect income.

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In some countries there are strong differences among the region of the country itself, in terms of total consumption and food consumption. In Italy we can see that:

• There are strong differences between north and south in terms of total consumption and food consumption.
• In the north the total expenditures are greater than in the south because the north part of Italy is richer than south.
• Also the household consumption are greater in the north
• Food consumption is also higher in the north Italy due to the higher total consumption in the north and due to consumption model/eating behavior which are
different in the north respect to the south.
• The fact that the prices are higher in the north Italy is connected to the fact that higher expenditure of total consumption and food consumption in the north.

For example in Italy the trend in terms of percentage of meat consumption, in the north was higher than in the south. But in the last decades we can see a decrease of
consumption of meat in the north more than the south. Maybe because there is higher knowledge of the risk of eating meat, and more knowledge of the effects of the meat on
environmental issues. We can also see that in the north there is a higher consumption of fruit and vegetable. But in the south there is a higher consumption of fish even if it is
increasing also in the north. Differences based on economic condition, difference of wealth and knowledge.

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 QUALITY ATTRIBUTES OF FOOD PRODUCTS

When we talk about the demand in the neoclassical theory we think about the consumer as an individual which buy simple goods, without considering goods like a set of
attributes. With the neoclassical approach a yogurt is just a yogurt which the consumer can buy. But in the reality consumers look for specific attributes of goods. This concept
was underline by Kelvin John Lancaster in the 1960es. He overcome the neoclassical model introducing different references for different quality attributes. The idea is that in
the products we can find an extremely heterogeneity. We can find strong heterogeneity in each product. For example, a yogurt with no fat, with sugar and so on. We can find
different kind of type of each product with different attributes. The consumer don’t buy just a product, but he/she look for specific attributes of the products. The price is still
an important parameter but it’s not enough: we need other drivers to explain the choice of consumers. Which are the driver of the consumer that can affect the consumer
choice? Of course the income and the price, but also a set of attributes which include the sensory aspect, the nutrition aspect, the convenience and so on. If we consider the
prepacked salad we can notice that the salad is like the one that is not prepacked but it is more convenient because it allow people to save time since they don’t have to wash
it. The willingness to pay is higher for the prepacked salad because it allow people to save time. In particular food products are a set of attributes.

Which are the attributes? There are two main categories of attributes which were made in 2002 from Caswell, Noelke and Mojduzka.

When we speak about food products which one are the most important attributes for consumers? It depends on the consumer view.
For some goods like wine the most important attribute is the sensory one because we don’t buy wine for the nutrition attributes of course.
Animal welfare is nowadays becoming more and more important.
There are strong differences in the choice of attributes based on the willingness to pay.
• Extrinsic quality attributes:
o Test/measurements indicators: certification, labelling, minimum quality standards.
o Cues: price, brand, manufacturer name, store name, packaging, advertising, country of origin, reputation, past purchasing experiences, other informations.

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INFORMATION ASYMMETRY IN THE FOOD MARKET:

In the food market there is a strong information asymmetry. So, the producer is better informed than the consumer. The consumer to increase his/her information level has to
dedicate time. If the consumer dedicate time to get informed there is a cost opportunity: the consumer can’t spend time for other activities. If in the market there is a strong
asymmetric information, the cost to increase the informations is higher for the costumers. The cost for increase the information for the costumers, depends on the level of the
information asymmetry in the market. The consumer would like to increase his/her information level, but the information is time consuming so the consumer has to make a
sort of cost benefit analysis (how he/she wants to spend the limited time available): the costumer has to check if the benefits to have a better information is higher or not of
the cost to get that information level. In searching information there are three kind of attributes:

• Search attributes: the information can be obtained before the purchase of the product.
• Experience attributes: the information can be obtained only after the purchase of the product.
• Credeance attributes: the information cannot be obtained either before or after the purchase of the product.

Some example:

• Nutritional attributes are “search attributes” in EU because there is a mandatory law about labeling which has to write these kinds of informations on each product.
Otherwise without the labeling nutritional attributes are “credeance attributes”. If we go out to eat in a restaurant, the nutritional attributes are “credeance
attributes”.
• Sensory attributes are “experience attributes” because we can get this information just after tasting (except for the color which is possible to discover before trying
them).
• Value/function attributes are “search attributes” because we can get this information just looking the products before buying them.
• Process attributes are mainly “credeance attributes” because most of them are extremely difficult to get the information even after purchasing because the process is
really hard to verify. Just a few products specify the process attributes and in this case are “search attributes”. Adding the process attributes on a product can be a
value added for the product itself. For example, the role of certification is to transform a creadence attribute in a search attribute, but certifications are made by third
part which are not involved in the production process. Traceability is a tool extremely important to guarantee the process attributes, because trough traceability we
can trace all the process through the supply chain to the origin.

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 TIME PREFERENCES AND EATING BEHAVIORS

Why we study time preference: we are talking about this topic, which is connected with behavioral economic and psychology, because it is a very important topic. It is strictly
linked and connected with many aspects which we already treated in this course, like sustainability, people behavior in their economic activities, obesity and it provide us a
good framework about how people behave.

Definition of time preference: time preference is the willingness to trade a current utility for a delayed utility. It is the willingness of people to accept a larger amount in the
future versus a smaller amount sooner. It is the willingness to trade a current utility with a future bigger utility, whatever it is. It’s something we renounce today, to have a
future benefit. It is also defined mainly in psychology as a “measure of impatient”: more a person is impatient and more this person is willing to wait for the gratification.

Other names of “time preferences”: Time preference is also known with other names like “time orientation” or “time discounting”. Basically the underline topic is the same
one.

Classification of individual based on time preference: Individuals are usually classified based on their time preferences in two main group:

• Individuals with high time preference: those individuals are typically less willing to delay gratifications. They tempt to highly discount future events and the future in
general and they are also very present oriented. They care to the present much more than the future.
• Individuals with low time preference: those individuals tempt to discount the future with less extent. They give more importance to future events and for this reason
they are future oriented and in general they are willing to delay future gratifications.

Time preference was treated by many disciplines, that’s why we often find papers which bridge many aspects of psychology, economic and so on. We will focus mainly of time
preference from an economic point of view. In the economic literature time preference is typically defined as Exponential discounting or time discounting. There are two
main theoretical frameworks to model time preference and to account for time preference in economic models:

• Exponential discounting: time preference and the way in which individuals discount future and future events is modeled following a constant rate of decline.
According to this model every people discount future events to a constant rate of decline over time. Every week the depreciation of time goes constantly down. These
people are time consistent which means that they tempt to attach the same value to future events and depreciate the value of future events and of future in general
of the time to a constant rate. Some experimental studies made after this model was developed, demonstrated that people often tempt to behave in another way
without following this constant rate of decline. Instead what happen is what we can see in the next model called hyperbolic discounting.
• Hyperbolic discounting: as we can see in the graph below, the blue line is still the exponential discounting which we already saw, while the purple line is the one
which represent the hyperbolic discounting. With this experimental study, economist realized that is quite unlike that people are able to depreciate future to the same
extent over time. Instead what they tempt to do most of the time is to show a very rapid rate of decline in the short run and then have a constant rate of decline after
a certain period. They tend to depreciate future much more into the short run and then have a constant rate of decline. This is because is quite difficult for everyone

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 to really attach a value to the future. It’s difficult to give a value to the future in general. For this reason people are present buyers and not buying consistent as
assumed by exponential discounting model. People are present buyer: they tempt to attach a value to present things and a different value to future events. That’s the
meaning of present buyers. This model suggests us how people behave and explain us why we are more concern about present and less about future events.

Here an example of one study made on this topic. The aim was to understand how people behave when they have to choose something. In this case was an easy decision
because people had to decide what to eat.

• The question was “if you were deciding today, would you choose fruit or chocolate for next week?”. 74% of participants chose fruit for next week: people tend to
make patient choices for the future.
• When the question was “if you were deciding today, would you choose fruit or chocolate for today?” 70% of participants chose chocolate: people tend to make
impatient choices in the present.

This experiment shows us our impossibility to attach a real value to future events and how it makes act us in a different way in the present. When we are not sure what is
happening in the future, how can we decide how to behave? What people do is just decide what to do in the present and if there is a problem in the future they will take
care of it when the problem will arrive. This is a prove that people tend to have a hyperbolic discounting behave.

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When we are talking about time preference we classify people with high time preference or with low time preference as we already said. But there is another way to classify
people:

• Sophisticates: they are those who would like to do something which require some force, like quit smoking, but they know they will not succeed. They are not able to
manage their decision over time. They are aware that they care more about present and they are not able to achieve the goal because it takes time. The fact that they
are aware, give them more chances to reach their goal or correct their behavioral failures. They will use commitment devices to help guide their future selves.
• Naïfs: they are those people which know what is important to do, they always try but they are not aware about the fact that they won’t be successful. These people
tent to fail much more easily than other due to a way to behave. These people have more chances to fail because they are not aware of their behavioral failures. They
don’t see the need of a commitment device.

ECONOMIC MODEL “DEMAND FOR HEALTH”

“Demand for health” is an economic model developed in 1972 from M. Grossman. It was the first time that time preference was introduced in a economic model as a
fundamental variable. It still used as a theoretical framework in other studies in this field.

The idea beyond the model is that we have a stock of health which we received at birth. The stock of health which we received is at the maximum level when we born, and it
depreciate with aging (over time) due to several issues/factors like the environment where we live, the socio economic conditions, the access to medical cure, genetic and so
on. These factors are interrelated which lead us to depreciate our stock of health over time. This stock of health can be off set with specific behaviors, basically investing in our
health. He classify two different type of investments in health which can be defined as:

• Direct investments: they relate to all medical cares, like the cure that individuals have (going to the pharmacy / hospital to receive the cures which people needs).
• Indirect investments: they related to health behavior which are all the activities that contribute to maintain or to improve the health status of individuals, without
relating with the health of an individual in that moment. For example, physical activity is something that people do because they know is important for their health
status even if it doesn’t have an immediate result/outcome. Even information can be an investment in health because for example, when we read carefully labels to
know what we are going to eat than we are doing something for our health.

Health behaviors have a peculiar and peculiar characteristic which is the fact that they can be classify as “intertemporal choices/decision”. It means that every time that an
individual decide to invest in his/her health indirectly, through a health behavior, the individual has to accept something he/she is doing today in order to have a delayed
outcome. So, there is always the trade-off between a current satisfaction and a future benefit. The extent which people are actually able to maintain their health level and
maintain their health status trough health behavior depends on how they evaluate the future (basically on time preference), depends on how they are willing to delay
gratifications and make sacrifices in the present and so, it is basically how they face all these intertemporal choices. If individuals are willing to delay gratifications, they are
most likely to be successful and having a good health for a longer time. Otherwise people which follows the immediate needs, will invest less in their own health and for this
reason they will face health issues earlier in time. Time preference is able to affect the outcome of our health.

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There are many other studies related to time preference beside the one of Grossman. Many studies focus on how time preference is related to health behavior. For example,
people with low time preference are less likely to:

• Smoking: people with low time preference, the once more future oriented, are less likely to smoke.
• Drink alcohol: people with low time preference, the once more future oriented, are less likely to drink alcohol.
• Have high BMI: people with low time preference, the once more future oriented, are less likely to have a high BMI which means body mass index, which is an index
used to measure obesity.

People with low time preference are more likely to:

• Exercise: indirect invest in their own health.

• Undergo medical examination: because they are more careful about their health and to the long run.
• Have higher diet quality: they are willing to spend part of their time taking care of health diet for example reading labels and get informed.
• Control their diets: check what they are eating and also check their BMI index.
• Make use of natural labels: spend time getting informed.

In conclusion, people with low time preference and so are more future oriented, tend to act preventing behaviors.

Time preference is not just related to health behaviors, but it’s involved on every occasion people have to face intertemporal decisions. People which have a low time
preference (future oriented) tend to have:

• Higher environmental concern

• Increased pre – environmental attitudes
• Recycling behaviors
• Less waste

Lack of studies that have investigated how time preference could affect environmentally friendly behaviors related to food economics.

The ability to delay gratifications is the key for success → Watch the video for the experiment called “marshmallows and children a lesson in time preference theory”:
https://www.youtube.com/watch?v=lWURnHkYuxM → The Stanford marshmallow experiment was a study on delayed gratification in 1972 led by psychologist which was a
professor at Stanford University. In this study, a child was offered a choice between one small but immediate reward, or two small rewards if they waited for a period of time.
During this time, the researcher left the room for about 15 minutes and then returned. The reward was either a marshmallow or pretzel stick, depending on the child's
preference. The researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores,
educational attainment, body mass index (BMI), and other life measures.

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HOW YOU CAN MEASURE TIME PREFERENCE? There are different possibilities to measure time preference related for example to:

• Saving and dissaving rate information: how much people have in their personal saving account and how much money people spend in a period of time and for what.
• We can also use the BMI and the habits of people and so on.

Whatever variable we use is not directly connected to the time preference: there is not a variable which is directly connected to time preference which we can measure. We
can just relate to proxies, which means that we always have to use variable which can give us an idea about people and if they are more present or future oriented.

In economic studies mainly, saving and dissaving rate information where used quite often to measure time preference. Another method which is often used is called
“Monetary choice task” or “multiple price list”. Multiple price list is a set of repeated choices that are proposed to the participants of the study in which is usually asked to
people: “do you prefer to have 10€ today or 15€ in a week?” or “do you prefer to have 15€ in two days or 20€ in two weeks?” and based on the answers is possible to
understand the time preference.

DOMAIN DEPENDED: It’s not so easy to analyze time preference. For example, some people can have for example a high time preference in term of money but a low time
preference in term of health domain. It happens that a person can have a very different time preferences with respect to specific domain we are considering. This is way is
really hard to measure time preferences: time preference is not domain specific.

FUTURE CONSEQUENCES SCALE: a convenient method to measure time preferences, especially when we want to analyze big samples, is for example online survey. The scale is
made by 14 items, which aim to catch if a person is more oriented to the present or more oriented to the future. 7 items refers to high time preference while the other 7 items
refer to low time preference. This method is really useful because is not subject to domain dependent and because is not necessary to incentivize the participants. In this case
the results will be more reliable because it avoid some problems like the trust in the test taker.

POLICY IMPLICATIONS OF TIME PREFERENCES: Time preference is related to individual characteristics, so is possible to formulate some policies who could change individual
time preferences? It’s not easy to modify personal time preferences. Some actions which ca be taken are:

• Future policies should attempt to decrease consumers’ preference for immediate utilities and lead people to rethink about value of their future health outcomes.
• Information campaigns which aims to improve consumer knowledge about their relationship between diet and health. Health education intervention could be
effective in decreasing the rate at which consumers discount the future.
• Modify the arrangement of food-shelves, placing healthier food in the center lines and discouraging the presence of snacks or other junk food near the cash register.
Spatial proximity to the object of desire, the presence of smells or sounds could be associated with increase impatience and impulsive behaviors.
• Discourage the increasing diffusion of food-self shops (vending machines).

Time preference is related to individual characteristics, but high time preference behaviors can cause externalities and costs for the society.

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 SECOND PART – MAIN CHALLENGES
HUNGER

What is hunger and which is the technical definition of hunger? Typically when we refer to hunger we refer to the concept of undernourishment, so a permanent situation in
which people don’t have adequate and stable daily calorie intake, without which an individual cannot live an active life. This is the definition given by FAO and this is also how
FAO study this problem. Undernourishment is not referred to a short period condition, but it refers to a permanent condition and for this reason it’s even more important in
term of consequences because undernourishment can really affect people’s life.

FAO study undernourishment in the world using some aggregated data related to:

• Food production, food import and export data for each country: to have an idea of the amount of calories availability.
• Population characteristics: to have an idea of dimension of population (for example how many young people there are in a county, or how many women there are in a
country and so on, because each segment of a population have different nutrition needs).
• Household surveys: this is one of the most precise indexes in the analysis of undernourishment and about people condition. Typically are done by international
organization or by the countries themselves. (for example in Italy is ISTATA which take care of collecting these data).

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 FOOD INSECURITY BASED ON THE FIES:

• We can define food security to mild food insecurity, and this is a situation in which
people can typically afford enough food for themselves. They are generally able to get
the food they need, and their scarcity is just occasional or specifically related to
particular events and is generally solved in a short period of time.
• Then we have a situation that we can call moderate food insecurity and here is more
complicated because actually people may change the type of food that they are able to
afford because maybe they don't have enough economic resources to afford fruit and
vegetables for example and so they change and they actually shift from nutritious food
to less nutrition and less quality food. They might get enough calories but there is a
problem of malnutrition. There is a difference between undernourishment and
malnutrition: undernourished means that there is not food enough while malnutrition
is a lack of specific nutrients which lead to several problem. Malnutrition can be even
overnutrition which lead to obesity for example. Malnutrition can be lack or abundance
of calories.
• Severe food insecurity: this is a permanent condition in which people don’t have food
enough.

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WHO IS MORE AFFECTED?

Where do we have hunger, and which are the area where people are suffering the most and why some areas is affected more than other areas?

• One of the main variables is the economic situation of each countries, because often poverty is one of the main causes of hunger. So, in rural area and poor area in
developing countries are the most affected. In these areas there is often a low productivity of agriculture for climate and soil conditions or a strong fragmentation of
farms. So agriculture is not able to guarantee enough food for the population. There is also a lack of water, energy and health care assistance.
• Other areas which are usually affected by hunger are the large urban region where live poor people. Especially the slums areas. Slums area are those huge areas
typically outside big cities, especially in Asia and India, in where people live right outside the border of cities in conditions which are totally inadequate both in terms
of hygiene and infrastructure. They don’t have enough economic resources to afford food. Even if someone have enough economic resources to afford food, there are
not infrastructure to be able to buy food. Usually in these areas is not possible to produce food due to lack of infrastructure and hygienic conditions.
• The third area in which people are suffering hunger the most is in developing countries which had suffered catastrophic events like for example earthquakes, floods,
conflicts, ethnic persecutions. In this case these areas are able to recover, and hunger is limited in a period.

THE CAUSES OF HUNGER:

Hunger have some causes, and the main causes of hunger are:

• Conflicts: conflicts are not necessarily huge in terms of people involved. Conflicts are not wars. Conflicts can be defined even as simple violence happening in specific
countries for specific reasons like religion, politics and so on. Conflicts are increasing around the world, also increasing the number of people affected by hunger and
malnutrition. Agenda for sustainable development goals have some targets to reach peace. These goals are strictly connected to the ones to reduce hunger because
the countries affected by conflicts are more likely to be food insecure and undernourished.
• Climate change: climate change can affect people life and agriculture productivity in many ways. There is a distinction between:
o Climate change over time: in the last decade average temperatures are increased a lot, and it affected the productivity in agriculture and the availability of
some food, affecting especially the poor countries.
o Specific catastrophic events: we can’t control them in any way, and we can just face the consequences. They affect of course the life of many people and the
agriculture and also the investment made on the agriculture. The number of catastrophic events (like storms, earthquakes, tsunami and so on) are double
since the early 1990s.
• Economic slowdown
• Poverty: In the world there is enough food for everyone, but if most of the people can’t afford it, because of poverty. So, the poverty is another huge problem related
to hunger. Another problem is that most of the food is produced in the north part of the world. Food aid is a common action which industrialized countries use to help
poor countries, but it’s not really helpful, because it give just a temporary benefit, it’s not a real solution to solve the problem of hunger. The food aid is not a viable
solution, as there are distortions like corruption or no stimulus to improve, despite they are absolutely necessary in case of emergency

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So, which are the best policy to solve the problem of poverty and hunger?

• For example one option is the “food security policy” which aim to increase the productivity of agriculture in the countries where there is the problem of
undernourishment.
• Policies that may increase food availability can be, for example, fostering constant economic growth in developing countries or increasing agricultural productivity with
the support of public and private investments. In the last case, a sustainable approach is needed, since deforestation and over-use of resources are depleting the
fertility of land. In particular, arable land is at risk of erosion and desertification.
• Moreover, agricultural growth has shown to be effective if it involves small farmers, especially women, by generating employment for the most vulnerable.
• Other policies can be focusing development on country specificities like natural, physical and human local capital) or increasing food preservation and reducing food
losses.
• Other policies may be concentrated on the adoption of social protection schemes, since economic growth is not always enough.
• Also increasing education can be an investment for the future.

Policies need to focus not only on the poor, but also, they need to pay attention to nutritional values, as well as quality and not just quantity. This happens because there is a
double problem: there are 842 million people suffering from hunger or stable malnutrition on one side, and on the other 1.4 million people suffering from obesity and
overweight issues.

THERE ARE OTHER REASON WHICH CONTRIBUTES TO THE PROBLEM OF HUNGER LIKE:

• Food production is high, but it is concentrated in industrialized countries.

• Transfer food is very costly and poorest countries can’t afford foreign food.
• Food aid is not a solution even if is extremely necessary in case of emergency.
• Many countries still lack adequate infrastructure to support agriculture (road, irrigation canals and so on) and this is a limit for agriculture development and food
access.

Today 20% of world population lives with less than a dollar par day and more than 50% with less than 2 dollars par day. Today the per capita income in industrialized countries
is 18 times the income of sub Saharian Africa.

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 OBESITY

Obesity definition: obesity is defined as a condition in which individuals have high value weight and basically it is defined and calculated with the “Body Mass Index” (BMI)
which is an index that tells us which is our level of obesity or eventually if we are still in the range or normal weight. BMI is calculated as the weight in KG divided the square of
height in miters. This is an index used mainly in economic studies because obesity from a medical and a health point of view cannot be just analyzed as the result of the
calculation of the ratio between the weight and the height. BMI index has several advantages:

• First of all it’s very easy to be measure also by self-reported data from consumers through the household surveys that we saw for malnutrition for example.
• It can be measured in a large scale, through doctors for example. It’s not necessary to have specific instruments or specific setting in where measure height and
weight.

For this reasons BMI is commonly used also in health studies combined with other indexes or values. From an economic point of view obesity is seen as an externality and so as
a market failure. In the economic studies BMI is the main index that is used to classify the problem of obesity. When we do the ratio between the height and the weight we end
up with 4 or 5 categories:

• Underweight: when the BMI is less than 18,5

• Normal: when the BMI is between 18.5 and 24.9
• Overweight: when the BMI is between 25 and 29.9
• Obese: when the BMI is between 30 and 34.9
• Extremely obese: when the BMI is greater than 35

For the last three categories there are three sub-indexes which define the grade of severity of the overweight and obesity condition.

Typically the overweight and the obesity conditions is the result of an energy imbalance: the energy that an individual intake while eating is higher than the energy
expenditure. In the longer run it generate the problem of overweight or obesity.

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SOME DATA:

• In 2015, across the OECD countries, 19.5% of the adult population was obese. This rate ranges from less than 6% in Korea and Japan to more than 30% in Hungary,
New Zealand, Mexico and the United States. More than one in four adults is obese in Australia, Canada, Chile, South Africa and the United Kingdom.
• Adult obesity trend data in OECD countries: over the past decade overweight and obesity rates have grown rapidly in Canada, France, Mexico, Switzerland and the
United States; it is almost stabilized in England, Italy, Korea and Spain; there is, however, no clear sign of retrenchment of the epidemic in any country.
• Childhood obesity rates in OECD countries: the number of 15-years old who report to be overweight or obese has steadily increased since 2000 in the majority of
countries; relatively stable rates in France up to 2012, while trends have been somewhat upward again for both boys and girls in England since 2012, and since 2011
for boys in the US.
• Expected obesity growth by 2030: obesity is expected to grow significantly in the US, Mexico and England up to 47%, 39% and 35% respectively; on the contrary, the
increase is expected to be weaker in Italy and Korea, respectively 13% and 9% in 2030, but obesity rates are projected to increase at a faster pace in Korea and
Switzerland where rates have been historically low.

The coexistence of undernutrition with overweight and obesity is commonly referred to as the “double burden” of malnutrition. Rapid demographic, social and economic
changes in many low- and middle-income countries have led to increased urbanization and changes in food systems, lifestyles and eating habits; dietary patterns have
shifted toward increased consumption of processed foods often energy-dense, high in saturated fats, sugar and salt, and low in fiber.

GROWTH IN CHILD OBESITY: While Italy still boasts one of the lowest adult obesity rates (10.3%) in Europe, the situation is opposite for children. Italy has one of the highest
rates of childhood obesity in the EU, together with Cyprus in Greece, Malta, San Marino and Spain, where 1 in 5 boys (approximately 20%) are obese. These data are alarming,
above all when compared to the much lower prevalence of childhood obesity in Denmark, France, Ireland, Latvia and Norway. The main causes to this issue are multiple
interrelated factors like socio-economic variables, time preference, time pressure, habits/traditions or psychological factors/personality traits/social context.

CONSEQUENCES: The main consequences are public health problem (according to WHO, overweight and obesity are responsible for 44% of the diabetes, 23% of ischemic
heart disease and up to 14% of cancer burdens; they are also related to other noncommunicable diseases such as metabolic syndrome) and economic problem (overweight and
obesity with their related health consequences imply significant costs for the sanitary systems, direct costs like medical care and indirect costs like scarce productivity at work
or increased investments). In fact, obesity ranks among the top 3 human-generated economic burdens in most developed economies.

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POSSIBLE POLICIES INTERVENTIONS to this issue can be:

• policies supporting more informed choice like public information campaigns, nutrition education, nutritional labeling and nutritional information on menus.
• Foods are advertised heavily on television, especially foods that are high in fat, salt and sugar (HFSS). Children are particularly vulnerable target group and there exist
regulatory measures across Europe, as well as voluntary initiatives by major food and beverage companies, concentrated on restricting the advertising of HFSS foods
to minors.
• Public health information campaigns and nutrition education in schools are the most common type of intervention employed to promote healthy eating. They do not
impose direct restrictions or direct costs on the food industry (less intrusive), which may account for their widespread popularity. An increasing number of campaigns
are targeted at specific foods or nutrients, such as fruit and vegetables, seafood or salt. The main goal of nutrition education is to inform people on what constitutes a
healthy, balanced diet, as well as how to improve their diet and lifestyle.
• Menu labelling facilitates healthy dietary decisions when eating outside the home by providing relevant information at the point of choice.
• Policies aimed at changing the market environment like fiscal measures, regulation of meals and nutrition related standards. There are two main types of fiscal
measure:
o fiscal measures applying to the population at large taxes or subsidies designed to change the prices of foods or nutrients depending on their healthfulness,
fiscal measures targeting disadvantaged consumers to guarantee food access by means of vouchers for food purchase or other forms of support.
o Introduction of the fat tax that is a tax placed upon unhealthy food aimed at discouraging unhealthy diets, which idea is based on a fundamental economic
principle, that is, when the price of an item increases, the demand of that item will decrease. In fact, decreased consumption of unhealthy food is equal to
decreased risk to incur in overweight and obesity. The fat tax cannot be considered an adequate measure, since obesity can be in part attributable to a high
consumption of unhealthy foods, however there are other consequences such as scarce physical activity and sedentary lifestyles. An analysis of sugary-drink
purchases, carried out by academics in Mexico and the US, has found that the 5.5% drop in the first year after the tax was introduced was followed by a 9.7%
decline in the second year. The tax had its biggest impact on the poorest households.
Access to healthy food may be restricted in certain geographic areas or regions, typically termed as “food deserts”. Food deserts are places where it is difficult to
access and/or expensive to purchase healthy food. These are usually deprived urban areas with few supermarkets and large numbers of consumers without cars.
Product reformulations to reduce levels of specified nutrients in processed foods can be achieved through legislation. Convenience foods can contain high levels of
unhealthy nutrients such as salt, trans and saturated fats and sugar Regulation of school meals are interventions that regulate catered meals in schools that are widely
applied and are notably regulation of the nutritional content of school meals, the provision of free fruit and control of vending machines.

Other important policies can be interventions not explicitly targeted at healthy eating but relevant.

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 SUSTAINABILITY

In 1972 the Club of Rome promoted a “holistic intertemporal approach” to protect the future of humanity and of the planet and the limits to the growth, that is, the
importance of considering limited natural resources and of accounting for future generations.

In 1987 the UN Brundtland Commission promoted the “our future” report in which it was presented the first global notice of what would be later called “green growth”, that is,
the first definition of sustainable development. The Brundtland commission had a key role in extending the meaning of sustainability, which was not just related to the
environment but also to economic and social concerns.

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Sustainable
development has to account for intra-generational issues, inter-generational issues and interconnectivity, that is, seeing the world as a system where all parts relate to each
other.

In 1992 was taken place the first Earth summit, which consisted in a UN conference on environment and development and was called Rio declaration on environment and
development which aimed at finding commonly agreed solutions. The concrete solution was the creation of the Agenda 21 action plan for sustainable development.

In 2000 was taken place the World Summit on Social Development which was called the Millennium declaration and Millennium Development Goals (to reach in 2015). There
were taken into account three important pillars: economy (profit), environment (planet) and society (people).

In 2002 was taken place the World Summit on sustainable development in Johannesburg which was mainly focused on governance, political and social aspects.

In 2012 was taken place the Rio+20 Earth Summit in which was created the Agenda 30 action plan which was built on the Agenda 21, but it set the SDG to be reached by 2030.
This declaration was adopted by all United Member States in 2015. The right to development must be fulfilled so as to equitably meet developmental and environmental needs
of present and future generations. In the Agenda 2030, sustainability is not just environment, but it comprises also the society and the economy.

The concept of sustainability has evolved over time into a not very well-defined umbrella term. In all cases, sustainability defines a way to approach problems and decisions,
that calls for a wide, multidisciplinary and across-generations vision, and for distrusting narrow perspectives as they are too limited and short-sighted. Sustainability is
based on balancing three principal objectives which are environmental protection, economic growth and societal equity.

The food system and the natural environment are closely linked. Food production strongly relies on environmental resources (primary inputs, especially related to
agriculture) and services (water, land, soil, seeds, nutrients, biodiversity, fish stock, energy). On the other hand, food production releases outputs into the environment like
agriculture, processing, transport, retailing, consumption and disposal. Other important links between sustainability and the food system relate to food quality, public health,
the use of resources, emissions, landscape and land use.

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In the context of sustainable development, the inter-generational and intra-generational equity issues relate also to the right to food today, the right to food tomorrow and the
right for a livable planet. However, the main challenges for the food system are:

• Population growth: population will grow to 9.5 billion by 2050 and will happens mostly in developing countries in urban areas. The food crop demand is projected to
grow by 70-85%, while the water demand will grow up to 85%. Moreover, in the period 2017-2050, half of the world’s population growth will be concentrated in just
nine countries that will be Nigeria, the Democratic Republic of the Congo, Pakistan, Ethiopia, the United Republic of Tanzania, the United States of America, Uganda
and Indonesia.
• Change in diets: the change in diets has highlighted the importance of production, but also consumption is important. The consumption of meat has a huge impact on
the environment; meat is all the production and the consumption chain and not just the emissions. In fact, meat production accounts for 70% of all agricultural land,
30% of the planet’s land surface, 40% of the world’s grain is grown for livestock feed and 7% of global water use is to grow feed grains for livestock. FAO defines
sustainable diets as those diets with low environmental impacts which contribute to food and nutrition security and to healthy life for present and future generations,
that are nutritionally adequate, safe and healthy, while optimizing natural and human resources.
• Climate change: each step of the food system, from input production to final consumption and disposal is responsible for greenhouse gas (GHG) emissions.
Agriculture, forestry and other land use are responsible for 20-24% of global GHG emissions mainly from deforestation and agricultural emissions from livestock, soil
and nutrient management; globally, it is the second largest emitting sector, after the energy sector. Agricultural productivity is projected to be strongly influenced by
changes in climate in relation to temperature, floods, draught and other changes. The combined effects of climate change, land degradation, cropland losses, water
scarcity and species infestations may induce a strong reduction in yields, while the increase in general energy demand could lead to an increase in prices of fertilizers
and pesticides.
• Resource distribution: the nutritional paradox is that there are about 820 million people that suffer from undernourishment, but, at the same time, in other parts of
the world we have problems related to over-nutrition and food waste. This is a problem of resource distribution where a crucial role is played by food self-sufficiency
that has strong linkages to the use of natural resources and the environment. In this case, we distinguish between food losses is related to the production phases and
it occurs generally in developing countries and food waste which is related to the final consumer and it occurs generally in industrialized countries; in developing
countries, losses are concentrated at the first part of the food supply chain, while in industrialized countries, food waste occurs at the final stages of the food supply
chain. According to FAO, annual global food waste is estimated to be about 1.3 billion ton, equivalent to about a third of the total food production intended for human
consumption. Causes for food losses: limitations on agricultural techniques and transportation and storage infrastructure, climate and environmental factors,
production surpluses, compliance with regulations and standards and technical limits and limits on processing and production processes. Causes for food waste:
technical limits and limits on processing and production processes, limits on the distribution system, errors in order forecasting and managing of reserves,
deterioration of products and packaging, marketing and sales strategies, excess purchase, excess portions prepared, difficulty in correctly understanding the labelling
and errors in food storage. The impacts on the environment are greenhouse gas emissions, soil degradation, waste of water resources and energy consumption. The
impacts on the economy are cost/value of the food wasted, value of the negative externalities produced and the opportunity cost of farmland. The impacts on society
are difficult food access, malnutrition and nutritional deficiencies.
• Resource depletion: The Millennium Ecosystem Assessment reports that 60% of the ecosystem services are being exploited in an unsustainable manner to meet
rapidly growing demands for food, feed, fresh water, timber, fiber, fuel and raw materials. Food is one of the most important causes for ecosystem service

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 degradation; in addition to overexploitation also pollution is an important source for ecosystem disruption. General global resource extraction doubled over the past
30 years, from 36 billion tons in 1980 to 85 billion tons in 2013, but this data is projected to keep growing, especially in emerging economies. Biocapacity is the
capacity of ecosystems to produce useful biological materials and to absorb unwanted materials, like carbon emissions, generated by humans.
• Biodiversity conservation: according to the Millennium Ecosystem Assessment report on biodiversity, ecosystems have been dramatically impacted with a consequent
strong loss of biodiversity. In particular, biodiversity loss is related to habitat and ecosystems’ degradation, as well as climate change, invasive species, loss of coral
reefs, over-exploitation and pollution. Moreover, causes strictly to the food system are catch of fish, use of fertilizers and pesticides, irrigation and change in land use,
as well as the challenge of preserving biodiversity is strictly related to food security issues in the long run.
• Land competition: the production sectors related to food, feed, livestock, forestry, non-food crops are the most land intense. Such activities are in competition with
the conservation of natural habitat and other land uses. In 2012, cultivated systems occupied about 24% of the total earth surface; the land dedicated to agriculture,
32% is occupied by arable land and permanent crops and 68% by permanent meadows and pastures. The increase in food production will have to deal with the strong
competition for land in a growing world. The ecological footprint calculates the amount of land and water that is needed to regenerate the resources used. It is an
indicator used to assess the impact of a specific population’s consumption on the environment and it quantifies the total area of land and water ecosystems needed to
sustainably provide all the resources used and to sustainably absorb all the emissions produced. The water footprint is an indicator of the use of fresh water devised to
convey both the actual quantities of water resources used and the way the water is used. In the case of food production, the water used in the industrial production
the evapotranspiration of irrigated agriculture is accounted for.

Consumers are quite aware of the issues of environmental sustainability and of the relation to their own food choices. There is an increasing awareness of the impact of
everyday consumption choices on the environment. We are more and more interested in environmentally friendly products. Consumers may use a demand pull, especially in
relation to non-mandatory environmental sustainability characteristics that food products may have. Eurobarometer data indicates that 77% of European citizens declare to
be willing to pay a premium price for products that have a low environmental impact. Policy interventions are required and should affect both the production and the
consumption side, since most of the negative impact that the food system poses on the environment is related to both production and consumption in an indirect way.

However, private agents do not have market incentives to avoid overuse of common environmental goods or pollution. And, in the same way, consumer preferences do not
represent a sufficient market-related incentive for firms to adopt environmentally friendly measures.

PUBLIC INTERVENTIONS CAN TAKE DIFFERENT FORMS THAT INCLUDE DIFFERENT LEVELS OF INTERVENTION, SUCH AS:

• Outlining general principles that should be followed by the agents. In this way, principles compared to standards are meant to leave more flexibility to agents.
• Fixing standards that are aimed at defining with a certain degree of detail the restrictions for the regulated behavior. The only limit is a limited flexibility.
• Implementing information or education schemes.
• Providing incentives.

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In the European Union there is no structured comprehensive legal framework for environmentally sustainable measures connected to agri-food production. Sustainability is
mentioned in a number of treaty articles and regulations, but it remains at a very general level.

Regulation 178/2002 specifies that one of its objectives is to protect “animal health and welfare, plant health and the environment”. However, there are no specific rules
connected to the practices to improve the environmental sustainability dimension of food production.

WITHIN THE EU AGRI-FOOD REGULATORY FRAMEWORK SUSTAINABILITY HAS BEEN ACCOUNTED FOR IN:

• The Common Agricultural Policy (CAP)

• The Common Fisheries Policy (CFP)
• The Directive 98/2008 on food waste.
• The circular economy action plan → It is a principles and guidelines.

Private standards are voluntary initiatives aimed at filling the gap between existing regulations and emerging consume demand for environmentally friendly products, aimed at
signaling and certifying environmentally friendly practices. They can be classified as third-party certified schemes like ISO 14000 or private schemes, that is, independently
adopted by firms. Voluntary measures once they are adopted, they must be in compliance with standards established by the EU Commission.

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 THIRD PART - POLICIES

FOOD POLICIES AND PUBLIC INTERVENTION

The neoclassical paradigm reports that economic agents, like consumers and entrepreneurs, behave to maximize their utility and profit, rationally and with complete
information. In competition, market plays a crucial role in coordinating consumer preferences and production through equilibrium price. In fact, market is the tool to
coordinate the economic system and competition allows to reach maximum efficiency, that is, optimal resource allocation and maximum social welfare. However, in some
cases, the market does not allow to reach maximum efficiency of the economic system and that usually happens in monopolistic systems. In this case, price is not the most
efficient economic tool and public interventions are needed to solve market failure. The main market failures are:

• Asymmetric information as far as regarding bounded rationality and imperfect information, as well as information seeking by consumers about product
characteristics. Asymmetric information creates opportunistic behavior.
• Externalities both positive and negative. Positive externality means that economic benefits deriving from one’s activity which implies advantages for people who did
not pay the cost, while negative externality means an economic disutility deriving from one’s activity which implies disadvantages for people without any reward.
• Public goods as far as regarding the non-exclusion principle and the non-rivalry of consumption principle.
• Transaction costs.

Food policies for food system and chains take into account food safety, food quality, food security, vertical coordination, international trade and low-income measures. Food
policies for single sectors take into account agricultural sectors, food industry and retailing.

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 FOOD SAFETY POLICY
The most important attribute in a product is safety. Food safety, food security and food quality are three different concepts.

• Food safety is the product attribute linked to the absence of components, like chemicals, pesticides or heavy metals, that can create a risk for health, it’s a disease.
• Food security is the food availability to face the population needs in terms of calories and other nutrients. It is a self-sufficient ratio for food production.
• Food quality is made up by individual preferences and individual perceptions. The quality profile is based on intrinsic and extrinsic attributes.

The definition provided by UNICEF is that food and nutrition security is achieved when adequate food, as far as regarding quantity, nutritional quality, safety and socio-cultural
acceptability, is available and accessible for and satisfactorily used and utilized by all individuals at all times to live a healthy and active life.

Food safety has a strong market failure above all because it is a public good. In particular, it is a public good because it is an intrinsic attribute that must be included in all the
food production.

Other reasons related to market failures of food safety are:

• asymmetric information (the producers have more information about the production process than the consumers)
• social costs (as food safety is connected to disease, social costs can be very high)
• the difference between perceived risk and real risk.

Price and other extrinsic product attributes are not an efficient tool for the coordination and regulation of demand and supply. This is a consequence for the loss of efficiency of
economic system and therefore it needs policy measures for food safety.

There is a market failure connected to food quality as well. In this case, market failure is due to asymmetric information. However, the public intervention to guarantee food
safety must be stronger than food quality. The objectives of a public intervention related to food safety are reducing asymmetric information between producers and
consumers and guaranteeing health conditions of food products.

As far as regarding the measures they can be:

• Information or labelling.
• Standards regarding product, process and both product and process → in the EU there are many product and process standards, and these are the main tools to
guarantee food safety.
• HACCP (hazard analysis and critical control points) → it is a self-evaluation and a self-control since producers is aware of the possible infections.
• Traceability.

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Currently, all the legislations regarding food marketing are based on regulations. Until 1979, there was nothing relevant about food safety and there was only the Common
Agriculture Policy. The European Union was created after the Treatment of Rome in 1957. There was the common idea according to the Member States to create a common
market within a free trade area. In fact, it was established the concept of free movement of goods with a high competition among States.

➢ In the ‘60s and ‘70s there were vertical directives that established common standards for ingredients and productions. This had a low effectiveness because it needed
agreement among all countries and there were many typologies of products.
➢ In 1979 the Court of Justice introduced the case “Cassis de Dijon” and the concept of reciprocal recognition under which products allowed in a country where they are
made must be permitted in the other Member States.
➢ In the ‘90s there were established horizontal directives. However, the mad cow crisis caused the biggest health issue in the EU. Huge costs were implemented to
manage the risks of the mad cow. During this crisis, consumers lost their trust in food safety and governments in general.
➢ In 2000 a new approach was applied and, in particular, it was published the white paper as a solution to the problems of that time. The regulation 178/2002 was an
important, structured and harmonic regulation about the general food law and the food market that was implemented in the new millennium. The goal of the
regulation 178/2002 was guaranteeing a high level of protection of human health and of interests of consumers for foods. The general principles were free
movements of goods and competition, the principle of precaution under which all the food produced and sold in the EU must be safe, the adoption of an integrated
strategy, which is the most important principle and it is connected to all the agents of the supply chain, a risk analysis and the creation of a food authority, the
European Food Safety Agency (EFSA).
➢ Other specific measures are the hygienic package with regulations 852/2004, 853/2004, 854/2004 and 882/2004. Those regulations created general rules about, for
example, factory and transport and HACCP.

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 LABELLING OF FOOD PRODUCTS

Food labels represent the most direct tool to transfer food-related information from the producers to the consumers. It is an informative measure. It provides the information
necessary to know exactly what they are eating, it allows consumers to choose food products that are in line with their preferences and it helps consumers to make more
aware food choices; in particular, it potentially leads consumers towards more healthful food choices. Food labels are regarded as a possible tool to empower consumers and
to facilitate food choices. In fact, there is a positive relationship between label use and diet quality. Moreover, food labels allow producers to communicate the properties of
their foods products, they provide product differentiation with intrinsic and extrinsic characteristics and the brand, and, finally, they reduce the information asymmetry in the
market by helping prevent opportunistic behaviors and therefore protecting the consumers. In particular, in this way, they improve the efficiency of the economic system.

On food labels, consumers may find information belonging to nutrition and health claims, nutrition facts panel, the ingredient list, but also certifications and the expiry date.

➢ Nutrition facts panel or nutrition declaration is the label required on most packaged food in many countries and it is, substantially, a panel on labels with the
nutritional values for that item. It lists the nutrient contents and it is typically based on the 2000 calorie diet.
➢ The claim is any message or representation which is not mandatory under community or national legislation, including pictorial, graphic or symbolic representation, in
any form, which states, suggests or implies that a food has particular characteristics. There are nutritional claims and health claims.
➢ Nutrition claim is any claim which states, suggests or implies that a food has particular beneficial nutritional properties due to the energy (caloric value) or nutrients it
provides, provides at a reduced or increased rate or does not provide.
➢ Health claim can be both function claims and reduction of disease risk claim.

In 1994 in the United States it was established the Nutrition Labelling and Education Act (NLEA) which is very important for policy intervention. From that moment, nutritional
labelling becomes mandatory for most pre-packaged foods, excluding foods in restaurant. Detailed requirements about the nutrition facts panel format had to be changed like
the font size, nutrients had to be separated by bars, values should be expressed in terms of serving size and mandatory info should be added like calories, calories from fats,
saturated fats, cholesterol, sodium and potassium (if a claim was present), carbohydrates, proteins, fiber, vitamins and minerals. The Nutrition Labelling and Education Act also
regulates nutrition and health claims; as far as regarding nutrition claims it must have standardized definitions, like low-fat, low-calorie or light, while as far as regarding health
claims there are two types of claims: the significant scientific agreement (scientific evidence meets FDA requirements to issue an authorizing regulation) and the qualified
health claims (scientific evidence is not strong enough to meet FDA requirements and therefore the claim must indicate that the evidence is limited.

Europe established a regulatory environment only in 2011 with the regulation 1169/2011, which established a new general legal framework for food product labelling. With
this regulation nutritional declaration becomes mandatory for all pre-packaged food and there must be requirements concerning the nutritional declaration format like the
font size enlarged, the energy value and the amount of nutrients expressed per 100g or 100ml and the presence of mandatory info like fats and saturated fats, carbohydrates,
sugar, proteins, salt and the list of allergenic compounds.

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Currently, in Europe, we have too much freedom as far as regarding voluntary information to be displayed. The first regulation on nutrition and health claims was established in
2006 with the regulation 1924/2006 in which, with regard to nutrition claims, the list of admitted nutrition claims was composed by energy, fat, saturated fat, sugar, sodium,
fiber, protein, vitamin and light. As far as regarding the health claims it was forbidden any health-related message that has not been previously authorized, the claims needed
to be based on accepted scientific evidence and approved by the European Food Safety Authority (EFSA) and they needed to be accompanied by additional information like the
importance of a varied and balanced diet or the food-quantity needed to obtain the beneficial effect.

➢ The regulation 116/2010 modified regulation 1924/2016 with regard to the list of admitted health claims. In particular, new admitted nutrition claims were added like
the omega-3 fatty acids, the monounsaturated fats, the polyunsaturated fats and unsaturated fats.
➢ The regulation 432/2012, with respect to admitted health claims, introduced a list of 222 health claims permitted by the EU Commission and claims regarding
especially vitamins, minerals, including also omega-3 and only one claim related to cholesterol, beta-glucans and only one claim related to cholesterol, live cultures
and olive-oil polyphenols.
➢ The latest regulation 432/2012 strongly affected the market in which 95% of health claims present on food products prior to the regulation were rejected. With this
regulation, food products produced after the 14th December 2012 couldn’t report claims that were not included in the approved list.

Nutrition facts panel in the US have a highly standardized format. Nutritional facts panel in the EU have mandatory information that must be displayed and additional voluntary
indications that are allowed. The size font is fixed, but the type font can vary, and complementary schemes are allowed on voluntary basis and there are no strict criteria.

The main issues related to food labels are:

➢ Information overloading: it means that the cost of information increases, and, at the same time, the label use decreases.
➢ Comprehension: the information on the nutrition facts panel are too complex and the cost of information is increasingly more increasing.
➢ Claims may be misleading: where it is written light, I can say with certainty that I can eat more.
➢ Voluntary labelling is not univocal: there is confusion among consumers coming from different parts of the world.

The market failure related to food labels is the opportunistic behaviors, since price do not represent the real value of the product.

The determinants of label use are:

➢ The household size. ➢ Income

➢ Gender. ➢ BMI
➢ Age ➢ Present/future orientation; time preference
➢ Education ➢ Health condition
➢ Nutritional knowledge ➢ Time constraint.

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 POLICY OF TRACEABILITY OF FOOD PRODUCTS

The traceability is the capacity to trace back the product along the chain to the origin, thus raw materials through specific documentation. Traceability becomes mandatory for
all food products. In the different countries in which it is applied, the traceability system is based on private standards, like ISO 22005, which is voluntary, and it gives market
incentives, or public regulations which are mandatory. In fact, regulation 178/2002 states that it is mandatory that all the agents identify any person from whom they have
been supplied with a food.

In the European Union there are two levels of traceability: mandatory traceability in which we can find EU policies with the respective regulations, like 178/2002 on all
products, 1760/2000 on beef chain or 1337/2013 on other meat chains, or voluntary standards in which we can find international private standards that trace back the product
from consumption to production, like ISO 22005, Global Gap, BSI or AFNOR.

There are different typologies of traceability like the precision, that gives the quantity of information registered, the length, that states the sectors or agents vertically involved,
and the breadth, that gives the size of the batch:

➢ The chain traceability is mandatory, and it was established with regulation 178/2002 that states that traceability registers suppliers and customers along the supply
chain through a specific document.
➢ The chain and product traceability involves the management of flows for separated batches. It is mandatory as far as regarding regulations 1760/2000 and 1137/2013,
while it is voluntary as far as regarding traceability at level of agents of the supply chain and of single firm. In this case, the product is traced back and we can see the
product history as well as the specific agricultural of raw materials.
➢ The objective of mandatory traceability is the improvement of food safety by increasing the information regarding the different chains from control, favoring the
liability of the agents, and withdrawing noncompliance products from market (but this only applies for regulation 1760/2000 in the beef chain).
➢ The objectives of voluntary traceability are the improvement of food safety by reducing the costs of noncompliance, the improvement of product quality by adopting
specific product and process rules, specific liabilities, product differentiation and the bran image and the premium price, the improvement of supply chain
management, and the adaptation to retailer requests. The voluntary traceability impacts the vertical coordination of the food chain by providing the management of
separate batched and production rules or standards.

In the EU voluntary traceability leads to the reorganization of the supply chain, but the changes in the governance depend on organizational transactions and previous
governance. In particular, formal contracts are applied in supply chains based on verbal agreements, contracts are enforced with price incentives in supply chains based on
contracts, while no crucial changes are applied, but specific production rules are applied in vertical integrated firms, COOP included. The choice of voluntary traceability
systems depends on costs and benefits. In particular, benefits are related to improvements of food safety, reduction of non-compliances, guarantee of high-quality levels,
brand reputation and increased efficiency of transactions.

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The system centralization occurs when a single company is the chain leader and have to choose the traceability standards and certifications; it also has the responsibility in
system application and the management of the information flow, as well as the establishment of the production rules, the selection of firms’ participants and control planning.

The vertical coordination also increases the bilateral dependency due to changes in the production processes for the adoption of the traceability standards. In fact, the supply
chain agreement reports specific production rules, procedures for the information management, trades, responsibility attribution in case of non-compliance and the control
planning. Traceability is a tool with important value for vertical coordination within the supply chain. There’s a business to business relation.

In the neo-institutional approach, traceability is treated as an institution, that is, a set of rules and procedures, that changes the organization of transactions in the supply
chain. This translates into the change of the governance. In this case, the effects of traceability are the increasing of asset specificity, due to bilateral dependency, the
decreasing of uncertainty, and the changes in the transaction costs and, especially, monitoring costs. Such changes favor the adoption of hybrid forms like the governance
based on supply chain agreements. In this case, the transparency and liability are improved, the risk of non-compliance is reduced and there are price incentives and
contractual conditions.

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 FOOD QUALITY

There is a general agreement that quality has an objective and a subjective dimension. The objective quality refers to the physical characteristics built into the product and it is
typically dealt with by engineers and food technologists, while the subjective quality is the quality as perceived by consumers. The quality profile of food products, that is the
intrinsic and extrinsic attributes, is aimed at meeting consumers’ preferences, giving particular importance to the individual perception. The quality differentiation is a choice of
the company and it is what gives competitive position on the market. However, quality is a public good and it entails a market failure due to information asymmetry, which
creates opportunistic behaviors.

The measures to improve and guarantee food quality can be based on EU and national food policies and being mandatory (labelling based on product standards) or voluntary
(geographical designation of origin or organic products), or based on international standards, like ISO and EMAS, and being voluntary (product certification, traceability,
environmental certification or ethical certification).

Through the EU quality schemes, the CAP (Common Agricultural Policy) provides tool to highlight the qualities and tradition of food products, or to assure consumers that these
are the genuine products and not imitations.

The regulation 1151/2012 on quality schemes for agricultural products and foodstuffs was applied for the protection and promotion of quality agricultural products as well as
traditional products. In particular, it contributes to guaranteeing quality to consumers and a fair price for farmers. Moreover, it achieves a simplified regime for several quality
schemes by putting them under one single legal instrument.

The Eu product quality schemes relate to agricultural products and foodstuffs, wine, spirits and aromatized wines, which producers or producer groups have registered
according to the rules. A product name identified as a geographical indication (GIs) is one that is closely linked to a specific production area. It means the production, the origin
of raw materials and the traditional production process.

There are different types of GIs:

➢ Protected Designation of Origin (PDO) → it identifies products that are produced, processed and prepared in a specific geographical area, using the recognized know-
how of local producers and ingredients from the region concerned. Those products must adhere to a precise set of specifications. Example are Bordeaux PDO, Cava
PDO, Pistacchio verde di Bronte PDO.
➢ Protected Geographical Indication (PGI) → it identifies products whose quality or reputation is linked to the place or region where it is produced, processed or
prepared. The ingredients used need not necessarily come from that geographical area. PGI products too must adhere to a precise set of specifications.
➢ Traditional Specialty Guaranteed (TSG) → it is not a geographical indication as such, but it focuses on tradition. It identifies products of a traditional character, either
in the composition or means of production, without a specific link to a particular geographical area.

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The total number of products with designation of origin increased significantly from 2001 to 2014, reaching a +136.3%. In particular, PDOs increased by 88% and PGIs by 186%.
However, there are north and south divisions: northern EU countries have small number of GIs products registered ad they prefer concentrating on the economic efficiency of
the market, while southern EU countries have an increasing number of GIs products since their introduction in 1992. In particular, the latter gives more important to culinary
cultures and promotes local tradition and diversified quality.

The EU GIs are protected by international agreements. However, outside the EU, the protection of each geographical indication depends on which country is taken into
consideration. In particular, TRIPS (Trade related Aspects of Intellectual Property Rights agreement) protects against misuse of GIs by avoiding consumers confusion, and it
enhances the level of protection for GIs wines and spirits.

Moreover, the TTIP (Transatlantic Trade and Investment Partnership) fulfils both the EU objective under which it wants to make its products recognizable and maintain the
same level of protection outside the EU, and the US objective under which GIs names are generic and it proposes to use trademarks.

Voluntary certifications involve:

➢ MSC Marine Stewardship Council → protection of marine ecosystems.

➢ Friend of the Sea → protection of marine habitat and marine resources. It applies FAO rules for responsible fishing.
➢ Dolphin Safe → reduction of dolphin accidental fishing during tuna fishing.
➢ Best Alliance → sustainable production of vegetable products together with Rewe Group network ortofrutticoli.
➢ Rainforest Alliance → reduction of the environment impact, promotion of biodiversity, enhancement of socio-economic outcomes, like tea, fruits, cocoa and coffee.
➢ Biodiversity Friend → promotion and protection of biodiversity.

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 THE COMMON AGRICULTURAL POLICY (CAP)

The Common Agricultural Policy is a system of EU subsidies and programs for agriculture. It initially sought to increase the agricultural productivity in the EU by enhancing rural
income and securing food availability, nut its objectives have changed over time. The idea was on equity and wealth distribution since the agricultural sector was weak and the
idea was to overcome a market failure.

Today, the main objectives of the CAP are to provide a stable and sustainable supply of safe food at affordable prices for Europeans, while also ensuring a decent standard of
living for farmers and agricultural workers.

➢ The Common Agricultural Policy (CAP) was born in 1962.

➢ In 1957 the Treaty of Rome created the European Economic Community between six European countries and the first common agricultural policy between six member
States that were Belgium, France, Germany, Italy, Luxembourg and the Netherlands. The main principles of this union were the free movement of agricultural
products, the removal of trade barriers and a common market organization by product and price.
➢ In 1962 the Common Agricultural Policy was created with the aim of creating a common market organization for six agricultural products that were cereals, pig meat,
eggs, poultry meat, fruit and vegetables and wine. The policy was based on price support and market support with the aim of protecting a common market based on
variable duty and export refund. There was an intervention mechanism to support internal prices because high prices favored production. The first aim of the CAP was
increasing productivity, but then after 20 years the goal changed in controlling the supply, since it became very high. The CAP was an extremely protected system.
Inside the market there was a free-trade area and therefore there were no duty, but from the outside importers had to pay a duty. CAP is a very expensive policy, but
it is an incentive for farmers because prices were extremely high, and they could produce more. It was an incentive for production because there were, at the same
time, high revenue as well as high profitability. Another positive effect was related to selling. There were no restrictions to sell the products and therefore the demand
was not considered. Moreover, production was very high, and farmers didn’t have any problems. From this, we can see an extremely increase of the supply. However,
reforms had to be introduced because the costs were extremely high, the consumer price were higher than the world market price and there was a scant regard as far
as regarding the rural environment.
➢ In 1980s the CAP tackles “food mountains”, that is, the EU had to fight with permanent surpluses of food production, like cereals and milk powder, and those
surpluses were either exported, stored or disposed within the EU. In general, there was a high budgetary cost.
➢ In 1984 Milk quotas were introduced. Introducing milk quotas, the EU extended the production quota system already applied to sugar.
➢ In 1988 a maximum ceiling for the CAP budget was introduced. Moreover, there were introduced limits on the quantities guaranteed to receive support payments.
➢ The major reforms took place during 1992 and 2013. In 1992 the Mac Sharry reform was introduced. It was born from the need to reach agreement with the EU’s
external trade partners of the General Agreement on Tariffs and Trade (GATT) with regard to agricultural subsidies. The reform expected a shift from product support
(through prices) to producer support (through income support, direct payments). The main objectives of this reform were reducing prices, introducing payments per
hectares or per head by partially decoupling payments, reducing the levels of intervention price by 29% for cereals and 15% for beef, and introducing the set-aside as a

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 measure to control demand. Accompaniment measures related to this reform were the 2078/92 on agri-environmental measures, 2079/92 on pre-retirement, and
2080/92 on afforestation.
➢ In 1999, Agenda 2000 was introduced, and it involved the creation of a European model for the agriculture based on two pillars: the market policy and the rural
development. The CAP shifted from price support to income support; moreover, price support for cereals, milk and milk products, beef and veal were further reduced.
There was a general idea to redirect the CAP toward the soil and the environment (rural development) and less toward price support mechanisms (market policy). It
was introduced a single payment scheme under which payments to farmers were decoupled. In particular, the first pillar, the market policy, included the Common
Organization of Market for cereals, oil, seeds, milk, meat and wine, while the second pillar, the rural development, included investments for young farmers, training,
pre-retirement and disadvantaged areas.
➢ In 2013, it was the first time in which the entire CAP was reviewed all at once. The new reform proposed maintained the two pillars but increased the links between
them. In fact, there was a more holistic and integrated approach to policy support. Moreover, it was introduced a new architecture of direct payments that were
better targeted, more equitable and greener. It was also promoted an enhanced safety net and strengthened rural development. The major aim of this reform was
meeting the challenges ahead by being more efficient and contributing to a more competitive and sustainable EU agriculture.

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