Progress report for GNC21-337
The emergence of niche crop markets and local food and drink value chains have offered small farmers an opportunity to diversify crop selection and increase profitability, but burgeoning markets are subject to boom-and-bust cycles that can leave farmers without an end-buyer. The craft alcohol movement has become one of these budding markets, with the number of local breweries, cideries, distilleries, and wineries growing steadily over the past decade. With this, the North Central region has seen a boost in specialty crop production to supply locally-sourced inputs to these craft producers.
The 2018 Farm Bill also legalized industrialized hemp production, offering yet another specialty crop for local farmers to consider. Industrialized hemp has several end-uses including fiber and feed, but the use of particular relevance here is the commodity’s cannabidiol (CBD) content. While countless CBD products have entered commerce—from CBD-infused muscle rubs to lotions to edible food and beverage—little is known about the long-run potential for cannabis-infused products, leaving farmers wondering about the economic longevity of producing for the industry. Further, many states have cannabis with tetrahydrocannabinol (THC), which could serve as an economic complement or substitute for craft beverages. It is unknown to what extent this policy reform will impact craft beverage markets, but any effect on craft beverage producers will also impact the profitability of farmers supplying the ingredients for alcohol production.
The proposal outlined here, titled “Consumer preference for alcohol and cannabis products and its impact on the economic sustainability of local farms and craft beverage producers,” considers analyzing consumer preference for alcohol and cannabis products to uncover the preferences for the two goods and identity the demand for cannabis-infused, non-alcoholic beverages. In achieving these objectives, we will evaluate how cannabis reform is likely to affect the alcohol supply chain, and we will offer market insight to farmers and craft beverage producers on how to adapt to these evolving markets to mitigate risk and uncertainty.
We will use data from an online survey distributed to a representative panel of U.S. households to understand consumer preferences, attitudes, and consumption habits of alcohol and cannabis products. Examining these two markets within a single experiment will allow us to identify how alcohol markets could change given cannabis reform.
Expected output includes academic publications, extension articles, and policy briefs. Information will be disseminated to our target audience of farmers and craft beverage producers through conference presentations. Project findings will also be shared with a more general audience through podcast episodes, popular press articles, and social media campaigns.
We identify three primary learning outcomes associated with this grant proposal. First is a more thorough understanding of the alcohol and cannabis laws regulating production, distribution, and commerce, emphasizing the North Central region. This understanding will be obtained through a review of the academic literature and state policies. Knowledge will be disseminated to our target audience, including craft beverage producers and farmers, through various outreach and extension outlets, increasing awareness of the laws regulating farmer, producer, and consumer behavior.
Second, by identifying consumer preferences for alcohol and cannabis products, we will calculate substitution patterns, or elasticities, within the industry. Generating and sharing this knowledge with our target audience will leave members of the alcohol supply chain better equipped to manage these evolving markets.
The final learning outcome is understanding the demand for alternative beverages, as this demand affects farmers and beverage producers alike. Uncovering consumer demand for cannabis-infused beverages will equip farmers and beverage producers with the knowledge to make production decisions.
The proposal also has three intended action outcomes. Primarily, for small-scale farmers with specialty crops, the expected output will better inform decision-making on niche crop selection, mitigating uncertainty about the longevity of these markets, which in turn increases expected profits. Next, the output will influence local craft beverage producers' production decisions as they continue to innovate. Finally, the proposal seeks to heighten industry collaboration amongst stakeholders across the alcohol and cannabis supply chains, increasing market coordination, participation, and lobbying efforts.
We have constructed a survey instrument to achieve our study's main objectives. The initial proposal outlined three surveys, each focused on cannabis and a single alcohol type. Instead, we will use one survey that combines cannabis and all alcohol types because of insights from conversations with industry members and advancements in the choice modeling literature. In brief, our discussions have conveyed that having a holistic view of the beverage market is essential (i.e., do not consider the relationship between one type of alcohol and cannabis in isolation). Many adults consume more than one type of alcoholic product, and we wanted to create a hypothetical setting that mimicked the real-world purchasing environment. If we only focused on one alcohol type at a time, we may bias the estimates since we do not observe the whole market. Recent advancements in the economics literature provide a convenient tool to address this change in the study's framework.
The survey begins with a series of demographic questions to ensure we obtain a sample representative of the U.S. population with respect to gender, age, income, education, and region. Following these questions, respondents will participate in a hypothetical economic experiment. This serves as the primary portion of the study. In this experiment, known as a basket-based choice experiment, consumers will be presented with multiple types of alcohol and cannabis products that vary in price. Consumers will be asked to select the alcohol and cannabis products they would select if they faced this decision in real life. In analyzing the responses to this experiment, we will address the primary objective of this study, which is to understand whether alcohol and cannabis are economic complements or substitutes.
A secondary objective of this study is to analyze the demand for cannabis-infused beverages. The experiment described above partially addresses this goal by including cannabis-infused sparkling water in the experimental framework. For a more comprehensive analysis, however, respondents will answer a series of follow-up questions regarding their willingness to pay (WTP) for various cannabis-infused beverages. Specifically, respondents will be asked to state their WTP for 14 products, including CBD- and THC-infused options. We ask about the WTP for a 12 oz. can of non-alcoholic beer, wine, ready-to-drink, and cider for both CBD and THC. We also ask about their WTP for 12 oz. cans of sparkling water, sweetened iced tea, and iced coffee to understand the demand for more general cannabis beverage product offerings (as opposed to adult beverage-inspired cannabis drinks). Respondents will be presented with a sliding scale that ranges from $0 to $10. From this, we can construct demand curves based on their stated WTP for the product. As stated preference methods can have hypothetical bias, leading some consumers to overstate their WTP, we will include cheap talk scripts following our profession's best practices.
After the questions of WTP for various cannabis-infused beverages, we will ask respondents additional questions about their personal and household characteristics to perform market segmentation analysis. The survey instrument is awaiting IRB approval. Once we receive this approval, we will contract with a survey provider to recruit a panel of approximately 3,000 U.S. adults above the age of 21 to complete the survey.
Data collection will occur in April - May 2023 (following IRB approval in March 2023), and data analysis will occur in the summer of 2023. Data analysis will include calculating consumer demand and willingness to pay, price elasticities, and market shares. From these statistics, and through the modeling of alcohol and cannabis supply chains, we can analyze how these results trace back to decision-making on the farm.
Extension educators are aware of the work being conducted. This will allow us to effectively disseminate results to our target stakeholders across alcohol and cannabis supply chains when appropriate.
Educational & Outreach Activities
The work conducted to date has focused on a literature review of the policies governing the relevant supply chains and the previous studies that have explored whether alcohol and cannabis are complements or substitutes. It has also been spent constructing the survey to be used in the analysis.
However, the study was presented at the 2022 Agricultural and Applied Economics Association (AAEA) Annual Meeting in Anaheim, CA, where we discussed the framework of the project and the next steps in data collection. It was also discussed in an MSU Extension hop working group meeting, where opportunities will arise for a presentation at least one state beer conference.
Once the data are collected and analyzed, we will prepare two separate peer-reviewed journal articles, one for each experiment in the survey as described earlier. As we prepare these papers, additional outreach articles will be prepared to share with MSU Extension. After publication, we expect news media interest and will engage in interviews, podcasts, etc.
To date, this project's effect on agricultural sustainability is limited. However, as we move forward and disseminate results to key stakeholders, the findings will primarily have economic and social benefits to the NCR farmers. From an economic perspective, the emergence of craft beverage and cannabis markets has allowed farmers to diversify crop selection, which could increase farm profitability. By uncovering consumer demand, willingness to pay, etc., the results will assess the long-term viability of these markets to help farmers think about risk and expected future profits. As for the social benefits, many studies have shown that craft beverage manufacturers and cannabis markets have boosted state and local economies through job creation, tax revenue, etc. In sharing our results, we provide insights into the demand for different alcohol and cannabis products. Highlighting these consumer results will have implications that affect local beverage manufacturers and cannabis producers, which affects on-farm decision-making.
During the first year of this project, I have increased my understanding of (i) the regulatory landscape of alcohol and cannabis supply chains; (ii) the manufacturing process of cannabis-infused beverages; and (iii) the delicacies of niche supply chains as they relate to farm profitability and sustainability. In addition, I have increased my survey and experimental design skills, including learning novel mathematical models to model consumer choice in our alcohol and cannabis setting.