Welcome

Brochure

Current Projects

Research Reports
and Bulletins

Newsletters

Vol.1 No.1
Vol.1 No.2
Vol.1 No.3
Vol.1 No.4
Vol.2 No.1
Vol.2 No.2
Vol.2 No.3
Vol.2 No.4
Vol.3 No.1
Vol.3 No.2
Vol.3 No.3
Vol.3 No.4

Newsletter--Volume 1, Number 2

The story of the growth of the California almond industry includes many of the ingredients found in other cases of West Coast agricultural success.In addition to being blessed with excellent soil and climatic conditions, farmers in the Sacramento-San Joaquin valley have worked with University of California scientists to develop varieties adapted to local conditions and cultural techniques to maximize crop yield and quality. They have also organized with or sold to marketers to ensure that reliable supplies of quality almonds are available to their customers. As a result of these and other actions, California almonds dominate both domestic and international markets. From a modest size at the end of the 1940s, the California almond industry has grown to supply upwards of 80 percent of the almonds marketed worldwide. Almonds are the second largest farm export from California. As in other California specialty-crop industries, a substantial portion of California almond producers belongs to a handling and marketing cooperative (Blue Diamond Growers, Inc). Growers who do not belong to Blue Diamond sell through independent handlers.

The California almond industry is sophisticated and highly competitive. One of the most visible elements of the California almond industry has been its advertising programs. Blue Diamond’s “Can a Week” program has been prominent on both television and radio. This campaign, as well as other industry advertising and promotional activities, has been encouraged and supported by the policies of the Almond Board of California, under the authority of a Federal marketing order.

The Almond Board and Almond Advertising

The Almond Board of California develops industry policy in three areas: the funding of production research, specification and disposition of almond reserves, and support for advertising and promotion. Advertising and promotion have historically accounted for the bulk of the Almond Board’s activities.

The Almond Board has supported advertising with a credit-back program. A per-pound assessment is set for all almonds handled; the assessment can be met with either cash payments to the Board or direct advertising expenditures, for which the advertising handler receives a fractional credit against its advertising and promotion assessment. Thus, the policy acts as both a tax on almond sales and a subsidy to support approved advertising activities.

Econometric Analyses of the Effects of Brand Advertising

Most almond advertising, and the focus of our recent work, has been associated with the Blue Diamond label. In our initial analysis, we utilized a tabulation of identifiable consumer almond advertising reported by LNA Mediawatch.1 With the exception of a few years in the late 1980s, the only identifiable almond advertising reported by LNA was undertaken by Blue Diamond. We used the LNA data to estimate demand equations for both Blue Diamond’s domestic sales volume and rest-of-industry sales volume; in both sets of estimates a 10 percent increase in advertising was associated with about a 1 percent increase in sales volume. These estimates, while large, were not particularly robust from a statistical standpoint.

In a second round of estimation, we used advertising and promotion expenditure data that Blue Diamond provided. In this study of total domestic demand, we used per-capita Blue Diamond advertising expenditures, real farmgate prices, and per-capita real household consumption expenditures to explain per-capita almond sales. The estimates from this study were statistically stronger than the estimates from our earlier study, but were otherwise similar. The estimated elasticity of demand with respect to almond advertising was greater than 10 percent in all equations we estimated, and these elasticity estimates were statistically significant in all cases.2 We used the advertising elasticity estimates to compute a marginal rate of return, which, with diminishing returns to research, must lie below the average rate of return. In the numeric estimates, the impact of domestic demand on export prices and earnings was ignored; this also causes the calculated rate of return to lie below the true average rate of return. Even with these two qualifications, the single-year marginal rates of return we calculated were high. With an estimated price elasticity of demand of -1.0009 and an advertising elasticity of 0.1394, the annual marginal rate of return on advertising has exceeded 100 percent every year since 1962, with annual average returns in excess of 400 percent. Even if the advertising elasticity is in reality much lower than this estimate, it still produces a healthy return—a true parameter that is one quarter the size of the estimate produces annual marginal returns of almost 5 percent.

The Impact of Foreign Markets

Accounting for exports would cause a significant upward revision in our calculated rates of return. In recent years, more than half of California’s annual crop has been sold abroad. Most of this trade is in almonds for industrial use, particularly to supply Europe’s confectionery industries. In earlier work, we found good evidence for highly competitive international markets; a Law of One Price appears to hold worldwide, particularly in the well-integrated European markets.3 In addition to the existence of a Law of One Price in almonds, our earlier work consistently demonstrated that demand for almonds in importing countries was price-inelastic. The estimated price elasticity of demand for almonds in Germany is approximately -0.5. Furthermore, the California industry accounts for a large and growing share of the sales of almonds in international trade. This means that a reduction in California exports leads to an increase in prices sufficiently large to cause an increase in total export earnings.4 This terms of trade effect was not taken into account in our rate-of-return calculations discussed above.

Blue Diamond is active in both domestic and foreign markets. If the cooperative received all the benefits from advertising in domestic markets, one outcome would be to draw its supplies away from foreign markets. With price-inelastic demand and well-integrated foreign markets, earnings to all exporters would increase. It is this benefit to other exporters, which is not taken into consideration in Blue Diamond’s profit-maximization calculations, that justifies a policy to encourage more domestic almond advertising. The more almonds sold in the U.S., the fewer exported, and the greater the benefits accruing to both exporters and their farmer-suppliers. If Blue Diamond’s brand advertising has had a generic effect as well, the argument in favor of intervention becomes even stronger. Similarly, if supported advertising is explicitly generic, and aims to sell almonds in general, and if such programs can be managed effectively, then the case for industry-supported advertising remains strong.

Editor's Notes
John E. Lenz

In this second issue of the NICPRE Quarterly, our main focus is on the California Almond program. In our feature article, Dr. Jason Christian (U.C. Davis) discusses some recent studies that he and his colleagues at Davis have undertaken on the California Almond program. In this issue’s “Manager’s Viewpoint” column, Roger Wasson (President and CEO of the Almond Board of California) describes the recent legal difficulties encountered by the Almond Board and the Board’s efforts to revive it’s funding base and promotion programs. Wayne Watkinson and Peter Butcher (McLeod, Watkinson & Miller) recap the legal issues and Court rulings in the almond challenge. In his “Director’s Corner” Olan Forker (Cornell University) introduces the new officers of NEC-63 (the Committee on Commodity Promotion Research) and briefly describes the program that is coming together for the October NEC-63 meeting. Once again, I invite you to get in touch with us if you have any suggestions about topics we should address, or any research you would like us to report in the NICPRE Quarterly. We also welcome any other comments you may have about the newsletter.

Manager's Viewpoint
Roger Wasson
President & CEO Almond Board of California

December 23, 1994, Christmas vacations around the Almond Board came to an abrupt end with a phone call that said our industry self-help program was “unconstitutional.” We later learned that the decision was narrower in its scope than we were first told. After more than 2 years of managing state and nationally legislated voluntary check off programs in several commodities, I thought I had experienced it all. However, there hasn’t been anything that compares to the organizational roller coaster ride we were about to take.

When I accepted the Board’s offer a year and a half earlier to move to California, there was some explanation of very old on-going litigation. However, the consensus was that it wasn’t going anywhere. Besides, court challenges go with the territory for California marketing orders. Consequently, no one was surprised that the Appeals Court ultimately rejected 22 of 23 points of contention, but everyone was shocked that an advertising program would end up being called “unconstitutional.”

In the months that followed, a number of other almond handlers filed suit against the USDA to avoid paying their advertising assessments. Although the current program was changed from the original program, some handlers felt that paying assessments was suddenly a voluntary matter. Others feared that any assessment they paid might ultimately be used to pay back their competitor who brought the original suit. To avoid further erosion of support, the Board suspended all advertising programs.

Without advertising programs, the agency and our marketing staff departed. Without an aggressive marketing campaign, our research began to show a decline in consumer awareness and attitudes.

The decision has also affected our international programs. With the industry split on the continuation of promotion programs in the shadow of ongoing litigation (appeals and new petitions), there was insufficient support on the Board to continue the Almond Industry’s MPP Program. Efforts to return to an EIP program (branded only) have resulted in the FAS substantially reducing the Almond Industry’s allocation.

Perhaps one of the most costly effects has been that Almond Board resources (funds, staff, and elected leadership time) were drained as we worked on appeals and fought off challenges to the new advertising program. Fortunately, we were joined in our efforts to defend self-help programs with key experts including: Dr. Margaret Campbell, Dr. Hoy Carman, Dr. Jason Christian, Dr. Olan Forker, Dr. Henry Kinnucan, Dr. Richard Sexton, Dr. Ronald Ward, Dr. Russell Winer, and Dr. Stephen Young. Dr. Michael Wohlgenant and Dr. Scott Davis were recruited by the other side to work against the Board and find holes in the research done on our behalf. At this time we are still awaiting the results of the hearings on the recent advertising program.

Fortunately, I can report that our situation is beginning to improve and we suspect that the light at the end of the tunnel is not an oncoming train. An energetic group of industry leaders has stepped forward to help get the industry’s promotion efforts back on track. One group has filed an amicus brief (friend of court) on the appeals of the old program and another group has weighed in with an amicus brief in defense of the new program. Others have successfully worked to bring some new leaders to our Board and committees. Our most ambitious public relations and research program to date (including an international dimension) has been unanimously approved by our Board. And, we received nearly 100 percent compliance with our last assessment, in record time. Maybe the adversity has brought out the best in our industry.

Our challenges are far from over; the appeals could continue for years. However, we are learning that we can still work together on industry-wide self-help programs. We will have to be careful to address the concerns expressed in the original judgment; it can be done. We will have to be extremely aware of our goals and carefully measure results. Finally, we must reach out to all “individual” segments of the industry. The Courts are insisting that the “will of the majority” is not all that matters.

CALIFORNIA ALMOND PROGRAM LITIGATION RETURNS TO NINTH CIRCUIT COURT OF APPEALS
Wayne R. Watkinson
Peter F. Butcher

On May 11 the Ninth Circuit Court of Appeals heard arguments on behalf of the USDA’s challenge to a judgment entered against it by the United States District Court in Fresno, California, requiring the Department to pay more than $2.5 million to California Almond handlers and to forego collection of another $1.7 million in commodity promotion assessments under the California Almond Marketing Order. The arguments represent the second time that litigation involving challenges to the California Almond Order has wound its way to the Court of Appeals since the plaintiff Cal-Almond first filed its administrative challenge to the Order in 1987. See Cal-Almond, Inc. v. U.S. Department of Agriculture, 14 F.3d 429 (9th Cir. 1993).

The Almond Marketing Order is one of thirteen commodity-specific federal marketing orders issued by the Secretary of Agriculture under the authorization of the Agricultural Marketing Agreement Act of 1937. The Act and the Order provide that provisions of the Marketing Order be funded by assessments of about two-an-a-half cents per each pound of almonds handled. The Act and the Order further provide that handlers which already engage in certain types of advertising of almonds may receive credit for a portion of their assessments.

The plaintiffs in the Cal-Almond decision were not the first to challenge an assessment funded commodity promotion program in federal court. In 1989, the Third Circuit Court of Appeals decided U.S. v. Frame, 885 F.2d 1119 (3rd Cir. 1989), and in a lengthy opinion found that the Beef Promotion Act satisfied high-level constitutional review. Like the Almond Order and other commodity promotion legislation, the Beef Act and Order provided for the use of assessments to fund promotional programs; but unlike the Almond Order, the Beef program contained no “credit back” provisions refunding assessments for certain “creditable” advertising undertaken by the individual. While the Third Circuit agreed that such assessments for commodity promotion implicate First Amendment rights of free speech and freedom of association, it rejected both of the first amendment challenges raised against the Act and found both the purpose and the implementation of the promotional program passed strict constitutional scrutiny.

The Ninth Circuit’s Cal-Almond decision, decided four years after Frame, reaffirmed the Third Circuit’s conclusion that the purpose underlying commodity promotion programs represents a substantial government interest. However, the Ninth Circuit went on to find that with regard to the almond industry, the USDA had failed to present evidence necessary to justify the particular creditable advertising regulations challenged by the almond handlers.

The Ninth Circuit’s analysis faulted the government for failing to present evidence demonstrating that its promotional efforts are better at increasing actual returns to the individual producer or handler than the advertising efforts already engaged in by that producer or handler. The Court also concluded that the evidence presented indicated that the assessment provisions did not stimulate additional or more effective advertising efforts by Almond handlers. The Court agreed with the challengers that “each handler knows best how to sell his own almonds; we are unwilling to presume, in the absence of hard evidence to the contrary, that a government agency is better at marketing than an individual business person.” (Cal Almond, 14 F.3d at 435.) The Court also found inadequate justification for the USDA’s decision to deny credit to almond handlers for certain advertising expenditures. The Court of Appeals therefore concluded that the assessment provisions of the Almond Marketing Program violate the First Amendment rights of almond handlers. The Court subsequently denied the USDA’s motion for a rehearing.

The case was then remanded to the District Court for further proceedings to determine appropriate financial remedy for the successful challengers. In an Order issued September 6, 1994, the District Court granted the plaintiffs’ motions on remand which sought a refund of Almond Board assessments. In a Final Order and Judgment issued September 19, 1994, the Court directed the USDA to: 1. refund approximately $135,000 of creditable advertising and related assessments that plaintiffs had paid to the Board; 2. release claims of approximately $1.7 million of creditable advertising assessments that had been placed in attorney-client accounts and/or bankruptcy trustee accounts; and 3. pay plaintiffs approximately $2.5 million, representing sums spent by plaintiffs on creditable advertising. In reaching this decision, the Court rejected the government’s argument that the plaintiff’s request for a refund of assessments constitutes a request for money damages from the government which is barred by sovereign immunity.

The Court also rejected the government’s request that the matter be remanded to the Department of Agriculture for an examination of equitable considerations and development of a supplemental factual record.

The District Court’s Final Order and Judgment has been appealed to the Ninth Circuit by the government and has granted the government’s request for a stay of the judgment pending the resolution of issues raised on appeal. In so doing, the court observed that “it found the issue of sovereign immunity difficult to resolve” and found ultimate success by the government likely, based on the merits of its arguments.

During the oral arguments on May 11, the government reasserted its position that reimbursing the handlers for money spent on advertising constitutes damages barred by sovereign immunity and any award of monetary relief to the handlers should be offset by the benefits they received from the advertising program. The government was supported by an amicus brief filed on behalf of several almond handlers, who argued in part that the only means available to the government to satisfy the judgment was through application of assessments against the entire industry which the Ninth Circuit had already found to be unconstitutional in its initial decision.

The Court of Appeals has yet to rule on the USDA’s challenge to the District Court’s Final Order and Judgment.