CONTENTS

The Returns to Brand Advertising in the California Almond Industry

Manager's Viewpoint

California Almond Program Litigation Returns to 9th Circuit Court of Appeals

Editor's Notes

Director’s Corner

NEC-63 Denver Meeting Notes

Next Meeting

The Returns to Brand Advertising in the California Almond Industry

by Jason E. Christian

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 (figure 1). 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.

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Figure 1: Shares of International Almond Trade
Non-US supplies: volume of exports (Source:FAO). US: Total harvests (Sources: USDA, ABC)