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Newsletter--Volume 1, Number 3

Dairy farmers in the United States invest over $200 million annually to promote fluid milk and dairy products. This money comes from a mandatory checkoff of 15 cents per hundred pounds of milk that is marketed. Individual states send at least 5 of the 15 cents to the National Dairy Promotion and Research Board (NDPRB), and may keep the remainder to fund state promotion programs. The NDPRB seeks to increase milk and dairy product consumption through generic dairy advertising and promotion, nutrition research, education, and new product development. Given the large sum of money involved, it is useful to periodically conduct economic evaluations of the NDPRB’s effectiveness.

In fact, Congress has mandated that the U.S. Department of Agriculture prepare an economic analysis of the NDPRB on an annual basis. This article summarizes the highlights of a recent study conducted by NICPRE that examined the impact of the NDPRB on the national milk market. Specifically, part of this research was intended to answer the following four key questions: 1. Has the program increased milk and dairy product sales? 2. Are farm milk prices higher due to generic dairy promotion? 3. Has the program resulted in lower government purchases of dairy products? 4. Do the benefits of this program exceed the costs for dairy farmers?

METHODOLOGY
We compared market conditions over the period 1984-93 with the NDPRB to what they would have been without this national program. In order to make these comparisons, a national econometric model of the dairy industry was developed. Compared to previous dairy models, our model was unique in its level of detail, including four products (fluid milk, cheese, butter, and frozen products) and representations of farm, wholesale, and retail markets. Milk and dairy product advertising was incorporated into the model by including generic advertising expenditures for fluid milk, cheese, butter, and ice cream in the retail demand equations for each product. In theory, generic advertising impacts consumers by increasing their demand for advertised products. This, in turn, increases the demand for milk at the farm level. In the analysis, we included other variables that effect total product demand such as price, income, population, and price of substitutes. This enabled us to obtain an estimate of the net effect of the advertising effort, as well as how each one of the other factors impacted the demand for fluid milk, cheese, butter, and ice cream.

RESULTS
The following is a brief highlight of the results of this study.

The national program has been successful in increasing milk and dairy product sales. Figure 1 displays the average percentage change in milk and dairy product sales attributable to the advertising effort of the NDPRB. On average, national sales of fluid milk, cheese, butter, and frozen dairy products was 1% higher with the national generic advertising program compared to what it would have been without the program. It is important to note that the amount consumed cannot exceed the total volume of milk produced by dairy farmers, no matter how strong the demand. The strength of demand is reflected not only in volume changes, but also in price changes. Consumption of fluid milk products, cheese, and butter were 1.2%, 0.7%, and 1.4% higher, respectively, while consumption of frozen products reflected no increase. Thus, national generic dairy advertising has been effective in increasing the volume of consumption of milk and dairy products. The increase in commercial milk consumption has been met by a slight increase in milk production and a decrease in the amount of dairy products purchased by the government.

Farm milk prices were higher due to the NDPRB. Between 1984 and 1993, the average price farmers received for their milk was 6.6% higher due to this program. This higher price at the farm level is the result of a stronger demand for the three major product categories associated with advertising and only a slight increase in farm production. In response to the higher farm milk price, dairy farmers increased milk production by 0.6% above what it would have been without the program.

The national program has resulted in lower government purchases of dairy products. Over this period, government purchases were 6.7% less than what would have been the case without the program. Hence, generic dairy promotion program has been effective in lowering government costs of the Dairy Price Support Program.

The benefits of this program have exceeded the costs for dairy farmers. To examine the benefits and costs of the NDPRB, a rate of return for the program was computed. The rate of return is a ratio of benefits to costs, which means that any number large than one implies the benefits exceed the costs. The benefit was measured as the increase in farm revenue associated with the generic advertising effort, while the cost was measured as the 15 cent per hundredweight assessment on milk marketings, which funds the entire NDPRB (not just advertising). The average rate of return for the program from 1984 through 1993 was estimated to be 5.4. This means that for every dollar invested in generic promotion, the farmer received an estimated $5.40 back in terms of increased net revenue.

Since the early 1970’s, the academic community has published research results of a relatively large number of studies about the economic impact of generic milk advertising and promotion programs. Most of these studies, including the model used to derive the estimates of this research, have been subjected to professional peer review. Although the specifics of the results vary from study to study, they all provide the same general conclusions to the questions posed here. They all indicate that generic advertising can increase the demand for the product being advertised. Most indicate that the increase more than covers the cost of the effort. However, the over zealous must be cautioned. The magnitude of the increase in demand depends on the amount of money invested in the program, the type and strategy of the advertising and promotion effort, and the nature of the product being promoted. Too much as well as too little money can be invested in particular activities. Economic analysis not only provides estimates of the extent to which the advertising and promotion efforts increase the demand for the commodity being promoted, but also provides information that helps determine the appropriate level of assessment, the optimal level of expenditure, and the proper allocation of funds across program options.

In conclusion, the results indicate that the NDPRB has benefited dairy producers in terms of increased farm milk prices and net farm revenue. The program also has had the impact of lowering the costs of the Dairy Price Support Program. Finally, farmers have been better off under this program since this study indicates that they receive an estimated return of $5.40 for every dollar invested in the program. Continuation of the legislation provides dairy farmers the option of having the program. However, it does not require them to do so except unless a majority of farmers approved it in a referendum.

Editor's Notes
John E. Lenz

The time has come to turn our attention inward, and report on some of the research we are involved in here at Cornell. In this issue, our lead article, by Harry Kaiser and Olan Forker discusses an advertising evaluation model for the national, farmer-funded, generic dairy advertising program in the United States. This model is among the most recently completed in a long series of evaluation projects on the dairy program, at both the national and state levels, that has been conducted here at Cornell. To accompany the lead article, we are pleased to have the Manager’s Viewpoint column written by Cynthia Carson, CEO, and George Harmon, Director of Research, both with the National Dairy Promotion and Research Board.

We also have an article by Harry Kaiser and Carlos Reberte on a model they recently completed to begin examining some economic issues related to advertising impacts on the consumption of whole, lowfat, and skim milk. The research team at NICPRE summarizes a research bulletin on advertising wearout in New York City. In his Director’s Corner in this issue, Olan Forker discusses the committees that review and provide direction for NICPRE activities.

Lastly, there is an announcement for the October 5 and 6 NEC-63 meeting to be held in Sacramento, California. We hope to see many of you there.

On another note, since I have your attention, many of you in commodity promotion organizations received a survey we sent out earlier this summer. As hard as it is to believe, some of you have yet to send in your response. It isn’t too late to do so, and we very much appreciate each and every response we receive. If you have misplaced your survey booklet, or didn’t receive one please give me a call and I’ll send one out to you.

Manager's Viewpoint
Cynthia Carson, General Manager
George Harmon, Group Executive Strategic Information
Dairy Management Incorporated

Program evaluation is a cornerstone of the national dairy promotion check-off program. In fact, the authors of the 1983 legislation which created the National Dairy Promotion and Research Board (NDPRB) had the foresight to make an annual independent analysis of program impact mandatory.

Dairy farmers invest 15 cents per hundredweight of milk produced to fund their promotion check-off program. The mission of the program is to maintain and expand domestic and foreign markets and uses for dairy products produced in the United States.

Our bottom-line evaluation criterion gets right at the heart of the mission. Are we expanding markets and uses of dairy foods?

Dairy farmers receive an annual report from USDA charting progress against our mission. It’s similar to a corporation’s annual report describing its progress against the bottom line to its shareholders.

USDA’s most recent report of that independent analysis to Congress detailed sales statistics for 1994 as well as running statistics since the board’s inception 11 years ago. For 1994, the report attributed a 4.7 percent increase in fluid milk sales and a 2.4 percent increase in in-home usage of natural and processed cheese to the dairy promotion check-off program.

Assessing bottom-line results is only one aspect of evaluation. Evaluation plays other very important roles in managing to a bottom line objective. Evaluation is an important tool in establishing priorities, setting goals, developing strategies to achieve goals, and developing programs to successfully deliver the strategies. Evaluation then tells us how well we did the things we planned and contributes to the knowledge we need to improve our programs.

We at Dairy Management Incorporated (DMI) are working hard to ensure that we are using evaluation tools to help us make the smartest choices at all levels of decision making. Historically, the NDPRB and the United Dairy Industry Association have used evaluation tools both to help determine advertising strategies and to measure advertising effectiveness. Recently, under the management of DMI, we have delved deeper into measuring the effectiveness of all our efforts by establishing explicit goals and measurements for not just advertising, but all programs. To maximize the effectiveness of national producer promotion dollars with those from the states and regions, it is important for all partners to understand what is working. We have worked together to establish common goals, determine responsibilities, and establish measurements to improve our effectiveness. By being disciplined to assure that each program has well-defined objectives that have specific measurable expectations (including the means to measure), are achievable and related to the strategy or other goals, and are time bound, we are able to assess benefits and cost effectiveness of each program and then later evaluate to determine what worked and what we can improve in the future.

Planning and evaluation go hand in hand and are essential tools that we are applying to continuously improve our effectiveness. Continuing to push ourselves to validate the effectiveness of our programs is a proactive strategy for both improving our performance and being accountable to our owners.

THE IMPACT OF GENERIC FLUID MILK ADVERTISING ON WHOLE, LOWFAT, AND SKIM MILK DEMAND
Harry M. Kaiser
J. Carlos Reberte

A common aspect of all previous studies of generic fluid milk advertising is that fluid milk has been analyzed as a single product. Since consumption patterns for individual fluid products have been quite different, analyzing fluid milk as one product results in a loss of useful information on specific product demand characteristics. For example, per capita whole milk consumption has been steadily declining for decades; per capita consumption of lowfat and skim milk has been steadily increasing over time. Because of these divergent trends, it would be useful to determine whether whole, lowfat, or skim milk drinkers respond differently to existing fluid milk advertising.

The purpose of our study was to determine whether there is a statistical difference in demand responses to advertising among whole, lowfat and skim milk consumers. We performed a case study for New York City using monthly data from 1986 through 1992. We estimated separate per capita demand functions for whole, lowfat, and skim milk with total per capita generic fluid milk advertising expenditures as one of the explanatory variables in each equation. Other explanatory variables that we included in the analysis of per capita demand were retail prices of whole, lowfat, and skim milk, retail price of orange juice, per capita income, and a health index representing consumer concerns about fat in one’s diet. We found that the long run sales responsiveness to generic milk advertising is greatest for lowfat and whole milk consumers, with the responsiveness of lowfat milk consumers somewhat greater than the responsiveness of whole milk consumers. The responsiveness of skim milk consumers is about half the level of that for consumers of the other two milk types. The sales responsiveness estimates for whole and lowfat milk consumers were statistically significant; the estimated responsiveness for skim milk consumers was not. Thus, we concluded that generic fluid milk advertising, as it has been implemented, has had a positive and significant impact on whole and lowfat milk demand, but little or no impact on skim milk demand in the New York City market. The current generic milk advertising campaign does not distinguish among the three products, rather, it simply advertises milk.

Our results indicate that the fluid milk advertising campaign in New York City has been influencing whole and lowfat milk consumers, but not skim milk consumers. Therefore, we conclude that under campaigns that do not differentiate among the three main fluid milk products, it would be preferable to target actual or potential whole and lowfat milk consumers, if possible, rather than skim milk consumers in New York City. It seems to us that any attempt to influence skim milk demand requires a change in the current message. Also, since we found the sales responsiveness to advertising among the three products to be different we believe that future research on generic fluid milk advertising should study advertising’s impact on each fluid milk product separately. We believe that it would be useful to apply our approach to other markets to determine whether similar conclusions hold, or whether New York City milk consumers are unique in their responses to generic fluid milk advertising.

Director's Corner
Olan D. Forker

Shortly after NICPRE became a reality in 1994, two committees were established to provide counsel and advice to the staff regarding the institutes activities. The Advisory Committee provides overall direction for operating policy and research efforts. The Steering Committee provides technical advice on research priorities, operating policy and research methods. Advisory Committee members come from commodity promotion organizations, universities, and government agencies. Steering Committee members are primarily involved in conducting economic analysis. The two committees will meet on September 11-12, 1995 in Annapolis, Maryland to review current program activities and research strategies, and provide guidance on future strategies and programming.

Advisory Committee members are: James Blaylock (Economic Research Service, USDA), Kenneth Clayton (Agricultural Marketing Service, USDA), George Harmon (Dairy Management, Inc.), Shida Henneberry (Oklahoma State University), John Huston (National Meat and Live Stock Board), Archie MacDonald (Dairy Farmers of Canada), Phil Macki (Foreign Agricultural Service, USDA), James Guinn (American Soybean Association), Allen Terhaar (Cotton Council International) and Wayne Watkinson (McLeod, Watkinson, and Miller).

Steering Committee members are: Walter Armbruster (Farm Foundation), Ellen Goddard (University of Guelph, Canada), Henry Kinnucan (Auburn University), John Nichols (Texas A&M University), Ronald Ward (University of Florida), and Clark Burbee (Advisor from USDA).

GENERIC ADVERTISING WEAROUT: THE CASE OF THE NEW YORK CITY FLUID MILK CAMPAIGN
Carlos Reberte
Harry M. Kaiser
John E. Lenz
Olan Forker

In a forthcoming NICPRE research bulletin, we examine the issue of advertising wearout in the New York City market. Between 1986 and 1992, New York dairy farmers made annual investments in the range of $2.1 to $4.2 million in generic fluid milk advertising in this market. As this is the largest fluid milk market in New York, dairy farmers are interested in ensuring that the money they invest in their advertising program in this market produces an effective campaign. For most of the 1986-92 period, new commercials, with or without a shift in the general advertising message, were deployed annually. Given the substantial production costs required to produce new advertisements, dairy farmers and their program managers are, understandably, interested in research aimed at determining whether annual “re-tooling” to lessen advertising wearout is necessary or desirable.

Building on a study conducted by Kinnucan, Chang, and Venkateswaran, we estimated a time-varying parameter model which allows, but does not require, advertising to exhibit varying effectiveness over time. Based on creative content, we grouped the commercials that ran in New York City during the 1986-92 period into two campaigns. The first campaign focussed on milk’s nutritional benefits, while the second was aimed at increasing fluid milk consumption by adults.

The results of our model indicated that the impact of generic advertising on fluid milk sales in New York city evolved over each campaign following a bell-shaped pattern. Our results also indicated that the first campaign was effective for twice as long as the second campaign and that it had a higher peak and a higher average advertising elasticity. By accounting for the dynamic nature of advertising responses, program managers and boards of directors can enhance their strategic planning in the areas of campaign duration, copy replacement, and expenditure allocations over time.

Selected Readings

Kaiser, Harry M. 1995. “An Analysis of Generic Dairy Promotion in the United States.” Department of Agricultural, Resource, and Managerial Economics, Cornell University, Ithaca, NY. NICPRE 95-01.

Kaiser, Harry M. and J. Carlos Reberte. 1995. “Impact of Generic Fluid Milk Advertising on Whole, Lowfat, and Skim Milk Demand.” Department of Agricultural, Resource, and Managerial Economics, Cornell University, Ithaca, NY. NICPRE 95-02, R.B. 95-04.

USDA. 1995. “Report to Congress on the National Dairy Promotion and Research Program and the National Fluid Milk Processor Promotion Program.”