CONTENTS

Economic Impacts of National Generic Dairy Advertising

The Impact of Generic Fluid Milk Advertising on Whole, Lowfat, and Skim Milk Demand

Generic Advertising Wearout: The Case of the NYC Fluid Milk Campaign

Manager's Viewpoint

Editor's Notes

Director’s Corner

Selected Reading

Next Meeting

Economic Impacts of National Generic Dairy Advertising

by Harry M. Kaiser
Olan D. Forker

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.