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 2, Number 2

Past studies of the demand response to generic meat advertising have generally found advertising to have been a profitable undertaking, from an industry viewpoint. To be profitable, advertising must increase demand. Whether or not advertising has caused a statistically significant shift in demand and whether or not the increase in demand was enough to more than cover the cost of the advertising are empirical issues. In a forthcoming article in the American Journal of Agricultural Economics, Piggott, Chalfant, Alston, and Griffith investigate, using Australian data, whether tests for advertising effects are sensitive to choices of functional form for demand equations and also whether estimated advertising effects from single-equation demand models differ from those obtained when a complete system of demand equations is estimated. This article highlights some of our main findings.

INTRODUCTION
The late 1970s and the 1980s were a period of declining total meat consumption in Australia due to a dietary shift from red meat to white meat in which the decrease in red meat consumption outweighed the increase in white meat consumption. On a per capita basis, beef consumption declined from 63.7 kilograms (kg) in 1977 to 38.6 kg in 1988. Over the same period, lamb consumption declined from 15.5 kg to 14.7 kg, pork consumption increased from 13 kg to 17.6 kg, and chicken consumption increased from 16 kg to 22.4 kg. In an attempt to counteract this trend, Australian meat producers initiated two checkoff-funded generic meat promotion programs. Overall, expenditures on generic meat advertising increased, in nominal terms, from less than $0.05 million in 1977 to over $10.2 million in 1988. Over this period, the Australian Meat and Livestock Corporation (AMLC) increased its expenditures on beef and lamb advertising from $0.05 million to $8.4 million and the Australian Pork Corporation (APC) increased its advertising expenditures from zero to $1.8 million.

Industry concerns about changes in meat consumption patterns have not been unique to Australia. The U.S. and Canadian meat industries have addressed similar concerns in much the same way the Australians have. Whether or not investments in generic meat advertising have been profitable is an important empirical question. Recent producer-initiated litigation in several agricultural industries regarding benefits accruing from checkoff-funded advertising highlights the importance of economic evaluation of advertising. Litigation aside however, checkoff-funded programs ought to be evaluated like any other investment, as these checkoff funds might be invested more profitably elsewhere.

Some studies of the demand response to generic meat advertising have provided evidence that not only has there been a statistically significant advertising-induced shift in meat demand, but also that the shift has been more than enough to cover the cost of the advertising expenditures in both Australia (e.g. Ball and Dewbre) and the U.S. (e.g. Ward and Lambert). These studies have mostly employed single-equation demand models with relatively simple functional forms for the demand equations. Such an approach, although having the advantage of simplicity, is ad hoc and may result in model misspecification, in which case the estimated demand response to advertising (how much advertising caused demand to shift) may be overstated or understated, with similar consequences for estimates of advertising-related benefits accruing to producers. To reduce both the potential bias from misspecification and the degree to which incorrect measurements might affect estimates of the demand response to advertising, a more flexible functional form can be employed when estimating demand equations. Flexible functional forms are generally believed to better approximate the true underlying demand functions. Furthermore, as an alternative to single-equation estimation, demand equations can be estimated as a complete system. The system approach allows for the imposition of theoretical restrictions on parameters across equations, thereby reducing the number of parameters to be estimated and increasing the precision of the remaining parameter estimates.

Flexible functional forms, however, do not overcome the inherent problem that the true underlying demand functions are unknown. Simply put, the estimated demand response to advertising is conditioned on the researcher’s choice of demand model. In turn, estimated demand parameters, among other factors, directly affect the researcher’s estimates of producer benefits from advertising. Understanding how model choices affect the estimated demand response to advertising is important in any empirical study evaluating the producer benefits from advertising. As well as affecting the magnitude of the estimated demand response to advertising (the point estimate from the demand equation), the researcher’s choices are likely to affect the precision with which the standard error of the point estimate is measured, and thus the researcher’s confidence about the magnitude of a particular demand shift and whether or not it is significantly different from zero.

A natural way to proceed in addressing some of these questions is to estimate alternative functional forms in both single-equation models and complete demand systems, and then compare the resulting estimates of the demand response to advertising. Our comparison in this regard should provide some insight into not only the robustness of the estimated demand response to advertising, but also the degree of confidence one can have when using parameter estimates from a chosen demand model.

ESTIMATION
To investigate the robustness of estimated demand responses to advertising, we adopted the widely-used single-equation approach with a variety of functional forms for our demand equations. We estimated separate equations for beef, lamb, pork, and chicken, all of which incorporated AMLC and APC advertising expenditures in the current and three previous quarters as demand shifters. We also estimated a flexible functional form in a complete demand system. We performed diagnostic tests on each of our models to check for misspecification of the functional form as well as other specification errors.

RESULTS
In our single-equation models, the estimated compensated price elasticities of demand were quite robust across the different functional forms. These elasticities measure the percentage change in consumption in response to a one percent increase in price, holding other prices and utility constant. Our estimated compensated own-price elasticities were all negative (around-0.4 for beef, -1.3 for lamb, -0.9 for pork, and -0.5 for chicken) and our estimated cross-price elasticities generally support the view that the meats were all substitutes, with the strongest substitution effects being between beef and lamb and between chicken and pork. Our estimated expenditure elasticities suggest that increases in meat expenditures will lead to increases in consumption of each meat type, with an increase in beef’s share and a decrease in the shares of each of the other three meat types.

In relation to advertising effects, our results were mixed but plausible, and again quite robust across functional forms. AMLC advertising (of beef and lamb) had a statistically significant positive effect on the demand for beef and a statistically significant negative effect on the demand for chicken. AMLC advertising did not have any statistically significant effects on demand for lamb or pork, although the estimated coefficients were of the expected positive and negative signs, respectively. Although APC advertising (of pork) was not statistically significant in the pork or lamb equations, the estimated coefficients were of the expected positive and negative signs, respectively. Curiously, APC advertising did have a statistically significant positive cross-effect on demand for beef (an unexpected result that seems anomalous).

The diagnostic tests we performed on the residuals of our single-equation models suggested that serial correlation was a problem in our beef and chicken equations, thus the prediction errors from these models were correlated from one quarter to the next rather than being simply random. Although serial correlation does not bias estimated demand responses to advertising, it affects the precision with which the responses are measured. We also investigated how correcting for serial correlation affected the robustness of the estimated demand response to advertising across our alternative models. Correcting for serial correlation was important across the alternative functional forms we estimated. For example, in both of the functional forms we estimated for the chicken equation there was a plausible negative effect from APC advertising on the demand for chicken; this effect became statistically insignificant when we corrected for serial correlation.

In our complete demand system, the estimated demand elasticities were comparable to our single-equation estimates. Our estimated coefficients for the demand response to advertising were mostly plausible and in accord with the results from our single-equation models, albeit mostly insignificant. AMLC advertising had a statistically significant positive effect on beef demand and a statistically significant negative effect on chicken demand. APC advertising effects were never statistically significant. Our results were affected more by our choice of serial correlation correction for the systems than by the use of either a demand system or single-equation model. In particular, the most general correction for serial correlation resulted in somewhat smaller estimated advertising elasticities of demand for AMLC advertising than those we obtained using simpler corrections for serial correlation. However, we rejected the simpler serial correlation corrections as special cases of the more general correction.

CONCLUSION
Our results suggest that AMLC advertising may have been profitable for the Australian beef industry. Much more knowledge about the supply side of the market is needed, however, to be confident that this is indeed the case. For the moment, our estimated advertising elasticities and marginal revenue products indicate that the necessary conditions for profitable advertising have been met. Elasticities of demand response to advertising measure the percentage change in consumption resulting from a one percent increase in advertising expenditures. Marginal revenues from advertising measure the increase in sales revenues resulting from a one dollar increase in advertising expenditures, holding the product’s price constant. The marginal revenue from advertising must be greater than one for advertising to pay. Estimated elasticities and marginal revenues were virtually identical across our single-equation models. Slightly greater differences emerged when we imposed cross-equation restrictions in our demand systems. Nonetheless, our demand systems’ results were remarkably similar to those from our single-equation models. AMLC advertising had statistically significant positive effects on demand for beef (elasticities between 0.015 and 0.040) and negative effects on demand for chicken (elasticities between -0.05 and -0.10). In our preferred demand system, the estimated AMLC advertising elasticity for beef demand was 0.015 with a marginal revenue of 24:1. Our estimated AMLC advertising elasticity for chicken demand was -0.05 with an associated marginal revenue of -22:1. APC pork advertising had a positive effect on beef demand that was statistically significant in the single-equation models, but not in the systems.

Further evaluation of generic Australian meat advertising must take into account the fact that Australian beef and lamb are internationally-traded products. This has important consequences for the returns producers receive on their advertising investments. To be profitable, it is not sufficient for the advertising to simply have a statistically significant impact on domestic demand. Nor is it sufficient to have a marginal revenue from advertising greater than one (where this is computed holding the product’s price constant). Advertising must also lead to a rise in the product’s price sufficient to cover any additional production costs (Alston, Carman, and Chalfant). Whether or not this is the case depends on the elasticity of supply, the price elasticity of total demand(which depends on the elasticities of domestic and export demand and the fraction exported), and the total advertising elasticity of demand (which is equal to the elasticity of domestic demand with respect to advertising multiplied by the fraction of output consumed domestically). Even with these parameters in hand, the researcher may not have sufficient information to completely evaluate the economic effects of advertising. Interactions amongst related meat markets, in both consumption and production, may require an explicit, multi-market analysis, as proposed by Piggott, Piggott, and Wright.

Nicholas Piggott is a doctoral candidate in the Department of Agricultural Economics, Univ. of California, Davis.

REFERENCES
Alston, J. M., H. F. Carman, and J. A. Chalfant. “Evaluating Primary Product Promotion: The Returns to Generic Advertising by a Producer Cooperative in a Small, Open Economy,” in E W. Goddard and D. S. Taylor (eds.) Proceedings from the NEC-63 Spring 1994 Conference in Toronto, Ontario.

Ball, K. and J. Dewbre. An Analysis of the Returns to Generic Advertising of Beef, Lamb, and Pork. Paper 89.4. Australian Bureau of Agricultural Economics. Canberra: Australian Government Publishing Service, August 1989.

Piggott, N. E., J. Al. Chalfant, J. M. Alston, and G. R. Griffith. “Demand Response to Advertising in the Australian Meat Industry.” AJAE 78(May 1996).

Piggott, R. R., N. E. Piggott, and V. E. Wright. “Approximating Farm-Level Returns to Incremental Advertising Expenditures: Methods and an Application to the Australian Meat Industry.” AJAE 77(August 1995).

Ward, R. W. and C. Lambert. “Generic Promotion of Beef: Measuring the Impact of the U.S. Beef Checkoff.” J. of Agricultural Economics 44 (September 1993):456-465.

Editor's Notes
John E. Lenz

In this issue of the NICPRE Quarterly, we return to more of a theme-oriented approach with both our feature article and the “Manager’s Viewpoint” focussing on the meat industry. I believe this is an issue worth waiting for; I hope you agree after you’ve had a chance to consider our offerings.

Nick Piggott, a doctoral candidate in Agricultural Economics at the University of California at Davis, wrote the feature article for this issue. In his article, Nick summarizes some important issues he analyzed, with Chalfant, Alston, and Griffith, in a study of demand responses to meat advertising in Australia. An article reporting this work is forthcoming in the American Journal of Agricultural Economics.

Mike Simpson, the Executive Vice President of the National Pork Board, provides this issue’s “Manager’s Viewpoint.” Customers, producers, consumers, and checkoffs are the among the points he explores and links.

Harry Kaiser’s “Director’s Column” focuses on an issue that affects many in commodity promotion: the Fair Act a.k.a. the 1995 (96?)Farm Bill. Harry highlights some of the changes to look for in the coming months.

Finally, we devote a portion of this issue’s back page to the 1996 NEC-63 conferences. Included in this article is a call for papers and contact information should you desire to answer the call for the 1996 fall conference.

As always, we look forward to hearing from you. If you have any opinions you think we should hear, ideas on topics we should consider for future issues, or any other issues you’d like to raise with us, please don’t hesitate to get in touch.

Manager's Viewpoint
Mike Simpson
Executive Vice President
National Pork Board Council

The Customer is Always Right

Businesses that have not taken the statement that “the customer is always right” seriously in the past have not survived. I would be willing to say that it will hold true in the future as well.

Producer checkoff organizations are in a business--the business of satisfying the investor (the producer) with successful programs. So, how does a producer, Board of Directors, or staff know that they are satisfying the customer?

Because not one measurement will satisfy all, there must be a variety of ways to measure success. It’s like discussing the satisfaction of a new car purchase: one customer is pleased with the great gas mileage; another points out the quality service and repairs provided by the dealer; and still another focuses on the car’s power and speed. Yet each individual is talking about the same model of car.

Satisfaction with producer checkoff programs is much the same. There are obviously two basic questions we should ask our customers when measuring satisfaction with our programs.

1) Do you think our checkoff program is helping the industry?

2) Do you feel that you have personally benefitted because of our checkoff program?

Those are the first two questions the National Pork Board asks when reviewing our checkoff program.

“Well,” you say, “that’s nice, but it’s a long way from econometric modeling.” Remember the customer is always right!

One important evaluation technique is to measure changes that result from areas of program emphasis. For example, the National Pork Board prioritized and allocated funds for promoting pork exports. We then looked at the macro effect--increased volume and dollars of product exported. Last year, for the first time since 1952, the U.S. became a net exporter of pork. Was it all due to producer checkoff investment? No. Exchange rates and world politics had an effect. But what producers saw was a hog market that was $7.50/head better because of a dramatically improved international market for U.S. pork. They knew that their checkoff dollars had been prioritized in that area. From the bottom-line perspective which most producers have, they had about $0.02 per head of their checkoff invested in that $7.50 return. Even if checkoff-funded promotions were responsible for only 10 percent of the increased value, that’s a simple payoff ratio no one can grumble about.

An area of producer board evaluation that the average producer is seldom concerned with is the continuous assessment of programs. Both boards and staff focus on program impacts against pre-determined objectives. Having the right objective to measure against is critical. In most of our business, that objective is increased pork consumption or use; but not at an unprofitable price. Here, measurements get more difficult; indirect methods are cost effective and provide the needed program information. An example would be a survey of health professionals, consumers, etc. that asks the question, “Do you recommend or eat the product?” What we measure is the before and after effect of our promotion/information material. Therefore, if the needle moves to the positive side, we say we have been successful although we really don’t know the quantitative amount the customer/consumer consumed.

It is a struggle to get producers interested in investing in econometric models for measurement. They quickly return to the other forms of “evaluation” I’ve outlined, which they readily understand. Is that right for them to do? Well, the customer is always right!

I remember a time when I was interested in getting the Pork Board to move to a higher level of evaluation sophistication. I had performed as good managers do by providing all the “right” information to encourage or persuade a favorable decision. When the decision didn’t go as I had planned, a wise producer/investor pulled me aside and said, “Son, the facts don’t always perfectly define the direction. They help--but business is also run on intuition and risk, and sometimes that pays off better than following just the facts - particularly when the facts are primarily based on the past. Besides, remember, I represent producers and this is what we want to do with our money.” The “customer is always right” comes into play again!

My message here is that all of us--government, academic, and professional staff--must recognize that we are not going to remain in business unless our customers are satisfied. That satisfaction can come in many forms. Usually the simple ones are best remembered and most convincing.

Director's Corner
Harry M. Kaiser

In early April, President Clinton signed the Federal Agricultural Improvement and Reform (FAIR) Act into law. This Act, which will direct agricultural policy into the next century, provides for sweeping changes for many agricultural programs, but I would like to focus on the commodity promotion aspects of it. The Act contains slight changes to existing promotion programs, new promotion programs, and a sharper definition of rules for commodity promotion evaluation. This column doesn’t begin to cover the variety of details found in the new Act, but intends to briefly cover some of the larger issues (see the Agricultural Law Letter published by the law office of McLeod, Watkinson, and Miller, volume XII, number 1-2 for an excellent reference on more detailed information).

One of the most interesting aspects of the new Farm Bill are the rules for commodity promotion evaluation. The Act requires an independent evaluation on the effectiveness of each industry-funded research program every five years with annual reports on administrative expenses to the House and Senate agricultural committees. This is an important addition because many commodity promotion programs have never been evaluated. It simply makes good business sense to ascertain the impacts on sales, price, and income attributed to promotion. People want to see whether the money invested in these programs is worthwhile. In fact, there currently are ongoing economic evaluation for cotton, table grapes, eggs, prunes, dairy, beef, and flowers to name several, and future issues of this newsletter will report some of the results.

With the FAIR Act, Congress has confirmed the constitutionality of promotion programs and has declared them to be vital to national public interest and the welfare of the agricultural economy. Rather than maintaining or expanding markets solely for individual producers, Congress claims the central purpose underlying promotion law has been to expand markets for agricultural commodities--in short, a distinction between the individual and the generic. This aspect of the FAIR Act will be important for future litigation on these programs. The FAIR Act also extends the Fluid Milk Promotion Program (funded by fluid milk processors) through the year 2002, alters voting requirements, and expands the definition of “research.” The Dairy Promotion Program, funded by dairy farmers, has been amended so that the National Dairy Board for fiscal years 1997 through 2001 can use revenues to develop international markets, if desired. Honey research and promotion has been amended requiring producers to maintain records and the cotton classing user fee has been extended through fiscal year 2002.

The new promotion programs authorized with the new Farm Bill include canola, kiwifruit, and popcorn. The assessment rates will be as follows: canola and rapeseed, 4 cents/cwt in noncertified states and 2 cents/cwt in certified states; kiwifruit, not to exceed 10 cents/7 lb tray; and popcorn, not more than 8 cents/cwt. The new Act also sets up procedures enabling commodities that don’t have promotion programs to start them.

Expect to see a lot more economic evaluations of these programs over the next several years.

NEC-63 NEWS

The spring 1996 NEC-63 conference was held in Cancun, Mexico. The theme of “Agricultural Commodity Promotion Policies and Programs in the Global Agri-Food System,” led to many fine papers. A published proceedings containing complete versions of the papers presented in Cancun will soon be mailed to conference participants. In addition, the proceedings will be available at this fall’s NEC-63 meeting, which will be held October 7-8 in Monterey, California.

The fall 1996 program will focus on “Economic Evaluation of Commodity Promotion Programs in the Current Political and Legal Environment.” The two day program will follow a format similar to last fall’s meeting in Sacramento, with the first day devoted to general issues and case studies of interest to both industry representatives and researchers, and the second day focusing on methodological issues and technical research results. Papers related to the meeting theme are being solicited for presentation on the second day. Those interested in presenting a solicited paper should send an abstract (one or two pages) and a separate sheet indicating the author’s name, organization, current title, address, fax and telephone numbers, plus a brief paragraph describing interests and activities in the area of commodity promotion. Please send this information to:

Hoy Carman
Department of Agricultural Economics
University of California
Davis, CA 95616
Phone (916) 752-1525, FAX (916) 752-5614

The submission deadline is July 31, 1996. Authors of papers selected for presentation will be notified by August 20, 1996. All travel, registration, and other expenses are the responsibility of the participants.