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Newsletter--Volume 2, Number 4

Since 1976, U.S. egg producers have paid a mandatory assessment to finance the national egg promotion program operated by the American Egg Board (AEB). In 1994, producers voted to increase this assessment from 5 to 10 cents per 30 dozen case marketed and to raise the producer exemption level from 30,000 to 75,000 laying hens (the current checkoff assessment amounts to about 0.75 percent of the farm price). Annual checkoff revenues under the revised scheme, which started in February 1995, are expected to increase from around 7 million to nearly 14 million dollars.

In the early years of the program, checkoff revenues were allocated primarily to nutrition research and education programs. Prior to 1990, media advertising expenditures constituted no more than 10 percent of checkoff income, while nearly 40 percent was spent on research and consumer education. Since 1990, the emphasis has shifted towards a larger share of the budget devoted to advertising. Annual nominal advertising expenditures, which exceeded $3 million in 1990 and 1991, increased to more than $5.5 million in 1992. After a drop in 1993, expenditures steadily increased through the first three quarters of 1995 totaling almost $5.8 million. More than 50 percent of assessment revenues are now allocated to advertising efforts.

Egg advertising has been, and continues to be, developed under a defensive strategy to counter negative publicity stemming from the relatively high level of cholesterol in eggs. Recent consumer tracking studies, however, have found consumers’ negative attitudes towards eggs are no longer increasing (Smith). The sharp increase in egg advertising expenditures in recent years stresses the need for economic analysis of the AEB advertising efforts. Measuring the impact of generic egg advertising on producer profits is particularly crucial as the AEB determines how to allocate the additional assessment revenues generated by the recent increase in the checkoff rate. Previously, the most recent studies of the egg industry were conducted in the late 1970s. This paper addresses the need for a more current analysis incorporating the influence of the AEB’s advertising program.

MODEL
In order to determine the market impacts of generic egg advertising in the U.S., an econometric model of the national egg industry was developed, which was similar in structure to an earlier model developed by Chavas and Johnson, which to our knowledge, is the most comprehensive representation of the U.S. egg industry in the literature. The model is disaggregated into farm, wholesale, and retail sectors, and includes storage components for both whole and processed egg products. Following Chavas and Johnson, it is assumed that wholesale egg prices lead farm and retail prices. Thus, wholesale level “drives” the model. The model was estimated with monthly national data from 1990 to 1995 and to determine validity, the model was simulated over those five years to see how well historical values for market variables were replicated. The results of the historic simulation indicated that the model did a fair job in replicating quantity and price variables, and was deemed acceptable for simulation purposes.

The impact of advertising is captured in the model by inclusion of generic egg advertising expenditures in the wholesale price equation for shell eggs. Current, as well as lagged, generic egg advertising expenditures were included to account for delays in the demand response to advertising. If advertising is successful in increasing the demand for eggs, this will be reflected in the model by an increased price at the wholesale level, which will in turn increase the price for eggs at the retail and farm levels. Monthly data on advertising expenditures were provided by Grey Advertising. The estimated coefficients on advertising expenditures indicated that AEB advertising has had a positive and significant impact on egg demand. The long-run advertising elasticity was 0.02, i.e., the total impact of a 1 percent increase in advertising expenditures over the 1990-95 period resulted in an increase of 0.02 percent in the wholesale shell egg price.

To measure the impact of the AEB advertising effort, the model was simulated under three alternative scenarios: (1) with actual, inflation-adjusted advertising expenditures, (2) with a 1 percent increase in advertising expenditures, and (3) with a 50 percent increase in advertising expenditures. Then, the change in net economic benefits due to the increase in advertising was computed for each month in the sample period.

RESULTS
Comparing the results of the historic and the 1 percent increase in advertising scenarios provides evidence on the marginal impacts of advertising. The results indicated that raising advertising expenditures by 1 percent over the period 1990-95 would have resulted in a 0.014 percent increase in the farm egg price and a 0.0001 percent increase in egg production. The small increase in egg production was due to the fact that the model found a very small production response by egg producers to a change in price. The 1 percent increase in advertising ($0.178 million) led to a significantly higher increase in producer net revenue ($0.836 million). The marginal rate of return (ratio of the increase in net revenue due to a 1 percent increase in advertising to the cost of the advertising program from 1990 to 1995) was 4.69. This means that an additional dollar invested in advertising over this period would have generated an additional $4.69 in producer profits, on average. The result that the marginal rate of return was greater than one has two important implications. First, it means that the benefits of increasing current advertising expenditure levels by 1 percent exceed the cost. Second, it means that advertising levels by the AEB should be increased since doing so would result in higher profits to egg producers.

When advertising expenditures were increased by 50 percent from 1990-95, the average increase in the farm egg price was just over 0.5 percent, and the average increase in egg production was 0.002 percent. The total increase in producer net revenue, under this scenario, was $23.76 million, while the total increase in advertising costs was $8.92 million. The rate of return from increasing advertising by 50 percent was 2.66, which is lower than the one obtained in the 1 percent scenario. In fact, the rate of return falls to 1.37 when advertising expenditures are doubled in the simulation. This simply reflects the “law of diminishing marginal returns to advertising,” i.e., successive increase in advertising will eventually result in diminishing increases in net revenue.

CONCLUSIONS
It is clear that generic egg advertising by both the AEB and the CEC has been profitable for egg producers. It is also clear from the California study (see companion article in this issue of the NICPRE Quarterly) that generic egg advertising in California has had a larger impact on producer prices and net revenue than the national advertising effort by the AEB. However, one should be cautious about making conclusions regarding the relative effectiveness of the national vs. California organizations based on these results. One explanation for the higher marginal rate of return in California is that generic egg advertising in California is substantially higher than it is in the rest of the United States. For example, from 1990 to 1994 California invested over seven times as much money in generic advertising per capita than the AEB invested over this period. Another reason for the difference in rates of return between California and the AEB is that California consumers may not be representative of the United States as a whole. Consequently, comparing the marginal rates of return between the two programs is not advisable.

REFERENCES
Chavas, J-P. and S.R. Johnson. "An Econometric Model of the US Egg Industry." App. Econ. 13(1981): 321-335.

Smith, R. "AEB, ENC Getting OK for Consumers to Eat More Eggs." Feedstuffs 65(1993): 1,4.

The authors are, respectively, research associate, research support specialist, and associate professor in the Department of Agricultural, Resource, and Managerial Economics at Cornell University.

Editor's Notes
John E. Lenz

As Harry Kaiser, in his Director's Corner, has given an overview of this issue's contents, I'll take this opportunity to say farewell and thank you. I have thoroughly enjoyed editing and writing articles for the NICPRE Quarterly, and hope that the information and viewpoints we've published have been of interest and use to those of you who read what we publish.

I'm grateful to all of the contributors to the first two volumes of the newsletter. From the industry side, we've had a diverse set of viewpoints from John Huston, Roger Wasson, Cynthia Carson and George Harmon, Jeff Manning, Rick Naczi, Mike Simpson, Louis Raffel, and Robert Pierre. We had the USDA's viewpoint from Kenneth Clayton. Wayne Watkinson, Peter Butcher, and Richard Rossier, all of McLeod, Watkinson, & Miller have kept us abreast of important legal issues relating to commodity promotion.

For our first issue, Ron Ward provided the report on which I based the lead article. In addition to my colleagues Olan Forker, Harry Kaiser, Carlos Reberte, and Todd Schmit here at Cornell, Jason Christian, Henry Kinnucan, Shida Henneberry, Brian Gould, and Nick Piggott have each written articles for preceding issues.

To all the contributors, thank you. To them and all our readers, I extend my best wishes for a happy holiday season and a successful new year. So long.

Manager's Viewpoint
Louis B. Raffel
President, American Egg Board

In this issue of the NICPRE Quarterly you’ll find studies utilizing econometric models to test the effectiveness of American Egg Board (AEB) and California Egg Commission advertising. Both show positive results. That should make egg producers happy, right? Well, half right.

While there has been a lot of work developing methods to measure the effectiveness of generic advertising, there has been little done to test the effectiveness of other generic promotional activities. In the case of the AEB, approximately half the annual budget is spent on media advertising. The other half is spent on a variety of other programs ranging from food service promotion to nutrition research.

There are ways to measure some of the other activities, of course. You can survey egg producers, for example, to measure how well your producer communications programs are working. And you can count newspaper clippings to see how well your recipe releases are being used.

But it is an axiom of research that you can’t measure the negative. Can anyone measure how many outbreaks of illness attributable to eggs may have been prevented by AEB education programs teaching food service operators and consumers how to store, handle, and prepare eggs properly? And how much negative impact does the publicity generated by one egg-related illness have compared with the positive impact of one TV commercial? How then do you determine the amount of money to spend on advertising relative to food safety education?

The American Egg Board has spent millions of dollars on scientific research to determine the relationship between dietary cholesterol and heart disease. After many years, we are learning that one or two eggs a day in the diet of most normal, healthy people will have no effect on their blood cholesterol levels. Those millions of dollars were committed without knowing in advance what the outcome would be. How could anyone measure the value of fund expenditure on research in advance?

For that matter, even now that we know the results of many of the studies, how can we measure their value? Consumer research shows a more positive attitude towards eggs. How much of this is attributable to the research and its resulting publicity? How much of it was from our ability to use the message learned from scientific research in our advertising? Pardon the pun, but which came first, the chicken or the egg?

The point here, of course, is that program evaluation is not an exact science. Some programs are not measurable by the usual standards. Many of the programs are interrelated and not measurable independently. Measuring the value of one program against that of others is even more difficult, especially when attempting to determine how much of the total budget should be invested in each.

In an earlier NICPRE Quarterly, Mike Simpson, Executive Director of the National Pork Board, observed that the majority of business is done based on intuition and risk. Like pork producers, egg producers are also business men and women accustomed to doing business their way. And any of us would be hard pressed to argue that our “scientific” measurement techniques are better than their intuition and common sense.

So, while egg producers are happy to know that there has been a scientific measurement that shows their investment in generic egg advertising is providing them with a positive return, they also know that accountability is a long road and they will still have to make a lot of tough decisions without a roadmap.

Manager's Viewpoint
Robert D. Pierre
President/CEO, California Egg Commission

Political pressures, commodity board/commission/council producer threats under the First Amendment, and the constant question of producers--“What is the Commission doing for us?”--helped encourage us to do a study of our economic impact. So what did we accomplish? To whom have we proven what? Do the people paying the bill fully understand what we presented to them?

Harry M. Kaiser and Todd M. Schmit came to our meeting and presented in exceptional laymen language, almost unbelievable facts--for every producer dollar invested for advertising, the producer return was seven dollars profit. Pretty fantastic, but who understood exactly what was being said in the statement? Did the egg producer in California, who competes in the national marketplace with producers of eggs in the other 49 states, in reality receive more for his/her product? Accounting for the higher environmental costs we have compared to the other states, was return on investment really that much higher? The answer appears to be a resounding NO!

The answer to the problem is familiar--competition. Share of the market. Whoever receives the order has the winning hand. The retailer in California, like any other in the country, feels he must have the best price to be competitive; that if the California producer of eggs cannot compete with the egg producer in Iowa, Indiana, Ohio, Pennsylvania, or Nebraska--the retailer can surely meet his egg requirements cheaper elsewhere.

So what did we accomplish with the econometric model? It may have convinced a few of us who understand the overall picture of competitive business. But I don’t really think we know how, nor did we before the study began, how to relay the complete results of these exercises to the producer of the product! This concern was brought up in the NEC-63 meeting held this fall in Monterey, California but never received detailed attention or further development. The subject is of sufficient proportion that it should be investigated during the year and reported at the next meeting.

I personally challenge all of you economists to go back to the drawing board and look at the big picture. You have done a great job in considering most of the factors that affect the particular product production; farm price, feed price, chick price, operating overhead, competitive product pricing, women in the workforce, etc., but are we looking at the complete picture of what has happened to an individual product? Has consumer demand been blighted by excessive retail markup? I think this is an area that affects the total picture not currently examined completely. I’ll try to shed some light on what I’m talking about.

The California Egg Commission came about because 60 percent of the producers were tired of paying the advertising/promotion/public relation cost of the total or 100 percent of production. Mandatory assessments or nothing was the edict. Mandatory assessments came in the form of the California Egg Commission with the California legislature’s blessing--effective date January 1, 1984.

Now let’s look at the whole picture, then and now. California had and has the largest human population in all 50 states; was and still continues to be one of the largest producer of table eggs (Ohio is closing in now with less layers but increased production).

Who Really Has Benefitted the Most from the California Egg Commission Advertising?

We would like to believe it has been the egg producer or handler, but during years when the egg producer was actually losing money, the retailer has continually been profitable. When we recognize that supply does not necessarily affect demand, or when the retail price does not reflect the increased supply, then we will have a better understanding of the marketing problem. It would appear, it seems, that when the producer is losing money, the retailer should be making less profit, wouldn’t you think? Not so, sometimes he increases his profit.

In 1985, we sold 16 plus million 30 dozen cases of eggs intrastate at a total of $257 million, or $0.63 a case profit (2 cents a dozen). During the same year, California retailers averaged $9.50 profit or $0.32 per dozen. California Fresh Egg advertising in California averaged $4 million that year and has been in excess of $3 million every year since.

Despite years when excess supply in the nation reduced California producer profits to a negative position (1987, 1988, 1992, 1993, and 1994), retailers continued to increase their margin of profit per dozen to a high in 1994 of $0.94 cents a dozen. Wouldn’t it seem rational that the California egg producer should share in some of these profits, too? Not when the national supply is at a surplus and California becomes a “dumping ground” for surplus eggs--as many as a million cases a year from 38 different states.

Let’s speculate--if one dollar invested by the egg producer resulted in a seven dollar return on producer profits, what was the eventual dollar return for the retailer? How are sales affected by prices in California that are a dollar a dozen higher than in our border states Oregon, Nevada, or Arizona? Obviously, when you look at the human population explosion from 1985 to 1995--26,150,000 to 31,910,000, a 22 percent increase, total cases of intrastate sales have taken a big drop, down to 14,616,892 in 1995 from 16,161,991 in 1985--9.6 percent less.

Obviously, California Fresh Egg advertising has convinced the consumer of the perceived value of all eggs or the retailer would not be making the dollar a dozen. Kaiser and Schmit are working on this one for me--the results will be interesting. Again, our sincere appreciation to the staff at Cornell and to NICPRE for an excellent study. Now we have to learn how to explain, translate, and decipher the results in a meaningful manner for the benefit of egg producers.

Director's Corner
Harry M. Kaiser

This issue of the NICPRE Quarterly is devoted exclusively to evaluating the economic impacts of generic egg advertising. The feature article examines generic egg advertising impacts nationally, while the second article looks at generic egg advertising impacts in California. The two articles are based on research projects by NICPRE that were sponsored by the American Egg Board and the California Egg Commission.

These two studies are particularly important and timely because it has been decades since an economic evaluation of generic egg advertising in the United States has been conducted. Per capita egg consumption in California, as well as the rest of the United States, has been declining for decades. Much of the decline in consumption is due to negative publicity stemming from the relatively high level of cholesterol in eggs. In response to declining consumption, egg promotion organizations shifted resources from nutrition research and education programs into advertising. For example, prior to 1990, the American Egg Board devoted no more than 10 percent of checkoff income to media advertising, while nearly 40 percent was spent on research and consumer education. Since 1990, the emphasis has shifted towards a larger share of the budget devoted to advertising. Currently, more than 50 percent of assessment revenues are allocated to advertising efforts.

Measuring the impact of generic egg advertising on producer profits is particularly crucial as groups such as the American Egg Board and the California Egg Commission determine how to allocate the additional assessment revenues generated by the recent increase in the checkoff rate between advertising, nutrition research, and education programs.

NEC-63 Reminder...

The spring NEC-63 conference will be held at the Pallas Hotel in New Orleans on March 21-22, 1997. The title of the conference is "Economic Analysis of Industry-Financed Research and Promotion." Tentative topics include analytical framework, measurement issues, Australian experiences with private sector funding of research and promotion, and general roundtable discussions. Further information on the conference, registration, and accommodations will be forthcoming from the co-chairs of this conference, Henry Kinnucan and Greg Traxler. Either can be reached at 334-844-5614.