CONTENTS

The Effectiveness of US Non-Price Promotion Programs for Wheat in Selected Countries

Relative Effectiveness of USDA's Non-Price Export Promotion Instruments

Editor's Notes

Next Meeting

NEC-63 Fall 2000 October 2 - 3, 2000 New Product Innovations Center Portland, Oregon Commodity Commissions, Boards, Orders and Checkoff Programs: How Can Evaluation and Accountability be Done on a Small Budget?

The Effectiveness of U.S. Non-Price Promotion Programs
for Wheat in Selected Countries

by Shida R. Henneberry and Junxiang Lu

As U.S. agricultural exports have grown over the past two decades, the product mix of U.S. agricultural exports has been changing rapidly. Prior to the 1980s, bulk agricultural commodities such as grains, oilseeds and cotton dominated U.S. agricultural exports. However, since the mid-1980s, the exports of high value products (HVP) have been growing at a faster rate than the bulk commodities. Starting from fiscal year 1991, the value of HVP exports has exceeded that of the bulk exports. However, to further expand its HVP exports, the U.S. must overcome a series of constraints such as the strengthening of the U.S. dollar in foreign exchange markets, higher labor and other costs, and the lack of connection to an international distribution system. Nevertheless, the U.S. has unrivaled strength as a bulk exporter because of its unique natural resource endowment. As the growth of domestic demand is not sufficient to absorb the growing productivity of U.S. agriculture, any further market expansion has to come from export markets. Wheat has been a major agricultural export commodity and has accounted for more than 20 percent of total bulk agricultural exports in the last decade.

The U.S. market share in world wheat trade declined during the last three decades; from 40 percent during the 1975-79 period to 30 percent during the 1985-89 period, and to 24 percent during the 1995-99 period. The decreasing U.S. share of the world agricultural trade and the stagnancy of bulk agricultural exports stimulated an array of government export programs to assist U.S. agricultural exports. The objectives of these programs have been to assist U.S. agricultural exporters in developing and/or maintaining long-term markets and countering foreign competitors’ unfair trade practices. These programs have included price subsidy as well as non-price export promotion programs. Non-price export promotion programs for wheat include the Foreign Market Development Program (FMDP) and the Market Access Program (MAP). The FMDP was established in 1955 and is also known as the cooperator program. Its goals have been to develop, maintain, and expand long-term foreign markets for U.S. agricultural exports. The MAP was authorized by the Federal Agricultural Improvement and Reform Act of 1996. The prime goal of MAP is to develop, maintain and expand commercial markets for U.S. agricultural commodities. The commodities covered by MAP are mainly high value products. Bulk exports accounted for only 20 percent of MAP expenditures, promotion of wheat has accounted for only 2 percent of MAP expenditures. Other wheat exporters have also promoted wheat through their national government promotion agencies. Since many of the direct export subsidies are disciplined under the WTO agreement, non-price promotion programs have gained importance over the past few years.

The Overall Objective

The objective of this study is to determine the effectiveness of the U.S. non-price export promotion programs for wheat in assisting the export of U.S. wheat in selected countries. Five countries were selected: two in Asia-Pacific, Japan and Korea; and three in North Africa, Egypt, Algeria and Morocco.

The Model and Data

The linear approximation of an almost ideal demand system (LA/AIDS) is used in this study to estimate the parameters of import demand for wheat by these five countries and to evaluate the effectiveness of non-price wheat export promotion programs. Only unmilled wheat is considered in the model, as all these countries except Egypt imported insignificant amounts of wheat flour. Import demand for wheat in each country was categorized into wheat from major competitors and wheat from the rest of the world (ROW). Export promotion expenditures were incorporated as an intercept shifter. Three versions of the model were estimated. In Model I, it was assumed that wheat is weakly separable from other commodities, and therefore only the price of wheat from various sources and total expenditure on wheat were considered. In Model II, the group of commodities included wheat imported from various sources plus imported cereal not differentiated by source. Model III, included all commodities in Model II, plus the quantity of production of all domestic cereals. Major competitors in each market included U.S., Canada, Australia, and the ROW. The data covered the period of 1971 through 1995. During this period, the U.S. wheat market share in the import markets of Japan, Korea, Algeria, Egypt and Morocco were .56, .79, .45, .39, and .58 respectively. FAS and the U.S. Wheat Associates (USW) provided the U.S. non-price export promotion expenditures. Misspecification tests were conducted to test the assumptions of normal distribution, no auto-correlation, parameter stability, homoskedasticity, and the appropriateness of functional form.

Estimation Results

The results of the three models were very consistent, implying robustness of estimators. Expenditure and own-price elasticities has signs that were consistent with economic theory and most of them were statistically significant. With regard to promotion expenditures, the U.S. wheat own-promotion elasticities were positive and statistically significant in Japan and Korea, but carried a relatively small magnitude. In Algeria, Egypt and Korea the U.S. promotion elasticities were small negative numbers (and non-significant in Algeria and Egypt). The impacts of U.S. promotion expenditures on imports of wheat from other importers benefited from U.S. expenditures. Moreover, the results from this study indicate that economic factors, such as own-price and expenditures, are a relatively more important determinant of wheat imports than the promotion expenditures. Moreover, the sign of cross-price elasticities indicate that wheat from different sources compete in many of the studied countries. For example, E.C. wheat competes with U.S. wheat in the Moroccan wheat import market. Therefore, U.S. wheat export strategy may also focus on its competitor’s export programs. Finally, promotion strategies should emphasize the U.S. origin, since a free ride is observed from the results by U.S. competitors from U.S. promotion expenditures in a few of the studied target markets.

From promotion elasticities, the returns to U.S. wheat export promotion expenditures were calculated. The return on investment (ROI) varies among the studied markets. In Japan and Korea, ROI ranges from $23.3 to $69.9 and the marginal rate of return (MRR) ranges from $8.15 to $49.9. In the North African countries, ROI’s are negative in most cases, implying the ineffectiveness of export promotion programs. The results of this study are consistent with the belief that price and credit availability are important factors in North African wheat purchases. Other factors affecting the choice of suppliers that are mentioned in the literature include foreign exchange constraints, import price (including shipping costs), and quality issues.