CONTENTS

An Economic Analysis of California Raisin Export Promotion

Director’s Corner

Next Meeting

NEC-63 Fall 2001 October 14-17, 2001 Mesa, Arizona The Food Distribution Research Society and The Research Committee of Commodity Promotion This conference theme selected to accomodate both research groups: "Know They Customer"

An Economic Analysis of California Raisin Export Promotion

by Harry M. Kaiser (Cornell University) and
Donald J. Liu (University of Minnesota)

The Raisin Administrative Committee (RAC) was established, in part, to administer the Federal Raisin Marketing Order. One of the many functions of the RAC is to conduct export promotion activities in other countries to increase California Raisin exports. Under the 1996 Federal Agricultural Improvement and Reform (FAIR) Act, all federal marketing orders operating promotion programs are required to have economic evaluations conducted to ascertain the extent of their impact on the market. Accordingly, the purpose of the study featured in this issue of the NICPRE Quarterly was to measure the economic impacts of raisin export promotion programs operated by the RAC. Since the two largest markets in terms of California Raisin export promotion are Japan and the United Kingdom, this summary provides a detailed assessment of the effectiveness of the California Raisin industry’s export promotion in these two countries.

Methodology

In order to assess the effectiveness of the export promotion activities, an econometric modeling approach was used. The econometric approach quantifies economic relationships using economic theory and statistical procedures with data. This framework enables one to simultaneously account for the impact of a variety of factors that influence raisin import demand of the foreign market in question, including the price of California Raisins, the price of competing supplier’s raisins, prices of raisin substitutes and complements, population, consumer income, consumer tastes and preferences, and the California Raisin industry’s export promotion expenditures. By casting the evaluation in this type of framework, this enables one to filter out the effect of other factors and, hence, quantify directly the net impact of California export promotion activities on raisin import demand of the foreign consumers.

Per capita import demand equations for California Raisins in Japan and in the United Kingdom were econometrically estimated. An aggregate measure of “export promotion elasticity” for the various California export promotion programs was obtained for each of the two foreign markets. While an individual export promotion program may have its own unique features, the model used in this study aggregates the expenditures of individual programs and treats them as a single activity with the common purpose of increasing import demand for California Raisins. The export promotion elasticity measures the percentage increase in per capita imports of California Raisins into each country given a one percent change in export promotion expenditures, while taking into consideration other factors that affect raisin demand in the foreign market.

This study provided answers to four key questions regarding the effectiveness of California Raisin export promotion:

1. What is the responsiveness of the demand for California Raisins in Japan and in the United Kingdom with respect to California export promotion?
2. What would exports of California Raisins be in Japan and in the United Kingdom had there not been any California export promotion in either importing country?
3. How does the gain in export revenue due to California export promotion compare to the costs of the promotion in the two importing countries?
4. What is the marginal return of the export promotion programs in each importing country? Specifically, what is the gain in export revenue due to an additional 10% increase in the export promotion expenditures?

Results

In both the Japanese and the United Kingdom import demand equations, the coefficients associated with the export promotion variables were estimated to be positive and statistically different from zero. This means that the statistical evidence supports the notion that California export promotion programs have the effect of increasing the demand for its raisins in both Japan and the United Kingdom. In the Japanese equation, the estimated export promotion elasticity was 0.029, which means that a one percent increase in California export promotion expenditures in Japan would result in a 0.029 percent increase in per capita import demand for California Raisins there. In the United Kingdom equation, the estimated export promotion elasticity was 0.133, implying that a one percent increase in California export promotion expenditure in the United Kingdom would result in a 0.133 percent increase in per capita import demand for California Raisins there.

The above estimation results indicate that the answer to the first question of this study is affirmative: The California Raisin industry’s export promotion is having a positive and significant effect on its exports to Japan and the United Kingdom. The estimated import demand equations were simulated to address the remaining three questions posed in this study. Two scenarios were entertained in the simulation:

1. Baseline Scenario - all export promotion programs have been in effect.
2. No-Export-Promotion Scenario – there have been no export promotion programs.

The difference between the above two scenarios gives the total impact of the export promotion on California Raisin export quantity.

From 1965-98, the results indicate that the California Raisin industry’s export promotion programs increased California Raisin exports to Japan by 201,539 metric tons in total, or 6,107 metric ton per year (Figure 1). The results were even more profound in the United Kingdom market, which had not had a raisin export promotion program until 1984. Over the period of 1984-98, the California Raisin industry’s raisin export promotion programs increased raisin exports to the United Kingdom by 253,624 metric tons in total, or 18,116 metric ton per year on average (Figure 2). Hence, the answer to the second question posed in this research is that the raisin industry’s export promotion programs have clearly had a large positive effect on the level of exports in both Japan and the United Kingdom.

While it is clear that export promotion of California Raisins had a major impact on boosting exports, the third question posed in this study is more bottom-line in nature: the comparison of benefits with costs. To answer this question, we computed an average benefit-cost ratio (BCR) for export promotion in Japan, the United Kingdom, and the two countries in combination. The average BCRs, which are also known as average rates of return on investment, are useful since they provide a measure of the returns (in dollars) to the California Raisin industry for every dollar invested in export promotion.

The following procedure was used to compute the average BCR in each country. To compute the benefits of export promotion, the gain in export quantity due to export promotion estimated from the simulation above was multiplied by the deflated export price for each year of the simulation. The average BCR was then computed by dividing this resulting monetary benefit value by the deflated combined cost of all export promotion activities in each country.

The resulting average BCRs for Japan and the United Kingdom were considerably larger than 1.0 indicating that the benefit of export promotion in terms of expanding export revenue was greater than the cost of the programs. In Japan, the average BCR for the period of 1965-98 was 6.64, and the average BCR for the more recent period of 1985-98 was 5.13. This means that every dollar invested in export promotion in Japan returned $6.64 or $5.13 in export revenue to the California Raisin industry, on average, over the two time periods examined. The average BCR was even higher in the United Kingdom, which averaged 15.29 from 1985-98. Hence, every dollar invested in export promotion in the United Kingdom returned $15.29 in export revenue to the California Raisin industry. The average BCR for the two countries in combination over the period of 1985-98 was computed at 7.32, indicating a return of $7.32 for every dollar invested in export promotion in Japan and the United Kingdom.

To make allowances for the error inherent in any statistical estimation, a 90 percent confidence interval was calculated for the above average BCR’s. The confidence interval provides a lower and an upper bound for the average BCR, within which one can be “confident” 90 percent of the time that the true average BCR lies. The lower and upper bounds for the average BCR were obtained by re-simulating the above two scenarios, with the export promotion coefficient in the estimated import demand equations being set to their lower and upper bounds of the 90 percent confidence interval.

The estimated lower and upper bounds for the average BCR in Japan for the period of 1985-98 were 4.60 and 5.62, respectively. This confidence interval demonstrates that one could be confident 90 percent of the time that the true average BCR for Japan lies between 4.60, on the low side, and 5.62, on the high side. The lower and upper 90 percent confidence bounds for the average BCR in the United Kingdom for the period of 1985-98 were 14.63 and 15.87, respectively. The above confidence intervals give credence to the previous finding that the revenue expansion benefit of the California Raisin industry’s export promotion programs was considerably greater than the cost of the programs.

The BCRs computed in this study for California Raisin export promotion compare favorably with those estimated for other U.S. commodity export promotion programs. For example, Table 3 in this study reports several recent studies of U.S. export promotion for various commodities, which range from 1.29 for the potato export promotion in Japan to 16.36 for the potato export promotion in Thailand.

In order to explore the “optimality” of the industry’s export promotion investment in Japan and in the United Kingdom, a marginal simulation analysis was also conducted. This analysis answers the fourth question of the study regarding the marginal return of the export promotion programs. The estimated import demand equations were used to simulate the outcome of an additional scenario (Scenario 3 below) for each country and the results compared with the baseline scenario (i.e., Scenario 1). In Scenario 3, export promotion expenditures are increased by 10% above the actual historical levels. The difference between the above two scenarios measures the “marginal” impact of a 10% increase in export promotion expenditures on California Raisin export quantity. This gain in export quantity was multiplied by the deflated export prices to arrive at a dollar measure of the gain in export revenue. A marginal BCR for export promotion programs was then computed, where the marginal benefits were the increase in export revenue due to the additional 10% increase in export promotion expenditures and the marginal cost was equal to 10 percent of the deflated historic export promotion expenditures. In Japan, the marginal BCR over the period of 1965-98 was 0.56, and over the more recent period of 1985-98 was 0.42. That is, had the raisin industry spent 10% more in export promotion in the Japanese market over the level at which it has been spending, the rate of return for this additional investment would have been only about $0.50 for every dollar invested. Together with the previous result that the average BCR for Japan is about $5 to $6 per dollar invested, the marginal BCR of about 0.5 suggests that it is not worthwhile increasing the export promotion expenditures in Japan over the present spending level. On the suggesting that the current spending level there is optimal. In the United Kingdom, the marginal BCR over the period of 1985-1998 was 3.19, indicating that the industry should explore the option of investing more money in its export promotion activities in the United Kingdom.

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Figure 1. Simulated California Raisin exports to Japan with and without export promotion programs.

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Figure 2 Simulated California Raisin exports to the United Kingdom with and without export promotion programs.