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CONTENTS
An Economic Evaluation of Generic Egg
Advertising by the American Egg Board
Director’s Column
Next Meeting
Special Cash Opportunity
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NEC-63
2002 Next Meeting
March 21-22, 2002
Albuquerque,
New Mexico
Allocation Issues in
Check-off Programs
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An Economic Evaluation of Generic Egg Advertising
by the American Egg Board
by Todd M. Schmit and Harry M. Kaiser
(Cornell University)
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 of shell eggs marketed, and to raise the producer
exemption level from 30,000 to 75,000 laying hens. Prior to 1990, media
advertising expenditures constituted no more than 10% of checkoff dollars,
while nearly 40% was spent on research and education. Since then, emphasis
has shifted to advertising, where the percentage of checkoff dollars devoted
to advertising has exceeded 50%. In 1999, checkoff revenues were approximately
$18.3 million, with $10.6 million devoted to egg advertising.
The generic advertising program is aimed at increasing consumer consumption
of shell eggs and egg products, and thus, indirectly, supporting producer
egg prices. This goal has been especially acute as society in general
has increased its focus on maintaining a healthy diet and how dietary
cholesterol concern affects that diet. While past efforts were focused
on mitigating the negative effects of consumer health concerns, more recent
strategies have focused on convenience and the nutritional value of eggs.
The ultimate economic impacts of the advertising program depend on the
level of demand-induced shifts resulting from the advertising program,
as well as the price responsiveness of both consumers and producers in
the egg market; i.e. slopes of the derived demand and supply functions.
A historical perspective of consumer demand and producer prices can be
gleaned by examining Figure 1. There are two trends that have occurred
in per capita consumption since the mid-1980s. Up to 1991, per capita
consumption of eggs was steadily decreasing due to the barrage of negative
publicity concerning dietary cholesterol and its link to heart disease.
However, since 1991, per capita consumption has been on the upswing with
large gains emerging after 1997. It was during this period of time that
there was a substantial increase in publicity indicating that eggs could
be part of a heart-healthy and nutritious diet. Producer egg prices have
not surprisingly followed a similar pattern. Egg prices declined quite
significantly and consistently over this period up to 1991. Since 1991,
egg prices have been relatively stable with some upward trend. An econometric
analysis will allow us to differentiate the effects of the AEB advertising
efforts in relation to the total variation in these series.
Figure 1 U.S. Quarterly per capita egg consumption and
farm-level prices.
The primary objective of this project was to measure the economic impact
of the AEB’s advertising efforts on sales volume and price of eggs
in the United States, and to determine the net economic benefits for egg
producers funding the program. This project was carried out as part of
the requirement under the 1996 Federal Agricultural Improvement and Reform
(FAIR) Act, which requires all federal marketing orders operating promotion
programs to have an economic evaluation conducted to ascertain the extent
of their impact on the market.
Our study addressed four important questions designed to ascertain the
effectiveness of the AEB’s generic egg advertising program.
First, what is the responsiveness of U.S. egg demand with respect
to the AEB’s generic egg advertising? To answer this question,
we estimated a per capita demand equation for eggs in the United States
and computed the corresponding “advertising elasticity.” The
advertising elasticity measures the percentage change in per capita demand
given a one-percent change in AEB advertising expenditures, holding constant
all other factors affecting egg demand. As such, it provides an isolated
measure of the impact of AEB advertising on per capita egg demand. Statistical
tests were performed to determine whether or not the advertising elasticity
was positive and statistically different from zero.
Second, what is the impact of AEB advertising on producer egg prices?
While increasing egg demand is a necessary condition for advertising to
be profitable for egg producers, it is not a sufficient condition. In
order for generic egg advertising to have a positive impact on industry
profit, it is also necessary that advertising results in an increase in
the producer egg price by an amount that is sufficient to offset the increase
in cost associated with the checkoff program. To answer this question,
we used the following methodology. An egg producer supply equation, wholesale
demand equation, and farm-to-wholesale price-transmission equation were
estimated and used to simulate market prices and quantities under two
scenarios reflecting alternative advertising levels by the AEB. The first
simulation was a baseline scenario, which was reflective of historical
advertising levels by the AEB. The second scenario simulated market conditions
assuming no AEB advertising. By comparing the results of these two scenarios,
one can determine the average impact of AEB advertising on producer egg
prices.
Third, how does the gain in revenues due to AEB’s advertising
compare to the costs of advertising? To answer this question, we computed
an average benefit-cost ratio (ABCR) for the AEB advertising program.
An ABCR is equal to net industry benefits from AEB advertising divided
by industry costs of AEB advertising. The benefits to egg producers of
generic egg advertising were measured as the net increase in producer
surplus (i.e., an economic measure similar to industry profits) over the
study period due to the AEB advertising program. The costs to producers
were the AEB advertising expenditures over this period. The ABCR, which
is also known as the average rate of return on investment, is useful since
it provides a bottom-line measure of the average returns (in dollars)
to the U.S. egg industry for every dollar invested in advertising.
Finally, what would the gain in revenue be for an additional dollar
invested in AEB’s advertising? To answer this question, we computed
a marginal benefit-cost ratio (MBCR) for the AEB advertising program.
A MBCR is equal to the net change in industry benefits divided by the
change in industry costs resulting from a small (e.g., one-percent) change
in AEB advertising. The change in benefits to egg producers of generic
egg advertising was measured as the net change in producer surplus over
the study period due to a marginal increase in advertising. The change
in costs was measured as the incremental increase in advertising costs
resulting from a one-percent increase in historical AEB advertising levels.
The MBCR, which is also known as the marginal rate of return on investment,
is useful since it provides a bottom-line measure of the returns (in dollars)
to the U.S. egg industry for each additional dollar invested in the advertising
program and thus can be used as a rational for evaluating if current spending
levels are appropriate. If the objective of the generic advertising program
is to maximize net returns to producers, then the level of advertising
should be set at the point where marginal returns are equal to the marginal
costs. From an economic perspective, if marginal returns exceed marginal
costs, then increasing the current level of expenditures should increase
producer net returns.
In order to determine the market impacts of generic egg advertising in
the U.S. by the AEB, an econometric model of the national egg industry
was developed based on quarterly national market data from 1988 through
2000. The model consists of a farm-level egg supply equation, a wholesale
per capita egg demand equation, and a wholesale price markup equation.
Farm supply was modeled as function of producer egg price, feed price,
lagged supply, and seasonality variables. Variables affecting demand included
price, per capita income, substitute product prices (i.e., a price index
of cereal and bakery products), a cholesterol awareness index, seasonality
variables, and generic advertising. The impact of advertising is captured
in the model by inclusion of generic egg advertising expenditures in the
wholesale demand equation for eggs. Current, as well as lagged, generic
egg advertising expenditures by the AEB were included to account for delays
in the demand response to advertising. If advertising is successful in
increasing the demand for eggs, this is reflected in the model by a positive
and statistically significant advertising elasticity, which measures the
percentage increase in per capita egg demand given a one-percent increase
in egg advertising. The price linkage (or markup) equation related wholesale
price to producer price, processor wage rates, and seasonality variables.
The impact of egg advertising on farm prices is also measured by taking
into account the extent of the increase in demand, and the farm supply
response due to the increase in price generated by advertising. The econometric
model was used to simulate the impact on wholesale demand, producer prices,
and producer surplus of the alternative advertising scenarios described
above.
The main conclusions of the analysis with respect to AEB advertising
program were: 
- AEB advertising had a positive and statistically significant
impact on per capita egg demand. The estimated advertising elasticity
was 0.003, indicating that a one-percent increase in AEB advertising would
cause a 0.003 percent increase in national per capita egg demand. While
this level of response seems small, it is important to remember that advertising
expenditures are small relative to the value of farm production. Over
the time period evaluated advertising expenditures were only about 0.2%
of the value of farm production.
- Had there been no AEB advertising from 1996-2000, commercial egg disappearance
would have been 165 million dozen eggs (33 million dozen per year) lower
than it actually was.
- In the absence of AEB advertising, the decrease in egg demand
would have resulted in a producer egg price that was 1.7 cents per dozen
lower on average than it actually was.
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