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CONTENTS
Domestic Impacts of the Walnut Marketing
Board's Marketing Programs
NEC-63 Call for Papers
Oct-2002 in
Washington DC
Director’s Corner
Next Meeting
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NEC-63
Fall 2002
October 21-22, 2002
Hotel Monaco
700 F. Street, NW
Washington, DC 20004
"Distribution of Benefits and Costs of Commodity Checkoff
Programs"
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The Domestic Impacts of the Walnut Marketing Board's
Marketing Programs
by Harry M. Kaiser
(Department of Applied Economics and Managerment, Cornell University)
The Walnut Marketing Board (WMB) was established in 1933 as a federal
marketing order representing walnut growers and handlers to promote usage
of walnuts through publicity, product promotions, research and education
programs. The WMB offers public relations and (non-advertising) promotion
programs servicing the domestic walnut market.
The purpose of this article is twofold: (1) to determine the domestic
market impacts of the WMB’s marketing programs, and (2) to compute
a benefit-cost ratio (return on investment) for the marketing activities
conducted by the WMB. In this research, the impact of the export marketing
activities conducted by the Walnut Commission is not evaluated. Specifically,
this research examines whether the domestic marketing activities by the
WMB since 1984 had a positive and statistically significant impact on
domestic shipments of California walnuts. The impact of all factors affecting
domestic walnut demand (where data are available) is measured statistically.
In this way, the impacts of other important factors affecting domestic
demand are accounted for over time.
This study addresses three important issues relating to the effectiveness
of the WMB’s marketing programs. The first issue is the degree of
demand responsiveness, if any, to the WMB’s marketing activities.
To examine this issue, a domestic per capita walnut demand equation is
estimated to compute the corresponding “marketing elasticity.”
The marketing elasticity measures the percentage change in domestic per
capita walnut demand given a one percent change in the WMB’s marketing
budget, holding constant all other factors affecting domestic walnut demand.
As such, it provides a net measure of the impact of marketing on walnut
demand. Statistical tests are performed to determine whether or not the
marketing elasticity is positive and statistically different from zero.
The second objective of this study is to measure how much lower total
domestic walnut utilization would have been in the absence of the WMB’s
marketing activities. To address this objective, the estimated demand
equation is used to simulate two scenarios over the period 1984-99: (1)
a baseline scenario based on historical WMB marketing levels, and (2)
a hypothetical “no WMB” scenario, which assumes were no WMB
marketing activities. A comparison of these two scenarios provides a measure
of the total impact of the WMB’s marketing programs on walnut demand.
While a positive impact on domestic utilization is a necessary condition,
it does not guarantee that the monetary benefits of the WMB’s marketing
activities are greater than the costs. Hence, the final and most important
objective of this study is to estimate the gain in industry profits due
to the WMB’s marketing activities and compare these benefits to the
marketing costs. To examine this issue, an average benefit-cost ratio
(BCR) for the WMB marketing activities is computed. The benefits to the
walnut industry of the WMB’s marketing programs are measured as the
increase in producer surplus (an economic measure of industry profit)
over the study period due to promotion. The costs in the BCR computation
are measured by the actual marketing expenditures over the study period.
The average BCRs are useful since they provide a measure of the returns
(in dollars) to the walnut industry for every dollar invested in marketing.
The economic model used in this study is based on the economic theory
of consumer demand. In theory, one expects that marketing activities are
beneficial to walnut growers and handlers because they increase walnut
demand, resulting in higher sales and revenues. However, there are also
other factors that affect domestic walnut demand. In order to distinguish
the impact of the WMB’s marketing activities on demand for walnuts
from the impacts of other factors influencing demand, an econometric framework
is adopted. The econometric approach quantifies economic relationships
using economic theory and statistical procedures with data. It enables
one to simultaneously account for the impact of a variety of factors affecting
walnut demand. These demand-determining factors (called “determinants”)
include the price of walnuts, prices of walnut substitutes and complements,
population, proportion of women in the workforce, consumer income, consumer
tastes and preferences, and the WMB’s marketing expenditures. By
casting the economic evaluation in this type of framework, one can filter
out the effect of other factors and, hence, quantify directly the net
impact of the WMB’s marketing activities on domestic walnut demand.
The empirical walnut demand model developed in this study uses time series
data for the period of 1980-99. The model can assess how strongly various
walnut demand determinants are correlated with domestic walnut utilization
(i.e., demand). For example, with the model one is able to determine how
important a change in the price of walnuts is relative to a change in
the WMB’s marketing expenditures regarding their impacts on domestic
walnut demand. To compare the relative importance of each factor on shipments,
the results from the statistical (econometric) model are converted into
demand elasticities. A demand elasticity measures the percentage change
in per capita domestic walnut utilization given a one-percent change in
a specific demand factor, holding all other factors constant.
The estimated demand equation suggests that the price of walnuts at the
grower level is not as important in explaining variations in the per capita
domestic demand as was expected. The estimated own-price elasticity was
–0.08, which implies that a one-percent increase in the walnut growers’
price would result in only a 0.08 percent decrease in domestic walnut
utilization. This result suggests that walnut utilization is not very
sensitive to changes in the grower price, which is intuitively plausible
since walnuts represent a relatively small portion of consumer’s
total budget. Ideally, it would have been preferable to have price data
at the retail or processor level, but such data were not available.
While the walnut grower’s price is not important, the grower price
of pecans is found to be an important demand determinant for walnuts.
The cross-price elasticity of per capita walnut demand with respect to
the price of pecans is estimated at 0.14. That is, a one-percent increase
in the pecan price would result in a 0.14 percent increase in per capita
walnut demand. This indicates that walnuts and pecans are substitute products
since the demand for walnuts is enhanced when the price of pecans increases
and causes the quantity demanded of pecans to decrease.
The cross-price elasticity of per capita walnut demand with respect to
the price of almonds is estimated at -0.08. That is, a one-percent increase
in the almond price would result in a 0.08 percent decrease in per capita
walnut demand. This result indicates that walnuts and almonds are complimentary
products since the demand for walnuts is enhanced when the price of almonds
decreases and causes the quantity demanded of almonds to increase.
The disposable income elasticity of demand in the United States is equal
to 1.12, indicating that a one-percent rise in U.S. disposable income
would result in a 1.12 percent increase in per capita demand for walnuts.
This implies that walnuts are a “normal good” since demand rises
with income.
The proportion of women in the workforce is the most important factor
affecting domestic walnut demand. The results indicate that a one-percent
increase in the proportion of women in the workforce would result in a
1.92 percent decrease in per capita walnut demand. This result confirms
the hypothesis that an increase in women in the workforce is associated
with a decrease in walnut demand, which is likely due to a decline in
overall baking in the household.
The coefficient associated with the WMB’s marketing programs is
positive and statistically different from zero. This means that the statistical
evidence supports the notion that the WMB’s marketing activities
have the effect of increasing the demand for walnuts in the United States.
The estimated marketing elasticity is 0.005, which means that a one percent
increase in walnut marketing expenditures would result in a 0.005 percent
increase in per capita domestic walnut demand. While this elasticity is
not large relative to the other demand determinants, it is statistically
different from zero and positive. Moreover, two points should be considered.
First, one should not expect a huge marketing elasticity since the annual
marketing budgets of the WMB is quite small. Second, and related, since
the costs of the WMB are relatively small, it does not take a large marketing
elasticity to lead to positive net benefits of the program.
The above estimation results indicate that the WMB marketing program
has had a positive and significant effect on domestic walnut demand. The
estimated demand equation is simulated to determine the market impacts
of the WMB. Two scenarios are considered in the simulation:
- Baseline Scenario – WMB marketing program in effect from 1984-99.
- No-WMB-Marketing Scenario– WMB marketing program not in effect
from 1984-99.
In the no-WMB scenario simulation, all demand determinants except WMB
marketing expenditures are set equal to their historic levels. However,
the WMB marketing variable is set to zero and the corresponding demand
is simulated over time. The difference between the above two scenarios
gives the total impact of the WMB marketing effort on the domestic walnut
utilization.
The simulation results indicate that the WMB had a major impact on annual
walnut utilization in the United States. From 1984-99, the WMB marketing
activities increased total walnut utilization by 342.4 million pounds
in total, or 21.4 million pounds per year. While these results indicate
a positive impact of the WMB marketing on walnut utilization, what remains
a key concern is the impact marketing has had on industry producer surplus
(i.e., profit) compared with marketing costs.
Previous econometric studies of treenuts have indicated that it is problematic
to obtain a reliable estimate of supply response to price. This is due
to the relatively long time needed between planting new trees and the
nut harvest. Consequently, harvest in any particular year is generally
a function of yield, which is influenced by weather conditions and is
largely unaffected by price. This makes it difficult to statistically
determine any positive correlation between nut production and price. Because
of this, an econometric supply model is not developed in this study. Instead,
an approach similar to previous studies by Crespi and Sexton; Alston et
al.; and Schmit and Kaiser is followed. Under this approach, the supply
response is incorporated by repeatedly simulating the model over a wide
range of possible supply elasticities (from 0.5 to 3.0) and comparing
the BCRs for each one.
The WMB had a positive impact on the walnut growers’ price over
this period. The average increase in price ranged from just under 3 cents
per pound, in the case of an inelastic (supply not sensitive to price)
supply response, to just under 0.5 cents per pound, in the case of a very
elastic supply response (supply very sensitive to price). The average
impact over all supply responses was 1.12 cents per pound. In other words,
had there not been a marketing program by the WMB, the average growers’
price would have been 1.12 cents per pound, or 2 percent, lower from 1984-99
than it actually was.
The WMB marketing effort had a positive impact on producer surplus over
this period as well. The average increase in producer surplus due to the
marketing programs of the WMB ranged from $7.87 million per year, in the
case of an inelastic supply response, to $1.34 million per year, in the
case of a very elastic supply response. The average increase in producer
surplus over all supply responses was $3.25 million per year. Hence, it
is clear that the domestic marketing effort of the WMB has had a positive
impact on growers’ profits since 1984.
How does the gain in producer surplus compare with the costs of the WMB
marketing programs? To answer this, an average benefit-cost ratio is computed.
A BCR greater than 1.0 implies that the benefits of the WMB exceed the
costs. The average BCR for the WMB exceeded 1.0 for every supply response
considered in the simulation. For the most in elastic supply response,
the average BCR was 9.72. This implies that, on average over the period
1984-99, the benefits of the WMB marketing programs have been almost 10
times greater than the costs. At the opposite end of the spectrum in supply
response, the average BCR was computed to be 1.65, implying that the benefits
of the WMB were 1.65 times greater than the costs. Given the wide range
of supply responses considered in this analysis, and the fact that the
BCR was above 1.0 in all cases, there is significance evidence that the
WMB’s marketing programs have been profitable for the domestic walnut
industry. The average BCR over all supply responses was 4.01, i.e., the
benefits of the marketing activities of the WMB exceeded the costs by
four-fold.
To make allowances for the error inherent in any statistical estimation,
a 95 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” 95
percent of the time that the true average BCR lies. The estimated lower
and upper bounds for the average BCR for the lowest assumed supply response
for the period of 1984-99 are 5.25 and 15.54, respectively. This confidence
interval demonstrates that one could be confident 95 percent of the time
that the true average BCR for this assumed supply response lies between
5.25, on the low side, and 15.54, on the high side. The lower and upper
95 percent confidence bounds for the average BCR in the highest assumed
supply response for the period of 1984-99 are 0.91 and 2.64, respectively.
It is important to point out that the average BCR is above 1.0 for all
assumed supply responses except the highest one. Hence, it is reasonable
to conclude that the above confidence intervals give credence to the previous
finding that the benefits of the WMB’s marketing programs have been
considerably greater than the cost of the programs.
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