Who Benefits, Who Loses from Commodity Check-off Programs?

Executive Summary, October 2002 Conference

Research Committee on Commodity Promotion (NEC-63)

Many factors influence the distribution of commodity check-off program benefits and costs, researchers reported at the conference. Two sets of presenters looked at the variance between benefits to individual producers from generic commodity advertising funded by growers assessed at an equal rate, a rate that is generally based on volume of product sold.

John M. Crespi of Kansas State University and Stéphan Marette of UMR d’Economie Publique INRA-INAPG, Paris-Grignon, France, report the benefits of generic commodity advertising to individual growers will vary depending on consumer preferences for qualities of specific varieties of that commodity. Their study found that assessment rates should only be equivalent if consumers perceive no difference in the varieties offered, or consumers’ preferences cause the market to be evenly split among varieties. If these conditions do not exist, an equivalent assessment will benefit a producer of one variety more than a producer of another variety. Further study is needed on developing a fair assessment mechanism that equalizes the benefits of generic advertising among all producers, assigning differential assessments for different commodity varieties, for example, in California table grapes.

Producers may not benefit equally from commodity check-off programs, even though they pay equal assessments per unit of sales, according to Chanjin Chung of Oklahoma State University, and Harry M. Kaiser of Cornell University. Their study indicates that long-run average costs of production relate directly to profits earned per additional unit of production stimulated by commodity promotion. Further study is needed on whether size of operation correlates to benefits.

Free-rider effects

Henry W. Kinnucan of Auburn University, and Øystein Myrland of the University of Tromsø, reported that free-rider benefits of generic commodity promotion far exceed the direct benefits to producers and must be considered in comprehensive program evaluation. Free rider benefits are gains realized by competing producers who don’t financially contribute to the program. These free-rider benefits may also help explain why domestic producers of traded goods are reluctant to fund generic advertising at the economic optimum. Their findings are based on a study of the returns marketing activities of the Norwegian Seafood Export Council (NSEC) generated for Norwegian salmon producers, as well as for their international competitors.  The study considered the export tax used to fund promotion; policy interventions that affect promotion returns; and the effects on promotion of eliminating Norway’s feed quota, which is used to adapt production to market conditions. The study also demonstrated that the quality of the promotion efforts plays a pivotal role in total producer returns, as well as the distribution of those returns.

Kaiser and Todd M. Schmit of Cornell University, found that while cheese and fluid milk processors realized gains from generic milk and cheese advertising sponsored by dairy farmers, fluid milk processors benefited more than cheese processors. Their study also looked at the cross-effects of generic cheese advertising on fluid milk processors, and the effects of generic milk advertising on cheese processors. The results indicate that fluid processors were marginally worse off from generic cheese advertising since it resulted in modest increases in the milk input price they paid to farmers. The same was true for cheese processors relative to generic fluid milk advertising. Further study is needed to determine the optimal allocation of generic fluid milk and cheese advertising expenditures to generate the greatest benefits to processors and producers.

One of the challenges in reporting the estimated benefits to producers of generic commodity advertising programs is helping non-economists understand the validity and context of the numbers. This is particularly critical because of the multitude of factors—often supported by little aggregate data—that can impact demand. Nick Piggott of North Carolina State University,  describes how a multi-market equilibrium displacement model can be used to measure with greater confidence the benefits and costs of small changes in check-off promotion programs.

Collection of check-off funds and the programs they finance have implications for the impacts on consumers, other producers and taxpayers, in addition to their effects on those producers who vote to authorize the programs, according to Julian M. Alston of the University of California—Davis,  John W. Freebairn of the University of Melbourne and Jennifer S. James of Pennsylvania State University. From a public policy perspective, the implications for all stakeholders needs to be considered in the design of enabling legislation, evaluation of specific programs, and rules governing behavior of producer groups engaged in commodity check-off programs.

Donald J. Liu of the University of Minnesota, and Brenda L. Boetel of the University of Wisconsin, River Falls, and discussed their work estimating to what degree generic advertising, versus non-advertising food health information, impacts consumer demand for U.S. meat products—beef, pork, poultry and fish.

Existing beef and pork check-off funding has resulted in excessive advertising in the sense that a simultaneous decrease in advertising expenditures of both groups can lead to a solution that maximizes the joint benefit of their promotional activities. While other studies suggest a negative spillover effect between pork and beef advertising, this study found a positive spillover effect of pork advertising on poultry consumption.

International perspectives

The benefits and costs of market promotion, and of research and development programs to various stakeholders in the Australian beef industry were examined by Xueyan Zhao of   Monash University; J.D. Mullen, New South Wales Agriculture;   G.R. Griffith and R.R. Piggott, University of New England; and W.E. Griffiths, University of Melbourne. They found that farmers receive higher shares of total benefits from all types of farm production research than from beyond-the-farm gate oriented research. However, in terms of shares of total returns, research into export marketing was preferable to farmers than such on-farm investments as cattle backgrounding and post-weaner grass-finishing. It is only when levies are invested in the sector in which they are generated that distribution of the benefits matches the costs incurred.

In a separate study, Zhao found that the benefits from research and development were proportionally greater than the costs for Australian grape-growers, winemakers and overseas consumers, but the costs proportionally outweighed the benefits for the Australian government and other domestic parties. Zhao discussed implications for equity between premium and non-premium wine producers, the free-rider issue for overseas consumers and justifying government funding of grape and wine research and development work.

Ronald W. Ward of the University of Florida, and Julian Briz and Isabel de Felipe, Universidad Politecnica de Madrid, analyzed information gathered directly from consumers of olive oil to identify major factors influencing consumer buying decisions among competing food oils. They found that targeted advertising can influence consumer choices among oils, and among non-competing country brands.

It is not market power that has the most effect on retail-to-farm price transmission, but rather the nature of the substitution between the proportions of raw farm product inputs versus marketing inputs used in creating a retail product, report Michael K. Wohlgenant, and Nick Piggott of North Carolina State University. To maximize profits, producer check-off programs should allocate check-off funds in such a way as to equate the increased return from spending an additional dollar on advertising with those from on-farm research, and to equate these marginal returns from off-farm research with those from on-farm research.

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