Abstract
Nine in ten US farmers collectively contribute about $1 billion annually to generic advertising and promotion campaigns. This chapter discusses the rationale and history of these controversial programs; explains the importance of the legal battles that shaped their development; and discusses the modern problems facing these campaigns. An especially difficult challenge is promoting commodities in a marketplace where food manufacturing is increasingly concentrated, brands are more and more prevalent, and consumer preferences are fluid. Areas for future research are cited.
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Notes
- 1.
- 2.
The Tenth Amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited to it by the States, are reserved to the States respectively, or to the people.”
- 3.
The Supreme Court upheld the Act and the Order in 1939 in a 5 to 4 decision (United States v. Rock Royal CO-OP., Inc. 307 U.S. 533). The ensuing years would still be filled with litigation involving marketing orders, but most of these complaints were along procedural grounds such as the timing or calling of board elections and voting, or the Secretary’s handling of various suspensions of program provisions. There would be no serious challenge to the constitutionality of the programs for nearly 50 years.
- 4.
This is based on an Internet search using the academic search engine EconLit on the key words “generic/commodity and advertising/promotion”.
- 5.
See, for example, the summary of various studies provided in Alston et al. (2007).
- 6.
In October 2002, a U.S. district judge in Michigan, Richard Enslen, also citing United Foods, ruled that similar legislation for the pork check-off program was not only unconstitutional but “rotten” as well (Michigan Pork Producers Association v. Campaign for Family Farms, 229 F. Supp 2d 772 W.D. Mich. 2002), and struck down the entire pork check-off, including the portions for research and education.
- 7.
Modern agricultural markets also feature increasing use of what economists call “vertical control” implemented through various types of contracts. Traditional “spot” or auction markets wherein prices are “discovered” on a continuous basis are increasingly rare. Mushroom marketers, for example, report that there is a single window of time during the year when they are able to negotiate prices with food retailers, and the price is fixed for the rest of the year. How does generic advertising work in this environment? What if it succeeds in raising consumer demand, but retailers capture that demand shift in the form of higher prices? No more farm product is sold in such a case, and, thus, farmers derive no benefit from a program that “worked” in the sense of raising consumer demand. Little research has been conducted into such possibilities. One exception is the work by Carman et al. (2009), which used retail-level scanner data to examine price and quantity impacts of promotions conducted by the Hass Avocado Board. This study found no evidence that retailers raised prices in response to avocado promotions.
- 8.
These concerns also tie in with nonmarket social values and government market intervention as discussed in the introductory chapter in that consumers may want certain food attributes.
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Acknowledgments
The authors are grateful to Walt Armbruster, Ron Knutson, and three anonymous reviewers for helpful comments, and they are held blameless for any errors.
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Appendices
Federal Orders and Check-Offs That Include Promotion and Advertising
The 51 industries covered by federal marketing orders and stand-alone research and promotion (check-off) programs that can partake in generic advertising and promotion are listed here. Not all programs are active and some have more activities than others. Other commodity promotion programs have state authorization and operate exclusively within the boundaries of the authorizing state. As of 2011, there are three Federal research and promotion programs under consideration (raspberries, Christmas trees, and softwood lumber).
Marketing orders for fruits, vegetables, and nuts | |
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1 | Marketing Order 981: California Almonds |
2 | Marketing Order 922: Washington Apricots |
3 | Marketing Order 915: Florida Avocados |
4 | Marketing Order 923: Washington Cherries |
5 | Marketing Order 930: Tart Cherries |
6 | Marketing Order 905: Florida Citrus |
7 | Marketing Order 906: Texas Citrus |
8 | Marketing Order 929: Cranberries |
9 | Marketing Order 987: California Dates |
10 | Marketing Order 925: California Desert Grapes |
11 | Marketing Order 982: Oregon and Washington Hazelnuts |
12 | Marketing Order 920: California Kiwifruit |
13 | Marketing Order 916: California Nectarines |
14 | Marketing Order 932: California Olives |
15 | Marketing Order 958: Idaho and Oregon Onions |
16 | Marketing Order 959: South Texas Onions |
17 | Marketing Order 955: Georgia Vidalia Onions |
18 | Marketing Order 956: Walla Walla Onions |
19 | Marketing Order 917: California Peaches |
20 | Marketing Order 927: Oregon and Washington Pears |
21 | Marketing Order 983: California Pistachios |
22 | Marketing Order 993: California Dried Prunes |
23 | Marketing Order 924: Washington-Oregon Prunes |
24 | Marketing Order 945: Idaho and Eastern Oregon Potatoes |
25 | Marketing Order 946: Washington Potatoes |
26 | Marketing Order 947: Oregon and California Potatoes |
27 | Marketing Order 948 Colorado Potatoes |
28 | Marketing Order 953: Virginia and North Carolina Potatoes |
29 | Marketing Order 989: California Raisins |
30 | Marketing Order 985: Far West Spearmint Oil |
31 | Marketing Order 966: Florida Tomatoes |
32 | Marketing Order 984 California Walnuts |
Milk marketing orders | |
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33 | Dairy Federal Milk Marketing Orders (currently there are 11 federal marketing orders) |
Current research and promotion check-off programs | |
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34 | Beef Promotion and Research Program |
35 | Blueberry Promotion, Research and Information Order |
36 | Cotton Research and Promotion |
37 | Dairy Producer Check-off Program |
38 | Egg Research & Promotion |
39 | Fluid Milk Processor Promotion Program |
40 | Hass Avocado Research and Promotion Plan |
41 | Honey Packers and Importers Research, Promotion, and Information Order |
42 | Lamb Promotion and Research Program |
43 | Mango Promotion, Research and Information Order |
44 | Mushroom Research and Promotion Plan |
45 | Peanut Promotion, Research and Information Order |
46 | Popcorn Promotion, Research and Consumer Information Order |
47 | Pork Promotion and Research Program |
48 | Potato Research and Promotion Plan |
49 | Sorghum Promotion, Research, and Information Program |
50 | Soybean Promotion and Research Program |
51 | Watermelon Research and Promotion Plan |
How Economists Measure the Benefits of Generic Promotions
There are a number of methods for measuring the benefits and costs of generic promotion programs. Here we present the method discussed by Alston et al. (2007) because it has been used extensively and because an understanding of this method is useful to understand other methods that have been proffered. The analysis begins with a model of supply and demand, as in Fig. 7.1, where S 0 represents the initial market supply of a commodity and D 0 represents the initial market demand. The market equilibrium price is P 0 and equilibrium quantity is Q 0.
Applying some additional standard assumptions in applied economics, the same supply and demand curves can be used to measure the total variable costs and benefits from consumption. Specifically, these assumptions state that (1) the area beneath the demand curve represents total consumer benefits from consuming the commodity; (2) the area beneath the supply curve represents total variable costs of production; and (3) we can add up benefits and costs across producers and consumers. Hence, for the initial quantity of Q 0, total benefits from consumption are equal to the trapezoidal area 0abQ 0 and, given consumer expenditure of P 0 Q 0 = area 0P 0 bQ 0, consumer surplus is equal to the area of the triangle, abP 0. Similarly, for the initial quantity of Q 0, total variable costs of production are equal to the trapezoidal area 0cbQ 0 and, given total revenue of P 0 Q 0 = area 0P 0 bQ 0, producer surplus is equal to the area of the triangle, P 0 bc. The total net benefit in this market is equal to the sum of producer surplus and consumer surplus, the area abc.
Now suppose a check-off of k per unit is collected from producers of the commodity. We can model the check-off as a parallel shift in supply from S 0 to S 1. The check-off generates revenue, R, that is used to finance promotions designed to enhance demand. Suppose the expenditure of R results in a shift in demand from D 0 to D 1, reflecting an increase in consumers’ willingness-to-pay for the commodity by r per unit for any quantity. The combined effects of the check-off and promotion shift the industry equilibrium from point b to point e, the market price (inclusive of the check-off) increases to P 2, and the quantity demanded increases to Q 2, which is also the quantity supplied at a producer net price of P 2 − k. This represents the final equilibrium, reflecting both the promotion-induced increase in willingness-to-pay of r per unit and collection of the check-off of k per unit that finances the promotion. The total expenditure on promotion equals the amount raised by the check-off: R = kQ 2.
Areas in Fig. 7.1 represent the implications for consumer, producer, and national welfare. Only the key elements of Fig. 7.1 that are required for the welfare analysis are replicated in Fig. 7.2. First, we wish to measure the change in producer surplus between the initial equilibrium at point b (P 0, Q 0) and the final equilibrium reflecting the check-off and the induced demand shift, point e (P 2, Q 2). This producer net benefit can be represented as the area of additional producer surplus associated with the increase in production from Q 0 to Q 2 measured along the supply curve that includes the check-off, S1—in other words, the trapezoidal area P 2 ejg. When studies report benefit–cost ratios, generally they refer to the producers’ gross gain associated with the promotion (which is best measured as the change in producer surplus, area P 2 ejg in Fig. 7.2) divided by either (a) the loss of producer surplus associated with collection of the check-off, which is equal to area P 1 df(P 2 − k) in Fig. 7.1—the final producer incidence of the check-off, or (b) the total expenditures on promotion, which are equal to P 2 ef(P 2 – k) = kQ 2 in Figs. 7.1 and 7.2—the initial incidence of the check-off that does not take the shifting of the tax into account.
How the benefits are reported differs across studies. For many studies a simple comparison of total benefits and total costs yields a measure of an average benefit–cost ratio, comparing the costs and benefits from having the program with a hypothetical alternative of no program. Other studies compute a marginal benefit–cost ratio by comparing the costs and benefits associated with a small hypothetical change in the size of the program. The average benefit–cost measure indicates whether a program was profitable while the marginal measure indicates whether it would have been profitable to increase the size of the program (marginal ratio >1) or reduce it (marginal ratio <1). Both ratios can be computed using the above methodology. Typically such computations are performed after collecting data and estimating the necessary functions, usually using some type of statistical analysis. Often researchers are forced to approximate key demand and supply variables, such as prices and quantities, with industry averages or aggregate-level data. Issues arise here as to the appropriateness of the chosen data, though more recent uses of retail-level scanner data gathered directly from supermarkets have lessened these concerns. Another issue that has led to debate among researchers is the appropriateness of the functional forms chosen to represent supply and demand.
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Crespi, J.M., Sexton, R.J. (2013). US Generic Advertising and Promotion Programs. In: Armbruster, W., Knutson, R. (eds) US Programs Affecting Food and Agricultural Marketing. Natural Resource Management and Policy, vol 38. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-4930-0_7
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