US Generic Advertising and Promotion Programs

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.

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
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
33	Dairy Federal Milk Marketing Orders (currently there are 11 federal marketing orders)

Current research and promotion check-off programs
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.

Fig. 7.1

Model of generic advertising

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.

Fig. 7.2

Measuring benefits and costs of generic r advertising

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.