Tuesday, July 18, 2006

Choices Magazine covers generic commodity promotion or "checkoff" programs

The new issue of Choices Magazine, the American Agricultural Economics Association's flagship publication for non-economists, offers a special section on USDA's generic commodity promotion or "checkoff" programs.

I have written previously for Choices about these controversial programs. Checkoff programs use the federal government's powers of taxation to collect hundreds of millions of dollars each year in mandatory assessments from producers, in order to fund well-known advertising campaigns, such as "Beef. It's what's for dinner," and "Pork. The other white meat." They have been roundly criticized in the nutrition half of the "nutrition economics" world (Laura Sims has called them “an anathema to most nutritionists and health professionals"). While the programs are treated more sympathetically by some agricultural economists, others have been critical.

In the new issue, the article by John Crespi and Roger McEowen reviews the ferocious legal history of the programs, ending with the Supreme Court's May, 2005, decision that beef producers must pay the tax for these programs even if they object to them and disagree with the advertising message:
While the opponents of the beef advertising program had argued that the Operating Committee was a nongovernmental entity and, thus, the advertising cannot be considered government speech, the Court rejected this premise: "The message of the promotional campaigns is effectively controlled by the Federal Government itself. The message set out in the beef promotions is from beginning to end the message established by the Federal Government.... Congress and the Secretary have set out the overarching message and some of its elements, and they have left the development of the remaining details to an entity whose members are answerable to the Secretary.... Moreover, the record demonstrates that the Secretary exercises final approval authority over every word used in every promotional campaign" (125 S.Ct. 2055 at 2063 (2005)).
Several of the new articles raise questions about the checkoff-funded economic research on the programs' effectiveness, which routinely concludes that producers more than make back the money they pay in to the system. In an article about measuring the effectiveness of the programs, Gary Williams and Oral Capps write:
Evaluations of checkoff programs specifically are intended to measure the portion of revenues at various levels in the industry that can be directly attributable to the checkoff programs. But in doing so, researchers must compare actual revenues or sales over some time period to nebulous, intangible concepts like "what might have been earned or sold in the absence of the program." In other words, the results imply that $2, $5, or $10 for every dollar they were assessed are in their pockets, but they just don't know it because their earnings would have been lower if the checkoff program had not existed. This concept has proved extremely difficult to communicate to producers.

Compounding that problem is the tendency of many checkoff program staffs and boards to oversell the actual and potential impacts of their programs to insure a positive outcome from producer referenda and otherwise justify continuation of their programs. Contributors come to expect large impacts on prices and profits because of the anecdotes they have been told about how successful various activities have been and how large the benefits to them are from contributing to the program. Estimated [benefit-cost ratios] much in excess of 1:1 often are taken to imply large absolute impacts of a checkoff program on the market. Nothing could be less true. A BCR of 5:1 results by dividing a $5 billion industry profit benefit by a $1 billion checkoff investment or by dividing a $5 benefit by a $1 investment. For most commodity promotion programs, the value of the expenditures in research and promotion activities is extremely small in comparison to the total value of industry sales. Commodity promotion expenditures generally amount to a fraction of 1% of the total industry sales each year. With such a low level of investment compared to sales, the overall impact of a commodity promotion program could hardly be expected to be significant in a practical sense in its effects on production, prices, sales, and market share even if the impact could be said to be statistically significant.

When producers and other contributors fail to see the large impact on their returns that they have been led to expect, they tend to disbelieve the measured effectiveness of the checkoff program.
In another article, Michael Wohlgenant reviews no fewer than six reasons why the actual benefit received by farmers might be different from the widely-touted benefit-cost ratios.
Despite the amount of econometric research indicating high rates of return to generic advertising, there is disenchantment and disbelief among some producers and commodity groups as to whether producers actually benefit from generic advertising. More accurate measurement of the farm-level effects of retail-level generic advertising must account for various factors that influence the transmission of retail demand changes from advertising to the farm level.
In the final article, Chanjin Chung, Bailey Norwood, and Clement Ward report results from a survey of Oklahoma beef producers. Of the 17% of producer respondents who were members of the National Cattlemen's Beef Association (see previous post), 63% were supportive of the beef checkoff program.

Does that sound low? Wait, there's more. Of the much larger fraction of Oklahoma beef producers who were not members of NCBA, only 50% were supportive of the checkoff program. It is easy to see why several of the largest checkoff programs are trying to avoid producer referenda on the question of their continuation.

Source: Chung, Norwood, and Ward (2006). Click for larger image.

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