Agribusiness Perspectives Papers 1997/98

Paper 16
ISSN 1442-6951

Returns to Incremental Promotion Expenditure in the Australian Fibre Industry : A Review of Some Recent Research ¹

Dr Roley Piggott

Department of Agricultural and Resource Economics, 
University of New England, Armidale, NSW

• Introduction
• Lack of Evaluation : A Cause for Concern
• Recent Evaluation Studies at the University of New England
• Example of Results
• Concluding Comments
• References
• Footnotes

Introduction

Australian farmers contribute significant sums of money through taxes (levies) on output to support expenditure on generic promotion of their commodities and research and development (R&D) of various kinds which is aimed ultimately at lowering costs of production and/or increasing the demand for farm products. A perusal of annual reports of various statutory bodies will show that the bulk of expenditure has been for promotion.

In this paper the lack of attention given to evaluation of promotion programs for Australian agricultural commodities is highlighted and contrasted with the United States where recent events have thrown the spotlight on commodity promotion programs. Attention is then turned to describing recent work at the University of New England aimed at gauging the effectiveness of generic promotion campaigns. The need to consider cross-commodity relationships in measuring effectiveness is highlighted. The paper is concluded with a discussion of some future research needs and informational requirements. 

Lack of Evaluation : A Cause for Concern

Consider the case of wool promotion. Australian wool producers have been contributing 3.5 per cent of gross wool receipts to promotion by the International Wool Secretariat (IWS) through a compulsory levy. According to Watson (1996), for many specialist wool producers, this has probably translated into about 10 per cent of net wool receipts in recent years. Promotion expenditure by Australia averaged about $150m/year over the period 1989/90 to 1994/95. In contrast, expenditure on R&D averaged about $34m/year. About 78 per cent of total levy dollars has gone to promotion and 22 per cent to R&D. It is the case, too, that many Australian farmers produce wool in combination with beef and/or lamb. All of these commodities are subject to compulsory levies – a triple whammy for the diversified producer!

Watson (1996) points out that wool promotion has always been a controversial issue. It has been the subject of much debate within the wool industry and, to a lesser extent, the research community. Despite this debate, there is still scant hard evidence available on the profitability of wool promotion. Some evaluations leave much to be desired. As evidence of the cursory way wool promotion is evaluated, consider a recent account of the effectiveness of IWS European campaigns. (Anon 1996, p1)

The advertising campaigns have been independently assessed in all the major markets, and the results for the Autumn/Winter 1995/96 promotion showed that positive attitudes to wool increased by 5 per cent and the likelihood of purchasing wool increased by 4 per cent after only one season. The advertising assessment appears to be answering calls from woolgrowers for the IWS to be more accountable, and will be used in an ongoing manner to improve future campaigns.

One doesn’t need any formal economics training to appreciate that there is a big step between ‘positive attitudes’ or increased ‘likelihood of purchase’ and dollars in woolgrowers’ pockets.

Australian wool producers are becoming more vocal on the issue of effectiveness of wool promotion. Last year there was a call by the IWS for an extra $70m to be spent on wool promotion in order to build market share (Carson 1996). The concept of ‘market share’ is of some importance in ‘business school’ – type thinking about promotion which, unfortunately, seems to have captured the attention of industry politicians more so than is warranted given that profits are what really matter. But Victorian producers have been calling for a thorough evaluation of wool promotion and the matter also received attention at a Ministerial round-table on wool marketing held in Canberra in late 1996. These are welcome developments.

It is a concern that so little attention is being given to the evaluation of promotion expenditure on Australian commodities. Wohlgenant (1993) has demonstrated that farmers should not be indifferent to how their marginal levy dollars are allocated between promotion on the one hand and R&D on the other. Alston, Carman and Chalfant (1994) draw attention to the public policy dimension of commodity promotion programs which arises because they are usually financed through legislated levies on output, the cost of which is ultimately shared between producers and consumers.

The lack of attention to promotion in Australia contrasts with the United States where empirical studies on the effectiveness of promotion have been published since at least the early 1970’s. There is an institutional structure to foster and support research on commodity promotion programs. For example, the Regional Research Committee on Commodity Promotion, or ‘NEC-63’, a committee of the Co-operative State research Service of the United States Department of Agriculture, was established in 1985 as a network and forum for communication among individuals interested in commodity promotion programs. It meets twice yearly and includes members from government, industry and universities. An ‘offshoot’ of this organisation is the National Institute for Commodity Promotion Research and Evaluation, founded in 1994 and located at Cornell University, which undertakes and sponsors research using funding from government and industry as well and publishing a quarterly newsletter.

In the United States research on the effectiveness of commodity promotion programs, which are typically funded under compulsory marketing order provisions, has been much in demand of late and is likely to continue as such. Farmers have been issuing challenges to the compulsory ‘check-offs’ on constitutional grounds. Several cases are pending before US courts. Those responsible for spending check-off dollars on promotion are being put on the spot in terms of demonstrating that generic promotion pays.

Also significant is the provision in the 1996 US Farm Bill requiring promotion and research programs financed through check-offs to be evaluated at least once in every five years. Kenneth Clayton, Deputy Administrator of the USDA’s Agricultural Marketing Service, had the following to say about this requirement (Clayton 1996, p2)

The recent litigation in the US must be driven at least in part by scepticism about the benefits of generic promotion. While the Constitutional validity of the Australian system of levies to support promotion does not seem to be in question, Australian farmers – and, for that matter, consumers and government – ought to be questioning of the benefits from generic promotion and one would hope that they become increasingly vocal in calling for pre-promotion and periodic evaluations of promotion programs. To date, they have been relatively silent on the issue compared with their US counterparts. If this occurs, researchers will need to assist in the evaluations. 

Recent Evaluation Studies at the University of New England

A small group of researchers in the Department of Agricultural and Resource Economics at UNE have completed studies on the effectiveness of generic promotion in the Australian meat, fibres and dairy industries. Two of these have been published in professional literature.2   Another is being prepared for submission for publication. The key questions addressed in these studies is as follows: given that an authority responsible for generic promotion has a sum of money available to spend on promotion, how do the benefits of that promotion in terms of profits to farmers compare with the costs of the promotion?

The evaluations have utilised models of demand and supply in the form of equations which relate quantities demanded and supplied to variables affecting these quantities. For example, in the case of wool, the quantity demanded is modeled as a function of wool and synthetic prices and generic promotion expenditure, among other things. The key information needed to implement these models are so-called "elasticity coefficients". These measure the percentage change in one variable (say, the quantity of wool demanded) in response to a one per cent change in another variable (say, generic promotion expenditure). These values are obtained from estimates published in the professional literature or, if such estimates are unavailable, careful thought is used to choose likely values. Results are obtained for alternative elasticity values in acknowledgement of the fact that the true values are not known with certainty.

The work has focussed on measuring effectiveness in terms of increased profits rather than increased quantities sold since the latter does not imply the former. It also takes account of some very important economic facts of life. First, the commodity being promoted may have close substitutes in demand and/or supply. This being the case, an increase in demand for the promoted commodity, if it occurs at all, is only the first event in a chain of events leading to a new market equilibrium following an increase in promotion expenditure. The chain of events might include increased promotion expenditure by producers of products which are substitutes in demand. Australian meats and fibres are examples of substitutes in demand. Australian meats and fibres are examples of commodities where these cross-commodity relationships are important. One can understand that farmers producing both beef and lamb might well question the point of them contributing levy dollars to both lamb and beef promotion on the domestic market given that, for many Australian households, an increase in consumption of one of these products is likely to result in a decreased consumption of the other. Second, commodities are generally sold in more than one market and promotional effort in one market cannot be evaluated without taking account of spillover effects to other markets. In the Australian case, the domestic-export market dichotomy is clearly important.

Various experiments have been conducted as part of the research. For example, one can examine ‘own promotion’ effects showing the impact on, say, wool producers’ profits of an increment in promotion expenditure on wool assuming promotion expenditure on other fibres remains constant; ‘cross promotion’ effects showing the impact on wool producers’ profits of an increment in promotion expenditure on cotton assuming promotion expenditure on wool and other competitor fibres remains constant; or ‘catch-up promotion’ showing by how much wool producers need to increase their promotion expenditure to present existing profit levels in the face of an increment of promotion expenditure by cotton producers. 

Example of Results

The following serve as examples of the results obtained. If there is a one per cent increase in apparel wool promotion on the export market with all other forms of promotion expenditure remaining constant, there is a 1.50 dollar increase in profits accruing to apparel wool producers for each additional one-dollar outlay on promotion. On the other hand, the profits accruing to apparel wool producers are diminished by 0.21 dollars for each additional one-dollar outlay on domestic apparel wool promotion expenditure, assuming no change in other forms of promotion expenditure. If there is a simultaneous one per cent increase in domestic apparel wool and domestic cotton promotion expenditure, the profits accruing to apparel wool producers decline by 11.26 dollars for each additional one-dollar outlay on apparel wool promotion. On the other hand, if there is a simultaneous one per cent increase in both domestic and export apparel wool promotion, the profits accruing to apparel wool producers increase by 1.47 dollars for each additional one-dollar outlay on promotion expenditure.

Overviewing the results for generic fibre promotion, there are several forms of incremental promotion expenditure in the Australian fibres industry which appear unprofitable. For example, increased domestic promotion of apparel wool is only profitable for apparel wool producers if it is accompanied by increased promotion of non-apparel wool on the domestic market or increased promotion of apparel wool on the export market. On the other hand, promotion of apparel wool on the export market is always profitable for apparel wool producers except for the case where it is accompanied by increased promotion of synthetic fibres on the domestic market. Increased promotion of apparel wool on the export market is more profitable for apparel wool producers if accompanied by a simultaneous increase in the promotion of non-apparel wool on the domestic market. Finally, taking account of cross-commodity impacts is clearly important. 

Concluding Comments

The researchers at UNE certainly do not claim that their evaluations of generic promotion of fibres and other products are the last word on these matters and they do not regard their numerical results as being buried in concrete. Much more research needs to be undertaken. Progress is hampered by lack of information. For example, whilst the key elasticity values used were based in part on elasticities derived from previous studies, information on some elasticities was extremely limited, particularly with regard to own – and cross-promotion elasticities. But even basic information on base prices, quantities and promotion expenditures was scarce or non-existent in some cases. Moreover, date limitations required the authors to use highly-aggregated measures of promotion (eg, export promotion of apparel wool). In practice there are many types of promotion expenditure and, in principle, one would expect them to vary in their effectiveness.

Given the public policy dimensions of the promotion issue, it seems reasonable that industries be required to provide data to assist public evaluation of promotion programs. This ought to include very detailed breakdowns of how promotional dollars are spent. Indeed, it would be in the public interest if industry representatives and researchers liaised on data needs to support the public evaluation of promotion programs.

Notwithstanding the limitations of the modelling approach and data deficiencies, it does seem that several forms of incremental promotion expenditure in the Australian fibre, meat and dairy industries are at the very least questionable in terms of benefits to producers. The returns from alternative uses of levy dollars, in particular, the returns from research and development, are also difficult to measure and highly uncertain, although many studies have suggested that the returns are high (see, for example, Scobie, Mullen and Alston 1991). As explained earlier, a major concern is that evaluation of the profitability of incremental promotion expenditure seems to be given relatively little attention compared with incremental expenditure on research and development, even though expenditure of levy dollars on promotion far exceeds expenditure of levy dollars on research and development. Little is known about the pre-promotion evaluation process for proposed promotion campaigns, although pre-promotion and post-promotion evaluations of these campaigns, like far any other investment decision, are important management tools. 

References

Alston J M, Carman H F and Chalfant J A (1994), ‘Evaluating primary product promotion : the returns to generic advertising by a producer cooperative in a small open economy’, in E W Goddard and D S Taylor (eds), Promotion in the Marketing Mix : What Works, Where and Why. Proceedings from the NEC-63 Spring ’94 Conference, Toronto, Department of Agricultural Economics and Business, University of Guelph.

Anon (1996), ‘Wool promotionis working’, Wool Watch, Issue 32, Wesfarmers Dalgety, Sydney.

Carson J (1996), ‘USDA’s viewpoint’, NICPRE Quarterly 2(3), National Institute for Commodity Promotion Research and Evaluation, Cornell University, Ithaca, p2.

Hill D J, Piggott R R and Griffith G R (1996b), ‘Profitability of incremental expenditure on fibre promotion’, Australian Journal of Agricultural Economics 40(3), in press.

Piggott R R, Piggott N E and Wright VE (1995), ‘Approximating farm-level returns to incremental advertising expenditure : methods and an application to the meat industry’, American Journal of Agricultural Economics 77(3): 497-511.

Scobie G M, Mullen J D and Alston J M 1991), ‘The returns to investment in research on the Australian wool industry’, Australian Journal of agricultural Economics 35(2), 1991.

Watson, Alistair (1996), ‘Wool promotion : difficult decisions ahead’, Elders Woolfocus January / February, 6-8.

Wohlgenant M K (1993), ‘Distribution of Gains from Research and Promotion in Multi-Stage Production Systems : The Case of the US Beef and Pork Industries’, American Journal of Agricultural Economics 75(3): 642-51. 

Footnotes

¹ This paper draws heavily on an Invited Paper by the same author presented at the Annual Conference of the Australian Agricultural and Resource Economics Society, Broadbeach, 20-25 January 1997. Most of the research reported here was undertaken by the author in collaboration with Garry Griffith, Debbie Hill, Nick Piggott and Vic Wright. These individuals are thanked sincerely for their contributions. Nick Piggott kindly provided up-to-date information on recent litigation in the United States concerning compulsory funding of promotion programs. The author is responsible for any shortcomings in the paper.

² Hill, D J, Piggott, R & R and Griffith, G R (1996b), ‘Profitability of incremental expenditure on fibre promotion’, Australian Journal of Agricultural Economics 40 (3), 151-74; and Piggott, R R, Piggott, N E and Wright, V E (1995), ‘Approximating farl-level returns to incremental advertising expenditure: methods and an application to the meat industry’, American Journal of Agricultural Economics 77 (3); 497-511.