CONTENTS

An Ex Post Evaluation of Generic Egg Advertising in the U.S.

Manager's Viewpoint - American Egg Board

Manager's Viewpoint - California Egg Commision

Editor's Notes

Director’s Corner

Next Meeting

NEC-63 Spring 1997 March 21-22, 1997 New Orleans Economic Analysis of Industry-Financed Research and Promotion

An Ex Post Evaluation of Generic Egg Advertising in the U.S.

by J. Carlos Reberte
Todd M. Schmit
Harry M. Kaiser

Since 1976, U.S. egg producers have paid a mandatory assessment to finance the national egg promotion program operated by the American Egg Board (AEB). In 1994, producers voted to increase this assessment from 5 to 10 cents per 30 dozen case marketed and to raise the producer exemption level from 30,000 to 75,000 laying hens (the current checkoff assessment amounts to about 0.75 percent of the farm price). Annual checkoff revenues under the revised scheme, which started in February 1995, are expected to increase from around 7 million to nearly 14 million dollars.

In the early years of the program, checkoff revenues were allocated primarily to nutrition research and education programs. Prior to 1990, media advertising expenditures constituted no more than 10 percent of checkoff income, while nearly 40 percent was spent on research and consumer education. Since 1990, the emphasis has shifted towards a larger share of the budget devoted to advertising. Annual nominal advertising expenditures, which exceeded $3 million in 1990 and 1991, increased to more than $5.5 million in 1992. After a drop in 1993, expenditures steadily increased through the first three quarters of 1995 totaling almost $5.8 million. More than 50 percent of assessment revenues are now allocated to advertising efforts.

Egg advertising has been, and continues to be, developed under a defensive strategy to counter negative publicity stemming from the relatively high level of cholesterol in eggs. Recent consumer tracking studies, however, have found consumers’ negative attitudes towards eggs are no longer increasing (Smith). The sharp increase in egg advertising expenditures in recent years stresses the need for economic analysis of the AEB advertising efforts. Measuring the impact of generic egg advertising on producer profits is particularly crucial as the AEB determines how to allocate the additional assessment revenues generated by the recent increase in the checkoff rate. Previously, the most recent studies of the egg industry were conducted in the late 1970s. This paper addresses the need for a more current analysis incorporating the influence of the AEB’s advertising program.

MODEL
In order to determine the market impacts of generic egg advertising in the U.S., an econometric model of the national egg industry was developed, which was similar in structure to an earlier model developed by Chavas and Johnson, which to our knowledge, is the most comprehensive representation of the U.S. egg industry in the literature. The model is disaggregated into farm, wholesale, and retail sectors, and includes storage components for both whole and processed egg products. Following Chavas and Johnson, it is assumed that wholesale egg prices lead farm and retail prices. Thus, wholesale level “drives” the model. The model was estimated with monthly national data from 1990 to 1995 and to determine validity, the model was simulated over those five years to see how well historical values for market variables were replicated. The results of the historic simulation indicated that the model did a fair job in replicating quantity and price variables, and was deemed acceptable for simulation purposes.

The impact of advertising is captured in the model by inclusion of generic egg advertising expenditures in the wholesale price equation for shell eggs. Current, as well as lagged, generic egg advertising expenditures were included to account for delays in the demand response to advertising. If advertising is successful in increasing the demand for eggs, this will be reflected in the model by an increased price at the wholesale level, which will in turn increase the price for eggs at the retail and farm levels. Monthly data on advertising expenditures were provided by Grey Advertising. The estimated coefficients on advertising expenditures indicated that AEB advertising has had a positive and significant impact on egg demand. The long-run advertising elasticity was 0.02, i.e., the total impact of a 1 percent increase in advertising expenditures over the 1990-95 period resulted in an increase of 0.02 percent in the wholesale shell egg price.

To measure the impact of the AEB advertising effort, the model was simulated under three alternative scenarios: (1) with actual, inflation-adjusted advertising expenditures, (2) with a 1 percent increase in advertising expenditures, and (3) with a 50 percent increase in advertising expenditures. Then, the change in net economic benefits due to the increase in advertising was computed for each month in the sample period.

RESULTS
Comparing the results of the historic and the 1 percent increase in advertising scenarios provides evidence on the marginal impacts of advertising. The results indicated that raising advertising expenditures by 1 percent over the period 1990-95 would have resulted in a 0.014 percent increase in the farm egg price and a 0.0001 percent increase in egg production. The small increase in egg production was due to the fact that the model found a very small production response by egg producers to a change in price. The 1 percent increase in advertising ($0.178 million) led to a significantly higher increase in producer net revenue ($0.836 million). The marginal rate of return (ratio of the increase in net revenue due to a 1 percent increase in advertising to the cost of the advertising program from 1990 to 1995) was 4.69. This means that an additional dollar invested in advertising over this period would have generated an additional $4.69 in producer profits, on average. The result that the marginal rate of return was greater than one has two important implications. First, it means that the benefits of increasing current advertising expenditure levels by 1 percent exceed the cost. Second, it means that advertising levels by the AEB should be increased since doing so would result in higher profits to egg producers.

When advertising expenditures were increased by 50 percent from 1990-95, the average increase in the farm egg price was just over 0.5 percent, and the average increase in egg production was 0.002 percent. The total increase in producer net revenue, under this scenario, was $23.76 million, while the total increase in advertising costs was $8.92 million. The rate of return from increasing advertising by 50 percent was 2.66, which is lower than the one obtained in the 1 percent scenario. In fact, the rate of return falls to 1.37 when advertising expenditures are doubled in the simulation. This simply reflects the “law of diminishing marginal returns to advertising,” i.e., successive increase in advertising will eventually result in diminishing increases in net revenue.

CONCLUSIONS
It is clear that generic egg advertising by both the AEB and the CEC has been profitable for egg producers. It is also clear from the California study (see companion article in this issue of the NICPRE Quarterly) that generic egg advertising in California has had a larger impact on producer prices and net revenue than the national advertising effort by the AEB. However, one should be cautious about making conclusions regarding the relative effectiveness of the national vs. California organizations based on these results. One explanation for the higher marginal rate of return in California is that generic egg advertising in California is substantially higher than it is in the rest of the United States. For example, from 1990 to 1994 California invested over seven times as much money in generic advertising per capita than the AEB invested over this period. Another reason for the difference in rates of return between California and the AEB is that California consumers may not be representative of the United States as a whole. Consequently, comparing the marginal rates of return between the two programs is not advisable.

REFERENCES
Chavas, J-P. and S.R. Johnson. "An Econometric Model of the US Egg Industry." App. Econ. 13(1981): 321-335.

Smith, R. "AEB, ENC Getting OK for Consumers to Eat More Eggs." Feedstuffs 65(1993): 1,4.

The authors are, respectively, research associate, research support specialist, and associate professor in the Department of Agricultural, Resource, and Managerial Economics at Cornell University.