IS LAMB PROMOTION WORKING? Oral Capps, Jr. Gary W. Williams* TAMRC Commodiy Marke Research Repor No. CM-01-07 November 2007 * Capps is Professor of Agriculural Economics and Souhwes Dairy Markeing Endowed Chair; Williams is Professor and he Direcor of he Texas Agribusiness Research Cener, boh of he Deparmen of Agriculural Economics, Texas A&M Universiy, College Saion, Texas 77843-2124.
IS LAMB PROMOTION WORKING? Texas Agribusiness Marke Research Cener (TAMRC) Commodiy Marke Research Repor No. CM-01-07 by Dr. Oral Capps, Jr. and Dr. Gary W. Williams. ABSTRACT This objecive of his sudy is o deermine wheher he adverising and promoion dollars colleced and spen by he American Lamb Board on lamb promoion since he incepion of he Lamb Checkoff Program have effecively increased lamb consumpion in he Unied Saes. The main conclusion is ha program has resuled in roughly 7.6 addiional pounds of oal lamb consumpion per dollar spen on adverising and promoion and $41.59 in addiional lamb sales per dollar spen on adverising and promoion. ACKNOWLEDGEMENTS The research repored here was conduced under conrac wih he American Lamb Board. The lamb adverising and promoion daa used in his sudy were colleced wih he assisance of he American Sheep Indusry Associaion, Inc. (ASIA) and he American Lamb Board (ALB). The conclusions reached and any views expressed, however, are hose of he auhors and may no represen hose of ASIA, ALB or Texas A&M Universiy. The Texas Agriculural Marke Research Cener (TAMRC) has been providing imely, unique, and professional research on a wide range of issues relaing o agriculural markes and commodiies of imporance o Texas and he naion for over hiry-five years. TAMRC is a marke research service of he Texas Agriculural Experimen Saion and he Texas Agriculural Exension Service. The main TAMRC objecive is o conduc research leading o expanded and more efficien markes for Texas and U.S. agriculural producs. Major TAMRC research divisions include Inernaional Marke Research, Consumer and Produc Marke Research, Commodiy Marke Research, Informaion Sysems Research, and Conemporary Marke Issues Research.
IS LAMB PROMOTION WORKING? EXECUTIVE SUMMARY The level of demand and he changes in ha level over ime are key deerminans of he long-run economic viabiliy of any indusry. Likewise, undersanding and promoing demand are necessary o achieve indusry growh and enhance indusry profis. Given he sruggle of he U.S. sheep and lamb indusry since a leas he mid-1940s agains a long lis of compeiive pressures, growh of lamb demand is a criical need for he fuure growh and developmen of he enire indusry. An iniial indusry effor o promoe lamb demand began in 1955 wih funds from he Wool Incenive Program. When he Wool Incenive Program and, hus, expendiures for he promoion of lamb were phased ou in 1996/97, an unsuccessful effor was made ha year o pass a mandaory checkoff program hrough a producer referendum. The only funds made available for lamb promoion afer he phase-ou of he Wool Incenive Program unil he esablishmen of he curren Lamb Checkoff Program in 2002/03 was hrough a special gran resuling from a 201-rade complain ha funded abou $4.8 million in lamb markeing and promoion projecs beween 2000/2001 and 2002/2003. The curren Lamb Checkoff Program was esablished hrough he Lamb Promoion, Research, and Informaion Order under he Commodiy Promoion, Research and Informaion Ac of 1996 following calls by virually all segmens of he domesic sheep and lamb indusry for he esablishmen of a checkoff program o enhance demand and, hus, o help revive he economic forunes of he indusry. Iniiaed on July 1, 2002, he Lamb Checkoff Program is funded hrough he collecion of assessmens on he sale sheep and lambs. The 13-member American Lamb Board (ALB) ha adminisers he program includes six producers, hree packers or firs handlers, hree feeders and one seedsock producer, all appoined by he U.S. Secreary of Agriculure. Is he Lamb Checkoff Program working? Have he checkoff assessmens paid by he indusry and invesed by he ALB in lamb adverising and promoion aciviies effecively increased lamb consumpion in he Unied Saes? Have any benefis of he program in erms of increased indusry revenues been sufficien o ouweigh he coss of he program? This repor addresses hese imporan quesions hrough a saisical analysis of U.S. demand for lamb a he reail level of he markeing channel o isolae and measure he separae demand effecs of he main economic deerminans of ha demand, including he ALB adverising and promoion program. The resuls of ha analysis are hen used o calculae he benefi-cos raio (BCR) for he program. The analysis uilizes hisorical daa and saisical procedures (regression analysis) o measure he effec of adverising and promoion on lamb consumpion. All possible relevan economic facors affecing lamb consumpion are considered, including: (1) he reail price of lamb; (2) he reail prices of beef, pork, and chicken; (3) disposable personal income; (4) populaion; (5) 2
inflaion; and (6) adverising and promoion expendiures for lamb. The analysis conrols for he effecs of all economic facors oher han he lamb checkoff program and, hus, isolaes he specific impacs of adverising and promoion on lamb. The resuls allow he measuremen of he change in lamb consumpion (and lamb sales a fixed prices) aribuable o adverising and promoion dollar expendiures, holding all oher facors consan. The main conclusion from his analysis is ha he Lamb Checkoff Program is working o increase he demand for lamb a a highly posiive benefi-cos raio. Specific conclusions include he following: Doubling inflaion-adjused ALB lamb promoion expendiures in any given year would boos lamb consumpion by 3.94%. The ALB lamb promoion program has resuled in roughly 7.6 addiional pounds of oal lamb consumpion per dollar spen on adverising and promoion and $41.59 in addiional lamb sales revenue per dollar spen on adverising and promoion. Even if he share of he reail sales dollar earned by lamb producers was quie low, his level of reail sales earnings indicaes a relaively high reurn o lamb producers from he Lamb Checkoff Program. The high reurn o lamb promoion implies ha he Lamb Checkoff Program is underfunded. However, lamb checkoff assessmen revenues and, hus, expendiures on adverising and promoion have been declining in recen years. Given he high esimaed BCR for lamb promoion, he reducion in promoion expendiures over he las several years ranslaes ino a sizeable opporuniy cos o he lamb indusry in erms of los indusry revenues. Pas promoion effors over he 1978/79-2001/02 period were effecive in enhancing lamb demand bu less so han he recen aciviies of he ALB. In oher words, he programmaic aciviies of he ALB have been relaively more successful in simulaing lamb han pas promoional effors. 3
IS LAMB PROMOTION WORKING? The level of demand for lamb and he changes in ha level over ime are key deerminans of he long-run economic viabiliy of he lamb indusry. Demand consideraions assis in deermining he long-range price oulook and provide he foundaion for long-range invesmen decisions. In he livesock and poulry secors, he demand for a produc a he producer level is a derived demand, meaning ha he demand for he live animals a he farm level is derived from he consumer demand for mea and oher livesock producs a he reail level. Changes in demand for mea and oher livesock producs a he consumer level are ransmied down he markeing channel o he producer. Undersanding and promoing demand are necessary for he expansion of any indusry. By definiion, demand is a schedule of he quaniies ha consumers are willing o buy a various prices a a given poin in ime in a paricular marke. The focus here is on lamb demand by consumers over he enire U.S. marke and he programs funded by he lamb check-off program o promoe ha demand. The Lamb Promoion, Research, and Informaion Order, beer known as he American Lamb Checkoff Program, was esablished under he Commodiy Promoion, Research and Informaion Ac of 1996 following calls by virually all segmens of he domesic sheep and lamb indusry for he esablishmen of a checkoff program o enhance demand. Iniiaed on July 1, 2002, he Lamb Checkoff Program is funded hrough he collecion of assessmens on he sale of sheep and lambs. The 13-member American Lamb Board (ALB) ha adminisers he Lamb Checkoff Program includes six producers, hree packers or firs handlers, hree feeders and one seedsock producer, all appoined by he U.S. Secreary of Agriculure. Is he Lamb Checkoff Program working? Have he checkoff assessmens paid by he indusry and invesed by he ALB in lamb adverising and promoion aciviies effecively increased lamb consumpion in he Unied Saes? Have any benefis of he program in erms of increased indusry revenues been sufficien o ouweigh he coss of he program? This repor addresses hese imporan quesions hrough a saisical analysis of U.S. demand for lamb a he reail level of he markeing channel o isolae and measure he separae demand effecs of he main economic deerminans of ha demand, including he ALB adverising and promoion program. The resuls of he analysis are hen used o calculae he benefi-cos raio (BCR) for he program. LAMB ADVERTISING AND PROMOTION The curren naional lamb demand adverising and promoion programs are adminisered by he American Lamb Board (ALB) hrough he Lamb Promoion, Research, and Informaion Order as auhorized under he Commodiy Promoion, Research, and Informaion Ac of 1996. The Board mees a leas hree imes per year o esablish goals and budges for new lamb promoion 4
programs and o evaluae he success of pas promoional effors. Board policies are implemened by a hree-member saff in Denver, Colorado. Under he Order, lamb promoion programs are funded by an assessmen on he sale all feeder and marke lambs and all breeding sock and cull animals. In general, he purchaser collecs he assessmen, referred o as a checkoff, wih a deducion from he sales proceeds of he seller. The checkoff funds are hen carried forward o he poin of slaugher or expor a which ime hey are ransmied o ALB. Those whose sales are subjec o he checkoff assessmen include producers, seedsock producers, exporers, feeders, direc markeers, ehnic slaugher operaions, cusom slaugher cliens, and slaugher/packing plans (ALB 2007). Impored sheep and lambs are assessed on weigh gained in he Unied Saes. The impor checkoff assessmen is colleced from he domesic producer, seedsock producer, or firs handler who akes possession of he impored animals. If sheep or lambs are impored ino he Unied Saes for immediae slaugher, here is no weigh assessmen a he ime of slaugher. The lamb checkoff assessmen is $0.005/pound of live lambs (ovine animals of any age) sold by producers, seedsock producers, exporers, and feeders. For lambs purchased for slaugher by firs handlers, he assessmen is $0.30/head. A firs handler is defined as an eniy ha akes possession of he lambs for slaugher (including cusom or ehnic slaugher) or sale direcly o he consumer. Firs handlers are primarily packing plans bu also include some producers, feeders, and direc markeers. Markeing agencies (sale barns) are no assessed a checkoff fee bu mus collec he checkoff assessmens from he sellers and pass hem on o he purchasers. Direc markeers, hose who are boh producers and firs handlers, and hose who process and marke lamb or lamb producs are assessed $0.005/lb on he live weigh a he ime of slaugher and mus pay an addiional assessmen of $0.30 per head. Each producer, feeder, or seedsock producer is obligaed o pay heir shares of he assessmen. The assessmen is passed on o subsequen purchasers unil i reaches he firs handler or exporer who hen remis he oal assessmen o ALB. A person who is boh producer and firs handler is responsible for he remiance. Since he incepion of he lamb checkoff program in July 2002, annual nominal adverising and promoion expendiures by ALB have oaled abou $7.33 million, an average of abou $1.47 million per year. On an inflaion-adjused basis, ALB expendiures in 2002/03 amouned o only $96,035 bu rose o $2,433,196 in 2003/04, dropped o $1,518,235 in 2004/05, dropped again o $1,215,240 in 2005/06, and dropped once more o $1,064,682 in 2006/07 (Figure 1). Adminisraive coss are limied o a maximum of 10% of collecions in any fiscal year so ha mos of he funds are used for promoional purposes. USDA has oversigh responsibiliies of he adminisraion of he program. All aciviies funded wih checkoff dollars mus comply wih he Ac and he Order and mus be approved by USDA. Before he curren Lamb Checkoff Program was approved as a mandaory program, he American Lamb Council of he American Sheep Indusry Associaion, Inc. (ASIA) operaed a lamb promoion program using funds made available under he Wool Incenive Program. Beween 1978/79 and 1996/97, inflaion-adjused annual expendiures on lamb promoion by ASIA ranged beween a high as $4.2 million in 1981/82 and a low of $1.2 million in 1996/97 (Figure 1). 5
Figure 1: Inflaion-Adjused Adverising and Promoion Expendiures, 1978/79-2006/07 $ housand 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Years When he Wool Incenive Program and, hus, expendiures for he promoion of lamb were phased ou in 1996/97, an unsuccessful effor was made ha year o pass a mandaory checkoff program hrough a producer referendum. The only funds made available for lamb promoion afer he phase-ou of he Wool Incenive Program in 1995/96 and he esablishmen of he curren Lamb Checkoff Program in 2002/03 was hrough a special gran resuling from a 201- rade complain. In 1999/2000, domesic peiioners alleged injury o he U.S. lamb indusry from impors. The U.S. Inernaional Trade Commission ruled in favor of he domesic complainans. As a resul, a lamb impor ariff and a one-ime assisance package for he domesic lamb indusry were esablished o remedy he injury and faciliae indusry adjusmens o impor compeiion. Through his program, $4.8 million in secion 201 relief grans for 23 lamb markeing and promoion projecs were funded beween 2000/2001 and 2002/2003. Compared o he value of lamb purchases by consumers each year, he amoun of funds ha he lamb checkoff program collecs for he promoion of lamb is exremely small. As shown in Figure 2, he lamb adverising-o-sales raio (ofen referred o as he invesmen inensiy raio) over he 1978/79 o 2006/07 period ranged from a minimum of zero in 1999/2000 and 2000/01 o a high of 0.23% in 1992/93 and averaged 0.14% over he enire period. In oher words, he amoun of checkoff funds spen o promoe lamb consumpion each year has been no more han 6
Figure 2: Lamb Adverising o Sales Raio, 1978/79-2006/07 percen 0.25 0.20 0.15 0.10 0.05 0.00 Years abou one quarer of 1% of he value of lamb sales in any year, much less han is he case for mos of he major checkoff program commodiies like beef, pork, soybeans, and milk. The lamb adverising inensiy has declined since he esablishmen of he lamb checkoff program, primarily because less has been colleced han wha was formerly spen on lamb promoion by he ASIA under he Wool Incenive Program. The annual lamb sales-o-adverising raio beween 2002/03 and 2006/07 averaged 0.07% compared o 0.19% beween 1978/79 and 1995/96 when he ASIA was responsible for generic lamb promoion effors. ALB checkoff adverising and promoion programs are aimed a expanding consumpion of American lamb by: (1) geing people o ask for American lamb year-round; (2) branding American lamb as he preferred choice in he markeplace; (3) differeniaing American lamb from impor compeiors; (4) minimizing he volailiy of seasonal produc sales hrough argeed promoions; (5) promoing he use of he whole lamb using all cus; and (6) leveraging and expanding ALB resources hrough cooperaive relaionships wih markeing parners. PREVIOUS RESEARCH Analyses of naional lamb demand ypically aemp o quanify how sensiive consumers are o lamb prices as consumpion moves from one poin o anoher along he demand curve and o 7
deermine no only if shifs have occurred in lamb demand bu also why such shifs have occurred. The resuls are he bases of appropriae recommendaions o improve he profiabiliy of all segmens of he lamb indusry. Raising he demand for lamb is a key o he growh and expansion of he indusry. Increasing demand ranslaes ino consumers purchasing more lamb a consan or higher prices, which in urn, improves he economic viabiliy of he enire sheep and lamb indusry. Despie is imporance in poenially fosering growh and profiabiliy in he sheep and lamb indusry, research focused on undersanding he economic deerminans of U.S. lamb demand has been limied. Shifle e al (2007) provide a summary of prior lamb demand sudies, including Byrne, Capps, and Williams (1993); Capps and Williams (2005); Purcell (1989); and Schroeder e al (2001). The principal focus of hese pas invesigaions has been on economic and oher facors affecing lamb demand. The respecive demand funcions are modeled using regression analysis and hisorical daa o examine poenial drivers of demand wih an emphasis on measuring he elasiciies of demand wih respec o hose demand drivers, including primarily he own-price, cross-price, and income elasiciies. The facors mos ofen found o be saisically significan in explaining changes in per capia lamb demand over he years include he real reail price of lamb, he real reail prices of beef and pork, and seasonaliy. Mos sudies have concluded ha income has no been a saisically significan driver of changes in lamb demand. All bu one sudy (Capps and Williams, 2005) have ignored he lamb demand effecs of lamb adverising and promoion programs. The own-price elasiciy measures he percenage change in consumpion of a paricular produc due o a one percen change in is own price, all oher facors invarian. Theory suggess ha he own-price elasiciy is always negaive, indicaing an inverse relaionship beween he reail level of consumpion of a produc and is marke price. The greaer he magniude of he own-price elasiciy (in absolue value), he greaer he sensiiviy of consumers o changes in he price. An elasiciy measure greaer han one in absolue value is considered elasic meaning ha a given percen change in price resuls in a larger percen change in quaniy demanded. In his case, demand is considered o be highly responsive o price changes. Also, if he demand for any produc is elasic, hen a price discoun (increase) generaes no only a larger percenage increase (decrease) in he quaniy consumed bu also an increase (a decrease) in oal revenue o he seller. On he oher hand, an elasiciy measure less han one in absolue value is considered inelasic meaning ha a given percen change in price resuls in a smaller percen change in demand. Thus, demand is relaively unresponsive o price changes. For a produc whose demand is inelasic, a price discoun (increase) leads o no only a smaller percenage decrease (an increase) in consumpion bu also a decrease (an increase) in oal seller revenue. Cross-price elasiciies of demand refer o he percenage change in he consumpion of one good due o a one percen change in he price of anoher good. If his measure is posiive, hen he wo goods are considered subsiues. On he oher hand, if his measure is negaive, hen he wo goods are considered complemens. If he cross-price elasiciy is no saisically differen from zero, hen he wo goods are considered o be independen. While a change in own-price moves consumpion along he demand curve, a change in he price of a subsiue or complemen acually shifs he demand curve (he cross-price effec), all oher facors invarian. 8
Income elasiciy refers o he sensiiviy of consumer purchases wih respec o changes in income. Wih changes in income, he demand curve shifs as well, holding all oher facors consan. The income elasiciy of demand, by definiion, is he percenage change in quaniy demanded aribued o a one percen change in income, al oher facors invarian. The esimaed own-price elasiciies of per capia lamb demand across mos sudies have been close, ranging from -0.5 o -0.8 despie he ime period analyzed (Table 1). In oher words, research provides evidence ha here is an inverse relaionship beween reail lamb price and he quaniy of lamb purchased and ha he relaionship is inelasic implying ha lamb demand is no highly responsive o price changes. Those sudies which included more recen daa, especially daa afer 1999, indiced a higher degree of elasiciy (more sensiiviy o price) han hose sudies using earlier daa. This suggess ha lamb consumers may have become somewha more sensiive o changes in price over ime in erms of heir willingness o buy or no buy lamb based on is price. Mos sudies have found a saisically significan subsiue relaionship beween lamb and beef and beween lamb and pork (Table 1). The esimaed cross-price elasiciies of lamb demand wih respec o beef and pork price across mos sudies are also close, ranging from 0.5 o 0.6 for beef and from 0.1 o 0.4 for pork. A he same ime, all bu one sudy (RTI 2007) conclude ha lamb and chicken are independen commodiies in consumpion. Those sudies using he mos curren daa show greaer subsiuabiliy beween lamb and he oher meas, alhough he relaionships are no consisen across sudies. Also, all bu one sudy (Shifle e al., 2007) conclude ha income is no a saisically significan driver of lamb consumpion. Shifle e al. (2007) iniially found ha income is saisically insignifican in explaining changes in per capia lamb demand bu hen added a rend variable o he model and found a posiive and saisically significan relaionship beween per capia lamb demand and income suggesing he possibiliy of bias due o collineariy of he income and rend variables hey used. The lack of broad evidence of a saisically significan relaionship beween income and lamb purchases may be he resul of eiher he relaively small amoun of lamb purchased or he fac ha mos lamb is purchased for special occasions which radiionally feaure lamb. Seasonaliy is anoher variable ha all sudies using a leas quarerly daa have found o be a saisically significan deerminan of per capia lamb demand. Lamb consumpion ypically is highes in he firs and fourh quarer of he year (for example, see Byrne, Capps, and Williams (1993) and Shifle e al (2007)). To dae, Capps and Williams (2005) is he only sudy ha has analyzed he responsiveness of lamb demand o he adverising and promoion aciviies ha have occurred over he years. They developed an economeric model of lamb demand in which he effecs of curren and pas lamb adverising and promoion effors on U.S. lamb consumpion a he reail level of he markeing channel were included using daa for he 1978/79-2004/05 ime period. The analysis conrols for he effecs of he primary economic facors oher han he lamb checkoff program ha drive lamb demand, including: (1) he reail price of lamb; (2) he reail prices of beef, pork, and chicken; (3) disposable personal income; (4) populaion; and (5) inflaion. In his way, he analysis isolaes 9
Table 1: Esimaed Elasiciies of U.S. Per Capia Lamb Demand a Sudy Time period of analysis Own price Cross-price Impor lamb Beef Pork Chicken Per capia Income RTI (2007) 1970-2003 -0.523 0.293 ns ns 0.35 Ns Shifle e al. (2006) 1980-2005 -0.665 -- 0.486 0.179 ns 0.684 Capps, Williams (2005) 1978-2004 -0.807 -- 0.533 0.389 ns Ns Schroeder e al. (2001) 1978-1999 -1.09 -- 0.57 ns ns -0.54 Byrne, e al. (1993) 1978-1990 -0.62 -- ns 0.131 ns Ns a Purcell (1989) 1970-1987 -0.51 -- ns ns ns Ns The dependen variable in all cases is per capia lamb consumpion excep for RTI sudy which uses per capia consumpion of only domesic lamb (excluding impored lamb). Noe: ns = no saisically significan and -- = no considered in he analysis. he specific impacs of adverising and promoion on lamb demand and allows a measuremen of he change in lamb consumpion (and lamb sales a fixed prices) aribuable o adverising and promoion dollar expendiures, holding all oher facors consan. Capps and Williams (2005) incorporaed he influence of he lamb adverising and promoion programs ino heir lamb demand model as a hree-period moving average (curren period and wo lags) of inflaion-adjused adverising and promoion expendiures in he periods boh before and afer he esablishmen of he curren Lamb Checkoff Program. Using his model, hey found ha he ALB program had a posiive bu no highly significan effec on lamb demand. They repored an adverising elasiciy of 0.022 in he pre-alb period (1978/79 hrough 2001/02) and 0.031 for he curren Lamb Checkoff Program (2002/03 hrough 2004/05). Though small, hese adverising elasiciies are consisen wih hose found by many oher researchers across a wide variey of agriculural commodiy checkoff programs (see Williams and Nichols, 1998). The ALB lamb adverising elasiciy implies ha a doubling of ALB adverising would boos per capia lamb consumpion by 3.1%. Using hese saisical resuls, Capps and Williams (2005) calculaed ha, beween 2002/03 when he lamb checkoff program began and 2004/05, he ALB adverising program had resuled in roughly 8.4 addiional pounds of oal lamb consumpion and $44.60 in addiional lamb sales per ALB dollar spen on adverising. 10
METHODOLOGY AND DATA Unforunaely, he Capps and Williams (2005) conclusions regarding he effeciveness of he ALB program were based on weak saisical significance of he adverising variable in he model. This sudy modifies he Capps and Williams model by using a polynomial disribued lag (PDL) process o capure he adverising carryover effecs as is commonly done in analyses of commodiy checkoff programs. In addiion, a square roo ransformaion of he adverising and promoion variable is used in he demand model o allow for boh diminishing marginal reurns and zero expendiures in adverising expendiures a cerain ime periods. The model was hen re-esimaed afer adding wo addiional years of daa o he daase o creae a 1978/79 hrough 2006/07 sample period. The analysis uilizes annual hisorical daa for fiscal years 1978/79 hrough 2006/07 and saisical procedures (regression analysis) o measure he effec of adverising and promoion on per capia lamb consumpion. To accomplish his ask, we consider all possible relevan economic facors affecing lamb consumpion (C), including: (1) he reail price of lamb (P); (2) he reail prices of beef, pork, and chicken (P i ); (3) personal disposable income (Y); (4) populaion (POP); (5) inflaion (I); and (6) adverising and promoion expendiures for lamb (E). The general form of he economeric equaion used in his analysis is expressed as: (1) C /POP = f(p /I, P i /I, Y /POP /I, E /I,) where = he curren year; i = beef, pork, and chicken; Y = personal disposable income; I = consumer price index; and E = he square roo ransformaion of ALB promoion expendiures. Daa for per capia lamb consumpion (C/POP) are available from USDA (2007) while reail prices (P and P i ) are from he Livesock Markeing Informaion Cener (LMIC) and he Bureau of Labor Saisics (BLS). Daa for personal disposable income (Y), populaion (POP), and inflaion (I) are provided by he Federal Reserve Bank (FRB). Daa for inflaion-adjused lamb adverising and promoion expendiures by he American Lamb Board are available only since July 2002. To insure a sufficien sample size for regression analysis, fiscal year daa on adverising expendiures by American Lamb Board since July 2002 are combined wih lamb promoion expendiures by he American Sheep Indusry Associaion (ASIA) under he Wool Incenive Program before he implemenaion of he lamb checkoff program 1. In he analysis, care is aken o delineae he effecs of he adverising and promoion expendiures of he American Lamb Board since July 2002 from previous promoional expendiures made from 1978/79 hrough 2001/02. Obviously, he more relevan adverising effecs for his analysis are hose of he curren Lamb Checkoff Program. The objecive of he regression analysis is o conrol for he effecs of all economic facors oher han he lamb checkoff program and, hus, isolae he specific impacs of adverising and promoion on lamb. The saisical regression echnique used allows a measuremen of he change in lamb consumpion (and lamb sales a fixed prices) aribuable o prices, income, and 1 Daa for ASIA promoion expendiures for 1978/79 hrough 2001/02 were provided by Tom McDonnell of he American Sheep Indusry Associaion. 11
adverising and promoion dollar expendiures, holding all oher facors consan. These measuremens are he own-price, cross-price, income, and adverising elasiciies associaed wih he demand for lamb menioned earlier. Specifically, he elasiciies esimaed are he percenage changes in he per capia consumpion of lamb due o uni percenage changes in inflaionadjused lamb price, he inflaion-adjused prices of oher meas (beef, pork, and chicken), he inflaion-adjused per capia income, and inflaion-adjused adverising and promoion expendiures. STATISTICAL RESULTS The srucure of he model used in his analysis is idenical o he Capps and Williams (2005) model excep for he consideraion of adverising and promoion expendiures. Diminishing marginal reurns o adverising normally observed in checkoff promoion programs was accouned for in he model wih he use of a square roo ransformaion of he adverising and promoion expendiures o creae he adverising variable used in he analysis. To capure he carryover effecs of adverising and promoion, a second degree polynomial of lag lengh of one year wih endpoin consrains was used. The degree of he polynomial and he number of lags were deermined hrough he use of he Akaike Informaion Crierion (AIC) and he Schwarz Informaion Crierion (SIC), commonly acceped saisical measures of model selecion. The raionale for he consideraion of lags in adverising is ha is impac may no be fel all a once. The impac of adverising and promoion likely is disribued over ime. The esimaed model explains roughly 84% of he variabiliy in per capia lamb consumpion over he 1978/79-200/07 period of analysis (Table 2). The parameer esimaes indicae ha he ALB checkoff program has had a saisically significan effec on per capia lamb consumpion. Oher saisically significan economic drivers of U.S. lamb consumpion were found o be he price of lamb and he prices of beef and pork. Neiher income nor he price of chicken was found o have any saisically significan effec on lamb consumpion. The esimaed own-price elasiciy of lamb is -0.70 meaning ha for every 10% change in he inflaion-adjused lamb price, per capia lamb consumpion changes by nearly 7% in he opposie direcion. Thus, he per capia demand for lamb is price inelasic, or in oher words, no overly sensiive o price. Cross-price elasiciies for beef and pork are esimaed o be 0.56 and 0.39, respecively, meaning ha a 10% increase in beef price leads o a 5.6% increase in per capia lamb consumpion and a 10% increase in pork price leads o a 3.9% increase in per capia lamb consumpion, holding all oher facors consan. The posiive cross-price elasiciies for beef and pork leads o he conclusion ha beef and pork are subsiue mea producs for lamb. The own-price, cross-price, and income elasiciies are consisen wih he resuls of previous research. The income elasiciy is esimaed a 0.19 bu is no saisically differen from zero. 12
Table 2: The Lamb Demand Model a LN(PCLC) = -2.887 0.700*LN(RPL/CPI99) + 0.562*LN(RPB/CPI99) + 0.394*LN(RPP/CPI99) + (3.917) (0.163) (0.231) (0.202) 0.193*LN(PCDI/CPI99) + 0.00088*(SRLADV )+0.00088*(SRLADV -1 ) (0.654) (0.00049) (0.00049) R 2 = 0.840 R 2 (adjused) = 0.804 DW = 1.559 where PCLC = per capia lamb consumpion (pounds) RPL = reail price of lamb ($/lb) RPB = reail price of beef ($/lb) RPP = reail price of pork ($/lb) PCDI = per capia disposable income ($) CPI99 = consumer price index (1999=100) SRLADV = square roo of real lamb adverising and promoion expendiures ($ housands) a Numbers in parenheses are sandard errors. This analysis consiues he hird updaed esimae of he parameers of his lamb demand model wih each updae adding more recen daa o he daase. Noably, he own-price and cross-price elasiciies have been quie sable. Tha is, hey have changed lile wih each updae. However, alhough no saisically differen from zero in his or previous updaes, he esimaed income elasiciy has risen monoonically over he various updaes from -0.20 wih daa hrough 2002/03 up o 0.19 wih daa hrough 2006/07. This rise in he income elasiciy may be he resul of he growing imporance of he food away from home secor o he lamb indusry over ime. The lamb promoion expendiure elasiciy is esimaed o be 0.0394 which is consisen wih hose of oher checkoff commodiies. In oher words, he saisical resuls indicae ha a doubling of lamb promoion expendiures (ha is, a 100% increase) would resul in a 3.94% increase in per capia lamb consumpion. Using he same model wih daa for only he 1978/79 o 2001/02 period prior o he exisence of he American Lamb Board, he adverising and promoion elasiciy was esimaed o be 0.0386. BENEFIT-COST ANALYSIS Anoher way o look a he esimaed relaionship beween per capia consumpion of lamb and promoion expendiures is o use he saisical resuls o calculae he benefi-cos raio (BCR) of he Lamb Promoion Checkoff Program by dividing he benefi of he promoion in erms of addiional quaniies sold or dollars of revenue earned per dollar spen on promoion. The firs sep is o use he esimaed promoion elasiciy o calculae he change in U.S. lamb consumpion (C) effeced by he Lamb Checkoff Program in any given year as: A Z A (2) C C [e PER ] POP 13
where refers o he curren year, C A = acual lamb consumpion; C Z = level of lamb consumpion ha would have occurred wih no promoion expendiures; PER A = acual per capia consumpion; POP = populaion; and e = esimaed promoion elasiciy. Then, using he resuls of equaion (1), he Lamb Sales BCR (he addiional lamb sold per dollar of promoion) is calculaed as: (3) Lamb Sales BCR T 1 (C T A 1 C E Z ) where E = annual expendiure on lamb promoion by he ALB. The Revenue BCR ( he addiional revenues generaed per dollar spen on promoion) is hen calculaed as: (4) Revenue BCR T 1 P A (C T 1 A E C Z ) where P A = he acual reail price of lamb. Using hese formulas, he Lamb Sales BCR is calculaed o be 7.56, meaning ha hrough 2006/07 he ALB adverising and promoion program has generaed roughly 7.56 addiional pounds of oal lamb consumpion per dollar spen on adverising and promoion. According o equaion (4), ha ranslaes ino addiional lamb sales revenue of $41.59 per dollar spen on promoion. Pas promoion effors over he 1978/79-2001/02 period were effecive in enhancing lamb demand as well bu less so han he recen aciviies of he ALB. Over he 1978/79-2001/02 period before he esablishmen of he ALB and he lamb checkoff program, adverising and promoion effors ranslaed ino 5.56 addiional pounds of oal lamb consumpion per dollar spen and $26.31 in addiional lamb sales. Consequenly, he programmaic aciviies of he ALB have been relaively more successful in simulaing lamb han pas promoional effors. Noe ha he benefis are calculaed a he reail level. An imporan quesion is how much of he increased reail-level revenues generaed acually reaches lamb producers. For many checkoff programs, he porion of he revenues generaed ha accrue o producers is esimaed using USDA esimaes of he share of he reail dollar ha is earned by farmers. Unforunaely, however, he USDA does no calculae ha share for lamb. For beef, USDA calculaes he farmers share of he reail dollar spen on beef was abou 46.2% on average beween 2001 and 2006 (USDA 2006). For pork, he esimaed share was lower a 28.9% over he same period. If lamb producers earned he same share of he reail dollar as beef producers, hen he revenue 14
BCR from he lamb promoion program a he producer level would be $19.21. If lamb producers earned he same share of he reail dollar as pork producers, hen he lamb revenue BCR a he producer level would be $12.02. Even if he share earned by lamb producers was much lower, even a 10% for example, lamb producers would sill be earning $4.16 for every dollar invesed in he Lamb Checkoff Program, a reasonable reurn on invesmen. These BCRs reflec a relaively high reurn o he invesmen made by he lamb indusry in promoing lamb demand. The high calculaed BCRs provide solid, saisical evidence ha he ALB lamb promoion effors have been highly effecive in building demand for lamb. They also imply ha he lamb promoion program is under-funded, a conclusion ha is consisen wih he experience of oher commodiy checkoff organizaions. In oher words, while an increase in he assessmen would resul in more funds for promoing lamb, he greaer he increase, he lower he calculaed BCR would likely be given he diminishing effeciveness of each addiional dollar of promoion ha is normally experienced by checkoff organizaions. However, wih such a large BCR, he lamb checkoff assessmen could be increased subsanially and sill realize a healhy reurn. In fac, however, nominal ALB adverising and promoion expendiures have dropped seadily from $2.72 million in 2003/04 o $1.75 million in 2004/05 o $1.45 million in 2005/06 o $1.30 million in 2006/07. Thus, he calculaed BCR for lamb suggess a noable opporuniy cos in erms of los revenue o he lamb indusry over he las few years from every dollar of reduced checkoff revenues. CONCLUSIONS The main conclusion from his analysis is ha he Lamb Checkoff Program is working o increase he demand for lamb. Specific conclusions include he following: Doubling ALB lamb promoion expendiures in any given year would boos lamb consumpion by 3.94%. The ALB lamb promoion program has resuled in roughly 7.56 addiional pounds of oal lamb consumpion per dollar spen on adverising and promoion and $41.59 in addiional lamb sales revenue per dollar spen on adverising and promoion. Even if he share of he reail sales dollar earned by lamb producers was quie low, his level of reail sales earnings indicaes a high reurn o lamb producers from he Lamb Checkoff Program. The high reurn o lamb promoion implies ha Lamb Checkoff program is underfunded. However, lamb checkoff assessmen revenues and, hus, expendiures on adverising and promoion have been declining in recen years. Given he high esimaed BCR for lamb promoion, he reducion in promoion expendiures over he las several years ranslaes ino a noable opporuniy cos o he lamb indusry in erms of los indusry revenues. Pas promoion effors over he 1978/79-2001/02 period were effecive in enhancing lamb demand bu less so han he recen aciviies of he ALB. In oher words, he programmaic aciviies of he ALB have been relaively more successful in simulaing lamb han pas promoional effors. 15
This analysis, hus, confirms ha ALB program expendiures since 2002/03 have successfully increased he demand for domesic lamb, afer accouning for oher economic forces. Neverheless, i is imporan o coninue o monior changes in reail lamb consumpion due o promoional effors. 16
REFERENCES Byrne, P., O. Capps, Jr., and G.W. Williams, U.S. Demand for Lamb: The Oher Red Mea, Journal of Food Disribuion Research, February 1995. Oral Capps, Jr. and G.W. Williams, Measuring he Effeciveness of Lamb Adverising and Promoion: An Updaed Analysis, Commodiy Marke Research Repor No. CM-01-05, Texas Agribusiness Marke Research Cener, Texas A&M Universiy, College Saion, Texas, Sepember 2005. Federal Reserve Bank of S. Louis (FRB), Economic Daa FRED, S. Louis, Missouri, 2007. On-line a: hp://research.slouisfed.org/fred2/. Livesock Markeing Informaion Cener (LMIC), Lakewood, Colorado, daa available o members, 2007. On-line a: hp://lmic.info/. Purcell, W.D., Analysis of Demand for Beef, Pork, Lamb, and Broilers: Implicaions for he Fuure, Research Insiue on Livesock Pricing, Virginia Tech, Research Bullein 1089, July 1989. Schroeder, T.C., R.J. Jernick, R. Jones, and C. Spaeh, U.S. Lamb Demand, Sheep and Goa Research Journal, May, 2001. Shifle, J.S., W.D. Purcell, D. Marsh, and P. Rodgers, Analysis of Lamb Demand in he Unied Saes, Repor o he American Lamb Board, January 2007. U.S. Bureau of Labor Saisics (BLS), Lamb Price Indices, Washingon, D.C., 2007. On-line a: hp://www.bls.gov. U.S. Deparmen of Agriculure (USDA), Food Availabiliy Daa Sysem, Economic Research Service, Washingon, D.C. Las updaed February 15, 2007. On-line a: hp://www.ers.usda.gov/daa/foodconsumpion/foodavailindex.hm. U.S. Deparmen of Agriculure (USDA), Food Marke Indicaors: Farm-o-Reail Price Spreads for Food, Economic Research Service, Washingon, D.C., 2006. On-line a: hp://www.ers.usda.gov/daa/foodmarkeindicaors/defaul.asp?tablese=3 Williams, G.W. and J.P. Nichols, Effeciveness of Commodiy Promoion, Consumer and Produc Marke Research Repor No. CP-1-98, Texas Agriculural Marke Research Cener, Texas A&M Universiy, College Saion, Texas, May 1998. 17