Six years ago, an economics journal published a seminal work that suggested that milk producers who pay "check-off" allocations may be better served spending that money on research, rather than on milk promotion and marketing. Now, however, Cornell agricultural economists say that the mathematical model used in that study may be incorrect due to erroneous assumptions.
Most agricultural commodities have check-off programs used primarily for generic promotion to increase consumption. For example, for every 100 gallons of milk a farmer sells, the farmer pays a check-off fee that goes toward airing those popular "Got Milk" commercials. "Producers raise about $750 million a year for the check-off programs," according to Chanjin Chung, Cornell research associate in agricultural economics, and Harry M. Kaiser, Cornell professor of agricultural economics.
In 1993 Michael Wohlgenant, an economist at the North Carolina State University, investigated the economic effects of research versus promotion. Before the 1993 study, researchers studied the efficacy of check-off programs, but those studies either focused on promotion or the financial efficacy of agricultural research (designed to ultimately lower production costs). Wohlgenant found that research on farm production generates better financial returns than advertising, assuming there is an equal efficiency in dollars spent on consumer promotion, farm research or promotion, and that leads to parallel shifts in retail demand and farm supply. But his conclusion should be interpreted with caution, says the new report.
"Erroneous assumptions can result in seriously misleading implications," said Kaiser. "We found that when there are pivotal shifts, producers would have better returns from promotion than from research."
A pivotal shift implies that consumers have a larger response to advertising a certain product at lower prices than at higher prices.
The Wohlgenant findings are confined to a special case, explained Kaiser. "So, we relaxed one of the key assumptions, and the results completely changed." By substituting Wohlgenant's parallel shift in the model with Cornell's pivotal shift, and leaving everything else the same in the model, the results show that marketing and advertising have a larger impact on improving sales.
The research, "Distribution of Gains from Research and Promotion in Multi-Stage Production Systems: Further Results," by Chung and Kaiser appeared in the May 1999 issue of the American Journal of Agricultural Economics.
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