Offsetting Price Impacts from Imports with Generic Advertising and Promotion Programs: The Hass Avocado Promotion and Research Order

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1 Review of Agricultural Economics Volume 28, Number 4 Pages DOI: /j x Offsetting Price Impacts from Imports with Generic Advertising and Promotion Programs: The Hass Avocado Promotion and Research Order Hoy F. Carman California avocado producers, concerned about sharp increases in imports from Chile and Mexico, secured passage of national legislation to include financial participation by imports in U.S. generic promotion programs. Estimated demand parameters for avocados indicate that new advertising and promotion funded by the 2.5 cents per pound assessment on all Hass avocados sold in the U.S. can offset a portion of the price impact of increased imports. Producers of other specialty crops may want to investigate the feasibility of using national promotion and research orders to expand demand when faced with increased production or imports. U.S. fruit and vegetable producers have employed government-mandated selfhelp marketing programs since the 1930s to increase the demand for their products. Designed to address a particular commodity s marketing problems, these programs may include one or more provisions selected from grades and standards, research, promotion, quantity controls, or container regulations. Government enforcement of rules preventing free riders has facilitated the long-term success of these industry programs. Increased imports resulting from new trade agreements and market integration are not covered by many mandated marketing programs, however, and free riding can once again be a problem for organized commodity groups. The California avocado industry provides a case study of the economic pressures from increased imports and ongoing efforts to expand the demand for all avocados using government-mandated marketing programs. The California Hoy F. Carman is a professor in the Department of Agricultural and Resource Economics, University of California, Davis, and a member of the Giannini Foundation of Agricultural Economics.

2 464 Review of Agricultural Economics Avocado Commission (CAC) and its producer members, after investing over $182 million on market development programs between 1961 and 2003, were understandably upset to see increasing imports by noncontributing importers taking advantage of their continuing promotional efforts. Avocado industry desires to have imports included in promotional efforts led to approval of the Hass Avocado Promotion and Research Order (HAPO). The industry s success in securing passage of legislation to include imports in avocado promotion programs and the potential impact of these promotional programs on returns to both domestic production and imports is of interest to avocado producers, policy makers, and other fruit and vegetable producers facing price impacts from increased imports. This paper outlines the features of the HAPO and examines its potential for overcoming the price impacts of increased avocado imports. Specifically, we describe mandated marketing programs used by producers to expand commodity demand, including an update on judicial developments; examine avocado industry trends and developments leading to proposal and passage of the HAPO and provisions included in HAPO; develop quantitative estimates of the demand parameters for California avocados based on previous studies; use estimated demand relationships to examine the potential effects of promotion funded by HAPO and other demand determinants on the price impacts of increased imports; and conclude with a short discussion of limitations, highlights of the results and implications for other commodity groups facing similar price pressures from imports. Mandated Marketing Programs California producers have embraced a combination of federal and state marketing orders, national check-off programs, and state commodity commissions and councils to fund their market development efforts. These programs include provisions for grades and standards, research, and generic promotion, with the largest expenditures for promotion. The provisions of individual commodity programs depend on the marketing problems facing the industry and the potential for a provision to solve those problems. Once approved by an industry vote, the provisions of a mandated marketing program apply to all producers and handlers of the commodity in the designated production area. Mandatory assessments on producers and/or handlers fund all of the program costs. Federal marketing programs often apply to producers in more than one state (marketing orders), or to producers in all states (national check-off programs for generic promotion). State marketing programs apply only to producers in that state. Producers of commodities with mandated marketing programs are concerned about increased imports of fruits and vegetables, especially those that enter the United States during the domestic products marketing season. None of the provisions of a state program applies to imports. Thus, avocado importers did not participate in California programs and importer promotional programs were limited, sporadic, and regarded as generally ineffective. To address free riding by imports, state commodity organizations must secure approval of an appropriate federal program. Marketing orders enabled by the

3 The Hass Avocado Promotion and Research Order 465 Agricultural Marketing Agreement Act of 1937 include imports under applicable grade, size, quality, and maturity requirements during the time that the domestic commodity is being shipped and regulated. They do not authorize collection of funds from importers to conduct promotion programs or research. National check-off programs to fund generic promotion, research, and information activities can be written to apply to imported products with assessments collected from importers by the U.S. Customs Service. For example, the federal research and promotion programs for beef, pork, cotton, cultivated blueberries, Hass avocados, honey, mangos, mushrooms, popcorn, potatoes, and watermelons include assessments on imports as well as domestic product to fund their activities. 1 The national generic promotion programs for dairy, eggs, lamb, peanuts, and soybeans do not include assessments on imports. Funds available for promotion under national check-off programs totaled almost $672 million in 2001 (Kinnucan and Zheng, p. 256). The number of programs and annual budgeted expenditures can be used to measure the importance of mandated marketing programs to California producers. There are currently 75 government-mandated marketing programs for California commodities, including 13 national commodity check-off programs, 2 12 federal marketing orders, 27 state marketing orders and agreements, 20 state commodity commissions, and three commodity councils (Carman and Alston). Of these, 63 have research provisions and 56 include generic advertising and promotion. Excluding the 13 national commodity check-off programs, California producers budgeted over $12 million for research and about $146 million for advertising and promotion under these programs during Research has validated the economic effectiveness of many of these programs and producer support remains strong, as evidenced by super-majority votes for new and continuing programs. 3 Despite this evidence and support, generic commodity promotion programs funded by mandatory assessments on all producers of a commodity are controversial and have been the subject of continuous litigation since the 1980s. 4 The Supreme Court has heard three cases concerning the constitutionality of generic promotion programs. In the 1997 case of Glickman v. Wileman Bros. & Elliott, Inc., et al., the Supreme Court ruled that federally mandated generic advertising for California peaches, plums, and nectarines did not violate the First Amendment of the U.S. Constitution. This ruling seemed to take much of the legal pressure off generic promotion programs until a new decision was issued in In U.S. v. United Foods, the Supreme Court ruled that the mushroom promotion program violated the First Amendment. This ruling set off a flood of litigation, with courts striking down a number of promotion programs. Then, the Supreme Court agreed to hear a third case on the Eighth Circuit Court ruling that the beef check-off program was unconstitutional. In Livestock Marketing Association v. USDA, the Supreme Court ruled (23 May 2005) that the beef check-off program is constitutional. The ruling, which overturns lower court rulings, stated that the beef promotion messages were government speech that is not subject to certain First Amendment challenges. This new ruling is expected to remove the cloud of litigation over many generic promotion programs and increase producer interest in new programs.

4 466 Review of Agricultural Economics Avocado Industry Background California produces 85 90% of the total U.S. avocado crop with Florida accounting for almost all of the remainder. 5 The U.S. demand for avocados has grown and California producers have responded by expanding planted acreage and production. During through , the California avocado crop averaged over 350 million pounds annually with a farm value averaging over $341 million (California Avocado Commission, Annual Reports). California had just over 18,000 bearing acres of avocados in 1970, and has recently ranged from 59,000 to 61,000 acres after reaching a peak of just over 76,000 acres in More than 20 varieties of avocados have been produced commercially in California since 1950, with the relative importance of each changing significantly over time. Production of the Fuerte variety, which accounted for the majority of California acreage and production during the 1960s, decreased to less than 1% in , while the Hass variety s share of total production expanded from just over 21% in to more than 93% in The Hass variety has two significant advantages the greatest average yields and the highest average prices per pound. California accounts for all U.S. production of Hass avocados and almost all avocado imports from Chile, Mexico, and New Zealand are of the Hass variety. Avocado Promotion The California avocado industry conducted generic advertising and promotion programs under a state marketing order program from 1961 through 1977, and has operated under provisions of the CAC since September 1978 (California Avocado Commission). A review of annual reports of the marketing order and commission programs indicates that the industry spent over $182 million on advertising, promotion, and related services since the initiation of the program in 1961 through the marketing year. 6 CAC crop year advertising and promotion expenditures averaged over $10 million annually from through Recently, consumer advertising and promotion accounted for about one-half of total expenditures, with the remainder going for trade advertising and promotion, food service, public relations, nutrition programs, and processed products. Avocado industry advertising and promotion programs have helped increase the demand and price for avocados over time, and favorable demand conditions have been an important factor affecting the growth of avocado imports. Avocado Imports Competition from imported avocados is a relatively recent development for the California industry. During 1961 through 1990, avocado imports from all sources averaged just over 4.8 million pounds annually and ranged from a few thousand pounds during the 1960s to a record 11.4 million pounds in 1986, with exports typically exceeding imports by a significant margin. Imported avocados jumped to almost 26 million pounds in 1991, increased to nearly 146 million pounds in 2000, and reached a high of over 314 million pounds in (figure 1). Imported avocados averaged million pounds annually for through , and accounted for an annual average of 34% of total U.S.

5 The Hass Avocado Promotion and Research Order 467 Figure 1. Source of avocados for U.S. consumption, Year Imports Florida California avocado consumption. The Hass variety from Chile, Mexico, and New Zealand accounts for most U.S. avocado imports. The Dominican Republic s exports to the United States consist mainly of green skin varieties. During the crop year , Chile s import share was 48.9%; Mexico, 46.1%; and the Dominican Republic, 4.9%. New Zealand and other countries combined for less than 1% of the total U.S. imports. The majority of imports arrive from September through December when domestic supplies are seasonally low, but as imports have increased, the season for large volume imports has been extended to January and February. In marketing year , avocado imports totaled over 555 million pounds (U.S. Department of Agriculture, Foreign Agricultural Service), which was 64.9% of the total U.S. supply (California Avocado Commission, Annual Reports). Mexico, the world s largest avocado producer, was unable to export fresh avocados to the lower 48 U.S. states before 1997 because of pest and disease problems. 7 After studies extending over 6 years, the USDA s Animal and Plant Health Inspection Service (APHIS), announced that it would allow avocados from Mexico to be sold in 19 Northeastern and Midwestern states and the District of Columbia from November through February beginning in In 2001, APHIS increased the number of states allowed to import Mexican avocados from 19 to 31 and expanded the shipping season to 6 months. 9 Finally, beginning on 31 January 2005, Mexican imports were allowed to enter all the U.S. states except California and Florida year around. California and Florida are slated to open their markets to Mexico after 31 January Mexican imports averaged million pounds annually for the 1999 through 2001 crop years (November October), increasing to 59 million pounds in 2002 and 71 million pounds in Mexican imports for

6 468 Review of Agricultural Economics increased to over 245 million pounds (U.S. Department of Agriculture, Foreign Agricultural Service). There were sporadic promotions by avocado importers but nothing that could be viewed as inclusive or sustained. In fact, the minimal efforts by importers and widespread perception of a free-rider problem in the face of rapidly increasing imports provided much of the impetus for the HAPO. Given California specialty crop producers tradition of group action as an approach to solving marketing problems and their substantial experience with government-mandated marketing programs, it is not surprising that avocado producers focused on an inclusive marketing program. The Hass Avocado Promotion and Research Order Since the CAC s programs apply only to avocados produced in California, a new federal program was required to extend mandatory promotional assessments to imported avocados. California producers had two options to file a request with the Secretary of Agriculture for a promotion program under the Commodity Promotion, Research, and Information Act of 1996 or to go directly to their legislators to secure stand-alone legislation for a promotion and research program that would apply to all Hass avocados sold in the United States. The CAC decided on the latter option because they wanted a program specifically tailored to the avocado industry and they thought that the stand-alone legislation pathway would be quicker (Bellamore). The CAC s efforts led to the creation of the Hass Avocado Promotion, Research, and Information Act of 2000 signed into law by President Clinton on 23 October 2000 (California Avocado Commission, Annual Reports). This Act established the authorizing platform and timetable for the creation of the Hass Avocado Promotion and Research Order (HAPO), which was approved in a referendum of producers and importers by a majority vote of 86.6% on 29 July The HAPO became effective on 9 September 2002, with program assessments starting on 2 January The board that administers the program under USDA supervision consists of eight domestic producers and four importers. The initial mandatory assessment rate is 2.5 cents per pound for all Hass avocados sold in the United States and the maximum permitted assessment is 5.0 cents per pound. The Hass Avocado Board, which collects the assessments, is required to give 85% of the domestic assessment to the CAC. Up to 85% of importer assessments must go to the two importer associations the Chilean Avocado Importers Association and the Mexican Hass Avocado Importers Association. While most of the funds collected will be used for generic promotion programs, the CAC may use assessments to conduct state-of-origin promotions. Importer associations may use assessments to conduct country-of-origin promotions. Mandatory assessments to support generic advertising and promotion programs are controversial and there will be producers and importers who question the effectiveness and legality of the HAPO. The question that we now turn to is: To what extent can an advertising and promotion program that includes a mandatory assessment on avocado imports offset the price impacts of increasing imports? The answer and the way we arrive at it is important not only to

7 The Hass Avocado Promotion and Research Order 469 avocado producers, but also to growers of other commodities considering a similar response to increased imports. We used estimates of the price elasticity and advertising elasticities of demand, which are readily available or easily estimated, for the analysis of potential impacts of HAPO. We use a restricted demand model for avocados to derive separate estimates of the impacts of changing income and an increasing proportion of Hispanics in the U.S. population. Model results indicate that demand response for avocados to increasing income is less than previously estimated and that a larger Hispanic population is strongly associated with greater demand. The Demand for Avocados Previous studies provide analytical models and empirical estimates for avocado demand parameters, price responsiveness to advertising, and acreage response to price changes. We could have used these parameters but decided to update previous work because of important changes impacting the avocado market. For this study, we are specifically interested in estimates of the price and advertising elasticity of demand for avocados for the analysis of the short-run impact of imports on domestic prices and revenues and on the impacts of income and Hispanic population for intermediate projections. Previous Studies Carman and Green estimated price and acreage response equations as the major components of a simulation model of the California avocado industry that was used to estimate the impact of generic advertising on acreage and returns over time. The price equation yielded a price flexibility of demand of 1.16 and an advertising flexibility of demand of 0.15, calculated at mean values. Carman and Cook used a revised and updated version of the Carman and Green model to examine possible impacts of avocado imports from Mexico on the California industry. The price equation yielded a price flexibility of demand of 1.53 and an advertising flexibility of demand of 0.28, calculated at mean values. Carman and Craft estimated both annual and monthly price equations for California avocados in a study of the returns to CAC promotional programs. The estimated annual flexibilities of demand were: price = 1.33, income = 2.77, and advertising = Estimated monthly flexibilities of demand were price = 1.54 and advertising = Carman and Craft estimated that California avocado producers enjoyed an annual average benefit cost ratio of 2.84 for the 34-year period covered by their analysis. Short-term returns, based on fixed supply, ranged from $5.25 to $6.35 per dollar spent on advertising. The USDA s APHIS included an economic analysis of the potential economic impact of increased Hass avocado imports from Mexico in each of three reports on proposals to increase the number of states and time period for shipments of avocados from Mexico. In the 2001 and 2003 reports, APHIS used a price elasticity of demand of 0.86 (U.S. Department of Agriculture, Animal and Plant Health Inspection Service, 2001, 2003). For the 2004 study, they used a price elasticity of demand of 0.57 and an income elasticity of demand of 1.00 (U.S. Department of Agriculture, Animal and Plant Health Inspection Service, 2004). APHIS did not

8 470 Review of Agricultural Economics consider the possible impacts of advertising and promotion on the demand for avocados. The price flexibilities and elasticities of demand summarized above were estimated with data series that began in and ended between and The estimated parameters vary as data were added. It appears that prices were becoming more flexible over time (i.e., price elasticity of demand was becoming more inelastic) while the advertising flexibility of demand varied but remained relatively small. A Model of Avocado Demand Previous studies of the annual demand for California avocados have included variables for per capita sales and real prices, income, and promotional expenditures. Variables for possible complements or substitutes and trends in demand were investigated but none was found to be statistically significant. Data series for these studies, however, ended in the early 1990s. There have been important changes since then that may have affected demand, including increased seasonal availability due to imports, changing demographics, and the growing popularity of Mexican foods. We investigate variables that may capture the impact of these recent changes. The annual f.o.b. level demand for avocados in the United States is specified as (1) Qa t = f (Pa t, Y t, A t, P rt, IM t, H t ), where, for a given crop year t, Qa t is per capita U.S. sales (pounds per person) of all avocados, (California, Florida, and all imports), Pa t is the average real f.o.b. price of California avocados, Y t is real per capita disposable income, A t is the real total value of advertising and promotion expenditures by the CAC in year t, Pr t represents real prices of related goods, IM t, is the effect of increased yearround availability as measured by the percentage of imports in annual avocado supply, and H t is a variable to measure shifts in demand due to an increasing Hispanic population and the increased popularity of Mexican foods. The consumer price index for all items ( = 1.00) is used to deflate prices, income, and promotion expenditures. Estimation of the specified model requires decisions regarding the nature of the variables to include for increased year-round availability, changes in tastes and preferences, and related products. We use the proportion of total supply made up of imports as the index for imports to estimate the impact of increased yearround availability on demand. We use the percentage of Hispanics in the total U.S. population as a measure of demographic changes and the increased demand for Mexican foods 11 and we examine several related products. Hispanic s estimated share of the U.S. population rose from 3.67% to 13.27% during the period of analysis (U.S. Department of Commerce, , ). Population projections indicate Hispanics share of total population will steadily increase from 12.6% in 2000 to 24.4% in 2050 (U.S. Department of Commerce, 2004). Mexico is the world s largest avocado producer and consumer, with annual per capita consumption recently reported at 8 kg or about 17.6 pounds, compared with about 2.4 pounds per capita in the United States. (U.S. Department of Agriculture, Foreign Agricultural Service)

9 The Hass Avocado Promotion and Research Order 471 With approximately two-thirds of the Hispanic population from Mexico, the Hispanic population variable measures demographic change that may be related to avocado demand. The increasing Hispanic share of the U.S. population may also act as a proxy for the growing popularity of Mexican food and Mexican restaurants in the U.S. Corn and flour tortillas, fresh lettuce, pinto beans, ground beef, salsa, and tomatoes are popular large volume ingredients for Mexican food. The most frequent uses for avocados are for guacamole, part of a Mexican side dish, in a salad, eaten plain, part of a sandwich/burger, and part of a non-mexican entrée (Cook). We examined variables for the price of fresh tomatoes and lettuce as related products and included a variable for the price of fresh tomatoes in the estimated model. We were unable to locate time-series data for tortillas or salsa. 12 Table 1 shows more detailed information on each of the variables used in the analysis, including means and standard deviations. Table 1. Definitions of the variables used in the avocado demand model Range of Mean Variable Definition Units Values Value SD Qa t Pa t Y t A t Annual average per capita U.S. sales of all avocados (California, Florida, and all imports) Average annual f.o.b. price of California avocados deflated by the consumer price index (CPI) for all items ( = 1.00) U.S. per capita disposable income, deflated by the CPI for all items ( = 1.00) Annual advertising and promotion expenditures by the California Avocado Commission deflated by the CPI for all items ( = 1.00) Pounds per capita Real cents per pound Thousands of real dollars Millions of real dollars Continued

10 472 Review of Agricultural Economics Table 1. Continued Range of Mean Variable Definition Units Values Value SD P rt IM t H t Average farm price of related goods (fresh tomatoes) deflated by the CPI for all items ( = 1.00) Imported avocados as a proportion of total U.S. avocado supply Hispanic population as a percentage of total U.S. population Real dollars per cwt Percentage Percentage Data Sources The CAC publishes information on California avocado acreage for all varieties and production and f.o.b. prices by variety and for all varieties in its annual reports. The California Agricultural Statistics Service provided some of the earliest data on acreage. The CAC also reports annual advertising and promotion expenditures. Florida avocado production is from USDA s Fruit and Tree Nuts Situation and Outlook Reports (2003). The annual Situation Reports also include data on avocado imports by source. USDA s Foreign Agricultural Service website provides more detail on imports and exports. The U.S. Council of Economic Advisors Economic Indicators includes data on the U.S. population, per capita income, and the consumer price index. The U.S. Census data and estimates were used to construct an annual time series for Hispanics share of the U.S. population. Hispanic data from the Census of Population (Gibson and Jung) and annual estimates for non-census years are from annual Current Population Reports (The Hispanic Population in the United States, ; and Persons of Spanish Origin in the United States, ). Estimates of the Hispanic share of total population for years when none was published were derived by a linear interpolation between 10-year census reports or adjacent observations. The resulting 10 estimates were all before 1985 when the Hispanic share was small and growing slowly. Estimated Demand Relationships Demand functions using the specified variables were estimated using ordinary least squares (OLS) and 42 annual observations for the marketing years through Significant serial correlation was evident and a Cochrane Orcutt iterative-type procedure in SHAZAM was used to re-estimate each equation. Table 2 shows the estimated coefficients for specified demand variables for four estimated equations, with the t-statistics shown in parentheses below each of the estimated coefficients. The signs on the estimated coefficients are generally

11 The Hass Avocado Promotion and Research Order 473 Table 2. Estimated coefficients of demand for California avocados, through Estimated Coefficients Variables Equation (1) Equation (2) Equation (3) Equation (4) Pa t ( 7.65) ( 6.19) ( 7.25) ( 7.43) Y t (6.08) (1.23) (1.44) A t (2.50) (2.66) (2.65) (3.05) H t (0.90) (1.07) (4.17) P rt ( 0.28) IM t ( 0.53) Constant ( 1.38) (0.001) ( 0.13) (1.21) D. W RHO R t-statistics are shown in parentheses. R 2 is adjusted for degrees of freedom. consistent with expectations, though several are not significantly different than zero. 13 Equation (1) (table 2) includes the variables typically in the estimated demand for avocados. The estimated coefficients for avocado price, per capita income, and advertising/promotion each have the expected sign and are statistically significant. Equation (2) includes estimated coefficients for each of the variables specified in the avocado demand model. Note that the estimated coefficients for income, Hispanic population, price of fresh tomatoes, and avocado imports are not significantly different than zero and the coefficient for imports has an unexpected negative sign. The two variables for price of fresh tomatoes and avocado imports were deleted and equation (3) (table 2) was estimated. 14 The estimated coefficients have the expected signs but the coefficients for income (Y t ) and Hispanic population (H t )are not significantly different than zero. This problem is due to very high correlation (r = 0.95) between the income and Hispanic population variables. To solve the problem of multicollinearity, we estimated the income purchase relationship for avocados from cross-sectional data and then used the estimated cross-sectional income elasticity as a restricted coefficient in estimating demand equation (4) (table 2). The Appendix outlines estimation of the income elasticity and specification of the constraint. Equation (4) (table 2) estimated coefficients have the expected signs and are statistically significant. Note that the estimated price and advertising/promotion coefficients and elasticities change very little across the four equations, while the coefficient on the income variable in equation (1) appears to be accounting for much more than increasing per capita income. The estimated coefficient on the Hispanic population variable (H t ) is statistically significant and the elasticity indicates that a 1% increase in the Hispanic share of total population is associated with a 0.536% rise in per capita consumption of avocados. The estimated price and

12 474 Review of Agricultural Economics advertising/promotion elasticities calculated for average values of the variables from equation (4) are and 0.238, respectively. The estimated elasticities will vary with price and quantity on this linear demand function, with elasticities decreasing as quantity increases. Estimated elasticities based on average values of the variables will be used to examine the estimated impact of HAPO on avocado prices and returns, and the implications of more inelastic coefficients will be noted. Possible Limitations of Demand Analysis The annual demand analysis for avocados has several possible limitations. First, we were not able to separate all of the causes for the significant increase in demand for avocados that has occurred over the last years. Traditional demand shifters, including income and population have had a major impact, as have advertising and promotion. We believe that avocado demand has also increased because of greater year-around availability due to imports, the larger share of Hispanics in the U.S. population and the growing popularity of Mexican food. However, we ended up with only a single variable to account for these factors. We were not successful in identifying statistically significant substitutes or complements for avocados. Note that the estimated price elasticity of demand for avocados derived from equation (4) is more inelastic than that found in previous studies. While the linear specification of the demand equation performs better than other specifications, it results in advertising and promotion having a constant impact on sales. Most studies indicate that the response of sales to advertising and promotion begins to diminish (or encounter diminishing returns) at some point rather than remaining constant. We subscribe to the nonlinear response function but still believe that the linear form estimated is appropriate for the range of values observed in this study. Note that the linear form, if not appropriate for larger levels of advertising and promotion expenditures, may overstate their impact on demand. The estimated value for the advertising/promotion elasticity of is larger than that found in previous studies for avocados and is also larger than that typically found for other commodities. The Estimated Effects of Imports and Promotion Given inelastic demand and the substantial increase in imported avocados, f.o.b. prices for California avocados would be expected to decrease significantly. As shown in figure 2, however, the usual inverse relationship between total avocado supply and average annual price has not always held during the past several years. This result is due to greater demand for avocados over time, and is particularly evident during the last two years when imports, total supply, and nominal producer prices increased. Using the estimated price and advertising elasticities of demand from equation (4), the relative impacts of increased imports and promotion from assessments are examined using four import scenarios. 15

13 The Hass Avocado Promotion and Research Order 475 Figure 2. Total U.S. avocado supply and California f.o.b. price, 1992 to Year Price (cents per pound) Quantity sold CA Price The base values are actual California and Florida production, imports, income, CAC and HAPO promotional expenditures, population, and Hispanic share of the U.S. population for the crop year (table 3). The California f.o.b. price for all avocados is used as a proxy for imported Hass avocados to provide an estimate of the comparative impacts of alternative scenarios on import revenues. 16 Three increases of imports in 50 million pound increments are examined, with most of the increase expected to come from Mexico. The estimated changes in prices and revenues are based on the price elasticity of and the advertising elasticity of from equation (4). The first two columns of table 4 show the import and HAPO promotion scenarios followed by estimated prices with and without additional promotion funds Table 3. Base values, conditions Variable Base Value California production of avocados Florida production of avocados Avocado imports from Mexico Avocado imports from Chile & others Total U.S. population Hispanic share of U.S. population 13.27% U.S. per capita income $28, million pounds 62.0 million pounds million pounds million pounds million Consumer price index ( = 1.00) 1.84 Total CAC advertising and promotion $10.31 million

14 476 Review of Agricultural Economics Table 4. Summary of estimated average annual California avocado prices and total revenue for California production and imports, with and without HAPO for four levels of imports, base values California Total Revenue Total Revenue HAPO f.o.b. Price for California for Imports Avocado Promotion With W/O With W/O With W/O Imports Spending HAPO HAPO HAPO HAPO HAPO HAPO mil. lbs. mil. $ $/lb. $/lb. mil. $ mil. $ mil. $ mil. $ Imported avocado prices are estimated at 75% of the price of California avocados. from imports, and estimated total revenue for California producers and for imports with and without promotion. We do not have a good data series for import prices but we know that wholesale prices for Hass avocados from Mexico and Chile have recently averaged from 73% to 90% of the wholesale price for California fruit (U.S. Department of Agriculture, Animal and Plant Health Inspection Service 2004, p. 16). We assume that wholesale prices for imports are 75% of the f.o.b. California price. The inelastic nature of f.o.b. level demand is illustrated by total revenues decreasing as total supply increases. Each increase in imports reduces California producers total revenue, but comparison of total revenue with and without HAPO shows that increased advertising and promotion moderates the impact of imports. Comparing total revenue for imports with and without HAPO promotion expenditures illustrates the nature of returns available to importers. For example, spending $7.86 million (first row of table 4) increases importers estimated total revenue of $49.6 million for an average total return of $6.31 for every $1.00 spent. California producers also gain $70.4 million from the additional HAPO spending. The highest level of imports results in the lowest average returns for importers promotion spending, with a return of $4.20 for every $1.00 spent when imports total million pounds (table 4). To illustrate the sensitivity of returns to the estimated elasticity of advertising/promotion coefficient, the estimated coefficient of is halved to (keeping the price elasticity constant at 0.387) and returns were recalculated. As expected, returns for importers spending on advertising and promotion decreased from a range of $4.20 $6.31 to a range of $2.09 $3.26 per dollar spent. Other Demand Shifters The demand for avocados is also expected to increase over time as real per capita income, population, and Hispanic share of population rise. Given HAPO, the overall impact of increased avocado imports over the next 5 years will depend on how fast imports increase relative to the demand shifters. One can construct

15 The Hass Avocado Promotion and Research Order 477 a number of scenarios with assumptions for changes in the demand shifters and increased imports, with some resulting in California producers being better or worse off than they were before HAPO. We can project the demand for avocados to 2010, for example, by specifying changes in the estimated demand shifters from 2003 to 2010 and applying the estimated elasticities. If real per capita incomes rise at the same annual rate as in the recent past, there will be a 13.8% increase from 2003 to With an income elasticity of demand of 0.46, the percentage change in quantity demanded at constant prices is expected to be 6.35%. The Hispanic share of the U.S. population is projected to increase from 13.27% in 2003 to 15.5% in 2010 (an increase of 16.8%). Using an elasticity of 0.517, the percentage change in quantity demanded at constant prices is expected to be 8.69%. Thus, applying the income and Hispanic population shifts, we would expect per capita demand for avocados to increase from 2.43 pounds in 2003 to 2.80 pounds in With the U.S. population increasing to million in 2010, total demand for avocados at constant real prices would rise from million pounds to million pounds with no increase in real advertising and promotion. The additional advertising and promotion funds from greater sales could increase total demand to just over million pounds before projected 2010 real prices would fall below 2003 levels. Any comparison of returns with and without HAPO shows that importers and domestic producers benefit from increased promotion. The very inelastic f.o.b. level demand for avocados is a problem in terms of the market absorbing increased imports, but it is an advantage when demand is shifted through promotion, income, population, the Hispanic share of population, or other factors because much of the shift reflects in higher prices. Thus, the price-depressing effect of more imports can be partially or fully offset by increased promotion, income, population, and Hispanic share of population. Concluding Comments California commodity groups have adopted a number of governmentmandated marketing programs to help solve economic problems associated with low product prices. There are now 75 programs that include one or more provisions for research, quality and supply control, and specification of packs and containers, but advertising and promotion account for the bulk of all expenditures by these programs. While often controversial, generic advertising and promotion programs for agricultural commodities have proven to be very effective, as measured by favorable benefit cost ratios, and the majority of producers continue to be very supportive of their continuation. The California avocado industry has spent millions of dollars annually since 1961 on advertising and promotion programs. With sharp increases in avocado imports from Chile and Mexico, it is not surprising that the CAC decided to work for the passage of the HAPO so that imports would share in the support of avocado advertising and promotion programs. Analysis of the demand for avocados indicates that new advertising and promotion program expenditures from the 2.5 cents per pound assessment on all Hass avocados will offset a portion of the price impact of increased avocado imports, while providing increased returns for both domestic and imported product. Estimated average total returns to importers for advertising and promotion ranged from $4.20 to $6.31 per dollar of

16 478 Review of Agricultural Economics assessments. Estimated demand parameters also indicate that demand for avocados can be expected to increase over time due to greater income, population, and Hispanic share of the population. The availability of the framework for national promotion programs established by the Commodity Promotion, Research, and Information Act of 1996 has been used sparingly by commodity groups. Increased imports and the recent Supreme Court decision favoring mandatory assessments for advertising and promotion may, however increase commodity groups interest in more inclusive promotional programs. Several commodity groups conducting generic advertising and promotion programs under federal and state marketing orders and state commodity commissions that face competition from imports in their major markets may be interested in national programs that include assessments on imports. Possible candidates include hazelnuts, kiwifruit, olives, raisins, and table grapes. 17 Appendix: The Income Constraint One solution to the problem of high correlation between per capita income and the percentage of Hispanics in the total U.S. population is to estimate the income avocado purchase relationship from cross-sectional data and then to use these results as a constraint in the estimated demand equation. The USDA s Nationwide Food Consumption Survey reports weekly household avocado consumption (pounds per week) by 13 categories of household income ranging from under $3,000 to $30,000 and over (USDA, ). The midpoint of each income group was used as the income observation, except for the highest group ($30,000 and over), where $30,000 was used. The income consumption relationship X = a + bm, where X is household purchases and M is household income, was estimated using OLS methods for the linear and log-linear forms of the equation. Results for the log-linear form follow, but note that the income elasticity estimates of 0.46 from the two equations were essentially identical: ln X = 6.95 ( 8.31) ln M. (5.07) The t-statistics are in parentheses and R 2 = The estimated income elasticity was combined with time-series data in a constrained regression model (Kmenta, pp ): Qa t b m Y t = f (Pa t, A t, H t ). The linear income coefficient for avocados is derived from the income elasticity formula m = Q M M Q.

17 The Hass Avocado Promotion and Research Order 479 Since the equation is linear or b m = Q M b m = m Q M. This calculated income coefficient (b m = ) was entered as a constraint and equation (3) (table 1) was estimated. Acknowledgments The assistance of Ana Maria Rodriguez, Richard Sexton, and Daniel Pick and careful reviews and constructive comments provided by the journal reviewers are gratefully acknowledged. Endnotes 1 There are five inactive national programs that apply to imports. Included are fresh cut flowers and fresh cut greens, kiwifruit, limes, olive oil, and pecans. Information on the federal check-off programs is on the USDA Agricultural Marketing Service website: 2 Inactive national promotion programs for fresh cut flowers and fresh cut greens, kiwifruit, and olive oil are not included. 3 Kinnucan and Zheng summarize evidence on the effectiveness of the national check-off programs for dairy, beef, pork, and cotton promotion while Alston et al. provides similar summary measures for 12 California programs. 4 Crespi (2003, 2005) provide an excellent discussion of the legal issues raised in generic promotion litigation. 5 Hawaii produces a small amount of avocados that are typically not reported in the U.S. crop statistics. 6 Adjusting for price changes, total industry advertising and promotion expenditures were about $307 million in Mexico submitted three different work plans between 1990 and 1992 under which avocados grown in Michoacan could be imported to the United States. In July 1993, one of those work plans resulted in APHIS allowing the entry of Mexican avocados into Alaska under certain conditions. This was the first opening in the U.S. market for Mexican avocados (U.S. Department of Agriculture, Animal and Plant Health Inspection Service, 1997). Available at 8 These states include Connecticut, Delaware, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia, and Wisconsin. 9 The initial shipping season extended from November 1, 2001 to April 15, 2002, with subsequent seasons extending from October 15 through April 15. The 12 additional states included Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota, Utah, and Wyoming. 10 Note that the responsiveness of avocado demand to generic advertising is similar in magnitude to that found for several other California commodities. Alston et al., in their summary of commodity promotion programs, listed the following advertising flexibilities of demand for two other commodities: eggs, 0.13 and strawberries, 0.16., and the following advertising elasticities of demand for five commodities: table grapes, 0.16; dried plums, 0.05; almonds, 0.13; walnuts, 0.005; and raisins, in Japan and in UK (pp ). Kinnucan and Zheng summarize estimated elasticities and benefit cost estimates for the dairy, beef, pork, and cotton promotion programs (pp , 270). 11 Two alternative measures of H t were examined, Hispanic population as a percentage of the total U.S. population and the U.S. per capita consumption of peppers. The percentage of Hispanics in the total population was superior to the pepper consumption proxy in terms of statistical measures of model estimates and is used for the demand model. Note that the growth of Hispanic population has been accompanied by increased popularity of Mexican food. While avocados are an important Mexican menu ingredient and Mexicans are heavy consumers of avocados, other groups figure importantly in

18 480 Review of Agricultural Economics the growing demand for avocados. For example, the typical U.S. avocado consumer is described as women years of age, $50,000 plus income, upscale, college educated, working full/part-time, and health conscious (Cook). 12 Wolfe and Ferland note that salsa sales have been growing at 10% annually over the last 10 years and that salsa sales surpassed ketchup sales in the mid 1990s. They describe the typical fresh salsa consumer as being affluent, living in the suburbs, and leading a very health-conscious and foodoriented lifestyle. Most are married, own their homes, and have children. The most likely purchasers are described as urban elite and affluent urban groups. 13 All statements regarding statistical significance are based on a 95% confidence interval. 14 Note that Carman and Craft were unable to identify any statistically significant substitutes or complements for avocados in their monthly analysis of demand (p. 34). 15 The estimated impact of promotion expenditures under HAPO can be calculated using equation (3) or the elasticities derived from equation (3). We elect to present results using the elasticities because this approach illustrates a method that can use estimated elasticities from any available source and because the results are more conservative than those calculated directly from the estimated demand equation. 16 Wholesale prices for imported Hass avocados are often less than for California Hass avocados but prices for Hass avocados are higher than the average for all California avocados. The price impact of advertising and promotion on imported avocados has not been estimated, but is expected to be similar to the effect for domestic fruit. 17 The Kiwifruit Research, Promotion, and Consumer Information Act includes both domestic production and imports but it remains inactive until the California Kiwifruit Commission posts a bond or submits an irrevocable letter of credit for $125,000 to AMS to cover the costs of a referendum on the order (U.S. Department of Agriculture, Agricultural Marketing Service). References Alston, J.M., J.M. Crespi, H.M. Kaiser, and R.J. Sexton. The Economics of Commodity Promotion Programs: Summary and Synthesis. In The Economics of Commodity Promotion Programs: Lessons from California, H.M. Kaiser, J.M. Alston, J.M. Crespi, and R.J. Sexton, eds., pp New York: Peter Lang Publishing, Bellamore, T. Personal Correspondence, May 26, California Agricultural Statistics Service. California Fruit and Nut Statistics. Sacramento, California, annual issues. Available at ftp:// California Avocado Commission. Annual Reports. Irvine, California ( ). Available at Formation of Commission Highlights Marketing Order Program in 1977/78. California Avocado Advisor, 1977 /78 Annual Report. VIII (June 1979):2. Carman, H., and R. Cook. An Assessment of Potential Economic Impacts of Mexican Avocado Imports on the California Industry. Proceedings of the ISHS XIIIth International Symposium on Horticultural Economics. Leiden, the Netherlands: International Society for Horticultural Science (August 1996): Carman, H.F., and J.M. Alston. California s Mandated Commodity Programs. In The Economics of Commodity Promotion Programs: Lessons from California, H.M. Kaiser, J.M. Alston, J.M. Crespi, and R.J. Sexton, eds., pp New York: Peter Lang Publishing, Carman, H.F., and R.K. Craft. An Economic Evaluation of California Avocado Industry Marketing Programs, Berkeley, CA: University of California Agricultural Experiment Station, Giannini Foundation Research Report No. 345, July Available at ucop.edu/researchreports/345-avocado.pdf. Carman, H.F., and R.D. Green. Commodity Supply Response to a Producer Financed Advertising Program: The California Avocado Industry. Agribusiness 9 (1993): Cook, R. The Avocado Market: A Growth Market in a Mature Food Industry. University of California, Davis, Department of Agricultural & Resource Economics. Slides for the Avocado Brainstorming Session, October Available at Crespi, J. Generic Advertising s Long History and Uncertain Future. In The Economics of Commodity Promotion Programs: Lessons from California, H.M. Kaiser, J.M. Alston, J.M. Crespi, and R.J. Sexton, eds., pp New York: Peter Lang Publishing, The Generic Advertising Controversy: How Did We Get Here and Where Are We Going? Rev. Agr. Econ. 25(2003): Gibson, C., and K. Jung. Historical Census Statistics on Population Totals by Race, 1790 to 1990, and by Hispanic Origin, 1970 to 1990, for the United States, Regions, Divisions, and States. U.S. Census Bureau, Population Division, Working Paper No. 56, Available at population/www/censusdata/hiscendata.html.