AN ECONOMIC EVALUATION OF THE HASS AVOCADO PROMOTION ORDER S FIRST FIVE YEARS

Transcription

1 AN ECONOMIC EVALUATION OF THE HASS AVOCADO PROMOTION ORDER S FIRST FIVE YEARS A REPORT PREPARED FOR THE HASS AVOCADO BOARD BY Hoy F. Carman Lan Li Richard J. Sexon 1 March 30, Hoy F. Carman is Professor Emerius and Richard J. Sexon is Professor, Deparmen of Agriculural and Resource Economics, Universiy of California, Davis. Lan Li is Research Associae, Naional Insiue for Commodiy Promoion Research, Cornell Universiy.

2 Table of Conens 1. Inroducion Avocado Promoion Programs California Avocado Commission Programs CAIA and MHAIA Programs Hass Avocado Board Programs Avocado Consumpion in he U.S Modeling he Annual Demand for Avocados Previous Sudies Economeric Models of he Annual Demand for Avocados Preliminary Daa Analysis Srucural Breaks in Per Capia Consumpion Esimaed Annual Demand Relaionships Diagnosic Checks of Annual Demand Models Two-Sage Leas Squares Esimaion Summary Benefi-Cos Analysis Benefi-Cos Analysis in Promoion-Evaluaion Sudies Demand Analysis a he Reail Level The Daa The Economeric Models Resuls The Effecs of he CAC s Promoions on Reail and Shipping-Poin Prices Evaluaion of he HAB s Nework Markeing Cener Program Variabiliy of Prices and Quaniies Over Time Coss of HAB Informaion Programs Esimaed Benefis from Informaion Programs Daa Collecion Suggesions o Faciliae Fuure Evaluaions Conclusions Meeing he Impor Challenge The Demand for Avocados Economic Evaluaion of HAB Programs Boom Line...72 References...73

3 Lis of Figures Figure 1: U.S. Per Capia Avocado Consumpion by Source, Figure 2: Per Capia Avocado Consumpion, U.S. Per Capia Disposable Income, and he Percenage of Hispanic Populaion...17 Figure 3: Per Capia Avocado Consumpion, he F.O.B. Price, and Promoion Expendiures...18 Figure 4: The U.S. Avocado Supply, Impors, and Domesic Producion...30 Figure 5: Avocado Promoion Simulaion Model...33 Lis of Tables Table 1: U.S. Avocado Promoional Expendiures in Dollars by Organizaion, Table 2: Variable Definiions and Summary Saisics...15 Table 3: Correlaion Coefficiens for he Demand Model...19 Table 4: Esimaed Annual Demand Models: Ordinary Leas Squares...22 Table 5: The Firs-Sage Regression o Predic California f.o.b. Price...27 Table 6: Esimaed Annual Demand Models: Two-Sage Leas Squares...28 Table 7: Simulaion Model Resuls...37 Table 8: Summary Saisics for he Disaggregae Model...41 Table 9: Esimaion Resuls for he Reail Sales Model Wihin Model...47 Table 10: The Effecs of Promoions on Reail Sales from Panel I: Table 11: The Effecs of Promoions on Reail Sales from Panel II: Table 12: The Effec of he CAC s Promoions on Reail Price and Shipping Price...57 Table 13: Sandard Deviaion of Weekly California and Toal Avocado Shipmens,...59 Table 14: Annual and Toal Coss of HAB Informaion Programs by Cos Caegory,...61 Table 15: Esimaed Toal Annual Changes in Gross Margins for Hass Avocados, Average Shipmens, Sandard Deviaion of Price, and Average Price,

4 AN ECONOMIC EVALUATION OF THE HASS AVOCADO PROMOTION ORDER S FIRST FIVE YEARS Hoy F. Carman Lan Li Richard J. Sexon 2 The U.S. Deparmen of Agriculure (USDA) requires periodic evaluaion of he effeciveness of naional promoion programs under is supervision. The Hass Avocado Board (HAB) has been direced by he Agriculural Markeing Service, USDA, o conduc an evaluaion of programs underaken during i is iniial five years of operaion, from markeing years hrough This repor provides he resuls of he USDA-mandaed evaluaion of HAB promoion programs. The evaluaion analyzes he impacs of hese expendiures and he overall reurns accruing o Hass avocado producers from all promoion programs. For some of he saisical mehods employed in his evaluaion, a five-year period provides insufficien daa. In hese siuaions, we evaluae he enire hisory of avocado promoion from he beginning of organized avocado promoion in California in 1962 o he presen. Following a brief inroducion, in secion 2 he repor discusses he major markeing programs conduced under he auspices of he HAB. Secion 3 provides an overview of rends in U.S. consumpion of avocados, while secion 4 conains a deailed analysis of annual demand for avocados in he U.S., wih he goal of deermining he impac ha promoions have had on avocado demand. Secion 5 inroduces and implemens a simulaion framework o esimae he impac of avocado promoions on grower price and income and on consumpion of avocados, based upon he resuls of he demand analysis. Secion 6 provides an analysis of avocado demand and he impac of promoions based upon reail scanner daa. Secion 7 presens an exploraory 2 Hoy F. Carman is Professor Emerius and Richard J. Sexon is Professor, Deparmen of Agriculural and Resource Economics, Universiy of California, Davis. Lan Li is Research Associae, Naional Insiue for Commodiy Promoion Research, Cornell Universiy. 1

5 analysis of he impacs of he HAB s informaion sharing and disseminaion programs. Secion 8 conains recommendaions for fuure daa-collecion programs ha he HAB should consider o faciliae fuure program evaluaions. Finally, secion 9 presens brief concluding remarks. 1. Inroducion The Unied Saes avocado indusry has evolved from an emphasis on seasonal domesic producion of a mix of avocado varieies o year-round availabiliy of domesic and impored Hass avocados. California avocado producers, who accoun for approximaely 90 percen of U.S. avocado producion and essenially all U.S. Hass avocado producion, have funded promoional programs for avocados since Wih few impors of avocados prior o he early 1990s, he benefis from hese demand-enhancing programs flowed direcly o California producers. Impors of avocados ino he U.S. have increased seadily since hen, resuling in a free-rider problem ha led ulimaely o creaion of he Hass Avocado Promoion, Research, and Informaion Ac of 2000 ha was signed ino law by Presiden Clinon on Ocober 23, This Ac esablished he auhorizing plaform and imeable for he creaion of he Hass Avocado Promoion, Research and Informaion Order (HAPRIO) ha was approved in a referendum of producers and imporers wih 86.6 percen suppor on July 29, The HAPRIO became effecive on Sepember 9, 2002, wih program assessmens becoming effecive on January 2, The 12-member Board ha adminisers he program under USDA supervision consiss of 7 domesic producers and 5 imporers. Appoinmen of he firs Hass Avocado Board (HAB) members on February 12, 2003 iniiaed aciviies under he HAPRIO. The mandaory assessmen rae is 2.5 cens per pound for all Hass avocados sold in he U.S., and he maximum permied assessmen is 5.0 cens per pound. The HAB is required o 2

6 rebae 85 percen of domesic assessmens o he California Avocado Commission (CAC) and up o 85 percen of imporer assessmens o imporer associaions, which use he funds for heir own promoion programs. The HAB uses he remaining 15 percen of assessmens for is operaions, promoion, and informaion echnology programs. During is firs five years of operaion, he HAB colleced assessmens oaling $98.67 million and rebaed $77.6 million o counry producer organizaions, including $38.64 million o he CAC, $20.54 million o he Chilean Avocado Imporers Associaion (CAIA), and $18.42 million o he Mexican Hass Avocado Imporers Associaion (MHAIA). Toal five-year promoional expendiures were as follows: CAC, $50.98 million; CAIA, $16.71 million; MHAIA, $14.35 million; and HAB, $9.27 million, for an overall oal of $91.3 million spen on Hass avocado promoion in he U.S. marke. 2. Avocado Promoion Programs Even hough he HAPRIO is only five years old, promoion of avocados in he U.S. marke by California producers provides significan program experience o build upon. Using a sae markeing order, he California avocado indusry conduced generic adverising and promoion programs from 1962 hrough 1977 and has operaed under provisions of he CAC since Sepember Review of annual repors of he markeing order and commission programs indicaes ha he California indusry spen over $334 million (in 2007 dollars) on adverising, promoion, and relaed services from iniiaion of he program in 1962 hrough Toal promoion expendiures by he California indusry, including he 2003 hrough 2007 HAPRIO 3 The U.S. avocado markeing year runs from November 1 hrough Ocober 31 of he following year. We use he convenion of referring o he markeing year as he laer year, e.g., we refer o November 1, 2002 hrough Ocober 31, 2003 as

7 allocaions, were almos $398 million (in 2007 dollars). Addiional promoional expendiures in he U.S. marke by he HAB, MHAIA, and CAIA from iniiaion of HAPRIO assessmens in 2003 hrough he end of he markeing year oaled almos 42 million (in 2007 dollars). Hass avocado promoion programs ake many forms. The CAC allocaes he majoriy of is funds for consumer adverising and merchandising/rade promoions. 4 Significan expendiures are also made on foodservice, public relaions, nuriion and inerne markeing programs. The CAIA conraced wih CAC o conduc is markeing/promoion programs for he firs four years from incepion hrough he 2006 markeing year. In 2007 he CAIA began conducing is own programs. The MHAIA did no conduc any promoion programs in 2003 bu has been acive since HAB expendiures have emphasized naional marke communicaions and indusry informaion programs. 5 The annual promoional expendiures by counry organizaion are shown in able 1. Noe ha he California daa are for markeing programs only (indusry programs and adminisraion are excluded), and HAB daa are for markeing communicaions only (informaion programs and adminisraion are excluded). All organizaional expendiures are repored for Chile and Mexico. Table 1: U.S. Avocado Promoional Expendiures in Dollars by Organizaion, Year CAC CAIA MHAIA HAB Toal ,682,060 1,427, ,499 10,255, ,756,130 3,010, , ,284 15,325, ,838,029 5,742,600 2,900,000 2,603,124 23,083, ,498,717 2,660,763 4,500,000 2,562,140 20,221, ,205,138 3,864,637 6,246,500 3,096,859 22,413,134 Toal 50,980,074 16,705,060 14,346,500 9,267,906 91,299,540 * Noe: The avocado markeing year runs from he prior November 1 o Ocober 31 of he year lised. 4 The CAC also collecs addiional funds from he producion of California Hass as well as oher ypes of avocados o suppor is indusry programs and oher aciviies. 5 Informaion in his secion is based upon each of he organizaions annual business or markeing plans and budges, as available. 4

8 2.1. California Avocado Commission Programs The CAC ypically allocaes abou 70 percen of is revenues from producer assessmens o is markeing programs. Consumer adverising is he leading aciviy in erms of expendiures, wih programs conduced in major markes across he U.S. Consumer adverising messages and iming are ailored o individual markes. The demographics for CAC radiional consumer arges include: women and aduls 25 o 54 years old, aended or graduaed from college, household income $50,000 plus, employed, and Hispanic. In erms of psychographics, he arge audience is advenurous and open-minded; ineresed in home, syle and food; healh conscious; and someone who enjoys a variey of cuisines. CAC geographic emphasis coninues o be on core markes in Wesern saes and developing markes in oher regions. 6 Consumer adverising is focused during he period from February hrough Augus coinciding wih he California harves. Radio has been he main medium for consumer adverising. Billboards, newspapers and cable elevision are also used, depending on he marke and message. Naional adverising programs have used cable TV (Discovery Nework, Food Nework and Fine Living), prin (Food and Wine, Saveur) and he inerne. Merchandising and rade promoion programs ake a variey of forms, including poin-ofpurchase maerials, display coness, produce programs (AvoInfo/RipeMax), co-markeing, rade adverising, reail ie-in evens, and cooperaive adverising. While he main arge is supermarke chains and mass reailers, smaller specialy reailers and wholesalers are no overlooked. The CAC s foodservice markeing effors focus on resauran operaors (including upscale independens and chains, as well as fas-food and casual-dining esablishmens), 6 The CAC s core markes in 2007 included Los Angeles, San Francisco, San Diego, Sacrameno, Phoenix, Seale, Porland, Dallas, San Anonio, and Houson. Is single selec developing marke was Alana. 5

9 insiuions such as universiies, and foodservice influencers including ediors, food wriers, and rend-seing chefs. The CAC s healh and nuriion research program is designed o work in synergy wih is public relaions effors o esablish and communicae he healh and nuriional benefis of consuming avocados. Research focused iniially on a deailed analysis of he composiion and nurien conen of avocados, including fay acids, viamins, and minerals. More recenly, emphasis has shifed o quanifying and qualifying various phyochemicals (i.e. pyoserols, caroenoids, gluahione), as well as heir healh benefis and effecs on disease processes. The CAC made a sraegic decision o focus on he use of public relaions o disseminae he healh and nuriional message for avocados raher han using paid adverising and promoion. Consumers place much more crediabiliy on a news sory abou healh and nuriion benefis of consuming a produc han hey do on adverising wih he same message. The CAC s healh and nuriion messages are also feaured on is websie (hp:// CAIA and MHAIA Programs The CAIA and MHAIA have a shor hisory relaive o he CAC, and informaion on heir programs is limied. The MHAIA conduced adverising/promoion programs for four of he five years in he evaluaion period while he CAIA s firs independenly operaed program was conduced in Beginning wih $700,000 of expendiures in 2004, he MHAIA expanded is markeing budge and aciviies each year hrough The MHAIA spen abou wo-hirds of is 2004 markeing funds on consumer adverising, wih 55 percen of oal expendiures for radio adverising. Trade adverising, including co-op markeing funds and websie expendiures accouned for anoher 26 percen of oal funds. The 2005 MHAIA budge increased o $2.9 6

10 million wih $1.5 million (52 percen) spen on radio adverising. Imporer co-op markeing and public relaions accouned for anoher 31 percen of oal funds wih he remainder being spen for websies, rade adverising, and adminisraive funcions. Wih a oal 2006 budge of $4.5 million, MHAIA spending on radio adverising increased o over $2.0 million, bu radio adverising s oal budge share decreased o 45 percen. Imporer co-op markeing, public relaions, and rade adverising accouned for almos 32 percen of oal expendiures in The oher major new expendiure of $498,000 was for a NASCAR sponsorship. Wih a oal 2007 budge of $6,246,500, MHAIA spending on consumer radio adverising increased slighly o $2,040,000 (32.7 percen). Wih oal spending of $1.89 million, he share for imporer co-op markeing, public relaions, websie and in-sore adverising was jus over 27 percen. Spending on he NASCAR sponsorship and promoion increased o $1,423,500 (22.8 percen). There is some annual informaion on CAIA markeing programs while i conraced wih he CAC bu only aggregae expendiure daa for is independen 2007 program. Noe also ha he CAIA daa available are for he period each season when avocados from Chile are expored o he U.S. raher han for he California markeing year. Informaion for he period Augus 2003 hrough February 2004 indicaes ha he CAIA markeing program conduced by he CAC included radio adverising, public relaions, and merchandising. Radio adverising accouned for abou 85% of expendiure on all programs. Four 3-week radio campaigns were conduced in 12 seleced markes: 8/18-9/8 including Labor Day, 9/29-10/20, 11/10-12/1 including Thanksgiving, and 12/29-1/19/2004 leading up o he Super Bowl. 7 The CAIA conduced he same markeing programs in he same markes he following season (April 2004 hrough February 2005). Toal spending for radio programs during his period was $3.3 million. CAIA 7 Thanksgiving, Super Bowl, and Labor Day are holidays shown by Li (2007) o represen periods of high avocado consumpion in he U.S. 7

11 markeing programs from April 2005 hrough February 2006 were similar o he previous wo years wih an emphasis on consumer radio adverising. Raher han four 3-week radio campaigns as previously, he campaign consised of hree 3-week and wo 2-week programs. In 2007, CAIA also included TV ads for boh he general and he Hispanic markes, as well as spor and media promoion programs Hass Avocado Board Programs HAB markeing programs fall under wo major caegories, Informaion Technology (InfoTech) and Markeing Communicaions (MarCom). The informaion echnology consiss of AvoHQ.com Inrane and he Nework Markeing Cener (NMC), designed o exchange markeing and sraegic informaion from all suppliers of Hass avocados o he U.S. marke in order o improve he flow of frui and mainain orderly markeing condiions. Markeing communicaions consis of consumer communicaions, online markeing, rade communicaions, indusry communicaions and markeing research. Markeing communicaions share of he HAB budge has increased over ime, as he oal HAB budge has increased and as he InfoTech program has become esablished. While geing esablished in 2003, HAB spen $340,179 on InfoTech and $146,499 on MarCom. Expendiures grew for boh programs in 2004, wih $1,090,228 spen on InfoTech and $859,284 spen on MarCom. Consumer communicaions included Super Bowl and Cinco de Mayo promoions and public relaions effors ha resuled in news releases wih high visibiliy. The web sie avocadocenral.com was esablished. MarCom became HAB s major expendiure caegory in 2005, wih a budge of almos $2.7million, wih $746,000 expended for InfoTech projecs. MarCom s budge increased o almos $3.5million in Parnering wih he Beef 8

12 Checkoff and a Napa Valley winery, HAB collaboraed o develop a 30-minue elevision program called Ho Trends in Tailgaing ha was aired on hree cable neworks (The Food Nework, HGTV and Fine Living Nework). Six airings of he 30-minue show on each of he hree neworks was supplemened wih 30-second consumer adverising spos ha ran more han 100 imes on four consecuive weeks on he Food Nework, creaing more han 27 million media impressions. The ailgaing heme was coninued in 2007 wih a new parner (Miller Brewing) and a coordinaed program wih reailers, inerne markeing and public relaions. MarCom expendiures increased o almos $3.2 million while InfoTech expendiures were $750, Avocado Consumpion in he U.S. U.S. consumpion of avocados before 1990 was largely from California producion; expors and impors were very small. Esimaed U.S. avocado consumpion remained below a pound per capia unil 1975 when a large California crop pushed consumpion o 1.2 pounds per capia. Avocado impors slowly increased during he las half of he 1980s and firs exceeded 25.0 million pounds in Impors coninued o expand hrough he 1990s and hen exploded as Mexico gained access incremenally o he U.S. marke. Impored avocados accouned for 26.1 percen of U.S. consumpion in 1998 and reached 73.1 percen in Per capia consumpion expanded wih increased impors, reaching a record high of 3.45 pounds in 2006 and again in Esimaed U.S. per capia avocado consumpion by source of he avocados is shown in Figure 1 from , demonsraing he sriking growh of impors in oal and as a share of U.S. consumpion. Several facors are associaed wih increased U.S. avocado consumpion. No doub a key facor is he availabiliy of good-qualiy avocados in he U.S. year around. Qualiy has been 9

13 improved in par by indusry-sponsored merchandising programs for produce personnel in supermarkes ha sress he imporance of proper ripening and having differen mauriy levels available for consumers. As noed, indusry promoion budges have included nuriion programs for several years. Some esimae of impac of hese programs is available from CAC racking sudies which show for example Healhfulness/Good for You as a reason o purchase avocados increased from 35 o 73% of survey respondens beween 1994 and The indusry has made Figure 1: U.S. Per Capia Avocado Consumpion by Source, successful effors o have avocados menioned specifically as a recommended frui in die plans and pyramids, such as he Medierranean die pyramid and he Adkins Lifesyle Food Guide Pyramid. 10

14 Indusry sudies have also examined demographic characerisics of avocado consumers. Cook (2003) described he ypical U.S. avocado purchaser as a women years of age, $50,000 plus income, upscale, college educaed, working full/par ime, and healh conscious. The mos frequen uses for avocados are guacamole, par of a Mexican side dish, in a salad, eaen plain, in a sandwich/burger, and as par of a non-mexican enrée (Cook 2003). The HAB has sponsored research examining U.S. Hispanic consumers ha ends o confirm some widely held indusry percepions, including ha Hispanics are heavy users of avocados. The HAB repors ha Hispanics buy significanly more avocados han he average consumer (2007, p. 12). For he ime period racked, 97 percen of Hispanic shoppers bough avocados as compared o 49 percen of he general populaion. In addiion, 60 percen of Hispanic shoppers purchased avocados weekly, and heir average purchase of 4.8 avocados was 58 percen greaer han he average overall purchase of 2.8 avocados. Research reveals wo disinc segmens of he Hispanic marke: U.S.-born Hispanics who speak English in he home and foreign-born Hispanics in Spanish-language-dominan households. U.S.-born Hispanics are more aware of he Hass variey bu purchase fewer avocados han do heir foreign-born counerpars (p. 13). 4. Modeling he Annual Demand for Avocados This analysis benefis from a considerable base of prior research on he avocado marke and on avocado promoion. Previous sudies provide analyical models and empirical esimaes for avocado demand parameers, demand response o promoion programs, and acreage response o price changes. We discuss his work and provide an updaed analysis in his secion. 11

15 4.1. Previous Sudies Carman and Green (1993) esimaed price and acreage-response equaions as he major componens of a simulaion model of he California avocado indusry ha was used o esimae he impac of generic adverising on acreage and reurns over ime. The price equaion yielded a price flexibiliy of demand of and an adverising flexibiliy of demand of 0.15, calculaed a mean values. 8 Carman and Cook (1996) used a revised and updaed version of he Carman and Green model o examine possible impacs of avocado impors from Mexico on he California indusry. The price equaion yielded a price flexibiliy of demand of and an adverising flexibiliy of demand of 0.28, calculaed a mean values. Carman and Craf (1998) esimaed boh annual and monhly price equaions for California avocados in a sudy of he reurns o CAC promoional programs. The esimaed annual flexibiliies of demand for price and adverising were and 0.13, respecively. Esimaed monhly flexibiliies of demand for price and adverising were and 0.137, respecively. 9 Carman and Craf esimaed ha California avocado producers achieved an annual average benefi-cos raio of 2.84 for he 34-year period covered by heir analysis. Shor-erm reurns, based upon assumpion of fixed supply, ranged from $5.25 o $6.35 per dollar spen on adverising. The USDA s Animal and Plan Healh Inspecion Service (APHIS) included an economic analysis of he poenial economic impac of increased Hass avocado impors from Mexico in 8 Thus, a one percen increase in adverising expendiures was esimaed o increase he California f.o.b. price by 0.15 percen. 9 The responsiveness of avocado demand o generic adverising found in hese prior sudies is consisen in magniude o ha found for several oher California commodiies. Alson e al. in heir summary of commodiy promoion programs, lised adverising flexibiliies of demand of 0.13 and 0.16 for eggs and srawberries, respecively, and adverising elasiciies of demand as follows: able grapes, 0.16; dried plums, 0.05; almonds, 0.13; walnus, 0.005; and raisins, in Japan and in UK (pp ). Kinnucan and Zheng summarize esimaed elasiciies and benefi-cos esimaes for he dairy, beef, pork and coon promoion programs (pp , 270). 12

16 hree repors issued on proposals o increase he number of saes and ime period for shipmens of avocados from Mexico. In he 2001 and 2003 repors, APHIS used a price elasiciy of demand of 0.86 (USDA 2001, 2003). For he 2004 sudy, hey used a price elasiciy of demand of 0.57 (USDA 2004). 10 USDA APHIS did no consider he possible impacs of adverising and promoion on he demand for avocados. The mos recen analysis of he impac of promoion on U.S avocado demand, based on annual daa from 1962 hrough 2003, esimaed ha imporers could realize reurns ranging from $2.09 o $3.26 per dollar of HAPRIO expendiures, wih ne reurns decreasing as impors increased (Carman 2006, p. 476). This sudy assumed ha he effeciveness of imporer promoional expendiures would be equivalen o he effeciveness of CAC expendiures Economeric Models of he Annual Demand for Avocados Esimaed U.S. avocado demand equaions in he sudies cied in he preceding subsecion included variables for per capia sales, real prices, income, promoional expendiures, and share of Hispanic consumers. Oher possible demand-shif variables, such as he prices of possible subsiues and complemens for avocados, and facors associaed wih rends in demand, including increased seasonal availabiliy of avocados due o impors, changing demographics, and he growing populariy of Mexican foods have also been invesigaed, bu wih limied success. Carman inroduced a variable for he percenage of Hispanics in he U.S. populaion as a measure of he impac of demographic changes and he increased demand for Mexican foods (2006, p.472). He also examined use of variables o measure increased impors (and, hence, 10 The price elasiciy of demand is he inverse of he flexibiliy of demand esimaed by Carman (2006) and ohers. Thus, all of hese esimaes are broadly consisen demand for avocados is inelasic (or flexible), meaning ha a one percen increase in price causes less han a one percen reducion in he quaniy demanded. 13

17 increased seasonal availabiliy) and accoun for possible subsiues bu none had a measurable impac on avocado demand. Using he resuls of he previous sudies and economic heory, we specified annual demand for avocados in he Unied Saes as a funcion of several explanaory variables: (1) Qa = f (Pa, A, Y,H ), where he variables for a given crop year are defined as follows: Qa is per capia U.S. sales (pounds per person) of avocados from all sources (California, Florida and all impors), less expors from he U.S., Pa is he average real f.o.b. (farm) price of California avocados, Y is real per capia U.S. disposable income, A is he real oal value of avocado adverising and promoion expendiures. H is he percenage of Hispanics in he oal U.S. populaion. The consumer price index for all iems ( =1.00) was used o deflae prices, income and promoion expendiures o a consan-dollar basis. 11 Deailed informaion on each of he variables used in he analysis, including means and sandard deviaions, is included in able 2. Prior o he creaion of he HAPRIO, A consised mainly of expendiures by he CAC. Hispanics share of U.S. populaion increased from 3.7 percen o 15.0 percen during he period of analysis, and U.S. Census Bureau populaion projecions have Hispanics share of oal populaion seadily increasing o 24.4 percen in Mexico is he world s larges avocado producer and consumer, wih annual per capia avocado consumpion recenly repored a 8 kg or 11 Based on he resuls of previous sudies, we do no include prices of subsiues or complemens in he demand model for avocados. Some of he previous variables ha have been invesigaed include prices of fresh omaoes, fresh peppers, and leuce (Carman 2006). In essence, he lack of imporance of hese producs as a facor in influencing avocado demand means ha avocados are a unique produc in he die of mos consumers, who are no readily willing o subsiue oher fresh ingrediens in place of avocados in heir dies. 14

18 abou 17.6 pounds, as compared o abou 3.5 pounds per capia in he U.S. (USDA, FAS, 2005). Wih approximaely wo-hirds of he U.S. Hispanic populaion from Mexico, he Hispanic populaion variable is inended o measure demographic change ha may be relaed o avocado demand. The increasing Hispanic share of U.S. populaion may also ac as a proxy for he populariy of Mexican food and Mexican resaurans in he U.S. Consumer demand is inversely relaed o he price paid based upon he law of demand. A basic quesion is which price o use in he demand analysis. Reail prices differ across sores, and grower prices differ by avocado ype and counry of origin e.g., California avocados generally receive a higher price han avocados from Chile or Mexico. We used he California grower or f.o.b. price because i is he only price series ha is available for he enire period of he daa analysis. Prices for avocados from differen origins (California, Florida, Chile, or Table 2: Variable Definiions and Summary Saisics Variable Definiion Unis Range of Values Qa Pa Annual average per capia U.S. sales of all avocados, (California, Florida and all impors) Average annual f.o.b. price of California avocados deflaed by he consumer price index (CPI) for all iems ( =1.00) Y U.S. per capia disposable income, deflaed by he CPI for all iems ( =1.00) A Annual adverising and promoion expendiures by he CAC, HAB, CAIA, and MHAIA deflaed by he CPI for all iems ( =1.00) H Hispanic populaion as a percenage of oal U.S. populaion pounds per capia real cens per pound housands of real dollars millions of real dollars 0.39 o o o (CAC); (HAB, CAIA, MHAIA) percen 3.67 o Mean S Dev Value (CAC); 4.05 (HAB, CAIA, MHAIA) (CAC); (HAB, CAIA, MHAIA)

19 Mexico) and a differen sages of he marke chain (farm, wholesale, reail) should move in unison as a consequence of he law of one price, so he specific choice of price series should be of lile consequence Preliminary Daa Analysis Before conducing formal economeric analysis, i is imporan o underake descripive sudies of he variables being considered for he economeric analysis. A basic problem in conducing aggregae ime series analysis of economic relaionships is ha many variables end o move ogeher over ime (o be coinegraed), making i difficul o isolae he unique impacs of each variable. From equaion (1), we seek o explain changes over ime in per capia consumpion of avocados in he U.S. as a funcion of variables such as real per capia U.S. disposable income (Y ), real expendiures promoing avocados (A ), Hispanic share of he U.S. populaion ( H ), and real California grower price (Pa ). Figures 2 and 3 illusrae a fundamenal challenge. Hispanic populaion share and per capia disposable income (figure 2) have increased over he ime period of he daase, , in a raher smooh, coninuous fashion. Alhough promoion expendiure and per capia avocado consumpion (figure 3) have been somewha more volaile, hey, oo, have rended upward over ime. Among he explanaory variables conained in equaion (1), he real California f.o.b price (figure 3) is he only one ha does no exhibi a significan upward rend. 12 The law of one price follows from basic arbirage. For example, prices for avocados from differen counries of origin may differ for a variey of reasons, such as percepions of differences in qualiy, bu as long as buyers are willing o subsiue among he various offerings, heir prices should move in unison. The same argumen perains o prices a differen sages of he marke chain. 16

20 Figure 2: Per Capia Avocado Consumpion, U.S. Per Capia Disposable Income, and he Percenage of Hispanic Populaion Simple correlaion coefficiens are a good way o measure co-movemen over ime of economic variables. Correlaion coefficiens vary from -1.0 (perfec negaive or inverse correlaion) o (perfec posiive correlaion). A value near zero indicaes variables ha are essenially uncorrelaed. Of course, a high posiive or negaive correlaion does no necessarily imply ha changes in one variable are causing he movemens observed in he oher variable. I 17

21 Figure 3: Per Capia Avocado Consumpion, he F.O.B. Price, and Promoion Expendiures merely means ha hey move ogeher joinly over ime. Examinaion of able 3 (column 2) reveals ha per capia consumpion, he variable we seek o explain, is highly correlaed wih A, H, and Y hese correlaion coefficiens all range from 0.83 o In fac, a simple rend variable, YEAR, consruced by seing is value o 1.0 in he iniial year of he daa and increasing i by 1.0 each successive year, has a similar correlaion wih per capia consumpion. Also imporan o observe is ha Y and H are boh highly correlaed wih YEAR he correlaion coefficiens are 0.97 and 0.99 respecively. In essence, his means ha over he period of our daa, , H and Y each have increased over ime in a manner ha can be almos 18

22 perfecly prediced wih a linear rend variable. Of course, H and Y are also highly correlaed wih each oher. Real promoion expendiures, A, while quie highly correlaed wih H, Y, and YEAR, exhibi some independen co-movemen, as manifes by correlaion coefficiens wih hese hree variables ranging from 0.74 o This is favorable informaion, given he purposes of he sudy, because he independence of movemen of Table 3: Correlaion Coefficiens for he Demand Model Per capia Consumpion (Qa ) Qa 1.0 Pa YEAR A Real CA price (Pa ) YEAR Real oal promoion Expendiures (A ) Hispanic share of Populaion (H ) Real per capia disposable income (Y ) A creaes he poenial o H Y isolae he impac of promoions on avocado consumpion relaive o he impacs of he oher variables. However, he exremely high correlaions among H,Y, and YEAR mean ha here is no opporuniy o isolae heir individual impacs. 13 Formal ess for he ime-series properies of he model variables were also conduced. These include ess of he null hypohesis ha a variable is saionary (i.e., is a variable ha revers o a consan mean and does no exhibi a deerminisic rend) agains he alernaive hypohesis ha he variable has a uni roo (i.e., he variable has no mean and follows a random walk ). Deailed resuls of hese ess are available from he auhors. Briefly, he California grower price, Pa, has no significan rend and is co-variance saionary, i.e., saionary wihou a deerminisic rend. All oher variables, per capia consumpion, real promoion expendiure, real per capia disposable income, and percen Hispanic populaion have a saisically significan rend as is apparen from examinaion of figures 2 and 3. Per capia consumpion and real promoion expendiure are rend-saionary (saionary afer removal of a linear rend), while real per capia disposable income and percen Hispanic populaion each conain a uni roo. 19

23 4.4. Srucural Breaks in Per Capia Consumpion Among he challenges in esimaing an annual demand model is ha he fundamenal economic relaionships linking he variable of ineres, per capia consumpion in our case, o he poenial explanaory variables may change over ime. In oher words here may be srucural breaks in he daa. This possibiliy is especially relevan for avocados given he significan changes ha have occurred in he indusry over he period of analysis in erms of rapidly escalaing impors and he availabiliy of produc year around. Examinaion of he plo of per capia consumpion over ime in figure 3 reveals wo poenial disrupions in he upward rend in per capia consumpion an upward shif in consumpion beween 1980 and 1981 and a downward shif in consumpion beween 1993 and Furhermore, following he decline in per capia consumpion beween 1993 and 1994, he upward rend in consumpion from 1994 onward is a a higher rajecory han in he preceding years, no doub reflecing a leas in par he progressive opening of U.S. markes o Mexican impors ha began in A fundamenal issue in he demand modeling is how o handle hese srucural shifs in consumpion and he revised rend in consumpion ha began in If we do no accoun for hese shifs hrough separae inercepshif and rend variables and insead allow he changes in per capia consumpion o be explained by he variables in equaion (1), he esimaed impac of he promoion variable is much greaer, as is is saisical significance. These resuls are presened nex Esimaed Annual Demand Relaionships Various demand funcions based upon equaion (1) were esimaed using 46 annual observaions for he markeing years 1962 hrough The key objecive is o deermine he impac of oal adverising and promoion programs on annual U.S. demand for avocados. Resuls from he 20

24 alernaive esimaions are presened in able 3. All esimaions repored in able 3 were conduced via ordinary leas squares. Several conclusions immediaely follow from examinaion of able 3. Firs, overall explanaory power of he model is very high, as measured by he adjused 2 R saisic, which measures he proporion of oal variaion in per capia consumpion from ha is explained by he variables included in he model. Adjused 0.99 for he alernaive models presened in he able. 2 R varies from abou 0.92 o nearly Second, price is inversely relaed wih per capia consumpion in a way ha is significan saisically and robus o alernaive model specificaions. 14 This resul is, of course, consisen wih prior sudies and is simply an affirmaion of he law of demand, bu is graifying noneheless as an indicaion of an economeric model ha is working properly. The esimaed price elasiciy of demand, evaluaed a he daa means, ranges from o 0.46, depending upon model specificaion. Thus, demand is in he inelasic range, meaning ha a one percen increase in producion causes roughly a wo percen decrease in he f.o.b. price, oher facors consan Conclusions abou saisical significance are based upon he absolue saisics, which measure he precision of esimaes. A larger value for he saisic indicaes greaer precision in esimaion. For sufficienly large samples, an absolue saisic greaer han abou 1.96 allows he researcher o rejec wih 95 percen confidence a null hypohesis ha he rue effec is in fac zero. 15 The esimae of price-inelasic demand is consisen wih resul from prior sudies of avocado demand. The esimae from his sudy is lower (more inelasic) han prior sudies, bu his resul is consisen wih he higher raes of avocado consumpion in he U.S., beginning in he 1990s and coninuing o he presen moving consumpion down he demand curve ino is more inelasic porions. 21

25 Variable California f.o.b. price (Pa ) Per capia disposable income (Y ) Hispanic share of populaion (H ) Toal promoions (A ) Table 4: Esimaed Annual Demand Models: Ordinary Leas Squares Model 1: Base model (7.48) [-0.414] (1.56) [0.592] (1.87) (5.79) [0.372] Model 2: Base model + rend (7.32) [-0.431] (1.43) [1.429] (2.06) (4.93) [0.347] Model 3: Model 2 + srucural break for (8.69) [-0.455] (2.88) [1.526] (0.15) (2.04) [0.148] (0.92) Model 4: Model 3 wihou YEAR (8.66) [-0.451] (3.97) [1.114] (0.56) (2.66) [0.176] YEAR (0.91) YEAR (3.59) (3.58) D (3.60) (3.59) Consan (0.58) (0.91) 2 Adjused R Noe: Absolue saisics are indicaed in parenheses; elasiciies evaluaed a daa means are in brackes. Third, high correlaion (mulicollineariy) among he variables Y,H, and YEAR makes i impossible o esimae he individual effecs of hese variables on consumpion. Recall from he prior discussion ha each of hese hree variables is almos perfecly correlaed. Thus, alhough we know from economic heory, pas research, and basic informaion on he avocado indusry ha per capia consumpion is likely o be posiively relaed o per capia income and o he percen Hispanic share of he U.S. populaion, i is no possible o isolae hese wo effecs, or 22

26 for ha maer o separae heir effecs from a simple rend variable ha could be capuring he effecs of boh Y and H, as well as oher omied variables affecing consumpion. This mulicollineariy among Y,H, and YEAR manifess iself in erms of esimaed effecs for each of hese variables being unsable and highly sensiive o model specificaion. For example, Model 3 shows an inverse (and saisically insignifican) effec beween H and Qa and also beween YEAR and Qa, bu hese resuls are merely due o he saisical program impuing all of he impac of hese hree upward-rending variables o Y in his model. In essence, due o heir high mulicollineariy, his aribuion of impac is almos arbirary, as can be seen in erms of he sensiiviy of resuls for hese variables o minor changes in he model specificaion. Imporanly, because our main ineres is in evaluaing he effec of promoions, his inabiliy o separae impacs due o Y,H, and YEAR does no consiue a significan limiaion on he analysis. Fourh, promoions have had a posiive effec on demand ha is saisically significan for all models presened in able 4. However, he magniude of he promoion impac hinges imporanly upon wheher we accoun separaely for he shif in per capia consumpion ha occurred beween 1993 and 1994 and he increasing rend line for per capia consumpion ha began in 1994 and coninues hrough he daase. The downward shif in per capia consumpion is capured by he dummy variable D , which is negaive and saisically significan in Models 3 and 4. The greaer rend upward in consumpion ha begins in 1994 is capured by he rend variable YEAR , which is se o 1.0 in 1994 and increases by 1.0 for each subsequen year, and is zero for all years preceding Imporanly, his change in rend canno be explained by he oher hree variables in he model, Y,H, and YEAR, ha are each 23

27 rending upward smoohly hrough ime. All hree of hose variables are included in Model 3 and Y and H are included in Model 4. YEAR is posiive and saisically significan despie he presence of hese oher variables. The one variable in he model ha can accoun, a leas parially, for his increase in he consumpion rend line is oal promoions, which also exhibis an increasing rae of rend beginning abou his same ime, escalaing especially rapidly wih he creaion of he HAPRIO. Thus, when we inroduce separae shif (D ) and rend (YEAR ) variables o accoun for his eviden change in per capia consumpion, i eliminaes roughly half of he esimaed impac of he promoion variable, as comparison of resuls for Models 1 and 2 wih Models 3 and 4 demonsraes. Promoion effecs, however, are noneheless posiive and saisically significan even in Models 3 and 4. The esimaed elasiciy of demand wih respec o promoions ranges from o 0.372, depending upon model specificaion. The upper end of his range is high relaive o prior esimaes for he avocado indusry and relaive o oher promoion sudies generally. The lower end of he range is very consisen wih prior esimaes for avocados and in general. We do no consider i possible o obain a reliable separae esimae of he impac of promoion expendiures funded by he HAB (i.e., expendiures in he las five years) using an annual model. The main problem is ha he creaion of he HAB was simulaed in large par by he rapid increase of avocado impors ino he U.S. and he growing free rider problem caused by imporers no conribuing o adverising programs funded hrough he CAC. Thus, HAB s naissance and commencemen of funding programs under is auspices are associaed wih rapidly rising per capia consumpion of avocados in he U.S. Any variables creaed o measure HAB s influence on consumpion apar from he general influence over ime of promoions as measured 24

28 by A will necessarily capure he rising rend in consumpion, much in he way i is capured presenly by he variable YEAR in models 3 and 4. Because he creaion of he HAB and he rapid increase in impors and, hence, domesic consumpion are, in essence, simulaneous evens, we canno impue a causal relaionship from HAB s creaion and commencemen of is funding programs o he increase in per capia consumpion. Again, he indusry s abiliy o wihsand he rapid escalaion of impors wihou enduring drasic decreases in real price demonsraes ha demand grew subsanially over his period, a leas parially in our view due o promoions Diagnosic Checks of Annual Demand Models Here we repor briefly on diagnosic ess of he models repored in able 4. These ess are imporan in deermining he confidence we can have in he esimaed resuls. Deails on various diagnosic ess are available from he auhors. The abiliy o aach confidence inervals o esimaed effecs and conduc saisical ess (such as wheher he effec of promoions is saisically differen from zero) depends upon he properies of he esimaed residuals (acual per capia consumpion in year minus prediced per capia consumpion in year ). Tess confirmed ha he esimaed residuals are homoskedasic (i.e., hey have a consan variance) and ha hey are disribued normally. Boh are desirable properies ha suppor he use of he model for hypohesis ess. The residuals do, however, reveal some evidence of serial correlaion, i.e., he expeced value of he error in period is a funcion of he error in period -1. The esimaed coefficiens are consisen in he presence of serial correlaion, bu he esimaed sandard errors (used o consruc he saisics) need o be adjused o correc for is presence. A more insidious 25

29 problem is ha serial correlaion of he errors may creae problems of endogeneiy of he explanaory variables. 16 Eliminaion of serial correlaion in he errors may, hus, eliminae some endogeneiy problems. Among he explanaory variables in he model, wo are candidaes o be endogenous, Pa and A. The California f.o.b. price may be endogenous because i could be deermined conemporaneously wih consumpion hrough he ordinary workings of he marke. Promoion expendiures could be endogenous because he oal budge for promoion is deermined by he check-off rae muliplied by he oal producion of avocados subjec o he check off. Realisically, here is a lag beween he realizaion of producion and consumpion, he collecion of he check-off funds, he preparaion of markeing budges, and he acual expendiures on promoion, making i reasonable ha promoion expendiures during year were deermined for he mos par by producion in year -1, making A exogenous unless errors are serially correlaed. Our sraegy was o address he endogeneiy of he California f.o.b. price using he wosage leas squares (2SLS) esimaion procedure because good insrumens for i are available, as described in he nex subsecion. Unless here is srong evidence of auocorrelaed residuals in he 2SLS esimaion, we can be relaively confiden ha A is exogenous for he reasons noed. 16 An economeric model suffers from endogeneiy if one or more of he explanaory variables is no exogenous, in which case i is correlaed wih he error erm, making he esimaed coefficiens be inconsisen. Endogeneiy is more likely in he presence of serially correlaed errors because an explanaory variable whose value in period was, say, deermined by evens in period -1 and would, hus, be uncorrelaed wih he error erm in period in he absence of serial correlaion, becomes correlaed wih he error erm in period and, hence, endogenous if he error erm is serially correlaed. 26

30 4.7. Two-Sage Leas Squares Esimaion The firs-sage esimaion in he 2SLS procedure involves regressing insrumens. The second-sage involves using he prediced values, re-esimaing he annual demand model. Using correlaion wih he error erm. ˆPa in place of Pa on a se of exogenous ˆPa, in place of acual Pa and Pa should eliminae he variable s The key crieria for selecion of insrumens are ha (a) he insrumens mus be exogenous, and (b) hey are correlaed wih Pa. Insrumens seleced for he sage 1 regression Table 5: The Firs-Sage Regression o Predic California f.o.b. Price Variable Hispanic share of populaion (H ) Toal promoions (A ) Coefficien (absolue saisic) (0.46) (2.33) YEAR (0.58) YEAR (0.18) D (0.18) World impor price (2.10) U.S. avocado acreage (1.40) Chilean avocado acreage (0.61) Mexican avocado acreage (0.15) Consan (0.57) 27

31 were oal U.S. avocado acreage harvesed, Chilean avocado acreage harvesed, Mexican avocado acreage harvesed, and impor price for avocados in he world marke. 17 Sage 1 regression resuls are conained in able 5. The second-sage esimaion resuls are repored in able 6. Given he high mulicollineariy among Y,H, and YEAR, Model 1 includes only YEAR o capure he linear rend effec presen in all hree variables. Model 2 adds Y as an explanaory variable, bu, as expeced, is inclusion does no improve he esimaion, and he esimaed coefficien on income is negaive (couner o he expeced posiive relaionship beween avocado consumpion and income) and is no saisically significan. Table 6: Esimaed Annual Demand Models: Two-Sage Leas Squares Variable Model 1 Model 1 + Income Prediced California farm price (Pa ˆ ) (5.64) (3.86) Per capia disposable income (Y ) Toal promoions (A ) (2.34) (0.53) (2.32) YEAR (8.20) (1.92) YEAR (5.99) (5.86) D (5.99) (5.86) Consan (1.69) (1.93) 2 Cenered R The model shows a small increasing rend in consumpion of abou lbs/year up o 1994, when he rend line spikes upward, increasing a abou = lbs. per 17 Harvesed acreage is expeced o be a good insrumen for price because i is deermined in advance of prices and, hrough he link beween acreage and oal producion, should be correlaed wih price. 28

32 capia annually. The promoion effec is posiive and saisically significan in boh models, bu he esimaed impac of promoions is reduced due o inclusion of he ineracion erm for YEAR (rend) and he D dummy variable. The wo-sage leas squares models have good saisical properies. 18 We canno rejec ha promoion expendiure is exogenous based upon he Sargan saisic. Homoskedasiciy of residuals is no rejeced based upon he Pagan-Hall es, and he hypohesis ha he residuals are no auocorrelaed of order 1 canno be rejeced under any versions of he Cumby Huizinga ess. Finally, based upon he Ramsey/Peseran-Taylor Rese es, we canno rejec he null hypohesis ha he rue relaionship among he variables is linear Summary As illusraed in figures 1 and 4, impors of avocados ino he U.S. increased dramaically beginning in he early 1990s and coninuing o he presen. The evidence from his sudy and prior sudies is ha avocado demand in he U.S. is price inelasic, meaning ha a given percenage increase in supply will cause a greaer and opposie percenage change in price. Rapid supply growh in he presence of inelasic demand can be a disasrous combinaion for an indusry in he absence of demand growh. Ye, as he record shows (figure 3), he real farm price in California has no fallen appreciably during his period of rapidly escalaing impors, meaning 18 Deails on all of he diagnosic ess are available from he auhors. 19 Evaluaions of commodiy promoion programs ofen specify a nonlinear effec beween promoion expendiure and demand. The economic basis for his specificaion is ha promoions mus evenually have diminishing reurns, or, in heory, i would be possible o expand demand indefiniely by spending ever increasing amouns of money o promoe he produc. However, such diminishing reurns may no be observed if he acual amoun of expendiures is less han he amoun ha coincides wih he onse of diminishing reurns. We esimaed various models wih a nonlinear relaionship beween promoion expendiure and per capia consumpion, bu none improved he model s performance, an oucome ha is consisen wih he resuls from he Ramsey/Peseran-Taylor Rese es. 29

33 ha demand has expanded sufficienly o keep real prices relaively sable. 20 In general, demand for food in he U.S. grows very slowly because, as a high-income naion, mos people have sufficien food in heir dies, so as heir incomes and expendiures Figure 4: The U.S. Avocado Supply, Impors, and Domesic Producion Noes: 1. The oal U.S. avocado consumpion is equal o he sum of avocado producion in California and Florida, and he oal avocado impors, minus oal avocado expors (million lbs). 2. The oal U.S. avocado producion is equal o he sum of avocado producion in California and Florida (million lbs). grow, lile of he incremenal expendiure goes for food. Unquesionably avocado demand has expanded during his period a a much faser rae han demand for food generally in he U.S. has expanded. The only variable in our model ha is capable of explaining he increasing rend line is promoions e.g., per capia income and Hispanic populaion share do no exhibi a similar increase in heir rend lines. 20 To be more precise, a regression of real California f.o.b. price from on a consan and a linear rend resuls in he following equaion: ˆPa = 58.86! 1.095YEAR. The absolue saisic on he YEAR coefficien is Thus, he real price is esimaed o have fallen by abou one cen per year, bu he effec is no saisically significan a 90 percen or higher confidence levels. 30

34 5. Benefi-Cos Analysis The economeric analysis repored in secion 4 presens srong evidence ha generic promoion of avocados has worked o increase he demand for avocados in he U.S. The addiional quesion o ask, however, is wheher he promoional expendiures have paid off in he sense of yielding benefis o producers from he demand enhancemen ha exceed he money expended o fund he programs. We address ha quesion in his secion Benefi-Cos Analysis in Promoion-Evaluaion Sudies Two ypes of benefi-cos raios (BCR) are relevan in promoion-evaluaion analysis average benefi-cos raios (ABCR) and marginal benefi-cos raios (MBCR). Producers ABCR from a promoion program consiss of he oal incremenal profi o producers generaed by he program over a specified ime inerval divided by he oal incremenal coss borne by producers o fund a program. Boh he profi and cos sreams should be properly discouned or compounded o a common poin in ime. The ABCR is he key measure of wheher a program was successful, wih ABCR! 1.0 defining a successful program. 21 The MBCR measures he incremenal profi o producers generaed from a small expansion or conracion of a promoion program. MBCR answers he quesion of wheher expansion of he promoion program would have increased producer profis, wih MBCR > 1.0 indicaing a program ha could have been profiably expanded. In general ABCR! MBCR because promoions are usually modeled as having a nonlinear effec on demand. For example, he square-roo funcion is ofen used o represen he 21 Because boh he sream of benefis and coss is discouned or compounded a an ineres rae inended o represen he indusry s opporuniy cos in erms of alernaive invesmens, he BCR is auomaically adjused for opporuniy cos of funds used o suppor promoion. 31

35 relaionship beween promoion and demand, and his funcional form guaranees a declining effec of marginal promoion dollars on sales (e.g., Alson e al. 1997). Thus, ABCR > MBCR for he square-roo model. As discussed in secion 4, we uilized a linear model o depic he funcional relaionship beween demand and promoion expendiures, and his relaionship was no rejeced by economeric ess. For he linear model ABCR = MBCR, and, hus, he wo quesions was he program profiable and could i have been profiably expanded are one and he same. Our sraegy was o simulae he impac of a small hypoheical increase in he HAB assessmen rae from he curren level of $0.025/lb. o $0.03/lb., i.e., an increase of one-half cen per lb., and esimae he benefis and coss o avocado growers from ha assessmen expansion. The raio of esimaed benefis o coss is hen he esimaed MBCR, and, given ha he funcional relaionship is linear, i is also an esimae of he enire program s ABCR. The simulaion framework is depiced in figure 5. The model begins wih demand and supply funcions for avocados ha depic he curren marke. Thus, demand, D, is oal U.S. demand, as esimaed in secion 4 on a per capia basis. Supply, S, is oal supply o he U.S. marke from all sources. The precise shape of his supply relaionship is a maer of some imporance for he simulaion model, as will be discussed shorly. Under he curren program, oal U.S. consumpion given funcions S and D is QA and price is P A. Implemenaion of a onehalf cen expansion in he program assessmen has he effec of increasing producer coss by he one-half cen, which shifs supply upward o curve S' as depiced in figure 5. The addiional funds generaed by he program expand demand by an amoun equal o he incremenal funds generaed by he assessmen imes he esimaed marginal impac of promoional expendiure on demand. The incremenal funds are simply he change in assessmen 32

36 muliplied by oal shipmens o he U.S. marke, and he esimaed marginal impac is he regression coefficien for he promoion variable, A, which is repored for alernaive model specificaions in ables 4 and 6. The new demand curve is illusraed in figure 5 by D'. The new marke equilibrium is found a he inersecion of curves S' and D' a poin A in figure 5. Equilibrium price has risen o P ' and sales have risen o Q'. Figure 5: Avocado Promoion Simulaion Model Pa S! S P A! P! A P A C B 0.5 Q A Q A Q! D D! 33

37 Producer benefis from he hypoheical expansion from he promoion program are measured in erms of producer surplus (PS), which is he same as producer variable profis, i.e., PS = producer price x oupu variable producion coss associaed wih producing and selling he oupu. In figure 5, PS in he absence of he promoion program is measured by he revenue recangle P A xq A minus he area below he supply curve, i.e., he riangle 0CQ A, which represens he oal variable coss associaed wih producing and selling oupu Q A. We seek o measure he change in producer surplus associaed wih he hypoheical expansion of he promoion program. In figure 5 PS afer he program expansion is PS' = P 'Q'! 0BQ', bu we mus also accoun for he addiional promoion expendiure, which is he recangle P A 'P 'AB = (P '! P A ')Q'. Thus, he ne increase in producer surplus o producers from expansion of he promoion program is! PS = PS' " (P '" P ')Q', which is represened by A he shaded area in figure 5. Three pieces of informaion are necessary o esimae! PS: (i) esimaes of he marginal impac of promoional expendiures on demand, (ii) esimaes of he slope or price elasiciy,! D, of demand, and (iii) esimaes of he slope or price elasiciy,! S, of supply of avocados o he U.S. marke. We have esimaes of (i) and (ii) from he economeric models summarized in ables 4 and 6, bu lack an esimae of! S. Mos promoion evaluaion sudies do no aemp o esimae he elasiciy of he supply relaionship. Supply funcions are difficul o esimae empirically, and he elasiciy varies by he lengh of run (ime frame) under consideraion e.g., supply becomes more elasic (responsive o price) in he long run as more producive inpus become variable o producers. Supply analysis is paricularly difficul for perennial crops 34

38 because he analys mus normally specify a dynamic model conaining equaions for planings, removals, bearing acreage as a funcion of planings and removals, and yield. See Carman and Craf (1998) for discussion of supply response in he California avocado indusry. Avocado supply o he U.S. is now complicaed relaive o he ime period analyzed by Carman and Craf by he fac ha boh Chile and Mexico are imporan suppliers o he U.S. marke, as well as o heir domesic markes and o oher expor markes. Thus, Chilean and Mexican supply o he U.S. marke is a residual supply ha is based upon oal producion and domesic demand in each counry and demand from all imporing counries excep he U.S. The alernaive and increasingly popular approach o sudying he supply relaionship is o esimae benefi-cos raios for a range of plausible values for! S, and if conclusions are robus across he range of supply elasiciy values chosen, here is lile need o worry abou choosing among he plausible alernaive values. Examples of he alernaive approach include Alson e al. (1997) for California able grapes, Alson e al. (1998) for California prunes, and Crespi and Sexon (2005) for California almonds. In considering a range of plausible values for! S noe ha shor-run supply of a perennial crop is highly inelasic because i is he produc of bearing acreage and yield, neiher of which is likely o be influenced much by curren price. Thus, he supply of avocados from California is likely o be highly inelasic. The supply o he U.S. emanaing from Chile and Mexico, however, is ap o be more elasic because he oal supply in each counry can be allocaed o domesic consumpion or o various expor markes. Thus, an increase in price in he U.S. due, say, o successful promoions is likely o cause Chilean and Mexican shippers o increase supply ino he U.S. Based upon hese consideraions, we specified hree alernaive values for! S : 0.5, 1.0, and

39 Among he available demand models in ables 4 and 6, we seleced wo: Ordinary leas squares model 2 in able 4 and wo-sage leas squares model 1 in able 6. Boh models have good saisical properies, and, because model 2 in able 4 has a high promoion impac relaive o model 1 in able 6, he choices effecively provide an upper and lower bound o he MBCR, given he economeric analysis. Benefis and coss were esimaed for each year of he HAB s exisence, The model was implemened by forcing he demand and supply funcions o inersec a he acual values for real price and quaniy for each year, generaing curves D and S inersecing a quaniy, QA and price PA in figure Curve S was hen shifed verically o S' by he half cen excise ax and curve D was shifed horizonally o D' by he esimaed promoion coefficien imes he funds generaed by he incremenal assessmen, producing he equilibrium a poin A in figure 5 and enabling us o compue he hypoheical changes in P and Q and he change in producer surplus in he manner described in he prior paragraphs. Resuls of he benefi-cos simulaion are repored in able 7. Six ses of esimaes are repored, one for each combinaion of he hree supply elasiciies and wo demand models chosen for he simulaion. For each simulaion model, able 7 repors he esimaed change in real f.o.b. price in cens/lb. and change in per capia consumpion in lbs. for each year of he program s exisence. Toal ne producer benefis are repored for each model by compounding he annual benefis and coss from he hypoheical program a a hree percen real rae of ineres. The BC raio repored in each able is compued by adding he program cos o he ne 22 In oher words he demand curve wih esimaed slope coefficien from he chosen economeric model was shifed by is esimaed error in year so ha he esimaed funcion precisely fi he observed real price and quaniy in year. 36

40 benefis o produce gross benefis and dividing gross benefis by oal cos.! PS + assessmen cos s MBCR = ABCR = assessmen cos s Table 7: Simulaion Model Resuls Supply Elasiciy = 0.5 Supply Elasiciy = 1.0 Table 4, Model 2 (OLS) 2003!P !P !P 3.79 Table 6, Model 1 (2SLS) 2003!P !P !P 0.86!P !P !P !P !Q !Q !Q !Q !Q !Q !Q !Q !Q !Q !PS 123,618,306.10!PS 26,505, B/C 6.73 B/C 1.49!P !P !P !P !P !P !P !P !P !P !Q !Q !Q !Q !Q !Q !Q !Q !Q !Q !PS 81,911,011.99!PS 22,447, B/C 4.43 B/C

41 Table 7: Simulaion Model Resuls (con.) Supply Elasiciy = 2.0!P !P !P !P !P !P !P !P !P !P !Q !Q !Q !Q !Q !Q !Q !Q !Q !Q !PS 53,847,986.33!PS 20,021, B/C 2.90 B/C 1.12 Esimaed dollar benefis and BC raio are lower he greaer he elasiciy of he supply funcion. This resul reflecs he imporan principle ha supply expansion in response o promoion-induced demand expansion limis he benefi from he demand expansion because he higher supply aenuaes he price increase ha would occur in is absence. Esimaed dollar benefis and BC raio are also lower for he wo-sage leas squares model because ha model s esimaed promoion coefficien is only 44 percen as grea as in he ordinary leas squares model 2. The esimaed BC raios range from 1.12 o 6.73, bu, imporanly, each exceeds 1.0, meaning i is highly likely ha (a) he promoional programs suppored by he HAB during is firs five years yielded ne benefis o producers and (b) could have been profiably expanded during he period of analysis. 23 To place hese BC raios in perspecive, he mos conservaive raio of 1.12 indicaes ha he 2.5 cens per pound assessmen paid by each avocado producer 23 Noe ha Carman and Craf s (1998) esimae of he average benefi-cos raio for CAC s promoion programs was

42 reurned 2.8 cens per pound for a ne reurn of 0.3 cens per pound. A he oher end of he specrum (greaer demand response o promoion and inelasic supply), he BC raio of 6.73 indicaes ha he 2.5 cens per pound assessmen reurned 16.8 cens per pound for a ne reurn of 14.3 cens per pound. 6. Demand Analysis a he Reail Level This secion presens analysis of sales (demand) for avocados a he reail accoun level. Due o inabiliy o obain disaggregae expendiures for HAB, CAIA, and MHAIA, his analysis is based on he effecs of he CAC s promoion program on reail sales of avocados The Daa The daa used in demand analysis a he reail level include scanner daa on reail prices and sales for avocados and CAC promoional daa on adverising plan and expendiure. Reailer scanner daa were acquired from Informaion Resources Inc. (IRI) by he CAC and were obained from Augus 4, 2002 o Ocober 31, 2004 (Panel I), and from November 12, 2006 o November 2, 2008 (Panel II) for purposes of conducing his sudy. The daa have he srucure of a panel, wih a reail accoun and size combinaion, e.g., small avocados sold a San Francisco reail chain 1, as a cross-secion uni, and wih a week as a ime period. A reail accoun refers o a paricular marke-reail chain combinaion, e.g., Safeway in San Francisco. There are 51 (43) differen reail chains in Panel I (II). A complee daa series of a cross-secion uni wihou missing values has 118 (104) weekly observaions for Panel I (II). Reailer scanner daa conain weekly sales volume in unis, dollar value of sales, and reail prices in $/uni for differen sizes and varieies of avocados for 90 (78) major reail accouns across 38 (41) reail markes in 26 (29) saes/regions 39

43 he U.S. for panel I (II). Reail price and sales are recorded by Price Look-Up (PLU) codes. PLU codes are used o idenify he size and variey of avocados sold a reail. However he origin of he avocado is no idenified. There are hree PLU codes, 4470, 4225, and 4046, for exra large, large, and small sizes of Hass avocados, and four oher PLU codes for oher varieies of avocados. These four-digi PLU codes are for convenionally grown avocados; he organically grown avocados are coded by adding a 9 in fron of he regular four-digi PLU codes. This sudy focuses on large and small sizes of Hass avocados ha are convenionally grown, which were carried by mos of he reail accouns and accouned for over 90% of he oal caegory sales in he daa. There are many missing values for oher PLU codes, including exra large Hass avocados, which were no carried by reailers consisenly. Hereafer, avocados refers o Hass avocados. Table 8 provides he summary saisics on he disaggregae daa. The CAC provided informaion on media ypes, geographic locaions, iming, and expendiure of he adverising programs i conduced during he 2003 and 2004 markeing years. The media ypes uilized in he CAC s promoion programs are radio adverising, oudoor displays, and magazine adverising. The CAC s adverising programs were conduced in 11 or 12 seleced markes during lae January or early February o July each year. These same markes have been chosen for he CAC s adverising programs for more han en years. They are Los Angeles, San Diego, San Francisco, Sacrameno, Phoenix, Dallas, San Anonio, Houson, Denver, Porland, Seale, and Alana. The reail scanner daa are available for all promoion markes excep San Diego and Sacrameno. The CAC provided daa on weekly expendiure on radio and oudoor promoions in each seleced promoion marke. Radio promoions are conduced four imes for hree-week periods beween February and mid-july each year. Oudoor promoions are held during he four-week 40

44 inervals beween radio promoions in all he seleced markes excep Alana, and involve displays of billboards and posers. For example, he CAC conduced radio adverising for hree weeks from January 26 o February 14, followed by a four-week break wihou promoion, hen radio adverising resumed for hree weeks from March 7 o 28, followed by oudoor promoions for four weeks from March 29 o April 24, and hen again radio adverising for hree weeks saring form April 25. All seleced markes have he same ime schedule for promoions. Table 8: Summary Saisics for he Disaggregae Model Iem Panel I: Panel II: Average Sd.Dev. Average Sd.Dev. Price (cens/uni) Large Small All Sales (1,000 unis) Large Small All Promoion ($1,000/week) Radio Oudoor All # of markes # of reail chains # of reail accouns # of cluser (accoun-size) # of observaions Max # of observaions per cluser Avg. # of observaions per cluser Similar promoion informaion is also available during he 2007 and 2008 markeing years, bu only on radio promoions. Oher CAC programs were eiher conduced wih coninuous iming and/or a he naional level, and disaggregae expendiure informaion is unavailable. Therefore, hose programs can be evaluaed a he disaggregae level. Furhermore, he reailer scanner daa include only 7 ou of 13 promoion markes in 2007, and 7 ou of 16 41

45 promoion markes in Therefore, due o he naure of available daa, he resuls from Panel I are more informaive and robus han he resuls from Panel II. In addiion, here are no expendiure daa available a he disaggregae level for MHAIA, CAIA, and HAB ha can be used for promoion evaluaion a he disaggregae level. This omission is more problemaic han i migh appear; in addiion o being unable o evaluae he impacs of hose expendiures, hey represen missing variables, and heir omission may bias he esimae of he impac of he CAC s expendiures The Economeric Models The reail sales model was specified in he following form: q =! + [" p + L+ " p ] a, s, 1 a, s, p a, s, % p + # Ad m, +! +! + $ a, s a, s,, (1) where qa,s, is he sales volume in housand unis for size s (s = {large, small}) avocados a reail accoun a (e.g., Safeway in Los Angeles) in week. Reail sales are modeled as a funcion of p a,s,,...p a,s, p conemporaneous and lagged reail prices,!, adverising expendiure, individual reail accoun, and ime-conrol variables including dummy variables for holidays and evens. Ad m, denoes he CAC s adverising expendiures in $1,000 in marke m in week. The adverising expendiures are aggregaed over expendiures on radio and oudoor promoions during , and include only expendiures on radio promoions during Alernaively, expendiures on radio and oudoor promoions can be inroduced as separae explanaory variables in Panel I o esimae differenial promoional effecs of differen media ypes on avocado demand. We firs presen a framework for program evaluaion based on a binary reamen variable 42

46 (he presence or absence of a promoion campaign), and hen exend his mehod o a coninuous reamen variable, he amoun of promoion expendiure. When he promoion variable is binary (i.e., adverising is presen in he marke, D = 1, or i is absen, D = 0), he approach of Difference in Difference (DID) is uilized. The fac ha he CAC seleced a subse of markes for is promoion programs from among he oal group on which scanner daa are available enables us o consruc boh reamen and conrol groups for he program evaluaion. The DID approach esimaes he counerfacual oucomes for he reail accouns in he seleced markes ha received he CAC s promoion programs. The DID framework for idenifying he reamen effecs of he CAC s promoions on reail sales can be presened by he following linear model: q ( a, ) = $ ( ) + #( a) + " D( a, ) +! ( a, ), where q(a,) denoes reail sales of avocados a reail accoun a a ime. Le he pre-reamen period, = 0, be he period when here was no promoion, and le he reamen period, = 1, be he period when he CAC conduced is promoions. D(a,) denoes wheher a reail accoun was exposed o he CAC s promoions or no a ime. Suppose ha only q(a,) and D(a,) are observed. We refer reail accouns ha were exposed o he CAC s promoion programs (i.e., D(a,1) = 1) as he reaed, and hose ha were no exposed o he promoions (i.e., D(a,1) = 0) as he conrols. D(a,0) equals zero for boh he reaed and conrols, because here was no promoion a = 0. ψ represens he reamen effecs of he CAC s promoion programs. δ() denoes he ime-specific componen, η(a) represens he accoun-specific effecs, and ν(a,) is he individual ransiory error erm wih zero mean a boh = 0 and = 1. The advanage of he panel daa is ha i enables us o conrol idiosyncraic characerisics of individual reailers or markes by use of fixed effecs. 43

47 Under he assumpion ha CAC s selecion for reamen is no correlaed wih he error erm, we can obain he difference in he expeced reail sales wih and wihou he CAC s promoions for he reail accouns in he reaed and conrol markes as E[ q( a,1) D( a,1) = 1] $ E[ q( a,0) D( a,1) = 1] = E[ q( a,1) $ q( a,0) D( a,1) = 1] = [" (1) $ " (0)] + [# ( a) $ #( a)] +! [ D( a,1) $ D( a,0)] = " (1) $ " (0) +! E[ q( a,1) D( a,1) = 0] # E[ q( a,0) D( a,1) = 0] = E[ q( a,1) # p( a,0) D( a,1) = 0] = [! (1) #! (0)] + [" ( a) #"( a)] =! (1) #! (0) Noice ha he use of a simple comparison of reail sales before and afer promoions o evaluae he promoional effecs is likely o be biased by emporal rends in reail sales or by facors oher han he promoions ha occurred during boh periods. They are represened in he preceding equaions by he erm! (1) "! (0). The DID approach is applied o consruc a counerfacual agains which o measure he promoional effecs. Therefore, he reamen effecs of he CAC s promoions, ψ, can be idenified in he following form: " =! { E[ q( a,1) D( a,1) = 1]! E[ q( a,0) D( a,1) = 1] }. { E[ q( a,1) D( a,1) = 0]! E[ q( a,0) D( a,1) = 0] } Our approach is o measure he promoion variable as a coninuous variable, consising of he weekly promoion expendiure for each promoion marke. In his case, he before - reamen level is represened by mean level of reail sales, and he afer -reamen level is represened by deviaion of sales from he mean level. The esimaed coefficien of he promoion variable presens he reamen effec of he CAC s promoions, ha is, he difference in deviaions of reail sales from individual means beween promoion and non-promoion markes. The comparison of reail sales beween promoion and non-promoion markes is made 44

48 by holding average reail sales a he individual reail accoun level consan. The promoion effecs, herefore, can be esimaed by a wihin model. This evaluaion of promoion effecs is based on deviaions of reail sales from individual chain mean levels of reail sales. However, he average reail sales in promoion markes may also increase as a resul of he CAC s promoions. We can also esimae he effecs of he promoion program on he average reail sales by a beween-effecs model ha compares sales in promoion and non-promoion markes. In he following, we presen resuls from four economeric models: a pooled model, a wihin model, a beween-effecs model, and a random-effecs model. The pooled and random effecs models uilize variaions over ime and in cross secion. The beween-effecs model only uses variaions beween individual chains in cross secion. The wihin model uses deviaions over ime from heir ime-averaged values for he dependen and explanaory variables Resuls Alhough he primary purpose of his analysis is o evaluae promoion effeciveness, he demand analysis provides addiional insighs regarding he characerisics of avocado demand ha may be valuable o he indusry, so we also provide a brief discussion of he overall resuls for he wihin model, which are summarized in able 9. Tables 10 and 11 focus specifically on promoion impacs esimaed across several economeric models. 24 The seasonal paerns of reail demand for avocados were quie sable over he sudy period. Avocado demand did no vary significanly in he same monh or in he same holiday/even across differen years. The esimaes for year indicaor or dummy variables indicae ha reail sales grew seadily over he 24 Aserisks (sars) are used o denoe saisical significance levels, wih one, wo, and hree sars denoing saisical significance a 90 percen, 95 percen, and 99 percen, respecively, for ables

49 years, consisen, of course, wih resuls from he aggregae model. Reail sales were highes during he monhs of May, June, and July, hen began o decline in Augus or Sepember. Reail demand for avocados is significanly higher during paricular holidays and evens. Super Bowl Sunday had he highes sales, followed by Cinco de Mayo, Chrismas/New Year, Independence Day, and Labor Day. Reail sales grew significanly over ime for Cinco de Mayo, wih sales growh more han doubling in 2007 and 2008 during Cinco de Mayo week compared o 2003 and The resuls indicae ha reail demand for avocados a he individual chain level is price elasic. The esimaed elasiciies are during and during Lagged reail prices had significan and posiive effecs on reail sales in he curren period. 27 However, reail sales responded mainly o changes in he conemporaneous reail price Li (2007) demonsraes ha reail prices and margins were significanly lower during some holidays/evens associaed wih high demand for avocados, e.g., Chrismas/New Year, Super Bowl Sunday, and Cinco de Mayo, indicaing ha reailers are using avocados as sale iems during hese periods of peak demand, hereby furher simulaing demand. 26 Noe ha demand a he level of he individual reail chain is expeced o be much more elasic han demand a he marke level. High price elasiciy a he chain level reflecs compeiion beween chains for price-conscious consumers and also he response of boh sore-loyal consumers and price-conscious consumers o price promoions for avocados. In essence, hese esimaed elasiciies demonsrae ha avocados are a produc ha responds well o price promoions. Due o heir perishable naure, hey are an effecive produc for promoions in a second dimension because hey canno be sockpiled by consumers. 27 This resul is also inuiive. Even hough avocados are perishable, he esimaed impac of lagged prices shows ha people are willing and able o defer purchases in, say, period -1 if prices are high in hopes of obaining a beer price in period. 28 An alernaive model included lags of reail sales, bu hey had no significan effecs. The resuls indicae he absence of sae dependence in weekly reail sales of avocados, or he absence of consumpion habi effec for avocados, as measured on a weekly basis. 46

50 Table 9: Esimaion Resuls for he Reail Sales Model Wihin Model Dependen Variable is Reail Sales Panel I: Panel II: (1,000 unis) Coeff. s.e. Coeff. s.e. Price (cens/uni) T *** (0.088) *** (0.123) *** (0.042) *** (0.096) *** (0.024) *** (0.043) Price elasiciy a means T ** ** ** ** ** ** Promoion ($1,000) *** (0.060) * * (0.080) Chrismas /New Year 7.06 *** (1.82) 6.17 *** (1.30) Super Bowl *** (3.86) *** (4.52) Valenine/Presidens Day 0.73 *** (1.21) *** (2.10) Oscar Awards 1.29 *** (1.25) * * (2.33) Cinco de Mayo 4.52 *** (2.11) *** (4.03) Easer 1.52 *** (1.40) *** (1.22) Mohers Day *** (1.50) *** (1.87) Memorial Day 2.70 *** (1.45) *** (2.03) Fahers Day *** (3.24) 0.61 *** (1.87) Independence Day 4.11 *** (1.35) 5.12 *** (1.36) Labor Day 5.19 *** (1.70) 2.32 *** (0.88) Thanksgiving *** (2.93) *** (1.88) 2002 (base) *** (1.41) *** (2.25) 2007 (base) *** (2.15) Jan *** (1.18) *** (2.01) Feb *** (1.34) 3.30 *** (2.67) Mar *** (1.44) 3.69 * * (1.95) Apr *** (1.50) 1.71 *** (1.82) May 3.68 *** (1.39) 8.62 *** (2.73) Jun *** (3.16) 5.26 *** (2.30) Jul *** (1.41) 6.34 *** (2.01) Aug *** (1.50) 3.85 *** (1.49) Sep *** (1.63) 0.06 *** (1.12) Nov *** (1.75) *** (1.68) Dec *** (1.75) *** (1.50) Consan *** (1.35) *** (9.78) R *** *** # of observaions *** *** Max # of observaions per cluser 118 * * 104 *** # of clusers 147 *** 142 *** 47

51 Turning now o promoions, he measured impac of he CAC s promoion programs on reail sales for avocados is comprised of wo effecs. Firs, he CAC s promoions may conribue o higher average reail sales in promoion markes relaive o he average reail sales in nonpromoion markes. However, he esimaed coefficien of he promoion variable from he beween-effecs model consiss of boh he effec of promoions on average reail sales and he effecs of oher unobserved facors on he average reail sales. The unobserved facors oher han promoions ha may conribue o differences in he average reail sales beween promoion and non-promoion markes need o be conrolled o aain clean idenificaion of he promoion effecs on he average reail sales. Second, he effec of he promoion programs on reail sales is measured by how much reail sales deviae from mean levels as promoion expendiure increases or as promoion programs are conduced in a week. This effec is esimaed by he wihin model by conrolling he difference in he average reail sales beween promoion and non-promoion markes. Clearly, he overall promoion effecs include boh he effec on he average reail sales and he effec on deviaions of reail sales from he average reail sales in promoion markes. Boh he pooled and he random-effecs models uilize variaions in promoions boh in cross secion and over ime o esimae he overall promoion effecs. The random-effecs model is preferred o he pooled model in presence of unobserved heerogeneiy. Neverheless, boh provide valuable informaion. Tables 10 and 11 presen he esimaed effecs of promoions on reail sales by he pooled, beween-effecs, wihin, and random-effecs models for Panel I and II daa, respecively. Esimaion I repored in he op porion of each able does no conrol unobserved facors ha may conribue o he average reail sales difference beween promoion and non-promoion 48

52 markes. As a resul, he esimaed promoion effec from he pooled and beween-effecs models, and he random-effecs model could be biased. Esimaion II inroduces a dummy variable o conrol he difference in he average reail sales beween promoion and non-promoion markes in he pooled, beween-effecs, and random-effecs model; and esimaion III uses dummy variables for individual promoion markes o conrol differences in average reail sales beween each promoion marke and non-promoion markes. 29 Consider firs he esimaes from Panel I daa in able 10. The esimaed promoion effecs from he beween-effecs model show ha he average weekly reail sales for each size of avocados a reail accouns in promoion markes were 1,472 unis more for each $1,000 weekly promoion expendiure han he average weekly reail sales in non-promoion markes (Esimaion III). The average weekly promoion expendiure was $20,419 in a promoion marke. Therefore, he average weekly reail sales increased by an esimaed 30,057 unis for each size of avocados sold a reail accouns in promoion markes. Inroducing dummy variables o conrol unobserved facors ha may conribue o differences in he average reail sales beween promoion and non-promoion markes reduces he size of he esimaed promoion effec significanly compare he promoion coefficiens in esimaion I versus esimaion III. The inroducion of more variables o esimae decreases efficiency in esimaion and increases sandard errors. The increase in he average reail sales in promoion markes due o promoions is posiive bu is no saisically significan for esimaion II and III. 29 In oher words, esimaion III conains a separae {0,1} indicaor variable o idenify marke-specific effecs on sales see he boom porion of able

53 Table 10: The Effecs of Promoions on Reail Sales from Panel I: Pooled Beween Wihin Random-effecs Esimae sd.error Esimae sd.error Esimae sd.error Esimae sd.error Esimaion I Reail price T *** *** *** *** *** *** *** *** *** *** Promoion expendiure *** *** *** *** Small size *** *** *** R *** *** *** *** RMSE *** *** *** *** Inra-class correlaion *** Λ *** *** *** Esimaion II Reail price T *** *** *** *** *** *** *** Promoion expendiure *** *** *** ID promoion marke *** *** *** Small size *** *** *** R *** *** *** RMSE *** *** *** Inra-class correlaion *** Λ *** *** Esimaion III Reail price T *** *** *** *** *** *** *** Promoion expendiure *** *** *** Promoion marke Phoenix *** *** *** Los Angeles *** *** *** San Francisco *** *** *** Alana *** *** *** Porland *** *** *** Dallas *** *** *** Huson *** *** *** San Anonio *** *** *** Small size *** *** *** R *** *** *** RMSE *** *** *** Inra-class correlaion *** Λ *** *** 50

54 Second, he resuls from he wihin model indicae ha reail sales a a reail accoun in a promoion marke increased slighly as promoion expendiure increased during promoional periods, bu he effec is no saisically significan. Third, he esimaed promoion effecs from he random-effecs model are he same as hose from he wihin model, afer effecs of individual promoion markes have been conrolled in esimaion II or III. This suggess ha promoions, on he whole increased average reail sales for promoion markes compared wih average reail sales for non-promoion markes. Promoion effecs from week o week in each promoion marke were small. This may be due o he fac ha he promoion effecs were merged over ime, increasing average reail sales on he whole. Therefore, he majoriy of he promoion effecs was idenified via he beween-effecs model compared o he wihin model. 30 Table 11 presens he esimaion resuls from Panel II daa ( ). Firs, he esimaed promoion effecs (Esimaion II) from he beween-effecs model show ha he average weekly reail sales for each size of avocados a reail accouns in promoion markes were 16,169 unis more han he average weekly reail sales in non-promoion markes for each $1,000 of average weekly promoion expendiure. The esimaed impac of hese radio promoions is eleven imes higher han he esimaed impac of CAC promoion programs (including boh radio and oudoor programs) during The average weekly promoion expendiure was $37,360 in a promoion marke. Therefore, he average weekly reail sales increased by an esimaed 604,474 unis for each size of avocados sold a reail accouns in promoion markes. Esimaion II conrols unobserved facors ha may conribue o differences in he average reail sales beween promoion and non-promoion markes. The resuls show ha he 30 In resuls no repored here bu available from he auhors upon reques, we invesigaed de-composing he impac of he CAC s expendiures by media ype radio adverising versus oudoor adverising. Resuls sugges a greaer effeciveness for radio promoions relaive o oudoor adverising, bu we cauion agains aribuing undue weigh o he resul because effecs were no saisically significan. 51

55 difference in average reail sales beween promoion and non-promoion markes was primarily and significanly explained by he difference in average reail sales due o promoions. These resuls are differen from hose for (able 10), which show ha he esimaed promoion effecs were reduced significanly afer conrolling he unobserved facors ha may accoun for differences in average sales beween promoion and non-promoion markes. Esimaion III includes dummy variables for each promoion marke in he daa o conrol differences in average reail sales beween promoion markes. The esimaed coefficien for he radio promoion expendiure is negaive and no saisically significan in Esimaion III. This is mosly due o ineviable mulicollineariy problems because he radio promoion expendiure is highly collinear wih he se of dummy variables for promoion markes, and due o he fac ha he inroducion of more variables decreases esimaion efficiency. Noneheless, he esimaed coefficiens for promoion markes provide valuable informaion as o in which markes he average reail sales were significanly higher. Noe ha he esimaes may represen some effec of radio programs because he promoion variable is highly correlaed wih he dummy variables for promoion markes, and ha he esimaes may represen he effec of oher promoion programs ha are no included in he model due o daa availabiliy. The coefficien esimaes for individual promoion markes are markedly higher han he esimaes during The markes associaed wih he highes average sales were Los Angeles, Alana, San Francisco, Houson, and Phoenix during , while he markes were San Anonio (daa were no available for San Anonio during ), Los Angeles, Houson, and San Francisco during

56 Table 11: The Effecs of Promoions on Reail Sales from Panel II: Pooled Beween Wihin Random-effecs Esimae sd.error Esimae sd.error Esimae sd.error Esimae sd error Esimaion I Reail price T *** *** *** *** *** *** *** *** *** *** Radio expendiure *** *** *** *** Small size *** *** *** R *** *** *** *** RMSE *** *** *** *** Inra-class correlaion *** Λ *** *** *** Esimaion II Reail price T *** *** *** *** *** *** *** Radio expendiure *** *** *** ID radio marke *** *** *** Small size *** *** *** R *** *** *** RMSE *** *** *** Inra-class correlaion *** Λ *** *** Esimaion III Reail price T *** *** *** *** *** *** *** Radio expendiure *** *** *** Radio marke Phoenix *** *** *** Los Angeles *** *** *** San Francisco *** *** *** Alana *** *** *** Porland *** *** *** Dallas *** *** *** Houson *** *** *** Seale *** *** *** Small size *** *** *** R *** *** *** RMSE *** *** *** Inra-class correlaion *** Λ *** *** 53

57 Second, he resuls from he wihin model and random-effecs model indicae ha he radio promoions insignifican effecs on reail sales during he periods of he promoion, boh in erms of magniude of he esimaed effec and is saisical significance. This may be because he effecs of he radio promoions were consolidaed over ime and increased he overall marke average sales, and/or because he effecs of radio programs were blended wih he effecs of oher promoion programs ha were conduced bu are omied from he esimaion due o daa availabiliy, e.g., any programs ha were conduced in he reamen ciies during by CAIA, MHAIA, and/or HAB. Taken ogeher, he resuls sugges ha he radio promoion significanly increased he average reail sales in promoion markes compared wih average reail sales in non-promoion markes. The esimaed promoion effecs in are also markedly higher han he promoion effecs during The various models repored in ables 10 and 11 esimaed promoion effecs from differen perspecives, bu he mos relevan resuls are hose for Esimaion II from he beweeneffecs model. Promoion effecs esimaed from he beween-effecs model are comprised of wo elemens, i.e., a significan increase in sales during he promoion period (he wave) and a sales increase sreched during and beyond promoion period (level). The resuls from boh Panel I and II consisenly indicae ha he second effec, i.e., an increase in he average level, dominae. The firs effec measured by wihin and random-effecs is small because: i) promoion expendiures did no vary much from week o week, and/or ii), because he effecs of promoion were carried over ime, and hence he promoion effecs were consolidaed o increase average reail sales, i.e., he average level. Comparison of he resuls from Esimaion I and II sugges ha he heerogeneiy 54

58 beween promoion and non-promoion markes needs o be conrolled, and hence, Esimaion II is preferred relaive o Esimaion I. Esimaion II yields he bes esimae of average promoion effecs across promoion markes, which is one of he main purposes of he presen sudy. Esimaion III resuls mus be viewed wih some cauion due o he problem of mulicollineariy. The value of Esimaion III is o see comparaive or relaive promoional effecs beween markes, and o see comparaive promoion effecs beween markes and beween wo panel periods, raher han focus on he absolue esimaes The Effecs of he CAC s Promoions on Reail and Shipping-Poin Prices The findings on reail sales for avocados sugges on balance ha he CAC s promoion programs had posiive effecs on reail sales for avocados. We now seek o deermine impacs, if any, of he programs on reail prices and prices a he shipping poin. This analysis is conduced only for Panel I daa during , because he expendiure daa are available for boh radio and oudoor programs. Table 12 presens he esimaed effecs of he CAC s promoion programs on reail price and shipping-poin price for avocados. Boh models use weekly dummy variables as ime-conrol variables. Panel (a) in able 12 conains he esimaed impac of incremenal $1,000 expendiures by CAC in he argeed marke, while panel (b) esimaes he cumulaive impac in erms of he oal expendiure during each of he promoion periods. If arbirage a he shipping level is efficien beween promoion and non-promoion markes and beween promoion and non-promoion weeks or periods, he CAC s promoion programs should have no significan effecs on shipping prices o alernaive desinaion markes. Successful promoions in argeed markes increase demand in hose markes, which should 55

59 cause shippers o expand shipmens o hose markes relaive o non-promoion markes. This reallocaion of supply beween markes should coninue unil shipping-poin prices o all desinaion markes are equaed, if arbirage by shippers is efficien. A similar argumen applies o ineremporal arbirage designed o have shipmens in place a desinaion markes o coincide wih promoion periods. The resuls for shipping-poin price of avocados in able 12 reveal a small posiive esimaed impac of promoions on shipping prices o arge markes. Shipping prices during promoion periods were cen/uni higher (panel (b)) han shipping prices during non-promoion periods in promoion markes compared wih non-promoion markes. However, his esimaed impac is no saisically significan for eiher CAC radio or oudoor promoions, which is consisen wih he efficien arbirage hypohesis. A possible concern for indusry generic promoions concerns reailer responses o promoions. Successful promoions argeed o consumers increase demand for avocados. Tha increase in demand can be refleced in higher reail sales, higher reail prices, or a combinaion of boh higher sales and higher prices. To he exen reailers increase prices and margins o capure he higher demand from indusry promoions, heir acions viiae he effeciveness of he programs from he indusry s perspecive, because he increase in sales ha is necessary o increase prices a he grower-shipper level will no occur. Conversely if reailers did no capure he benefis of increases in demand for avocados due o he CAC s promoion program hrough higher prices, we expec he benefi o accrue o he grower-shipper level in he form of higher f.o.b prices. 56

60 Table 12: The Effec of he CAC s Promoions on Reail Price and Shipping Price (a) Esimaion Resuls Reail Price (cens/uni, weekly) Shipping Price (cens/uni, weekly) Esimae s.e. Esimae s.e. Promoion (pooled) Radio Oudoor (b) The Esimaed Effecs of he CAC s Promoions during Reail Price (cens/uni, weekly) Shipping Price (cens/uni, weekly) Radio Radio Radio Radio Radio Average Average Radio Oudoor Promoion An ineresing possibiliy suppored by some scholarly research is ha reailers may reduce reail prices in response o a posiive demand shock for a produc, mos likely as a way o enice cusomers o he sore in hope ha hey will purchase addiional iems. Evidence of lower reail prices for avocados in response o he CAC s promoion programs would mean ha reailers acions were reinforcing (insead of offseing) he impacs of he CAC promoions. The resuls in able 12 show ha reail prices were (0.405) cen/uni lower, bu no saisically significan, han reail prices in non-promoional periods and in non-promoion markes in 2003 (2004). Thus, here is no evidence ha reailers capure some of he demand expansion induced by he CAC promoions hrough higher reail prices and some very weak 57

61 evidence ha hey may conribue o he effeciveness of he programs by lowering price o suppor indusry promoions. 7. Evaluaion of he HAB s Nework Markeing Cener Program The HAB conducs an acive inrane informaion program hrough is Nework Markeing Cener o share informaion o promoe orderly markeing. As saed in is firs annual repor: The primary goal behind he INFOTECH plank of HAB s Sraegy is o develop Sraegic Inelligence ha will enable avocado markeers o share informaion essenial o orderly markeing hroughou he full 12-monh season and ameliorae seasonal ransiion poins and concomian marke insabiliy beween sources. This iniiaive is designed o help ALL sellers in he U.S. marke develop a much-needed framework o ensure orderly flow of frui and marke sabiliy. The benefis from such an end sae would inure o consumers, supermarke reailers and hose suppliers selling Hass avocados in he U.S. (p , 2003). All paricipans in he Hass avocado markeing chain have access o he HAB websie ( where hey are able o share harves and shipmen planning informaion. The Annual Repor indicaes ha HAB s echnology infrasrucure suppors over 2500 users and coninues o grow (p. 3). This ongoing informaion exchange is inended o smooh shipmens o major U.S. markes, preven surplus and shorage siuaions, and promoe sable f.o.b. and reail pricing Variabiliy of Prices and Quaniies Over Time Empirical evaluaion of he benefis of an informaion program is difficul and he aciviies of HAB are no excepion. We can however examine some indusry saisics relaed o he HAB goal of orderly flow of frui and marke sabiliy ha provide an indicaion of progress oward meeing program goals. We measure he variabiliy of prices and quaniies over ime using he sandard deviaion of weekly prices and quaniies for California and impored avocados. We 58

62 firs examined he sandard deviaion of California f.o.b. avocado prices over he mos recen 10- year period ( hrough ). While here was no an eviden rend over ime, he weekly sandard deviaion for he mos recen five years price averaged , a decrease from he firs five-year average sandard deviaion of prices of A he same ime he weekly sandard deviaion of California shipmens increased from an annual average of 2,293,841 pounds for he firs five years ( hrough ) o an annual average of 4,303,944 pounds for he mos recen five years ( hrough ). This indicaes ha, while California shipmens have become more variable, coordinaion of impors wih California shipmens has smoohed oal weekly avocado shipmens and prices during he markeing year. The mos recen five-year comparison of California wih oal weekly shipmens (California plus impors) is shown in able 13. While growing impors had he poenial o inroduce addiional Table 13: Sandard Deviaion of Weekly California and Toal Avocado Shipmens, Year California Toal California plus impors ,359,560 1,479, ,020,240 2,693, ,593,614 2,052, ,399,061 3,330, ,483,128 1,990,026 5-YR AVE. 4,303,944 2,309,312 quaniy and price variabiliy ino he U.S. marke, he opposie has occurred. Impors have been imed o mainain a raher seady flow of avocados o reail markes, which ends o sabilize prices a boh he f.o.b. and reail levels. A porion of he smoohing of quaniy and prices as 59

63 impors increased significanly can, and should be, aribued o he acive HAB informaion programs. Previous research for specialy agriculural commodiies has demonsraed ha decreased price variabiliy can benefi boh producers and consumers. Marke condiions presen in he U.S. avocado indusry ha can lead o his resul are: (1) food reailers have marke power in seing heir reail prices, (2) he produc is perishable, and (3) reail chains purchase he produc direcly from grower-shippers who are small relaive o he chain buyers. Under hese condiions buyers can use large or emporarily large supplies o bid down shipping-poin prices and increase heir margins (Sexon and Zhang, 1996). These same condiions can also lead o asymmeric price ransmission from he producer o he reail level, as evidenced by reail prices responding quicker and more fully o f.o.b. price increases han o f.o.b. price decreases. 31 Li (2007) analyzed he price ransmission process for avocados for increases and decreases in shipping poin prices. She summarized resuls of her exensive analysis of asymmeric price adjusmens for California avocados as follows: The [reail] price adjusmen raes were 76% o an increase in shipping price and 29% o a decrease in shipping price, and he adjusmen was made slower in response o an increase in shipping price han o a decrease in shipping price. Asymmery in price adjusmen o changes in shipping price suggess ha reailers were able manipulae price adjusmens o increases and decreases in shipping price o aain higher profis. (p. 333) Thus, reail prices for avocados respond more fully o shipping-poin price increases han o shipping-poin price decreases and reail price margins for avocados, hus, end o increase wih larger and more frequen price changes or decrease wih smaller and less frequen price changes. Price insabiliy promoes higher reailer margins a he expense of boh producers and 31 Sudies ha have found asymmery in price ransmission for food producs include Kinnucan and Forker (1987) for dairy producs; Pick, Karrenbrock and Carman (1990) for cirus; Zhang, Flecher and Carley (1995) for peanus; and Carman and Sexon (2005) for fluid milk in he Wesern U.S. 60

64 consumers, and increased price sabiliy ends o decrease annual average reailer margins wih benefis flowing o boh producers and consumers. Thus, informaion programs ha smooh he flow and prices of avocados o U.S. markes benefi boh producers and consumers Coss of HAB Informaion Programs The annual coss of HAB informaion programs are lised by caegory in each HAB Annual repor and are summarized in able 14. Annual expendiures for he informaion programs ranged from $340,179 o $1,090,228 over he five years, wih an average annual cos of jus Table 14: Annual and Toal Coss of HAB Informaion Programs by Cos Caegory, Cos Caegory Year Grand Toal ($) Informaion ($) 28, ,553 71, ,434 94, ,936 Analysis ($) 0 44, , , , ,475 Ineracion ($) 286, , , , ,592 2,125,915 Nework Markeing Cener ($) Toal Informaion ($) Source: HAB Annual Repors, ,876 66, , , , ,179 1,090, , , ,522 3,749,840 under $750,000. Toal five-year coss for he caegories of informaion, analysis, and he Nework Markeing Cener were in a raher igh range of $530,514 o $536,936. Almos 57 percen of oal coss for he firs five years ($2,125,915) were in he ineracion caegory. 61

65 7.3. Esimaed Benefis from Informaion Programs We used he resuls from Li s research on price ransmission in he markeing channel o esimae weekly changes in gross markeing margins beween he shipping poin (f.o.b.) and he reail price of avocados. Thus, we assume ha reail prices increased on average by 76 percen of he increase in shipping-poin prices and decreased by 29 percen of he decrease in shippingpoin prices. We use he aggregae esimaed adjusmen wihou aemping o accoun for he wo o hree weeks required for he oal price adjusmen, based upon Li s analysis. The changes in esimaed gross markeing margins from week o week are based on oal weekly shipmens, he change in average weighed shipping-poin price per pound for all Hass avocados and Li s esimaed adjusmen raios. Annual esimaed gross changes in markeing margins, based on each markeing year s weekly oal Hass avocado shipmens and weighed weekly average Hass avocado shipping-poin prices, are shown in able 15. The acual annual sandard deviaions of weekly Hass avocado shipping-poin prices boh decrease and increase from year o year, ranging from a high of in 2003, he firs year of he informaion program, o a low of in 2006, a year of record weekly shipmens due o a very large California crop. Esimaed oal changes in markeing margins associaed wih shipping poin price changes vary from $2,889,059 in 2004 o jus over $10 million in Noe ha he oal changes in markeing margins are posiively relaed o average weekly shipmens and he sandard deviaion of weekly prices during he markeing year. 62

66 Table 15: Esimaed Toal Annual Changes in Gross Margins for Hass Avocados, Average Shipmens, Sandard Deviaion of Price, and Average Price, Year Iem esimae Margin change($) 6,533,780 2,889,059 8,133,135 4,033,952 10,070,172 Ave. weekly shipmens (lbs.) Sd. deviaion of price ($/lb.) Average weighed price ($/lb.) 8,512,807 11,771,751 12,484,837 15,194,896 13,361, The sandard deviaion of weekly prices for each markeing year repored in able 15 measures acual price variabiliy, bu we also require an esimae of how differen his variabiliy would have been wihou he HAB informaion program. In oher words, has price variabiliy been reduced by he HAB informaion program and, if so, by how much? Our approach is o compare he variabiliy of prices immediaely before iniiaion of he informaion program wih variabiliy of prices afer beginning he informaion program. A limiaion of his approach is ha he enire change in price variabiliy is aribued o he informaion program, even if here were oher facors conribuing o i. As noed, he sandard deviaion of annual California Hass avocado prices decreased from an annual average of during he five-year period o an annual average of from This decrease of 28 percen in price variabiliy is used as he maximum reducion in price variabiliy due o he HAB informaion program. The esimaed oal five-year increase in markeing margins as a consequence of price variabiliy from able 15 is $31,661,

67 Considering ha his figure represens he reduced value due o he presence of he informaion programs, he reducion of 28 percen in margins would have been worh a five-year (undiscouned) oal of $12.3 million in erms of reduced margin ha is refleced in boh lower reail consumer prices and higher prices o growers a he shipping poin. 32 The division of he oal benefi, as well as he assessmen cos o fund he informaion program, beween consumers and producers depends upon he value of consumers price elasiciy of demand,! D, relaive o producers price elasiciy of supply,! S of avocados o he U.S. marke. As noed in secion 5, we have good esimaes of! D from he economeric analysis in secion 4, bu lack a reliable mehod o esimae! S in he curren marke environmen. Thus, secion 5 repored benefi-cos raios for alernaive values of! S of 0.5, 1.0, and 2.0. The share of a change in margin going o consumers in erms of lower price is! S " P =. For purposes of! #! S D his calculaion we compued! D a he average of price and quaniy for he pas 10 years. Alhough he esimae varies depending upon he specific economeric model esimaed, all produced a value of! D " # 0.25 during his period. Thus, he producers share of he benefi and he cos from he informaion program varies from abou 11% o 33%, depending upon he value assumed for! S. Assuming ha he enire margin reducion can be aribued o he HAB s informaion program, he oal ne benefi is $12.3 million gross benefi minus $3.75 million program cos, or $8.55 million ne benefi. Producers share of his ne benefi is hen in he range of $ $2.82 million dollars, wih he remainder of he ne benefi going o U.S. avocado consumers. 32 Le M0 denoe he increase in margin due o price variabiliy in he absence of he HAB programs and M1 = 31, 661, 000 equal he value in he presence of he programs. Then we have (M0! M 1) / M0 = Solving for M1 and subracing M0 from i yields $12.3 million. 64

68 8. Daa Collecion Suggesions o Faciliae Fuure Evaluaions The U.S. avocado indusry is forunae o have a well-esablished indusry-funded daa source available. AMRIC, esablished by he CAC, collecs and mainains a daabase ha conains weekly, monhly, and annual observaions by variey for avocado shipmens by source and desinaion and for shipping poin prices. The CAC also purchases reail level daa for reail avocado prices and produc movemen in major U.S. markes. The major daa gap for evaluaing HAB promoion programs is he lack of a sysemaic daabase of deailed informaion on promoional programs and expendiures. The CAC has published annual daa on adverising/promoion expendiures in each of is annual repors. The HAB also includes promoion budges and expendiures in is annual repor ogeher wih a descripion of major iniiaives and programs. The MHAIA and he CAIA each prepare an annual accouning saemen ha includes promoion expendiures bu provide no descripion of programs. Wih four separae organizaions adverising and promoing Hass avocados in he U.S. marke here is a need for cenralized daa collecion and reporing. The HAB is he logical eniy o collec and mainain daa on indusry adverising/promoion programs, given is role in collecing and disribuing funds o he CAC, MHAIA and CAIA and conducing is own promoion programs. Our abiliy o analyze promoion impacs a he disaggregae level was severely limied by lack of disaggregae expendiure daa. Our aggregae annual analysis used oal promoion expendiures as he variable of ineres o explain demand shifs. There are several limiaions wih his annual analysis ha disaggregaed weekly marke-level daa may help solve. Firs, annual analysis using oal expendiure daa assumes ha all media are equally effecive; ha a dollar spen on radio has he same impac on demand as a dollar spen on elevision or prin adverising. This is probably no 65

69 rue, and good, disaggregaed daa can be used o examine he responsiveness of reail sales o differen media. However, even wih he marke level daa uilized for he presen sudy, i was necessary o assume ha he message did no maer. Marke level daa can be used o es promoional messages, hemes, or copy o help deermine which is mos effecive. This requires careful aenion o he daa and informaion o be colleced and may also require an experimenal design using differen messages in differen markes. We recommend ha deailed adverising/promoion daa be colleced on a regular schedule by he HAB. The basic uni of observaion should be geographic (individual reail marke, region or naional) wih deails on program arge (consumers or subse such as homemakers 20 o 45 years of age, Hispanics, seniors, ec.; reailers; healh professionals; insiuions; ec.), iming of program (saring and ending daes), program expendiures carefully mached o he iming of he program, media used (radio, billboards, TV, newspapers, magazines, ec.) wih he expendiure allocaion if more han one medium is used, and finally, any measures of impac repored by media providers, hird pary agencies, or adverising agencies (media impressions, gross raing poins, ec.). These daa should be gahered on a weekly basis o coincide wih he reporing inerval for reail scanner daa. The HAB can process he daa o repor weekly and monhly expendiures by marke by media ype, wih descripions of each program. I is very imporan o sress ha failure of any of he paricipans in HABfunded promoions o conribue o he daa collecion effors described here has he poenial o undermine he enire effor. A second concern is ha daa collecion effors in reail markes by indusry groups appear o be declining. As discussed in more deail in secion 6, reail daa were available for only seven of 16 promoion markes for 2008, whereas only wo promoion markes were 66

70 excluded in he daa collecion for he panel. We recognize ha scanner daa are expensive o purchase, bu hey do yield a wealh of informaion ha is imporan o undersanding promoion impacs and oher faces of demand for avocados. These daa acquisiion coss should be shared indusry-wide and suppored under he auspices of he HAB. 9. Conclusions The Hass Avocado Board faced significan organizaional and economic challenges during is firs five years of operaions. I was able o mee hese challenges by building on he longsanding programs of he California avocado indusry, while planning and developing is own iniiaives. This resuled in a smooh ransiion of promoion programs funded and conduced by he California indusry o programs funded by HAB and conduced by CAC, CAIA, HAB and MHAIA, while successfully growing he U.S demand for avocados. A combinaion of effecive promoion and informaion programs prevened a feared collapse of U.S. prices as impors soared Meeing he Impor Challenge U.S. avocado impors began o expand in he early 1990s, wih growh becoming subsanial as consrains on Mexican impors were eased and removed in a series of seps. Toal Hass avocado impors o he U.S. marke in 2002, he year before HAB began operaing, were over 233 million pounds, U.S. producion plus impors oaled over 633 million pounds and U.S. avocado consumpion averaged 2.34 pounds per capia. Five years laer in 2007, avocado impors oaled 760 million pounds, impors and domesic producion oaled over 1.04 billion pounds and U.S. avocado consumpion averaged 3.45 pounds per capia. The amazing fac in his growh sory is 67

71 ha nominal California avocado prices averaged cens per pound in 2002 and acually increased o cens per pound in 2007, while per capia consumpion increased by 47.4 percen. Wihou a significan increase in consumer demand, he sory would have been much differen. The annual f.o.b.-level demand for avocados in he U.S. is price inelasic, which means ha relaively small percenage increases in supply can resul in much larger percenage price decreases wih oher facors consan. The indusry s programs o increase avocado demand successfully prevened a collapse in he price of avocados The Demand for Avocados A number of facors are associaed wih he dramaic increase in he U.S. demand for avocados over he pas decade. Previous sudies of he demand for avocados have included variables for per capia avocado consumpion, real prices per pound, adverising and promoion expendiures, real per capia consumer income, ases and preferences (ime rend), and Hispanic populaion (as a percen of oal populaion). Effors o idenify subsiues or complemens for avocados have me wih limied success, perhaps due o he naure of available daa. As noed, he Hispanic populaion variable, which may also include he effecs of a large increase in Mexican resaurans and he growing populariy of Mexican and Souhwes syle cuisine, was an aemp o separae and idenify facors ypically lumped in he ases and preferences caegory. Oher facors, such as he increased seasonal availabiliy of avocados due o impors, changing consumer lifesyles, and die/healh concerns, may also be associaed wih he increase in demand over ime. Iniial specificaion of he demand equaion for avocados included U.S. per capia consumpion as he dependen variable, wih independen variables for price, income, Hispanic 68

72 populaion and promoion. Afer esimaion by ordinary leas squares mehods, saisical ess indicaed possible problems including srucural change, mulicollineariy, and simulaneous relaionships. The demand equaion was re-esimaed sequenially using new rend and dummy variables o capure he effecs of srucural change. Esimaed coefficiens changed wih each change in specificaion. The esimaed coefficiens for price remained relaively consan for each equaion and he esimaed price elasiciy of demand ranged from o a average prices and quaniies. The esimaed coefficiens for he promoion variable were he only oher coefficiens ha were posiive and saisically significan for each specificaion. The esimaed coefficiens for income and Hispanic populaion varied grealy by specificaion, were ofen saisically insignifican and were boh dropped from he Model 1 wo-sage leas squares esimaion. In shor, he rend and dummy variables used o accoun for srucural change effecively accouned for changes in demand measured by he variables for income and Hispanic populaion. The impac of HAB promoion programs on he demand for avocados was he focus of his sudy. While he coefficien on promoion was always significan, is magniude varied by specificaion, wih he elasiciy of promoion ranging from a high of 0.37 wih he original equaion o a low of 0.15 when he year and dummy variables were included in he demand equaion. I appears ha he rend variables accouned no only for he effecs of ases and preferences bu also for some of he effecs of promoion. Thus, he low esimae of he promoion elasiciy is undoubedly oo low and is viewed as a very conservaive esimae. 69

73 9.3. Economic Evaluaion of HAB Programs HAB programs have wo major objecives, o expand he U.S. demand for Hass avocados and o promoe orderly markeing. Evaluaion of HAB s degree of success required economeric esimaion of he U.S. demand for avocados, simulaion of promoion program coss and reurns and examinaion of he variabiliy of weekly avocado shipmens and prices. Esimaed demand equaions indicae ha HAB promoion programs had a saisically posiive impac on he U.S. demand for avocados, wih esimaed promoion elasiciies ranging from o 0.372, depending upon model specificaion. The lower end of he range is very consisen wih prior esimaes for avocados and oher commodiies wih successful promoion programs. Simulaion of benefi/cos raios using he highes and lowes esimaed promoion response and supply elasiciies ranging from 0.50 o 1.0 o 2.00 indicae ha producer funded promoion programs no only expanded demand for avocados bu provided a posiive reurn on funds spen. The esimaed B/C raios range from 1.12 o 6.73, bu, imporanly, each exceeds 1.0, meaning ha (a) he promoional programs suppored by he HAB during is firs five years yielded ne benefis o producers and (b) could have been profiably expanded during he period of analysis. Given he range of promoional and supply elasiciies used for he simulaion, our bes esimae of he benefi-cos raio for HAB promoion programs is somewhere in he middle of he simulaed range of 1.12 o 6.73; mos likely in an inerval beween 2.5 and 4.0. The orderly markeing objecive of HAB s informaion programs implies a smooh maching of weekly supply and demand wih sable prices. Boh producers and consumers benefi from price sabiliy when reail prices respond more o f.o.b. price increases han o price decreases, as occurs wih avocados. Comparison of weekly avocado prices for five years before HAB wih he firs five years of HAB operaions shows ha price variabiliy decreased an 70

74 average of 28 percen. Esimaed oal producer and consumer benefis from HAB s informaion programs may have been as much as $12.3 million. Subracing $3.75 million for program coss leaves ne benefis of $8.55 million. Producers share of his ne benefi was esimaed o be in he range of $ $2.82 million dollars, wih he remainder of he ne benefi going o U.S. avocado consumers. Analysis of avocado promoion programs in major reail markes suggess ha radio promoion significanly increased he average reail sales in promoion markes compared wih average reail sales in non-promoion markes. Previous resuls also sugges ha radio is a more effecive media han oudoor adverising bu he difference in effecs was no saisically significan. The opporuniy o conduc evaluaion based upon he available reail scanner daa was limied by he indusry s inabiliy o sysemaically provide disaggregae promoion expendiure informaion. I was recommended ha collecion of such informaion be a prioriy o faciliae fuure reviews. A poenial problem wih producer funded consumer promoion programs is ha reailers respond o increased demand by raising reail prices, hereby curailing he demand expansion. Analysis of reail pricing behavior for avocados indicaes, however, ha his does no seem o have occurred sysemaically and, hus, is no a problem limiing he impac of promoions. Insead, here is weak evidence ha reailers may conribue o he effeciveness of he programs by lowering price o suppor indusry promoions. Reail demand for avocados is significanly higher during paricular holidays and evens. Super Bowl Sunday had he highes sales, followed by Cinco de Mayo, Chrismas/New Year, Independence Day, and Labor Day. Reail sales grew significanly over ime for Cinco de Mayo week, wih sales growh more han doubling in 2007 and 2008 compared o 2003 and Previous research found ha reailers were using 71

75 avocados as sale iems during he high demand periods of Chrismas/New Year, Super Bowl Sunday, and Cinco de Mayo, hereby furher simulaing demand Boom Line The 13.2 percen average annual growh in U.S. per capia avocado consumpion during he 10- year period 1998 hrough 2007 wih essenially consan producer prices is unprecedened for a U.S. ree crop. Much of he credi mus go o HAB promoion programs ha have significanly increased he U.S. demand for avocados and have conribued o orderly markeing. Producers have received an aracive reurn on heir assessmens for HAB programs, wih he mos conservaive esimae indicaing a benefi/cos raio of 1.12 for promoion expendiures. Informaion programs have helped reduce price variabiliy and decrease reail margins wih benefis flowing o producers and consumers. 72

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