I see that the Perishable Pundit has “finally” dipped his toe into the proposal of a national generic promotion board for fruits and vegetables. As you know, I am a supporter of the concept and feel that would elevate the profile of fresh fruits and vegetables in the market place and give a reliable base for national fruit and vegetable promotion messages. Does this industry, which a recent PMA study says accounts for a half a trillion dollar in economic impact, want to continue rely on a pass the hat, charity auction, golf tournament proceeds approach to promotion? I don’t think so….
You may be curious to know, as I, about the approach of the Pundit to this argument. I’ll give you an excerpt:
We come to the issue somewhat wistfully as there is little question that the world would be a better place if diets shifted to a diet composed mostly of plant-based foods, especially fruits and vegetables. So the concept is not merely desirable; it is an important public health and sustainability opportunity.
TK: So far so good. But wait, why come to the issue “wistfully”? Why not come to the idea "psyched up"?(wistful defined: “full of yearning or longing; sad and thoughtful”) Are you "wistful" perhaps because you know you will oppose what is inherently a good and worthy undertaking? Let’s continue, from Jim:
Yet that doesn’t settle the matter. The way this is being promoted — as a program to increase consumption — there is a contradiction at the heart of the proposal. In this industry of family businesses, there are plenty of farmers who grow a set acreage, say 200 acres of vegetables. These growers will not profit just because consumption increases. They will only profit if prices go up.
TK: To me, the idea of linking all fruit and vegetable growers’ profitability to generic promotion is a classic “straw man” argument. (defined: To "attack a straw man" is to create the illusion of having refuted a proposition by substituting a superficially similar proposition (the "straw man"), and refuting it, without ever having actually refuted the original position.) The proposed national generic promotion board never has promised to solve all ills of the industry. If it did purport a solution to grower profitability, it would be immediately discredited. Growers and grower representatives can’t set this as a required outcome of a generic promotion board. What generic promotion does promise is a return on investment in moving the demand needle. I found this story about salmon promotion that explains why the two can’t be directly linked. From the Web link http://commodity.aem.cornell.edu/nicpre/newslet/vol9no1/index.htm
Relative Impacts of Generic Advertising:
The Case of Salmon
Henry W. Kinnucan and Øystein Myrland
Auburn University and University of Tromsø
From the piece:
Studies of generic advertising often show benefit-cost ratios in excess of 3:1. Yet producers wonder “If advertising is so profitable, why am I losing money?” The answer is that generic advertising’s effect on market demand typically is tiny. Benefit-cost ratios are large because generic advertising expenditures in relation to product value are small. Take beef as an example. The annual farm value of beef in the United States is about $30 billion. The annual expenditure on generic advertising for beef is about $25 million. Given these two numbers, how much would demand have to increase to yield a 3:1 return? The answer: approximately 0.25%. A sales increase of this magnitude is not apt to be observable at the farm level. Nor is it likely to spell the difference between profit and loss during times of economic stress. Thus, farmers can be forgiven for being skeptical about generic advertising, particularly when studies show large returns when farm prices are low. Still, the fact remains that large returns are compatible with small effects. In fact, in the beef example, if generic advertising were to increase demand by 5%, a not unrealistic expectation for a private firm that advertises, the benefit-cost ratio would be on the order of 63:1!
This article’s basic theme is that generic advertising effects typically are tiny. In the case of salmon, a 254% increase in generic advertising expenditures in the European Union was shown to increase in the EU wholesale price by a mere 3.0% and the Norwegian farm price by a mere 4.3%. Cause and effect relationships of this magnitude are not uncommon in the commodity promotion literature. This does not mean that generic advertising is unprofitable. Indeed, our analysis suggests program intensification over the 1997-99 period yielded Norwegian producers a benefit-cost ratio of 3:1 (see Kinnucan and Myrland for details). Rather, it indicates that generic advertising’s ability to influence prices, production, and trade flows is limited.
TK: Based on this article, it is true that advocates might be overselling the idea that generic promotion at suggested levels would have enough heft to move the demand needle dramatically. At the same time, it is beyond reasonable argument to believe $30 million in promotion funds should be accountable to determine grower profitability for an industry the PMA rates at better than $275 billion in direct economic impact in the U.S.
Yet for the investment that is asked (1/20 of 1% of f.o.b. value) I believe the advertising and market place results from a national promotion board would create a positive returns on the investments made in promotion. Let’s continue the discussion about the promotion board, but please, Jim, don’t try to pin grower profitability solely on generic promotion.