A World Pork Expo press conference unveiled a review of pork checkoff contributions and the return producers realize from their invested checkoff dollars.
The estimated net return to pork producers was at least $4.79 for every checkoff dollar invested from 1987 through 1998, according to John Nichols, Texas A&M University agricultural economist and team leader of an independent study of the 14-year-old national pork checkoff program.
Nichols is a director of the National Institute for Commodity Promotions, Research and Evaluation.
The study was commissioned by the National Pork Board (NPB), which is responsible for overseeing checkoff funds. A congressional mandate, drafted as part of the 1996 Farm Bill, directed all commodity promotion programs to do a return on investment study, specifically looking at the economic values of the checkoff programs to the producer, importer and investor, explains NPB President John Kellogg, Yorkville, IL.
Kellogg also explains the study was commissioned well before the petition drive calling for a national referendum on the pork checkoff. "In addition to fulfilling our obligation to the Farm Bill, we wanted to be able to use the results to refine the allocation of (checkoff) funds among projects and improve programs' performance," he says. That meant digging a little deeper than the congressional economic return mandate.
NPB and the National Pork Producers Council (NPPC) provided quarterly data for 1987-1998. Branches of the U.S. Department of Agriculture (USDA) and other public sources provided additional data on prices, inventories and key economic variables. Investigators also were charged with analyzing the relationship between consumer attitudes and their purchase and consumption of pork. USDA data for individual food intake levels were also used.
"The complexities of the hog and pork markets, their relationship to other meats, growing international linkages, the effects of competitors and many other economic and marketing variables were all taken into account in order to sort out and estimate the effects of the checkoff program activities," Nichols explains.
In doing so, they grouped checkoff activities into four major categories and used two separate econometric techniques to measure their return on investment - the time series approach and the structural approach. The results of both approaches are expressed as net benefit cost ratios (NBCR).
* Pork demand expenditures are activities designed to expand the U.S. demand for pork and pork products, especially at the consumer level. For these expenditures, the time series NBCR is $15.26, and the structural NBCR is $22.49.
* Post-farm research expenditures are for activities targeting new products and processes and aimed at the marketing chain, including research and technology transfer to processors and others beyond the farm gate. For these, the time series NBCR is $116.30, and the structural NBCR is $197.49.
* Foreign market development expenditures are funds spent on the development and expansion of export markets for U.S. pork and pork products. The time series NBCR is not estimated, but the structural NBCR is $12.52.
* Farm research and education expenditures are funds to improve production technology and educate producers on the adoption of new technologies. For these, the time series NBCR is -$9.24, and the structural NBCR is -$1.
"We distilled out of that a measurable return that, when aggregated over the whole 12-year period, results in an average return of at least $4.79 per dollar invested," says Nichols. The time series approach provides the "most conservative" estimate of the net return to producers for each dollar invested from 1987 to 1998.
Taking the more traditional structural econometrics approach - the NBCR climbs to $26.19/dollar invested. The structural NBCR figure reflects an analysis of 30 factors affecting the market for pork and hogs, pork producer behavior and consumer behavior.
"These results should be interpreted as a range which brackets the effects of the program," Nichols explains. Why the big difference? One reason is that the time series approach considers domestic market response only. No consideration is given to the complexities of the export market.
Nichols reviews the four categories more closely:
* Post-farm research and technology transfer - The highest returns from checkoff funding were realized from funds spent on market chains, new product development and improvement of product quality and safety. In other words, this involves investment in activities directed at increasing hog demand. On the conservative side, the return/dollar invested exceeded $100, while the structural analysis estimated a return of nearly $200/dollar invested.
Nichols notes the high return, in part, may be the result of greater emphasis placed in these areas in recent years, plus a relatively small allocation of funds. He predicts the return would moderate over time.
* Pork demand enhancement - The second highest return came from allocations to advertising and foodservice, merchandising and pork information bureaus. The $15-$20 return should be viewed as "very substantial and positive," he says.
* Foreign market development activities - The $12-plus return on investment in the structural analysis is encouraging, Nichols says, reminding that the time series analysis measured only domestic response; therefore, no response was recorded.
"All three categories are certainly positive and significant, contributing to the overall, aggregate NBCR of $4.97," Nichols comments.
* Farm research and education activities - At first blush, this portion of the report was disconcerting and drew requests for clarification. The finding that the NBCR in this category is generally negative is not surprising, according to Nichols. The dollars spent here have helped producers increase production efficiency and lower cost of production. In that context, the tendency is to produce more hogs in response to lower cost of production, thereby registering a negative rate of return to producers.
Still, the efficiency gains keep producers' costs competitive with other meats. Failure to keep pace in this important area could take pork out of the meat protein game. "Finding returns to research at the producer level quite often is a long-term payback. If you can see the importance of competing for market share from the strategic point of view, and if that requires you to reduce costs industry-wide to compete with other sources of meat protein, then you might view it as a strategic investment from which you wouldn't expect a short run or direct return. It may be part of the cost of doing business in order to maintain a competitive industry that will grow. That's a strategic decision that an industry makes, collectively," he adds.
$4.79 - The Texas A&M team's most conservative estimate of producers' net benefit to cost ratio for the entire checkoff program from 1987 to 1998. This means every dollar invested returned at least $4.79 to pork producers.
$1.17 - The net price effect/head of the entire checkoff program. The research found that the value of a 250-lb. hog increased by $1.55 due to checkoff programs. The checkoff cost an average of $0.38/head from 1987 to 1998.
Why the difference? Producers got more than the net price effect of $1.17/head. They also benefited from industry growth (i.e. they could make a profit on more animals) and cost reductions. These effects account for the difference between the two numbers.