NFAPP's Newsletter August 1995

Featured Articles :

"Marketing Orders and Game Theory", by Tim Richards
Topic: Marketing Orders

"Free Speech or Free Lunch?, by Timothy Richards
Topic: Generic Commodity Promotion Programs

"Market Watch.....U.S. Melon Outlook", by Pieter van Ispelen
Topic: The U.S. Melon Market

Marketing orders appear to be undergoing a period of unprecedented turmoil. All institutions of group marketing face a very real threat from within, especially considering last year's suspension of the California and Arizona citrus marketing orders, and ongoing challenges to mandatory promotional check-offs. Why is this the case? A relatively new branch of economic thinking called "game theory" may offer an explanation of these examples as symptoms of a general economic problem.

Many believe the marketing orders' success in improving producer returns sows the very seeds of their own destruction. If everyone withholds supply, or funds generic promotion, then individual producers have incentive to avoid the payment or supply constraint. Therefore, if everyone behaves in his or her self-interest, the group effort fails. In economic terms, this is known as the "free-rider" problem. A simple example illustrates how these incentives can lead to the demise of cooperative marketing.

Suppose two growers of the same commodity are asked to invest in a promotional scheme that does in fact, increase the demand for the output of both. If one grower contributes but the other doesn't, then the non-contributor enjoys the benefits of greater demand, but pays no program costs. If neither grower contributes to the promotional effort, sales will be poor. This logic is summarized in the table to the right, where each entry compares profit levels to contribution levels.

From this example, it's clear that if Grower B decides to not participate, then Grower A will be better off by not participating either ($10 > $8). Furthermore, even if Grower B does decide to help fund the program, Grower A still benefits by avoiding the cost of the program while "free-riding" on Grower B ($18 > $16). Because the argument is the same from Grower B's perspective, neither will choose to contribute to the program. Although failure to cooperate is individually rational, notice that the total industry profit (the sum of the profits of A and B in each box) is fully $12 lower than if both contribute. Each grower realizes an advantage if there is incentive to trust the other to participate.

Obviously, this is a simple example. If this scenario were repeated many times, it's likely that the growers would learn to cooperate. Also, in reality, individuals don't exist in the information vacuum this example describes. It does however, highlight fundamental economic forces at work behind the collapse of many such agreements. If you're not convinced, substitute Iran for Grower A and Saudi Arabia for Grower B where the decision is whether or not to limit oil production. While OPEC still exists, it's not nearly as effective as it once was. Can the same be said of U.S. produce marketing orders?

On June 27th, handlers opposed to mandatory assessments for generic commodity promotion programs added another notch to their gunstocks. In its ruling on the challenge to USDA marketing order activities by Wileman Brothers and 14 others, the Ninth Circuit Court of Appeals found that generic promotion programs are unconstitutional, therefore, some of the $10 million in assessments collected since 1980 may have to be returned. Predictions of the death of marketing orders as we know them - especially after a similar ruling in 1993 in the Cal-Almond case - are likely premature, but this decision does challenge the mandate of the orders on a very fundamental level.

Without a doubt, the case presented by the plaintiffs was a strong one. In the Cal-Almond case, the Ninth Circuit Court found that the "First Amendment right of freedom of speech includes a right not to be compelled to render financial support for others' speech". In fact, the USDA must meet three criteria to pass the "commerical speech test" for forced advertising to be deemed constitutional: 1) they must show "substantial governmental interest" in the restrictions, 2) they must "directly advance" the interest, and 3) the restrictions must not be "more extensive than is necessary" to serve that interest. Although there was little argument over the governmental interest in increasing the demand for fruit, the USDA could not produce evidence to show that such generic promotion directly advanced the government's interest. If it were clearly the case that the "others' speech," or generic promotion, could be proven more effective at increasing the demand for fruit than individual promotional efforts, then there would be little incentive to challenge the programs. The USDA failed to provide evidence of this in both the Cal-Almond and Wileman cases. Moreover, in the Wileman case, the USDA could not show the programs were indeed "narrowly tailored to achieve the desired objective" because the nectarine and peach order does not even provide the ability for individual producers to credit promotional expenditures against the mandatory assessment, as in the almond order. Indeed, these arguments were sufficient to win the day.

As expected, both sides have appealed this decision. The plaintiffs' appeal is based on the failure of the ruling to support their arguments against the larger anti-trust issues -- the fundamental rights of the orders to regulate grade, size, and maturity; or to delegate authority to committees. The defendants however, point to several flaws in the ruling's logic.

According to The Agricultural Law Letter, published by the independent law firm of McLeod, Watkinson, and Miller, the USDA has at least one strong argument in its appeal. Namely, the standard against which the effectiveness of generic promotion was compared does not exist, and will not exist. In an industry comprised of many small growers, there is no economic incentive to do individual commodity promotion since they have no brand presence to differentiate their product from others. Without brand recognition, money spent on promotion will benefit everyone, so the money will be wasted - a classic "free rider" problem. Not surprisingly, there is no record of the effectiveness of individual promotion.

Although there is no credit system in place for peach and nectarine growers to substitute their own promotion for the generic programs; they are not precluded from doing additional promotion. The fact that there has been virtually no private promotion supports the government's side of the case. Predictably, the counter-agrument maintains that the order usurps all promotional funds that the firms would otherwise use themselves.

As the battle rages on in California, the cold war between diverse interests on either side of the marketing order issue continues. If upheld, this decision and others like it, may represent a far stronger factor in the reform of U.S. agricultural policy than the current House ever imagined they would become - for better or for worse.

The prospective area for melon harvest during the summer quarter is forecasted at 139,000 acres - down 1% from last year, but slightly above 1993. Acreage reductions for watermelon were offset by increased acreage of honeydew and cantaloupe. Summer harvested acreage was estimated at 46,000 acres for cantaloupe, 16,800 acres for honeydew, and 76,200 acres for watermelon.

California remained the leading cantaloupe-producing state in the summer with 88% of total U.S. production. California cantaloupe traded in a buyer's market in mid-August, with f.o.b. prices at just $5 per carton. The crop recovered after a late start, and irregular harvest plagued the start of trading in July. California's harvested acreage was estimated to be sightly above last year's level. Georgia's cantaloupe acreage is expected to decrease by 14%, while Texas will remain at a constant level. Halfway into the season, the U.S. shipments of cantaloupes lagged behind 9.5% - compared to 1994.

California also produces the majority (86%) of honeydew in the U.S. during the summer. Harvested acreage is expected to be up 12% from last year, while Arizona, the second largest honeydew-producing state, is expected to see a slight increase of 5% during the summer months. The season started slowly, with total U.S. shipments 18% below last year's levels.

Watermelon acreage in the summer is expected to be the same as last year's, in all but one of the producing states. Texas' acreage levels are expected to decrease to an estimated 13,500 acres - 16% below 1994, and 25% below 1993 levels.

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