NFAPP's Newsletter July/August 1996

Featured Articles :

"Effects of Market Promotion on Export Sales; A Study of the U.S. Apple Promotion Effort" , An Excerpt from "Export Promotion of U.S. Agricultural Products", (policy briefing paper, NFAPP #96-5).
Topic: Effectiveness of U.S. Export Market Promotion

"Legislative Update.....", by Pamela Mischen
Topic: Food Quality and Protection Act

"Market Watch.....Strawberry Market Update", by Pamela Mischen
Topic: $16 Million Loss due to Cyclospora

Federal export promotion programs, from the Foreign Market Development Program (FMD) through the Market Access Program (MAP), aid in the promotion of high-value agricultural products (HVAP) in export markets by non-profit firms, trade organizations, and cooperating private agribusinesses. For years, debate has focused on the efficacy of these programs in expanding foreign consumption as well as increasing the market share for U.S. products. Also central to the promotion debate is the role of generic v. branded advertising. This analysis considers four strategies for the promotion of agricultural products: no promotion, "Buy USA," international cooperation for generic promotion and value-added, branded promotion.

Exports of high value agricultural products represent a significant potential source of market growth for U.S. agriculture. Exports of high value agricultural products accounted for 47% of exports in 1992. By 1995, 59% of agricultural exports were high value products, with an estimated 62% of HVAP forecast for the year 2000 (Dwyer, 1994; Love, 1995). Although the worldwide growth in demand is responsible for much of the increase in U.S. exports, U.S. global market share has improved from 10% to 15.5% over the 1980 to 1992 period (Dwyer, 1994).

Considerable controversy has surrounded both the re-authorization and appropriation of the Market Promotion Program (MPP), which has been renamed the Market Access Program (MAP). Beginning in 1955 with the Foreign Market Development (FMD), or Cooperator program, the MPP and its predecessor, the Targeted Export Assistance (TEA) program, have sought to maintain and increase U.S. market share in select markets of high-valued agricultural products through export promotion programs supported by cooperatives, non-profit trade organizations, and cooperating private agribusinesses. Both academic and government research shows that these programs have been effective in increasing sales of U.S. products abroad. In fact, the Foreign Agricultural Service (FAS) estimates an average $16 increase in exports for every MPP dollar spent (Dwyer, 1994) so that the increase in tax revenue due to higher export sales more than covers the cost of the program. Research shows that export promotion is, in general, a sound public investment.

Generic and branded promotion affect demand in two different ways. Generic promotion educates the consumer on the product while the goal of branded promotion is to differentiate the product from other products on the market.

By evaluating the effectiveness of promotion in terms of impact on market share and total market sales, four strategies for promotion can be identified. Figure 1 illustrates the criteria for determining which strategy is most appropriate. If neither market share nor total market expenditure increases as a result of promotion (Quadrant I), then there is no incentive to promote. If market share declines but total market expenditures expand (Quadrant II), there is evidence that promotion has had a predominantly generic effect in that other exporters are the main beneficiaries of U.S. promotion. In this case, even if the return to U.S. growers is positive, there is an incentive to collaborate with other nations in expanding the demand for the product. Through collaboration, all countries are able to continue to increase total market expenditures; however, all countries are also now paying for promotion.

A generic promotion effect is apparent when consumers are not able to differentiate between the U.S. product and product from another country. An alternative strategy for promotion then is to make the item distinct from that marketed by other countries. This can be accomplished through value-added processing and branding. Processed products such as wine and french fries are more easily differentiated than grapes or potatoes.

Quadrants III and IV both represent a situation where market share for the U.S. is increasing. In quadrant III, there is a negative or zero change in total market expenditures, implying that U.S. promotion has solely a branded promotion effect and is taking market share away from other countries but not increasing total demand (Galbraithian Effect). Quadrant IV represents a situation where some spillover effects exist, however, as the total demand increases, the U.S. continues to increase its share of the market. For both quadrants III and IV, a "Buy USA" marketing strategy is advised since the branded promotion efforts outweigh the generic promotion effects in the foreign market. Although "Buy USA" is the recommended strategy for both quadrants III and IV, quadrant III represents a mature market whereas quadrant IV represents a market which is still growing. Therefore, governments have an incentive to support market development for quadrant IV cases, but such an incentive does not exist for quadrant III markets. This corresponds to the FAS mandate of using MAP funds in expanding markets rather than mature market segments (GAO, 1993).

Using apple exports to Singapore and the United Kingdom as a case study, the appropriate export promotion strategy can be identified. Results from both the Singapore and U.K. models indicate that export promotion has a significant and positive effect on the total expenditure on apples from all sources. In fact, each dollar of promotion funding returns over $20 in total world exports in each case. However, in Singapore, export promotion causes the U.S. to lose market share to other countries that free ride on U.S. promotional efforts. This places the Singapore case in quadrant II of the market share/total market matrix. On the other hand, the U.K. results show that U.S. promotion both increases the size of the total market and the U.S. share of the market, placing the U.K. example in quadrant III.

As theory suggests, promotion is more effective the less elastic is demand. That is, the less sensitive demand is to changes in price, the more likely it is that promotion will ensure brand loyalty and be less susceptible to lower priced competitors. In this case, the demand for apples is more elastic in Singapore than in the U.K. where there is an established market for apples and consumers respond more to quality than to price. This result suggests that if a country is able to differentiate its product successfully, then it is likely to benefit from promotion that has a large generic component due to the nature of the product as inherently hard to brand.

Although there is little U.S. exporters can do to differentiate fresh apples beyond their current efforts, as this study suggests they do in order to avoid the free rider effect, the policy implications of this study are more broad. In particular, these results suggest two alternative strategies to "Buy USA" promotions. First, in order to avoid the subsidization of rivals' sales, export promotion should be targeted to those products that are intrinsically easier to differentiate. This includes manufactured goods, processed foods, and products with more value-added content. Second, an international cooperative promotion effort aimed at increasing total sales of the product raise total expenditure on apples by the importer and reduce their costs through sharing promotional expenditures with other countries.

Dwyer, G. "Evaluating the Effectiveness of the Market Promotion Program on High-Value Agricultural Exports."
Washington, D.C.: USDA/Foreign Agricultural Service, 1994.

Love, J. "U.S. Horticulture's Long Run Outlook." in Vegetables and Specialties: Situation and Outlook Report Washington, D.C.:
USDA/ERS, April, 1995.

General Accounting Office. "International Trade: Changes Needed to Improve Effectiveness of the Market Promotion Program."
Report to Congressional Requesters, July, 1993.

On August 3, 1996 President Clinton signed the long awaited Food Quality and Protection Act. This Act will replace the "zero-tolerance" Delaney Clause which regulates the level of carcinogens allowed in processed food with a "reasonable certainty of no harm" risk level. This risk level is understood to mean creating a lifetime risk of cancer of no more than one in one million. This risk level will be applied to both raw and processed foods. This standard is more stringent than the one previously in place for raw foods, but not as strict as the Delaney Clause. The compromise between environmentalists and the processed food industry incorporates the National Academy of Sciences recommendation to consider the risks of cancer and nervous system damage on infants and children, and the risk of breast cancer and reproductive harm on women.

Also a part of the Act is the Minor Use Crop Protection Act which amends the Federal Insecticide, Fungicide and Rodenticide Act. A minor use pesticide applies to crops for which total U.S. acreage is less than 300,000 acres or pesticides for which economic incentives for registration are not sufficient. This title will allow for expedited review of applications to support minor use pesticide registrations.

On June 8, Texas health officials announced a statistical correlation between strawberries and Cyclospora outbreaks recorded in 20 states, and warned consumers against eating strawberries. The disease, which was eventually traced to raspberry imports, was linked to 850 cases of intestinal illness. The warning was lifted on June 27.

Strawberry growers had just come through heavy May rains and were expecting record volumes for the June harvest when the Cyclospora announcement was made. Instead of increasing shipments after June 8, strawberry weekly shipments fell by approximately 25%. In addition to low shipments, prices fell from an average of $6.37 per flat to $5.23 per flat.

Due to strong prices and a large supply due to both increased acreage and yield, June revenues for strawberry shipments for the Central Coast region was an anticipated $63 million dollars. By the end of June, however, only $47 million worth of sales were recorded-- $16 million less than anticipated-- and the lowest June sales since 1990. (See Figure 2) Unlike natural disasters, such as the flooding which reduced lettuce shipments by 20% in summer of 1995 which resulted in high prices and record revenues, a health scare such as Cyclospora reduces both shipments and price.

Although July shipments were at normal seasonal levels, prices dipped below $5.00 per flat and remained low throughout July. Hopes for July prices to rebound to $9.25, did not materialize. Although shipment data is not available for August, prices have been quoted in the $6.25-$9.25 range.

California dominates the strawberry market with approximately 50% of the acreage and 80% of the production. The Southern districts of San Diego, Orange and Los Angeles, and Oxnard provide the majority of the late winter-early spring shipments. California's major strawberry production region is in the Central Coast. Central Coast strawberries, coming from Santa Maria and Salinas/Watsonville appear on the market as early as February and March, but peak shipments don't arrive until May and June.

Winter and early spring strawberries are also sourced from Florida and Mexico with total imports comprising less than 4% of the fresh strawberry market.

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