Guest comment - Herb Baum

09/14/2009 04:01:26 PM
Tom Karst

Retired industry veteran and esteemed economist Herb Baum weighs in on a recent blog post about blueberry promotions. From Herb:

Your recent blog on the Blueberry Marketing Order was interesting as was your suggestion of this as a possible model for a generic marketing order. As the former CEO of Naturipe Berry Growers and twice Chair of the California Strawberry Commission (CSC), I have written and analyzed the subject in my book, "Quest for the Perfect Strawberry - A case study of the California Strawberry Commission and the Strawberry Industry: A Descriptive Model for Marketing Order Evaluation." The book was the basis for my PhD at the University of Chicago in 2006.

Chapter 6 outlines my basis for evaluating marketing orders and differs from the Kaiser econometric approach and uses a list of barometers for measurable performance outcomes.

Not having read the Kaiser paper it is difficult to comment on his definition of promotion and his distinguishing between private sector promotion and Board promotion, including the magnitudes of each and their causal relationship.  Private sector promotion involves price and quantity projections (ads), usually with 2 week advance quotations. Whether the multiple industry projections create general market price equilibrium is unknown until after the fact.

Price is the key variable and, if promotions (ads) are based on prices which are too high to clear the market, prices will continue to fall until a correct price is reached and frequently it will be below what it would be if projections were correct. We also do not know what effect quality had on price relative to other periods. What I am suggesting from the strawberry experience is that private sector pricing and promotion (creating ads) is the key ingredient in marketing and influencing demand. For this reason, the CSC ceased industry promotion expenditures as well as industry advertising.

Additionally, it was assumed that Chains throughout the country would promote without promotion allowances provided by the CSC. It now relies on Category Management not direct promotion, since the private sector directs this activity with its own category management, including sales (prices) and promotion (ads). When Kaiser and other economists (UC Davis) discuss this issue they generally fail to include the most important element in the evaluation, the private sector pricing and promotion practice, which is intended to increase demand with chain advertising and promotion.

We know that chain advertising and promotion increases demand. We also know that price is the key element in determining the level of demand.

A positive, measurable effect of introducing generic promotion into a national marketing system, already too complex to understand for a single commodity and involving private sector pricing and promotion (ads) for thousand of firms and multiple commodities, is incomprehensible because of the unlimited number of variables and cross commodity effects. It sounds good and the strawberry industry, including yours truly, led the effort for generic advertising and industry promotional allowances later to be discontinued because of the inability to establish causal relationships.

However, with large crops and acreage, the industry is reconsidering generic advertising during peak periods. I understand the decision is to “study” causal relationships rather than launch a program.

It is interesting to note that contract pricing is now the predominant form of marketing between private firms and the large chains, although special price and supply situations are considered by the parties. Industry activity, as you suggested, is mostly irrelevant in this entire new marketing environment since each shipper-marketing agent has its own relationship with customers in the form of category management

Finally, as I mentioned in my book, “measurable performance outcomes” are vital for evaluation of any program and must refer to the direct effects of polices on demand, prices, and growers real farm income. Proxies for demand may indirectly affect demand by influencing behavior and attitudes, but are difficult to measure.

The CSC and other marketing Boards are trying to influence these proxies, and the proxies would be the variables that a national generic program would attempt to effect. Proxies for sales, or substitutes, i.e., product usage, consumer attitudes, shopping behavior and consumer perceptions of the product, are frequently used instead of measuring actual sales (demand). However, the defense of a national generic program should be based on “measurable performance outcomes” rather than indirect proxies which are immeasurable, as would be the cross-commodity effects of multi-commodity promotion activities.

If Kaiser bases his conclusion, that the Board promotion positively effected price, I would suggest that the private sector pricing and promotion activity, along with contract pricing, have had a more important influence on price averages and price stability than Board promotion activities. The relative quality in comparative years is also important in comparative pricing. Any further study of generic promotion and Blueberries should evaluate the private sector and understand the complete working of the Blueberry industry before concluding from an econometric model that Board policy is responsible for price increases and marketing larger volume.

Chapter 5 pages 57 of “The Quest” discusses that “descriptive models have been widely used in analyzing agriculture and commodity systems. A practical, decision making model, which requires forecasting and predicting capabilities, may not be effective if the markets being studied are not understood in terms of their relationships. Similarly, a useful model for a member of a commodity board may be different from a useful model for an academician.” The model suggested in my book may be a starting point.

Leaping from “apparent success” in Blueberries to a national generic program with all of its complexities would be a serious uneconomic use of resources. I cannot imagine the California Strawberry industry supporting a national program of generic promotion when it no longer participates in the direct promotion of strawberries but rather category management, which provides customers market information with no promotion or ad activity. The private sector has that responsibility.

I do not speak for the strawberry industry. These are my personal views.

Herbert Baum
Depoe Bay, OR

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