An econometric model of the United States dairy industry is used to simulate the economic impact of alternative strategies in the generic advertising of dairy products. Advertising programs for fluid milk, cheese, and butter are considered. The historic quarterly advertising expenditure levels experienced during the period October 1984 through December 1990 are used as a basis of comparison. A national model enables the analyst to simultaneously estimate the impact of changes in advertising expenditures on price and volume of sales at retail, wholesale, and farm levels of trade. The impact on government purchases can also be estimated. The simulations indicate that the largest impact of decreases or increases in advertising expenditures is on price. A 50 percent decrease in advertising expenditures (using the same allocation proportions among product categories constant) will result in a 6 percent decline in retail fluid milk price, a 2.4 percent decrease in retail cheese prices and a 1 percent decrease in retail butter price. On the other hand, a doubling of expenditures will result in retail price increases of 7.7 percent for fluid milk, 3.6 percent for cheese, and 1.3 percent for butter. At the farm level, overall increases in advertising expenditures will result in increases in the all farm milk price and increases in total production, cow numbers, and production per cow. As expenditure levels increase, the increased demand more than offsets the negative impact of increases in production volume so that producer returns overall continue to increase, but at a decreasing rate. Accounting for all impacts, the rate of return is 4.6 percent at historic levels of advertising, 9.8 percent at 50 percent of historic levels, and 3.5 percent at advertising expenditure levels of 200 percent of historic levels. The simulations indicate that a reallocation of advertising dollars toward fluid milk and away from cheese or butter will result in increases in producer returns, while a reallocation toward cheese or butter will result in decreases. This simulation process using the industry model can be used to estimate the economic impact of a large number of different expenditure strategies.


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