1. Agribusiness, Food, and Consumer Economics Research Center USW/NAWG JOINT BOARD SESSION USW/NAWG J OINT F ALL W HEAT C ONFERENCE S ANTA A NA P UEBLO, N EW M EXICO O CTOBER 31, 2014 USW/NAWG JOINT BOARD SESSION USW/NAWG J OINT F ALL W HEAT C ONFERENCE S ANTA A NA P UEBLO, N EW M EXICO O CTOBER 31, 2014 D R. G ARY W. W ILLIAMS D R. J. M ARK W ELCH Texas A&M University AN ECONOMIC ANALYSIS OF THE POTENTIAL RETURNS FROM AN ENHANCED WHEAT CHECKOFF PROGRAM

2. Two main questions addressed: What Does This Study Do? What are the major forces affecting the U.S. Wheat Industry? Would an enhanced wheat checkoff program likely benefit wheat producers?

3. SWOT Analysis Major Forces Facing U.S. Wheat Industry STRENGTHSWEAKNESSES  Positive Wheat Demand Outlook  Improvements in U.S. Wheat Quality  The Reliability of the U.S. as a Wheat Supplier  Relatively High U.S. Farm Price of Wheat  Relatively Stable Cost of Wheat as an Input  The U.S. Farm Policy Safety Net  Cost of Production Disadvantage  Slow Relative Growth of Wheat Yields  Low Relative Returns to Wheat  Wheat Transportation Issues OPPORTUNITIESTHREATS  The Sustainability Movement  The Advent of Trait-Specific Varieties  The Potential of Biotech Wheat  The Opportunity of Managed Market Volatility  Growing Export Competition  Growing Strength of the U.S. Dollar  The Prediction of Climate Change  Opposition to GMOs  The Anti-Gluten Movement

4. Key Negative Forces Major Forces Facing U.S. Wheat Industry ●Low relative growth of wheat productivity ●Low relative returns to wheat production U.S. Crop Value of Production Less Operating Costs $/per planted acre, 2003-2013

5. Key Negative Forces Major Forces Facing U.S. Wheat Industry ●Low relative growth of wheat productivity ●Low relative returns to wheat production ●Increased market price volatility ●The complexity of crop insurance as opposed to traditional farm policy tools

6. Key Negative Forces Major Forces Facing U.S. Wheat Industry ●Low relative growth of wheat productivity ●Low relative returns to wheat production ●Increased market price volatility ●The complexity of crop insurance as opposed to traditional farm policy tools ●Disruptions of or inaccessibility to transportation systems for wheat producers

7. Key Negative Forces Major Forces Facing U.S. Wheat Industry ●Low relative growth of wheat productivity ●Low relative returns to wheat production ●Increased market price volatility ●The complexity of crop insurance as opposed to traditional farm policy tools ●Disruptions of or inaccessibility to transportation systems for wheat producers ●Wheat quality concerns Export Wheat Quality, 1985-86, 2004-06, 2011-13

8. Key Negative Forces Major Forces Facing U.S. Wheat Industry ●Low relative growth of wheat productivity ●Low relative returns to wheat production ●Increased market price volatility ●The complexity of crop insurance as opposed to traditional farm policy tools ●Disruptions of or inaccessibility to transportation systems for wheat producers ●Wheat quality concerns ●The uninformed consumer regarding GMO, gluten, and other wheat consumption issues ● Uncertain future domestic demand for wheat and the impact of noneconomic demand drivers like health and diet.

9. Key Negative Forces Major Forces Facing U.S. Wheat Industry ●Low relative growth of wheat productivity ●Low relative returns to wheat production ●Increased market price volatility ●The complexity of crop insurance as opposed to traditional farm policy tools ●Disruptions of or inaccessibility to transportation systems for wheat producers ●Wheat quality concerns ●The uninformed consumer regarding GMO, gluten, and other wheat consumption issues ●Growing wheat export competition

10. Some Activities an Enhanced Checkoff Program Could Fund to Combat the Negative Forces Major Forces Facing U.S. Wheat Industry ● Research to boost yields, lower the cost of production, develop new wheat varieties ●Development of producer decision aids to support efficient farm production decisions ●Organization of a Wheat Transportation Coalition ●Research on the safety/nutrition of U.S. wheat/wheat products ●Science-based media campaigns to combat wheat concerns ●Trade servicing to demonstrate U.S. productive capacity and reliability as a supplier, advertising in trade periodicals, promotional material for food buyers, etc. ●Technical assistance to food manufacturers to expand the type, quality, and number of uses of wheat and wheat products ●Media campaigns to promote consumption of wheat-based products; consumer education seminars; baking/cooking seminars for institutional nutritionists/cooks/food buyers, etc.

11. How to Measure the Returns from Checkoff Funds that Have Not Been Raised or Spent? Potential Producer Returns from an Enhanced Wheat Checkoff Program Potential Producer Returns from an Enhanced Wheat Checkoff Program ●First, some assumptions have to be made: (1) How many additional checkoff dollars will be spent? -Reasonable range of possible increased funding -Five potential additional levels of funding: 1 /bu 1.5 /bu 2 /bu 0.4% of value 0.5% of value

12. How to Measure the Returns from Checkoff Funds that Have Not Been Raised or Spent? Potential Producer Returns from an Enhanced Wheat Checkoff Program Potential Producer Returns from an Enhanced Wheat Checkoff Program ●First, some assumptions have to be made: (1) How many additional checkoff dollars will be spent? -Reasonable range of possible increased funding -Five potential additional levels of funding: 1 /bu 1.5 /bu 2 /bu 0.4% of value 0.5% of value -Assume they will be spent as effectively as the average commodity checkoff program currently in operation -Assume “low effectiveness” and “high effectiveness” to provide a plausible range of effectiveness (1 standard deviation below and above the mean) (2) How effectively will the additional dollars be spent?

13. Potential Producer Returns from an Enhanced Wheat Checkoff Program Potential Producer Returns from an Enhanced Wheat Checkoff Program Selected Commodity Promotion Studies: BCRs and Promotion Elasticities

14. How to Measure the Returns from Checkoff Funds that Have Not Been Raised or Spent? Potential Producer Returns from an Enhanced Wheat Checkoff Program Potential Producer Returns from an Enhanced Wheat Checkoff Program ●First, some assumptions have to be made: (1) How many additional checkoff dollars will be spent? -Reasonable range of possible increased funding -Five potential additional levels of funding: 1 /bu 1.5 /bu 2 /bu 0.4% of value 0.5% of value (3)What are wheat production, demand, and price likely to be in the future (baseline)? -Assume they will be spent as effectively as the average existing checkoff program -Assume “low effectiveness” and “high effectiveness” to provide a plausible range of effectiveness (1 standard deviation below and above the mean) (2) How effectively will the additional dollars be spent? -USDA and FAPRI to provide a range of estimates (2012/13-2019/20)

15. How to Measure the Returns from Checkoff Funds that Have Not Been Raised or Spent? Potential Producer Returns from an Enhanced Wheat Checkoff Program Potential Producer Returns from an Enhanced Wheat Checkoff Program ●Second, use the assumptions to calculate a plausible range of Benefit-Costs Ratios(BCRs) -BCRs calculated over: » Three demand variables: » Three demand variables: Domestic demand, Export demand, and Total demand Domestic demand, Export demand, and Total demand » Three alternative measures of promotion effectiveness: » Three alternative measures of promotion effectiveness: Low, Mean, High Low, Mean, High » Five levels of potential additional funding: » Five levels of potential additional funding: 1¢/bu, 1.5¢/bu, 2¢/bu, 0.4% of value, and 0.5% of value 1¢/bu, 1.5¢/bu, 2¢/bu, 0.4% of value, and 0.5% of value » Two forecasts of U.S. wheat market quantities and price » Two forecasts of U.S. wheat market quantities and price USDA and FAPRI USDA and FAPRI

16. Estimated BCRs Based on FAPRI Forecast Potential Producer Returns from an Enhanced Wheat Checkoff Program Potential Producer Returns from an Enhanced Wheat Checkoff Program Additional Assessment Levels Domestic Demand Promotion Export Demand Promotion Total Demand PromotionLowMeanHigh LowMeanHigh LowMeanHigh net revenue per checkoff $ spent $0.01/bu6.4421.2836.12 3.2520.9943.88 5.0021.1539.64 $0.015/bu3.9613.8623.75 1.8413.6628.92 3.0013.7726.10 $0.02/bu2.7210.1417.56 1.139.9921.44 2.0010.0819.32 0.4% of value1.987.9113.85 0.707.8016.96 1.407.8615.26 0.5% of value1.386.1310.88 0.366.0413.36 0.926.0912.01

17. Estimated BCRs Based on USDA Forecast Potential Producer Returns from an Enhanced Wheat Checkoff Program Potential Producer Returns from an Enhanced Wheat Checkoff Program Additional Assessment Levels Domestic Demand Promotion Export Demand Promotion Total Demand PromotionLowMeanHigh LowMeanHigh LowMeanHigh net revenue per checkoff $ spent $0.01/bu5.3518.0430.72 2.5517.3536.36 4.1017.7333.30 $0.015/bu3.2411.6920.15 1.3711.2323.97 2.4011.4921.87 $0.02/bu2.188.5214.86 0.788.1817.73 1.558.3616.15 0.4% of value2.018.0114.01 0.687.6916.73 1.417.8715.23 0.5% of value1.416.2111.01 0.355.9513.18 0.936.0911.99

18. Main Conclusions Potential Producer Returns from an Enhanced Wheat Checkoff Program Potential Producer Returns from an Enhanced Wheat Checkoff Program ●An enhanced wheat checkoff program would likely generate a positive return to producers under most assumptions. -The range of potential BCRs is wide -Most potential BCRs are greater than one under all alternative assumptions of the analysis. ●The producer return (BCR) to an enhanced wheat program depends critically on: -The effectiveness of the promotion investments -The level of the funding increase -Future wheat prices and quantities ●BCRs and funding levels tend to be inversely related at the same level of promotion effectiveness. -As funding grows, revenues grow also but at a decreasing rate -Thus, BCRs decline as funding increases.

19. Main Conclusions (cont’d) Potential Producer Returns from an Enhanced Wheat Checkoff Program Potential Producer Returns from an Enhanced Wheat Checkoff Program ●A high BCR generally implies that a checkoff program is underfunded. -As funding increases, the checkoff investments capture some of the revenues that are unrealized at lower funding levels. -In the process, the BCR tends to drop. ●The same level of BCR can be generated by many different levels of additional funding depending on the level of program effectiveness at those funding levels. -To get a 5-to-1 BCR: Invest $1 billion and get a $5 billion return or … Invest $1 and get a $5 return. -The same level of funding results in a higher BCR the more effective you are at investing the checkoff funds!

20. ●Primary Implication: An Expanded Wheat Checkoff Program Would Likely Be Successful Implications for an Expanded Wheat Checkoff What the additional checkoff funds are spent on will make a difference for the returns to wheat producers. Study of best practices across commodity checkoff groups needed: -Most effective mechanisms for managing and investing the additional checkoff funds (“Doing things right”) -Most impactful type of activities in which to invest (“Doing the right things”)

21. Implications for an Expanded Wheat Checkoff ●Setting the initial level of the additional wheat checkoff assessment is important -Should probably begin at a modest level. -BCR would likely be high for an initial modest increase in wheat checkoff funds -Would communicate well to stakeholders -Will provide the basis for seeking an additional increase in the funding level over time Plan for periodic external evaluations of the effectiveness and returns to the expanded wheat checkoff program Develop a system to collect and maintain expenditure data by type of activity, product, and market segment

22. Implications for an Expanded Wheat Checkoff Care must be taken in communicating these results to producers. “If the returns are so high for checkoff programs, then where are my high returns for every checkoff dollar I have already been assessed?”

23. Implications for an Expanded Wheat Checkoff Care must be taken in communicating these results to producers. - Common lack of understanding of how checkoff programs return value to them. -Basic problem: producers know the cost to them of their checkoff assessments. -But they do not know what those contributions have returned to them in additional revenues. -A competent ROI study will measure the share of producer revenue generated by the additional checkoff dollars rather than any other market force or event. -For example, soybean checkoff program estimated to contribute 5.3% of producer cash receipts.

24. Implications for an Expanded Wheat Checkoff C Common mistake by checkoff groups: Representing a checkoff program to stakeholders as the panacea to their financial problems in an effort to gain support for the establishment or enhancement of such a program. -Many forces have much bigger effect on markets than checkoff programs. DEMAND Price Prices of related goods Prices of related goods Income Tastes and Preferences Tastes and Preferences Health Concerns Government Policies Government Policies Exchange Rates Exchange Rates Imports Foreign Demand Foreign Demand Quality Grade Trade Policy WTO Transport Costs Transport Costs Promotion

25. Implications for an Expanded Wheat Checkoff C Common mistake by checkoff groups: Representing a checkoff program to stakeholders as the panacea to their financial problems in an effort to gain support for the establishment or enhancement of such a program. -Many forces have much bigger effect on markets than checkoff programs. -Disenchantment with the program and the leaders when producers do not see the big market effects that they were led to expect (“But price is still dropping!”) -Competent ROI studies can provide realistic, objective measurements of actual market effects. -A checkoff program is a tool to fight against downside market pressure in bad years and contribute to higher prices and stronger markets in good years rather than the panacea to all producers’ financial problems.

26. We Appreciate the Opportunity to be of Service to Wheat Producers Our Goal Is To Support Your Efforts In Promoting Your Industry Agribusiness, Food and Consumer Economics Research Center Texas A&M University