Free Riding Lowers Market Returns 5-20%

[MGMT]

I came across some interesting research entitled “Will the Voluntary Checkoff Program be the Answer? An Analysis of Optimal Advertising and Free-Rider Problem in the U.S. Beef Industry” that should be of interest to all Alberta beef producers. In 2004 research was conducted in the United States on the market place impacts that would be expected if the compulsory check off that was in place in the U.S. were to be made voluntary, exactly as later happened in Alberta.

The term free rider is commonly used to refer to those producers who ask for a refund of their check off. In effect they are getting a free ride while continuing to benefit from the industry work funded by the participating producers.

The key phrase is “The possible voluntary program is expected to further under-invest in advertising and promotion programs, and as a result, producers are likely to lose 25 to 85 percent of current promotion benefits. The free-riding from non-participating producers would lower market price by 5 to 20 percent.” See Table 5.

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Discussions and Conclusions
This study develops a framework for the analysis of optimal advertising and free-rider problem. Previous studies in the literature were extended in two ways. First, the new framework allows retailer’s oligopsony power separately from processor’s market power. Second, to examine the free-rider problem, we introduce the trade component to the model and divide domestic producers into two groups: participating producers and non-participating producers in the possible voluntary program. Then, the free-rider problem was measured as the amount of domestic price decrease due to the increased production from importers and non-participating producers.
The optimal advertising rule derived in this study indicates that as retailer’s oligopoly power increases the optimal advertising level decreases. The oligopsony power is not relevant to the determination of optimal advertising intensity, which is consistent with Zhang and Sexton. The optimal advertising rule also suggests that as import supply elasticity becomes more elastic, the optimal intensity decreases. The newly derived rule is consistent with Dorfman and Steiner in which as demand elasticity is more elastic, the optimal advertising intensity decreases, while the intensity increases as the advertising effectiveness increases.
Simulation results for the U.S. beef industry indicate that the industry has under-invested in advertising and promotion programs except a few cases where advertising effectiveness is extremely low (0.0005), the degree of imperfect competition is exceptionally high (0.3), and import supply elasticity is highly elastic (higher than 5). The possible voluntary program is expected to further under-invest in advertising and promotion programs, and as a result, producers are likely to lose 25 to 85 percent of current promotion benefits. The free-riding from non-participating producers would lower market price by 5 to 20 percent.

http://ageconsearch.umn.edu/bitstream/34694/1/sp04ch05.pdf

[grassfarmer]

False conclusion when applied to Alberta - as is
spelled in the small print:
"...indicate that the industry has under-invested in
advertising and promotion programs except a few
cases where..... the degree of imperfect competition
is exceptionally high"
The degree of "imperfect competition" is
exceptionally high in Alberta by their definition.

Nice try Mr "I am not with ABP" - sounds awfully like
a familiar poster has reinvented his persona for the
New Year.

[rkaiser]

Maybe not ABP...but are you the chairman of the CCA Mr. MGMT... LOL

Time you ABP/CCA boysand girls stopped free riding on producer dollars....

[rkaiser]

Ironic how this post comes from a man who earlier admitted that there is no trickle down effect from all the marketing and money spent by ABP/CCA to support the current oligopoly / captive North American supply system.

All the while supporting an ABP/CCA ideology that holds back any initiative to break this system with their personal fears and agendas.

Nothing but propaganda to deceive producers MGMT. Do you truly feel that the producers of this country are that stupid?

I feel that articles like this will have an opposite effect on what you are trying to accomplish with your obvious desperation to brings some dollars back to the pockets of the mostly old boys club called ABP/CCA.

[wd40]

Lke I said before - all the wisdom, business MGMT, un-calculable hours/dollars spent by so-called beef industry leadership has gotten us what.

An enormously shrunk beef industry that will never never be back to what it was in the late 90's early 2000'snds.

Seems to me some should sooner stick their heads in the sand and hope people forget who they are and not recognize them.

The epidomey of failure.

[parsley]

Studies. Ah yes., the old freeloader argument aka
cherrypickers aka as greedy aka selfish

Wheat and barley producers, non of them
freeloaders, we're legislatively forced to pay for
studies similar to the excerpt provided by this
Vmorning's central planner.

The larger picture is this....the bottom line of grain
producers never benefitted from multi million
dollar deductions. Every one except producers
benefitted from unfettered raiding of the pooling
accounts.

No rancher should have to fight in a constitutional
battle to defend not having some duckshit
organization automatically deduct money from his
account. Normal people know what decency is.

So what is not normal, you ask? Abnormal are the
guys who have sat in some secret little back
room, planning your industry for you, expecting
YOU to pay for their grand scheme that will
benefit everyone but cattle producers.

Central planners will tell you every time you're not
capable, they are experts, you are a bum, you are
selfish, you'll never make it, they have a plan.

Yup. The thing is you don't need them. You create
wealth. They need you. They want an easy piece
of your wealth.

If you want to gift them some of your wealth, it's
your choice. And if you want to tell them to piss
off, that has got to be an option. In a free society.
Pars

[rkaiser]

Gee whizakkers MGMT. You would think that at least one ABP/CCA die hard would help you out with this thread. You are the duly elected voice of all the producers in the country are you not?

[MGMT]

Sorry to disappoint. I am not duly elected to anything big or small. I understand some of the people posting here do have positions of responsibility within the industry however that would not be me.

Thank you for your thoughtful replies.

OK, so if strong economic analysis does not persuade you that refundable check offs are costing the cattle industry dollars then what?

The Canadian cattle industry does face countervail challenges from the United States. Canada faces various trade barriers from a whole host of potential export markets. We face ongoing challenges from various groups that have an anti meat and anti animal agriculture agenda. As an industry we do face competition from other beef importing countries and even other competing protein choices. And there are benefits to be had from research directed towards the cattle sector. Is everything being done that needs to be done?

I would welcome suggestions as to how we should, as an industry, pay for the cost of meeting these challenges and opportunities head on. I ask you why should some people, free riders, do not have to pay for that effort.

Governments have created the problem by allowing refundable check offs. I do not see where other countries have refundable check offs, it is a Canadian concept. And some producers will find countless ways to justify why they should not pay their fair share and why others should invest in their industries future except them. Why should that be allowed? Why should some producers not have to pay their fair share to advance our industry?

How do we compete as an industry with a refundable check off when the U.S. collects over $80 million in non refundable check off and Australia would be well over $150 million, again a non refundable check off.

I would point out as well a refundable check off gives huge leverage to a few very large producers who can extort policies that favour their positions to the detriment of the larger producer population. In a refundable check off scenario it is one check off dollar equals one vote instead of one producer equals one vote as it was with the non refundable check off.

I welcome your suggestions. How do you see our industry funding these industry challenges? Do you think the check off should be refundable or non refundable. If you prefer refundable how best to deal with the free rider problem that drags down the industry. Given the prices for calves is much stronger would you support a $5 or higher check off if it were made non refundable? I would. We have a bright future in our cattle industry and we need to make the most of the opportunities before us.

[grassfarmer]

The "strong economic analysis" is not applicable.
Read what you posted - "except where......the
degree of imperfect competition is exceptionally
high" so it doesn't apply. Producers here are in the
cattle business not the beef business - we sell live
cattle, packers sell beef - why should we pay to
advertise and market a product that we don't own,
don't control and share damn little of the profit
from? Also it's a US study - the US industry doesn't
need to export very much hence there may be more
advantage to funding domestic advertising there
than here.
But in your later post you drop the whole idea of
levy for advertising - now it's all about fighting
trade challenges and countervails.
How can you expect producers to back that given
ABPs domestic record? you have absolutely refused
to oppose packer consolidation, packer bailouts and
to support many of the things producers wanted
from the organization during the last decade. Now
you are the only farm organization in the province
not opposing the AB Governments land take over
bills. You made your bed now lie in it. If the
organization gets its act together and starts doing
smarter stuff they will be rewarded with more
checkoff funding being left with them.
Refundable all the way for me - certainly as long as
ABP does more to "drag down the industry" than the
alleged "free riders".

[rkaiser]

""""I welcome your suggestions. How do you see our industry funding these industry challenges? Do you think the check off should be refundable or non refundable. If you prefer refundable how best to deal with the free rider problem that drags down the industry.""""

Your questions assume that the ABP/CCA has made a difference in industry challenges MGMT. How can you say that you have made a difference? These are not courtroom battles in front of judges where the lawyers earn their wages with facts and or perception. These challenges you speak of are between governments and ABP/CCA can not say they do anything but cheer lead. And their cheer leading affects no one other than the groups who sell beef to the countries in question. When ABP changed their name from the Alberta Cattle Commission, they assumed that they were now representing a beef industry.... And that is just what happened. They left the cattle behind and started supporting the packers in an industry that is not linked together in a business sense. Any business decisions ABP/CCA has made in the past ten years have had an adverse affect on the cattleman.

I will answer your second question quickly with a "yes" and say that your second question has the answer to your third question. Are you keeping up?

The way to deal with the free riders who drag down the cattle industry is to direct the checkoff away from the freeloading ABP/CCA.

[burnt]

Oh Bazinga!

[smcgrath76]

A few thoughts...
I agree in principle that everyone should pay their fair share. I also agree that most producers are in the cattle business, not the
beef business. One of the issues is allocation of resources. Should ABP (or other representative organizations) invest in R&D,
Marketing, Legal Defence, Lobbying, Etc. Once that is decided, there is further question about positions and resources within each of
those areas.
I think that AB has done a reasonable job in the past, but I am not convinced that they represent either my viewpoint or my criteria for
allocation of resources.
Examples: I for one do not believe in the "Canada Beef" concept. I also do not believe that Canadian Beef is superior by virtue of being
Canadian and that we are focusing on marketing in a lot of cases to the detriment of substance (a short term fix). I think we invest too
much in domestic promotion and not enough in export promotion. I think we pay a lot for legal challenges that are not our responsibility
(Government responsibility) and I think we spend a lot of time lobbying positions that may not benefit the industry.
I agree with directional more than refundable checkoff and yes it is hard to stop freeloaders, but it also creates a responsiveness of
organizations that are to serve their members.
I also believe that if there are 2 cowboys in a room there are at least 3 opinions on every subject present as well. I am not sure how
you navigate this when often "industry first" takes a back seat to "me first". And the last thing is that it only takes on belligerent
director or non-responsive staff to create a wave of negativity at ground level. This has bitten ABP and other producer groups numerous
times. ABP has had a hard time changing in the past, partly because agriculture has a hard time. For example when they were reforming
ABP a few years ago they decided to keep the same number of directors as in the past (and associated expenses, travel, etc). At the time
there were more ABP directors than there were MLAs for the entire province. I think in this new era we will have to trim and slim the
organization, add accountability, and direct resources more carefully.
Big challenges if they hope to represent and carry weight on our ranching operation. I do not request a refund on my checkoff and likely
won't, but ABP is not the only group I support and certainly at present not the one that best represents my interests.

[forage]

Free ride is exactly what ABP was getting when we had no choice whether our check off dollars were automatically sent to them , I was so tried of hearing well your a member it is for your good. Let me have the choice, ABP is nothing but a puppet on a string to the Alberta Government. I am a recent new comer to cow/calf industry and I have had a tough road to keep my head above water while ABP spends money like drunken sailers on expensive trips and high end AGMs'. If they had to survive on what they earned they wouldn't last a minute.

[Happytrails]

Some good comments. I have heard it said that organizations will tend, over time, to serve themselves more and their reason for being less. The refundable ABP checkoff has got to help resist that trend. And also inhibit raising the checkoff so much in the future. So refundable is the way to go for me. Too bad ABP can't or won't publicize the names of the refundees tho.

BTW if you want to apply for checkoff refund for your marketings in last half of 2011 you have to do it in January.

PS 5-20% market price reduction???? For letting people keep some of their money??? I don't think so. HT

[grassfarmer]

HT, for someone who has previously indicated their
support for ABP i'm suspicious why you would now
want to see that a list of people requesting refunds
be published. What possible benefit or reason is
there for publication of this information other than
as an intimidation tactic?