CHECKOFF CHECKUP

American Christmas Tree Journal

July 2010

Checkoff

Location: Pages 14-17

Number of Words: 2,707

Related Materials: 1 chart; sidebar

 

CHECKOFF DISCUSSION CONTINUES                                                         

 

By Pam Helmsing

I’m told that when the Christmas Tree industry discussed a checkoff program in the 1980s, it involved death threats and destroyed friendships. The industry has come a long way in working together. While not everyone is agreement, for the most part the discussions have been respectful and have resulted in a higher level of understanding of the goals and concerns.

Not surprisingly, here at the national office, we hear from those who support a checkoff and those who don’t. We get a wide array of questions and comments, and would like to address a few here.

 

What’s the difference between a Checkoff and a Marketing Order?

The Christmas Tree industry is discussing a Checkoff Program – not a Marketing Order.

“Checkoff” is the common name for a Federal Research and Promotion Program. USDA defines this as: “Authorized by federal legislation, these programs are designed to strengthen the position of the industry in the marketplace and to maintain and expand domestic and foreign markets. The programs are all fully funded by industry assessments. Board members are nominated by industry and appointed officially by the Secretary of Agriculture. AMS oversees the activities of the boards or councils and approves budgets, in order to assure compliance with the legislation.”

Marketing Orders generally contain provisions to manage production and quality, in addition to seeking to stabilize markets. USDA defines them as: “Marketing agreements and orders are initiated by industry to help provide stable markets for dairy products, fruits, vegetables and specialty crops. Marketing orders help to maintain the quality of produce being marketed, standardize packages or containers, and authorized advertising, research and market development. Each order and agreement is tailored to the individual industry’s marketing needs.”

Are Checkoff programs constitutional? I heard they weren’t.

Federally-authorized checkoff programs have been tested all the way to the U.S. Supreme Court, where they were definitively ruled constitutional. The Court ruled these programs were, in effect, “government speech.” There are currently 18 national programs in operation: Beef, Blueberries, Cotton, Dairy Products, Eggs, Fluid Milk, Hass Avocados, Honey Packers and Importers, Lamb, Mangos, Mushrooms, Peanuts, Popcorn, Pork, Potatoes, Sorghum, Soybeans and Watermelon.

Is some self-appointed group claiming to represent the entire industry?

No. The Christmas Tree Promotion Now group represents themselves – individuals concerned about the Real Christmas Tree industry. They have had multiple discussions with USDA about the level of industry support and the fact that there are individuals who are for and against it.

If a checkoff program is authorized by USDA to begin, there will be an extensive nominating process that will give all interested parties a chance to be nominated to serve on the board. The U.S. Secretary of Agriculture will appoint the board from the nominations received.

 

Will a Checkoff solve all our current problems?

No. It’s important that the industry have realistic expectations. When NCTA began its Market Expansion program in 2004, the goal was to “Stop the Bleeding” or stop the decline in tree sales. An increase in sales would be exceeding the goal.

Economists use scatter charts to illustrate demand. One would expect that as price goes up, the quantity demanded would go down. When market actions run counter to this principle (i.e. both price and quantity go up – or down) that indicates a shift in demand.

Looking at the data from the annual consumer poll conducted by Harris Interactive, we notice a sharp increase in both the number of trees consumers reported purchasing and the price they reported paying between 2003 and 2004. This appears to be a positive shift in demand. I would argue that it is no small coincidence that this was the first year of the Market Expansion program in which the industry invested about four times the marketing dollars that were invested in 2002 and 2003.

Demand appeared to make another, albeit more modest shift in 2005, when consumers reported purchasing 21% more trees, while paying only 1.6% less. Since then, funding for promotions programs has dropped considerably and demand has drifted back toward the 2004 level.

Had the industry been able to sustain the demand at the 2005 level, one would project that with 28 million trees on the market, as there were last year, consumers would have been willing to pay about $5 more for trees than they did – or they would have purchased up to 34 million trees at the price paid in 2009. Had there been 28 million trees on the market with demand at 2002 levels, one could have expected the price to be about $32, or about $10 less than consumers reported paying in 2009.

As any economist or reputable investment broker will tell you: past performance is not a guarantee of future performance. Certainly the demand equation for Christmas Trees has other variables – species, size, location, style, freshness and services offered, to name a few. And the quantity available for purchase by consumers may be less than what is available in the fields if wholesalers, brokers and commercial retailers do not have confidence in the market. One way to increase confidence in the market is with a consistent marketing program.

Other measurements of success could include successful research to improve needle retention after harvest, or an increase in the number of Real Trees exported. Many checkoff programs get additional funding from USDA’s Foreign Ag Service to help develop foreign markets.

Will it encourage more people to grow more trees?

That’s possible over the long term. Any time an endeavor is profitable, it will attract expansion and new entries. However, Christmas Tree production is fairly inelastic in the short term (5-10 years) because of the length of time it takes for a seedling to reach saleable size. It also has fairly high barriers to entry: high costs of land and labor with a long lag before income starts to come in. Still, the industry has proven an ability to expand in the face of profitability – even sometimes in the face of unprofitability. Unlike the current situation, though, increased production with a checkoff program in place would presumably generate more marketing dollars.

Is a bigger industry better?

That depends. Is your vision for the industry to have a Real Christmas Tree available to everyone that wants to purchase one? Or do you just want to be more efficient and more successful than your neighbors?

Maryln Jorgensen, a diversified Iowa farmer shared a story about his cattle operation. When one of his neighbors went out of business, he was happy because that meant more of the market for him. A couple more neighbors went out of business and he thought he’d do even better. Several more went out and he had nearly all of the local market. Then the packing house closed, meaning he no longer had a market for his cattle and had to get out of the cattle business himself.

A larger industry has a greater voice on issues like fire codes, pest control and other regulations. A smaller industry means more individual independence and more dependence on yourself. It really boils down to your vision for your business and the industry.

 

Is it going to replace my individual marketing or take away my competitive edge?

No. A checkoff program would promote all farm-grown Christmas Trees. Ten percent of the funds would go to state Christmas Tree associations to do more targeted, localized promotions. These efforts would concentrate on increasing consumers’ desires to buy a Real Tree versus a fake one. Growers and retailers would still need to convince the consumer to buy the tree from them. It will not result in the same price for everyone … or make bad tree farmers automatically successful.

 

Is something being sneaked past us?

NCTA, along with the state/regional Christmas Tree associations have endeavored to hold a frank and open discussion of a possible checkoff program over the past two and a half years. A task force was formed to study the possibilities. Informational sessions encouraging farmer feedback were held at several state/regional Christmas Tree association meetings, as well as at each NCTA meeting since February of 2008. There have been frequent articles/updates in NCTA and many other publications.

For those who have been talking about a checkoff for nearly three years now, it’s hard to imagine that anyone involved in the industry could be unaware of the discussion. Then again, it’s also hard to imagine that anyone could believe that a fake tree is better for the environment, but there are people out that that haven’t gotten that message either.

While the major features have been widely discussed, the specific details won’t be available until USDA finishes its work and publishes the checkoff program draft rules in the Federal Register. Then we will all be able to read, analyze and have a chance to comment on it.

Is NCTA for a Checkoff? I don’t remember being asked!

NCTA’s Board of Directors, which is responsible for the affairs of the organization, considered feedback from the meetings discussed above and polled the boards and/or members of their respective state/regional organizations. The feedback (positive and negative) was reported at an NCTA board meeting in March of 2009. After hearing all reports, the Board voted to support a checkoff.

Additionally, NCTA members were surveyed in January of 2010, with 62% indicating they were in favor of a checkoff and only 17% opposed.

Does that mean all members have to be for a checkoff? Of course not. NCTA is about a lot of different initiatives that promote and protect the industry. Every member is not going to agree with every position NCTA – or any organization – takes. While there is a tendency to want to say “My way or the highway,” consider that you remain an American although you may not like every action Congress takes and remain a Christmas tTree farmer although the weather doesn’t always cooperate.

Why can’t we vote up front?

This is probably one of the hardest questions for many people to wrap their minds around. The act that authorizes checkoffs allows either an upfront or delayed vote, called a referendum. The delayed referendum provision was included to give industries the chance to test the program before making a decision.

To many, it seems counterintuitive to be “forced” to buy something before you know whether or not you want it. To soften the impact, when this provision is used, USDA requires the board to allow producers to apply for refunds during the first three years of the program and set aside 10% of the total receipts to fund those refund requests.

An additional challenge with an up front referendum for Christmas Trees is the lack of a database that verifies how many trees each producer sells. Since it has been proposed that those selling less than 500 trees per year would be exempt from paying the assessments, only those that sell 500 or more trees per year would be eligible to vote. If a program is established prior to a referendum, it will be easy to verify that those who paid in are the ones who are eligible to vote.

However, the referendum is not your first opportunity for your views to be heard. The comment period on the USDA Draft Rule allows you to weigh in on not only whether you support the program or not, but specifically what points you agree with or would like to see changed. After the comment period, USDA will publish a final ruling, which could be to proceed with the program as first published, halt the process, or proceed with a modified program based on comments received.

What is taking so long? Does that mean USDA is reluctant to start a program?

USDA carefully reviews such proposals and questions each provision to try to best assure that the program will work for the industry it is designed to serve. To do that, they have to learn about the industry, which takes time. They say that the delay has had to do with the process and changes in personnel. In July, the proposed program was sent to the USDA Office of General Counsel (OGC) by the USDA Agricultural Marketing Service, which would provide oversight to the Real Christmas Tree checkoff program. Once OGC approves the wording in the draft rule, it will be published and a comment period will follow.

 

Are you personally for or against it?

I probably shouldn’t answer this, but it’s a fair question.

As an employee of Drake & Company – NCTA’s management firm – it is my job to help the board get access to as much factual information as possible to aid in their decisions. I am pleased that the board diligently gathered factual and subjective information from a wide variety of sources.

As NCTA’s Executive Director, it is my job to support the decisions of the board.

I do have concerns about how it will affect NCTA and how NCTA and the new checkoff board will work together for the good of the industry. I am pleased that NCTA president Dick Moore has appointed a task force to study how other national organizations and their checkoff boards interact – getting advice on what has and has not worked for them.

As an agricultural economist who has spent 30 years in agriculture and almost 13 of them with NCTA, these things I know:

  • Promotion works.
  • Misinformation has to be countered with facts.
  • Voluntarily-funded promotion programs are destined to be short-lived because those who don’t contribute gain a competitive advantage over those that do. (If you truly believe voluntary donations are the way to go, may I remind you that the voluntary program is all we will have for the 2010 season? Please send your contribution today!)
  • The Real Tree industry is going to continue to face challenges that threaten its very existence. Fire codes are likely to get more and more restrictive – not just in public buildings, but in all households. This battle is on our doorstep now, and voluntary funding that may or may not come in isn’t going to cut it.
  • The fake tree industry is commissioning “research” aimed at finding someone – anyone that is seemingly credible – to say that fake trees are better for the environment than real ones.
  • If it’s not worth 15 cents a tree to answer these serious challenges as an industry, the handwriting is on the proverbial wall.

 

A checkoff program offers a higher level of funding than the industry has had in the past, and perhaps more importantly, consistent funding. We are now halfway through the year and NCTA has commitments for less than half of this year’s promotion budget. It’s hard to plan effective programs when you don’t know the budget.

I’ll leave you with this fact for perspective: NCTA’s entire 2010 budget for promoting and protecting the industry is less than one artificial Christmas Tree company spends on a single, one-page ad in a national magazine.

###

SIDEBAR

KEY PROVISIONS

USDA is considering a Federal Research and Promotion Program, commonly called a checkoff program, for the Christmas Tree industry. Key provisions are expected to include:

  • An assessment rate of 15 cents per harvested tree.
  • An exemption for anyone that sells fewer than 500 trees per year.
  • An assessment on imported trees in cases where the importer imports 500 or more trees per year.
  • A delayed referendum, to take place within three years of the start of the program so the industry can assess the value of the program before deciding whether to continue or not.
  • Each company subject to the assessment would have one vote in each referendum.

 

The 1996 Act, which is the legal authority for checkoff programs provides that:

  • The checkoff be governed by an independent board with representation proportionate to production.
  • 10% of the income would be set aside for a temporary refund program, which would available to those requesting refunds prior to a referendum passing. This amount would be prorated if refund requests exceed the 10% set aside.
  • If the initial referendum passes, a subsequent referendum would be held every five years.
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