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Anticipating Market Effects of New Uses for Whey and Evaluating Returns to Research and Development

J. V. Balagtas^*,1, F. M. Hutchinson, J. M. Krochta^,2 and D. A. Sumner

^* Department of Agricultural and Resource Economics, University of California, Davis
University of California Agricultural Issues Center
Department of Food Science and Technology, University of California, Davis
University of California Agricultural Issues Center, Department of Agricultural and Resource Economics, University of California, Davis, and Giannini Foundation of Agricultural Economics

Corresponding author: Daniel A Sumner; e-mail
dasumner{at}ucdavis.edu.

As U.S. dairy farms continue to become more productive, increasing demand is a key to improved economic prospects for the dairy industry. One way to expand demand for dairy products is to find new, economically viable uses for milk. Ex ante economic analysis of new uses for agricultural products anticipates the potential market effects of innovations, and provides a basis for evaluating investment in research and development and setting research priorities. This study evaluated potential economic effects of new applications of films and coatings made from whey protein. An economic simulation model was used to predict the likely effects of the innovations on dairy markets. Cost comparisons with existing technologies and interviews with industry officials were the basis for evaluating potential for commercial adoption of the innovations. The economic simulation model traces the projected increased demand for whey through the markets for dairy products and milk. The associated increased demand for milk could result in benefits to U.S. milk producers of $123.0 million in present value terms, compared to a research cost of $ 4.9 million, with the dairy industry, consumers, and taxpayers all contributing. Interpreting the cost of the research program as an investment on behalf of milk producers, the benefits to producers from development of new whey uses represent an annual rate of return between 28 and 33%. These results are useful for evaluating further investment in the whey research program. The methods illustrated here are applicable to the evaluation of a wide range of research and promotion efforts.

Key Words: economics • new uses • returns to research • research and development

Abbreviation key: CDRF = California Dairy Research Foundation, IRR = internal rate of return, WPC80 = whey protein concentrate, 80% protein, WPI = whey protein isolate

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