A Libertarian Approach to Rural Development

1. A Libertarian Approach to Rural Development Dermot Hayes Iowa State university

2. Overview • Is there a problem? • A possible market based solution: creating a new property right • Prospects for this solution in the US • Welfare analysis • Current work in Canada • A learning experiment at ISU

3. Is there a problem? • D. Gale Johnson has argued that the most important role for Midwestern educational establishments is to educate people so that they can leave and be productive elsewhere • By allowing markets to allocate resources in this manner we would reach a new equilibrium where those who remain in rural areas control enough resources to cover their economic costs • This is not a “leave it alone” approach, it actually suggests that the more you distort markets to achieve a different outcome, the worse it is for the resources that are attracted in, or who chose to remain

4. However… • As people leave, the per capita fixed costs of maintaining courts, schools, roads and main streets increases • Some communities have responded by increasing taxes on commercial property and this has exacerbated the problem • A possible solution is to look for a new marketmechanism, which in this case is a missing property right

6. A Market Based Alternative • 700 Geographic Indicators now approved in the EU many more on the way. One approved in Quebec • A subset of these have an effective supply control mechanism, for example limited production area for lentils, price fixing for wines in Tuscany, supply controls for Parma ham producers • They appear to have generated economic prosperity in the Po valley, “The Iowa of Italy” • We have called these successful GI’s “Farmer Owned Brands” to emphasize the connection with brands in the rest of the economy

7. The Concept of Farmer-Use of Brands • Farmers (or their agents) develop a niche product and market this product as a collective brand • If the product succeeds, output must be restricted to preserve economic profits • Regulators must protect the product from competition from outside the group and from competition from within the group via property right protections.

8. Lessons from the EU • There are at least 100 successful EU applications of the concept and many more in the legal pipeline • Price premiums range as high as 400% for lentils, and land values are as much as 1,000% higher for vineyards eligible for the Brunello di Montalcino brand • Most of the economic activity occurs near the source

9. Lessons from the EU (continued) • These brands can run afoul of antitrust legislation if the price fixing aspects are obvious; therefore, no explicit production of price triggers should be used • Connecting the brand to the local environment in the minds of consumers is helpful, but a continuous production history is not essential

10. A 14th Century Fresco

11. The Super Premium Cinta Cenese

12. Is the concept legal in the U.S? • Among U.S. producer groups, only wine producers have the legal right to develop brands • a certification mark is subject to cancellation if its owner “…refuses to certify or to continue to certify the goods or services of any person who maintains the standards or conditions which such mark certifies.” US Trademark Act (Section 45 15 USC. §1127): • Congress changes marketing order guidelines in 1982 to discourage programs limiting entry, supplies, or direct control of output levels in general (Kohls and Uhl) • Even the Italian ham manufactures have been subjected to price fixing lawsuits • We think U.S. rules are ambiguous, and open to interpretation

13. Is the concept welfare enhancing? • Consumers gain ex-ante but lose ex-post • Commodity producers lose market share • Lence et. al. examined this issue in two papers • Both models assume that brands allow producers to capture a margin in excess of marginal costs, the degree of market protection is measured by this markup • Both models also assume that the consumer can always revert to the commodity product

14. Present value of expected change in total surplus as a function of strength and length of legal IP protection Present Value of Expected Change in Total Surplus ($) Length of Legal IP protection (years) Strength of Legal IP Protection

15. Present Value of Expected Surplus for Consortium and Consortium Members

16. Change in World Well-Being No Protection in the U.S. Harmonized Protection Protection in the EU Protection Level in the EU Protection Level In the EU

17. Developments in Canada • Canada has just approved its first FOB for lamb and it appears to be a success • Initial price premiums are 25% greater than the commodity product • So far the consortium accepts all breeds produced in the region! • We were told that there is a “line of other producer groups” waiting in Canada

18. Charlevoix lamb is the first product to be place-protected in Canada. Used to protect the name from counterfeit lamb. Charlevoix

19. Opportunities in the U.S. • Most U.S. states are too large to act as a geographic limit on production and state brands often become a commodity standard • Additional criteria are needed; these criteria should increase quality without the use of variable standards • The concept should also make intuitive sense to an uninformed consumer • CARD and ISU are in process of creating an FOB to see if it can be done under U.S. situations ,and to describe what needs to be done.

21. Where Did Japanese Want to Purchase Beef? • At packing plants that process cattle from regions with inexpensive feed and improved breeds • Japanese have often asked for more I 80 beef • These animals are often fed on grain after weaning and they are often beef breeds, but there is no guarantee; someone has to eat the Holsteins

23. Our Proposed Requirements Minimum Certification Requirements • The cattle must be produced from Black Angus, Red Angus, bulls • Individual animals must be source verified to the farm of birth using an electronic animal identification system • The cattle must be fed in Iowa for a minimum of 200 days on a high-concentrate ration of at least 75 percent corn or corn co-products

24. Our Proposed Requirements (continued) • Individual animals must be age verified and processed by 18 months of age • Each carcass must grade Choice Plus or better according to official USDA Grades • A second quality level must grade Middle Choice or higher • Product may be aged at least 14 days prior to being sold