A Libertarian Approach to Rural Development

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A Libertarian Approach to Rural Development

• Dermot Hayes
• Iowa State university

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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

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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

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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 market
  mechanism, which in this case is a missing
  property right

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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 GIs Farmer
  Owned Brands to emphasize the connection with
  brands in the rest of the economy

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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.

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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

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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

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A 14th Century Fresco
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The Super Premium Cinta Cenese
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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

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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

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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
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Present Value of Expected Surplus for Consortium
and Consortium Members
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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
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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

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

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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

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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

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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

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