The Economics of Food: How Feeding and Fueling the Planet Affects Food Prices. Transcript Brady Deaton: Today my guest is Dr. Patrick Westhoff, and we will be discussing his book, The Economics of Food: How Feeding and Fueling the Planet Affects Food Prices. This book was published in 2010 by the FT Press. Dr. Westhoff is the Director of the Food Policy Research Institute at the University of Missouri in Colombia. He's had an active role in both academia, as well as in the legislative setting in the United States. Welcome, Pat   Patrick W.: Hi. Thanks for the opportunity.   Brady:  Pat, tell me a little bit about what inspired you to write this book.   Patrick W.: Well, during the summer of 2008, food prices were very much in the news. I was getting lots of calls from reporters around the country and around the world, trying to explain what was actually going on in those food markets. An editor gave me a call and asked if I wanted to try put those thoughts into a book, and I thought it might be a good opportunity, so I took advantage of it.   Brady: Now, your book focuses on the economics of food, but it orbits around the change in food prices between 2005 and 2009. Give me a little bit of background about food prices over the last little bit.   Patrick W.: Well, we've seen food prices increase in US over the last several decades at an average rate of about two and a half percent per year. For most of the last a couple of decades, food prices really weren't that much in the news. It was a relatively stable set of things going on in those food markets, and meant that food price inflation was very similar to overall inflation in the economy. But then came 2007 and 2008. We had big run ups in the prices for a large number of American cultural commodities, and a sharp increase in the overall consumer food price index in the US, and concerns about food prices around the world. It definitely got lots of folks' attention and then just in time for everybody to get excited about the really high price of food in 2007 and 2008, we had the global recession that made things go the opposite direction a year later.   Brady: Talk to me a little bit about it. When we talk about food prices, where that information comes from, where the data on food prices and commodity prices how do ...? We talk a bit about this in your book but where is this information coming from?   Patrick W.: Well, in the US the Bureau of Labor Statistics estimates consumer food price inflation by a variety of categories every month. We can find out what the average price of food was this month versus last month or versus a year ago. Every few weeks we get new information about that. [inaudible 00:02:28] can be more of a challenge to get information about consumer food prices in particular countries but individual countries do have their own statistical services putting out this information. In contract commodity markets are probably easier to follow. We have lot of information about futures markets for grains, oil, seeds, meat, sugar and a variety of other agricultural products where it's very easy to get information on a daily basis about what people think is going to happen to the price of those commodities.   Brady: I want to talk a little bit about why we are concerned, or the general public is concerned about these changes in food prices. I want to just back off a bit and talk about, economists usually look at changes in prices as really important to coordinating the market system. If prices go up then it may induce incentives to plant more corn if for example the corn price increases or, if price would go up we may conserve on food, or it may induce investments and importantly it will allow for local decision making. If a farmer wakes up, and he's learned that the price of soybeans is gone up then he may plant more soybeans. We are concerned about food prices. What are those concerns?   Patrick W.: You're absolutely right that the prices play a vital role in the agricultural economy, and the economy as a whole and helping folks decide what's the appropriate set of things to try to produce and what are the appropriate set of things to consume in any given point in time. Concerns of course come from the fact that food is such a vital part of people's standard of living. Consumers in some countries spend a very high proportion of their income in food each month. In some of the poor countries lower income folks can spend half or more of their income on food at any given time. When there is a big change in the price of food it can very directly affect their standard of living. A higher price for food can make it much harder for a low income family to be able to meet their basic needs. Of course, you have [inaudible 00:04:26] food is also a very big source of income for lots of people around the world. Higher income countries in Europe and North American and elsewhere the number of people directly involved in agriculture is relatively small and so the number of people directly affected by food prices in terms of their income is relatively modest. When you're talking about a lower income countries, developing countries around the world, quite often a very significant portion, some places as much more than half of overall population may be involved directly in agricultural production. The price of food can be important for them in terms of their incomes as well.   Brady: How does your work experience in Guatemala inform your understanding of that issue?   Patrick W.: Yes, I was a Peace Corp Volunteer in Guatemala a long time ago. It was very good to get the exposure to people who have much more limited means and a very different set of things that drive their daily decision making. The typical person I was working with may have only owned or operated a couple of acres, one hectare of land, which might just barely be enough to feed their own family, maybe not even enough to feed their own family. They would use the land that they operated to provide some of their basic needs for corn and for beans and then would have to rely on outside employment for whatever income they were going to have to be able to buy other necessities in life. For those people a change in the weather, a change in market prices could have a big impact on their standard of living.   Brady: Now, when you've talked about the change of food prices, you've directed your attention to a number of specific issues that you thought were important. I don't know that we'll have time to review all of them today, but I thought I would name them, and we can begin to discuss some of them. You mention of course biofuel production, energy prices, government policies, the weather, economic growth and changing diets and there is a focus a bit on India and China here, speculation and the changes in the value of the US Dollar. Of that list, is there any one of those or a couple of those that are more important?   Patrick W.: Oh I think over the long haul what's happening to the global economy is probably as important as anything else in determining where we're going to see food prices evolve to over the next several years and over the next several decades. Yet, the global economy is growing at a rapid pace. We're going to see more rapid increases in demand for meats and other socio products that people tend to consume when they have higher incomes. That's especially important in countries like India and China where we're seeing diets change very rapidly in recent years. If Chinese consumers for example are going to be consuming more meat and other high valued products in the future, that means that we're going to need to have more grain to feed those animals and that's going to have an effect on the global system. Likewise, global economic growth will affect the price of petroleum and other major energy inputs. As the price of petroleum changes it affects not only the cost of producing crops and livestock products that will be turned into food that people eat but it will also affect the demand of bio fuels and their demand for biofuels of course has risen very sharply in recent years, caused by a variety of factors, [inaudible 00:07:39] policy and the overall economy. Again, if I had to pick one thing that's really important for the longer haul in terms of determining food prices I'd probably say it's the general economy.   Brady: What about for the short run, the period between 2005 and 2009 that you focus on?   Patrick W.: Right. If you had to pick one thing that was really important during that period of time and continues to be important today, I'd say it's probably the weather. People who are involved in agriculture know this but, some folks who may not deal with agriculture production every day don't really understand to what extent agricultural producers are at the mercy of the weather. If we have a favorable set of figure conditions, we can have very large crops, larger than expected. Those large crops can have a major effect in driving down food prices in any given year. Supplies exceed the immediate need to consume that grain or those other products. On the other hand if we have a short crop caused by floods, drought, disease, or whatever we can have a very sharp increase in food prices as available supplies may come short of what desired levels demand might be. In 2006 and 2007, we saw crops that weren't quite as big as they'd been in 2004 in particular. That caused a draw down in the overall level of grain and other foods that were in storage to eventually we got to where the level of grains available for consumption were getting really, really tight relative to what demands were going to be. People got concerned about that and helped drive up the prices very sharply. Then, in contrast we got the 2008 and 2009. We had much bigger crops than we'd had the previous couple of years. That helped to restore global supplies of those commodities and aid prices fall back again.   Brady: One of the interesting points that you bring up when you're discussing the weather is this idea that if you're more dependent in terms of trade in the global economy then you're more vulnerable to these shocks, international changes in weather. But, that if you're less dependent for example on trade, then you basically increase your vulnerability on domestic changes in the weather. I thought that was important when you were comparing the effect that a drought in Australia might have on consumers in Australia as in contrast with low income wheat importing countries. Could you just expand on that point a little bit?   Patrick W.: No. That's right. If you're talking about what happens when you have a drought in a country like Australia, it's not really going to affect food consumption in Australia very much. The Australian markets are pretty open markets. If they have a reduced production of wheat in Australia, they'll still feed their domestic consumers and you won't see a big effect on the consumption of calories in Australia. But the reduced exports out of Australia will mean higher prices for food in global markets and that will mean increased cost to consumers around the world that are reliant on imported wheat and other imported grains to try to satisfy their dietary needs. That's an example of where, what happens on the other side of the globe can affect people everywhere on the planet, at least everywhere in the planet where their local policies allow prices in the local market to be tied to prices in international markets. In contrast, if you talk about say, a country in Central Africa that, because of high transportation cost or because of government policies may find it difficult to import or export, much of its local demand or supply for food. In those types of countries if there is a change in Australia or Canada or the United States, it has almost no impact whatsoever on the local markets but in contrast a change in the local weather can have a huge impact on the welfare of people in those countries so that's a case where not being able to trade means that you're protecting yourself if you will from some of the volatility in global markets but at the expense of being much more at the mercy of what happens in your local markets. If there is a drought or something in some country in Central Africa it will directly affect the ability of people in that country to be able to get a good diet.   Brady: It's interesting that your primary two issues that you focused in on are the growth in demand in China and India and then changes in the weather. The one is the demand push, and the other is the variation in supply as a result of changes in the weather. Certainly two issues that we certainly have paid a lot of attention to recently are biofuel production and speculation.   Let's take a moment and talk about one of the first rules of thumb that you have in your book and that is that an increase in production raises the price of food. What did you mean by that rule of thumb?   Patrick W.: Well, we saw a large increase in biofuel production in the United States and many other countries between 2005 and 2007. Lot of people looking at what was occurring in the markets were very concerned that we were taking grain, sugar and vegetable oil that could be used to feed people and instead using it to produce biofuels. There were many folks who were drawing the connection saying, "Well this sharp increase in biofuel production was a major, even the major cause for the higher food prices you were experiencing during that period of time." In the book I try to take a look at that. It's certainly true that is, if you are taking more of the world's available supplies in grains and oil seeds and sugar to make biofuels it does mean there's less available for other uses. That will obviously result in higher prices. That is indeed a large part of the story. But, it was, I try to make clear in the book, there was also many other things that were happening at the same period of time. It wasn't just biofuels that caused the sharp run up we saw in prices there was also concerns about the weather, exchange rates and many other factors all happening at that same time.   Brady: Right. Now we talk about this first generation of biofuels regards to at least in the US, I guess we're largely talking about corn. Talk to me a little bit and one of the things I thought was really well done in your book is that you really talk about how a change in the price of corn works its way through all of the commodities and eventually into the prices of meats and such. Talk to me a little bit about that.   Patrick W.: Sure. Corn is the single largest crop produced in the United States. In fact there is more corn produced in the world than there is any other single commodity, agricultural commodity. Corn is really important just in terms of the amount being produced. It's also important because of its effect on all the other major foods as well. When, the price of corn goes up it means that farmers are probably going to want to plant more corn [inaudible 00:14:05]. They're going to plant more corn, they're going to plant less of something else, less soybeans, less wheat, less of any other crops that might be competing with corn for available resources. Likewise, if you are someone who's using corn, higher prices of corn maybe [inaudible 00:14:19] make you want to try to find other alternatives that you might be able to turn to instead. For example, you might want to feed more wheat to your livestock if wheat is affordably priced. You may want to use more rice in providing food for humans if you have a higher price for corn. Those things mean that you'll see substitution away from corn towards other commodities to try to assess by the demand that's out there for feed and food around the world. When that happens that ends up driving up the price for all those competing food stuffs as well. Higher price for corn doesn't just mean a higher price for products that are made directly from corn, it also means higher prices for everything from vegetable oil to bread to rice that you might see in people's diets. On the livestock side of the picture, corn is the number one feed that's being used to produce pork and chicken around the world. When those hogs and those chickens are going to be needing to have a feed that's more expensive that means their producers are either going to cut back on their production or going to be expecting to get a higher price of their beef and pork and chicken that they're going to be selling eventually. By the time these pieces work through the system we end up with higher prices not just for corn but for all the grains, for all the oil seeds and for the meats and other products as well.   Brady: The simple, the rule of thumb is that increasing the biofuel production raises the price of food and an increase in the price of corn works its way through all of these other commodities and eventually into the prices of all sorts of food. You also mentioned several arguments that complicate our understanding of the biofuel effect. You mentioned some of those. Are there any other issues we should think about when we're thinking, okay well, generally we think an increase in biofuel production will raise the price of food but what complicates that simple rule of thumb or what are the things you would be thinking about?   Patrick W.: One thing to remember if you're talking about corn based ethanol for example is that when we produce ethanol from corn we also get the distillers grains, a co-product of ethanol production that can be used as a livestock feed. Roughly one third of the weight that goes into an ethanol plant of corn comes back out the other way in this distillers grains that can be fed to livestock. That all by itself mitigates some of the effects that you might see from increased production of ethanol. Still, we are taking a lot of the calories that are in a bushel of corn and converting them to biofuels and that does have an effect on the market. Of course as I've already alluded to, the fact that when we have higher prices for corn we're going to see more corn production, means that markets do respond. It's not as if every bushel of corn that goes in an ethanol plant reduces the amount of grain available to feed the world's people by exactly the same bushel. We're going to see some offsets on supply, some offsets in demand that will mitigate those effects to at least some extent. Then, clearly there is many [inaudible 00:17:19] that are happening in the market at the same time. People were very quick to point to ethanol as being the major culprit in the increase in food prices. One report for example from the Royal Bank suggested as much as 70% of the increase in food prices was due to ethanol and some others [inaudible 00:17:35] on those regards. In contrast, USDA Secretary of Agriculture at the time, he thought that the impact is much, much smaller. In fact, he was citing reports and estimates that it may be less than 5% of the increase in food prices as being due to ethanol production growth. In our own look at these questions, we've come to the conclusion that, yes there were lots of things going on in those markets at the time. Therefore some of the higher estimates of how important ethanol was in the overall mix of things was probably overstated but at the same time it was still a very significant effect. I think when you're trying to make sense out of all this, it is important to remember that the growth in ethanol production was by no means unexpected. We knew that we were going to have a lot of new plants coming on stream in 2006, 2007. The markets had that information already. The fact that prices went as high as it did in 2007 and 2008 probably means that there had to be other factors going on besides just the growth in ethanol production.   Brady: Talk to me a little bit about the policies in the US with respect to, that support ethanol production and I guess this at least in the period that we're discussing, these policies, the importance of them depend on the price of oil. Maybe we'll discuss and blend these two topics in the price of energy and the policy issues that you've discussed in your book.   Patrick W.: Sure we have several reason why people want to produce biofuels. The simple of course is it's profitable. If people can sell ethanol or biodiesel at a price that exceeds their cost of production there's going to be an incentive for folks to expand production of those biofuels. During the period from 2005 to 2007 and December 2008, we had several things all pushing in the same direction when it came to biofuels. We had policies in the US that were requiring increased levels of biofuel usage. We have something called the Renewable Fuel Standard that each year is mandating an increased level of biofuel use. That provided some security to those who were trying to build new biofuel plants. They knew they were going to have at least market for their product no matter what. Also, during that period of time, we saw rising oil prices. Those rising oil prices meant that people were willing to pay more for ethanol because gasoline prices were also going up. Ethanol became an affordable alternative or complement if you will to gasoline in helping meet people's demands for fuel. Those two things combined really pushed us up in terms of the overall level of demand and supply of ethanol in the market. It was probably surprising just how fast it was possible to increase ethanol production during that period of time. We literally doubled production in just a couple of years' time. It is a really amazing thing in retrospect that was possible. We went from ethanol being a relatively minor use of corn, less corn being used for ethanol production than we exported each year in the united states to just a couple of years later where ethanol use of corn was roughly double that amount that was used for exporting to two third countries. Again really remarkable developments in that respect. Again, it's both the policies and the developments in oil market that mattered here. On top the mandates required use, we also have subsidies for the use of ethanol in fuels so that every gallon of ethanol that's blended with gasoline received a subsidy, 45 US cents per gallon. That also of course provided incentive for an increased level of production and consumption.   Brady: Now, the group that you direct, The Food and Agricultural Policy Research Institute, FAPRI at the University of Missouri did a study on the effect of these policies on corn prices. What were your findings from that?   Patrick W.: Well, two things are probably very important from that study/ First of all it is certainly true that the combination of policies we have in the United States does provide a strong incentive for additional ethanol production with implications for global markets for not just corn but all other foods across the board. If you were to take away the existing US policies we would result in less production of ethanol and other biofuels and lower prices for grains, lower prices for oil seeds, lower prices for food. But, the other interesting finding is that while the current set of policies were critical in building up the industry, the industry now exists and taking away those subsidies wouldn't result in the complete closure of all the ethanol plants we have out there. We would see a reduction in production by roughly two-thirds of current production would remain in place even without the current set of subsidies. While we again see a less demand for corn, less demand for soybean oil, less demand for other feedstock in biofuel production, it wouldn't completely eliminate those industries overnight. We would continue to have a significant share of the US production of grain and oil seeds continuing to be used for biofuel production.   Brady: When we talk about oil prices, it seems to me that one of the things that, I mean, it's always had its increase, it's effect on production, so it's always had this supply side effect on the price of food and commodities. What it seems to be now is, now it has a strong demand side effect too so that the price of oil goes up and then ethanol demand and that plays itself out through the price of corn. There's a demand side effect as well as maybe the conventional supply side effect that we think about increase in oil having on the price of food and commodity prices. You talk about crop, the role of oil in a production and you do one very interesting aspect of your book is really to break down the production of a farm and look at the role of energy prices. I was wondering if you could talk a little bit about that?   Patrick W.: Sure. Oil prices are obviously important in the production of agricultural products the world. In the United States a direct way that it comes in is of course in terms of fuel. When the price of oil goes up, it means higher prices for gasoline and the diesel fuel that's used to operate the country's tractors and combines and all the other farm equipment that people have. That's a pretty easy to understand effect on farmers' bottom lines. In terms of fertilizer most nitrogen fertilizer in the United States is produced from a process that uses natural gas as its basic feed stock. When natural gas prices increase that means higher prices for nitrogen fertilizer, which also has effect of reducing the profits for farmers when they are trying to produce a crop. Now, natural gas prices and gasoline prices do not always work in tandem as we've seen especially in the last couple of years. We've seen natural gas prices actually being fairly modest the last two years at the same time gasoline prices have recovered from their recession time lows. During much of the period from 2005 to 2009, we did see more of a correlation between oil and natural gas prices. We were seeing things that were pushing up cost of production of farmers in 2005-06 and the first part of 2008 and then a sharp drop in those prices in the last part of the period. Those are things that have been around for a long time and those are not new effects. Those effects have been there forever. When those costs of production go up, it does mean farmers are inclined not to produce as much. Their profits go down and [inaudible 00:25:08] that might not be used for crop production anymore and maybe not quite as many input supply as well. That can reduce yields [inaudible 00:25:15] a little bit. These things do have the effect of helping to push up prices at least a small amount. As you said, the new thing in the marketplace is a connection with biofuels. As higher oil prices increased the demand for biofuels, that means that a higher oil prices now [inaudible 00:25:32] not just with the reduction and supply of food but also with an increase in demand for corn, for soybean oil and other feedstock used in biofuel production. That means now that we're having a two pronged effect on the prices of food. In fact this later effect may be large on food prices than the effect just coming from the cost of production alone. Now of course if you're a livestock producer there's not a lot of positive here. For crop producer the higher demand for biofuels and the higher resulting prices can offset some or all of the increase in production cost, that they're facing. For livestock producer it's kind of a double whammy. They're facing the higher cost to producing hogs, chickens, cattle etc. At the same time they're paying higher prices for feed as well. Their income is definitely reduced and that results over time in reduced levels of meat production, reduced level of dairy production and therefore higher prices at the consumer level for those products as well.   Brady: Well, let's move to one of the issues that I find in some ways most difficult to understand and in some ways maybe that's why it gets as much press as it does but, talk to me about the speculative argument, basically that index funds and increased role of index funds has kind of pushed up food prices. Maybe even break that argument down for me into a basic level. What's the argument that's basically being made here?   Patrick W.: Well, one of the arguments is that we have a lot of new money, if you will, involved in the commodity markets. They're index funds or other sources of revenue that are finding their way into the commodity markets. The index funds are particularly known as being long side only speculative, that is say that they're putting all their money on the side of things that'll attract prices higher if they go higher and they will make money if F&D prices do move up over time. Some people have contended that all that additional investment on that side of the market has had the effect of pushing up prices as well. If you have more people trying to buy or betting on higher prices, it's going to have the effect of pushing those prices up as there's new source of demand if you will that's coming into just one side of the market. Now, whether that's actually the case of not is been very controversial. While it's certainly true in any given day of the week, what people decide to do in those futures markets will determine the price of corn or wheat and of other commodities on that given day, it's a different question whether they can really effect the price of commodities a lot over a longer stretch of time. Part of the reason for that is what has to happen in terms of the fundamentals for that to be sustained. Let's suppose that speculators in the market are somehow able to push the price of corn higher than the otherwise fundamentals would suggest it should be. If that occurs and is persist for some period of time, the higher price for corn is going to result in more corn production, it's going to result in less demand, less consumption of corn in the US and around the world and the net effect is going to be that there's going to be more corn that has to be stored by somebody. Somebody has to be willing to store the corn that's not being consumed and that is being produced that wouldn't have been there otherwise. While that can work for a while but eventually someone's going to say, "No, wait a second. Why am I holding to all this commodity that nobody seems to want." It ends up being a natural check on things that if these stocks build to too high of a level, eventually there'll be a correction and eventually we'll see markets come back into line. While again, I'm not denying the possibility that speculation can indeed play a role in day to day movements in market prices, I think it's much harder for speculative behavior to have a large impact on prices in the longer run.   Brady: Yeah, certainly that's consistent, I think with a recent article that came out in Applied Economics Perspectives and Policy by Scott Irwin and Dwight Sanders. They review all that literature and suggest there's no smoking gun in the sense that there's no clear evidence of an effect. I guess, I imagine it's going to remain a subject of debate for some time in our field.   Patrick W.: Yes. I guess it's very safe to say because again there's many things that are very difficult to entangle here. There's, no single indicator's going to tell you what the price should be on any given day of the week.   Brady: Well, since, you finished the book in 2010 and you focused on the 2005 to 2009 time period, has anything recently happened that's changed your perspective or do you think basically you hit the main themes in the book?   Patrick W.: Sure, I think for the most part I'm reasonably happy that the themes laid out in the book are probably still holding in more recent market developments. I feel like, what's occurred to commodity markets in 2010 and 2011 you can see a lot of the factors at play that are discussed in the book. Why have prices increased so much over the last year for example for grains? A large part of the story in 2010 and 2011 is a short crop of grain around the world in 2010. We saw reduced production of wheat in Ukraine, in Russian, and in a number of other countries that resulted in less wheat being available in global markets in the December of 2010 than people had been expecting causing a very sharp run up in those grain prices at that time. In the US on the other hand we were expecting to get a record crop of corn as recently as May of 2010. The estimates coming out of the USDA for the largest corn crop ever and people were expecting this to put down prices. Indeed, prices were much, much lower than they'd been at the peak of commodity markets in 2007 and 2008. Then, just a few months later, we were learning that while that corn, 2010 corn crop in the US wasn't nearly as big as we thought it was going to be. A fairly significant downward vision in the estimates of the size of that crop corresponded with a big run up in the prices of corn in the global markets. Since the fall of 2010, there's been lots of other factors at play besides just the weather. We've seen significant movements in oil prices both up and down. That's had an effect on the demand for biofuels, that's had a spillover effect on commodity markets as well. We've seen major changes in exchange rates, something we haven't talked about so far. As the value of the US Dollar goes up or goes down, that effect how much foreign producers or consumers are getting for a penny for the products that they're producing and consuming in their domestic currencies. That can have a major impact on markets as well. I think we've seen a lot of the factors at play that were discussed in the book continuing to be important today.   Brady: Let's touch again on that currency point because I think it's an important point. If the US Dollar goes down, then essentially it makes it cheaper for other places to buy food, is that the argument?   Patrick W.: That's right. If the Dollar gets weaker against other curries, let's say against the Japanese Yen, take a very simple example. That means that when buyers in Japan are purchasing US corn or some other US product it takes fewer yen to buy that product. It becomes more affordable for domestic consumers in Japan to buy that product. If you're talking about say Brazil, as a major competitor in global markets, when the price of soybeans is what it happens to be on any given day of the week but the value of the Dollar changes, if the Dollar gets weaker against the Brazilian currency that has the effect of making products in Brazil not be able to sell for the same price they were previously. That means that you're also going to have fewer supplies coming out of Brazil in the future. That'll also have the effect of helping it drive up prices measured in dollars.   Brady: When you end your ... One of the last sections in your book you talk about looking into the future and why you're cautious to say that you don't have a crystal ball. You talk about some work that you do. You do a lot of simulations of what the future might look like. You talk about three different visions of the future. Talk to me about those three visions.   Patrick W.: Sure. A lot of what we've been talking about so far has been focused on the relatively short run, what determines the price of food this year and next year. If you want to talk about what the price of food is going to be 10 years, 20 years, 50 years from now, it's probably also very, very important to look at some longer term factors that affect food prices. In addition to the things we've already talk about two of those are technology and population growth. The rate of growth in the world's population has been slowing in recent years. The world's population is continuing to grow. We're expected to pass nine billion people by the year 2050, which indeed is a major challenge from the global food system. Where are we going to get the food to feed an additional two billion people, especially if those population growth is going to go along with the increasing incomes as well and therefore changes in diets. That is indeed a very major challenge in front of us. But, as I point out, the rate of population growth is indeed slowing. If we've been able to have a global system that can meet the demands of people over the last 20 or 30 years when population was growing more rapidly, at least that aspect of things shouldn't be quite as challenging in front of us as it has been. The population growth again is very, very critical and what the income of that population is as well. In terms of technology, that's the other side of the ledger. How fast are we able to increase the amount of corn, the amount of wheat, the amount of rice that we obtain from a single hectare or acre of land around the world? World growth in yields has been fairly steady over the last 30 years, at least by some measures. The amount of additional grain that we're going to be able to produce in a given hectare of land has grown steadily over time. As a result we've been able to produce a lot more grain, a lot more food in general without increasing the amount of land used for crop production nearly as much. If we can continue to grow crop yields at the kind of pace we have over the last 30 years then satisfying the demand for food in the future will not be nearly as challenging as it would be if that rate of growth in technology were to slow. People are very concerned about whether we're investing enough in agricultural research both in terms of public sector and the private sector to be able to get those kind of growth in yields in the future and of course whether our resource base is such that it will allow that as well. People are concerned very much about the availability and quality of water around the world, soil erosion and of course climate change. It seems there could be threats to the future supply of food around the world. Again, the major demand side factor being population growth and the income growth that will affect the food demand and the supply side, how fast are we able to grow crop yields over the next several decades to meet that demand.   Brady: If you had to project do you think we'll see increased volatility in food prices or will we be able to tackle this? Do you have a sense or a guess of which way it might go?   Patrick W.: We've definitely seen a huge increase in volatility by some measures in recent years. I frankly expect that we're going to see continued volatility at least for a few more years to come here. As long as our stocks of grain that we carry over from one year to the next year remain very small, any small effect of supply or demand on those stock levels will have a big effect and prices. Until we have a more stable situation that allows us to rebuild some of those stocks we're probably going to continue to have markets that are very sensitive to even the smallest perturbation. I do think the linkage between food markets and petroleum and other energy markets is going to continue to be very strong in the future. That means unless we figure out a way to make energy price much more stable than they've been, we're probably going to continue to have very unstable food prices as well.   Brady: Now do you see any policies out there, are you an advocate of any particular policies that you think we should be pursuing both in Canada and the United States?   Patrick W.: Well, as part of my job with the Food and Agricultural Policy Research Institute, we do look at policies on a daily basis for US congress and other decision makers. We try to avoid making policy recommendations, but I can probably make some observations about what things do if were to have certain effects and what things don't. In the past there's been a lot of controversy about policies in developed countries in general and the US in particular about what affects it might be having on global markets. Until about 2007, probably the thing you were hearing most commonly in international forum were concerns that US farm programs were having the effect of subsidizing US production of grain and other crops and therefore depressing prices for food in global markets with detrimental effects on producers around the world. Many people were concerned about those policies and wanted to see changes in those policies so as to not have those effects on farmers in other countries. Then I think things kind of did a 180 in 2007 and 2008 as food prices increased very sharply, people started focusing instead on biofuel policy as being a major cause of the increase in prices that we were observing in that period of time pointing out the effect of those higher food prices on consumers around the world and suggesting that US needed to change those policies to avoid having those effects on food prices. Somewhat ironically it went from a situation where people were complaining about US policies as causing food prices to be too low to just a couple of years later people complaining about US policies as being a major cause of prices being too high. In the book I try to point out that US policies do indeed have both of those effects on world markets as do policies in many other countries around the world. I think a lot of it comes down to what do we really want to try to achieve with our policies in the future. Are we trying to primarily make food as affordable as humanly possible for everybody around the world. If that's the case, subsidizing production can actually be a good thing and trying to do things that would reduce the amount of demand for biofuels and other things that divert grains and other products to making fuel, would also be a desirable change in policy, if that's your major objective in life. If on the other hand you're more concerned or as concerned about the welfare of farmers around the world, even in developing countries it may well be the case that you want to see opposite set of policies. You actually want to talk about trying to reduce the kind of subsidies that we have for crop production in Europe and North America and actually, thinking that biofuel policies that tend to increase [inaudible 00:40:24] might actually be on balance a good thing. Again, it very much depends on who we're talking about and what sort of goals one has for the global food system.   Brady: Well, that's, I think, a good point to end it on with. Two visions of the future really, one in which policy is oriented towards reducing the price of food to benefit people in lower income countries around the world and the other in which it's worried about farm producers in developing countries and that they are beneficiaries potentially of a higher food price. Patrick I want to thank you for coming and joining us and discussing your book, The Economics of Food: How Feeding and Fueling the Planet Affects Food Prices put out by FT press. Thanks very much.   Patrick W.: Thanks for the opportunity.

Dr. Busch argues that standards play a central role in constructing reality. Transcript Brady Deaton: My guest today is Dr. Laurence Bush. He and I will be discussing his forthcoming book titled Standards: Recipes for Reality. The book will be published by MIT Press. Laurence Bush is university-distinguished professor in the Department of Sociology at Michigan State University and co-directs the Center for the Study of Standards in Society. Larry, thanks so much for joining us.   Laurence Bush: Good morning, Brady. It's a pleasure to do so.   Brady:  Larry, after reading your book, I saw in every newspaper I picked up the issue of standards, and I found it was particularly relevant to the area of agriculture economics, but before I focus on those issues, I'd like to just start off broadly, and ask you about what you mean by the idea that standards are the way and the means by which we construct reality.   Laurence Bush: Yeah. The thing about standards is that they very, very quickly become taken for granted objects, whether they are texts, or they are physical objects, like for example, weights and measures. These things take on a taken for granted character, and as a result, become part of the reality that we expect. For example, if I get in a car that I've never seen, the cars are sufficiently standardized, and I can very quickly figure out how to drive that car. It doesn't require any special training. Once I've learned how to drive a car, I can drive any car.   Brady: In your book, you have a number of examples that are fascinating, and I wonder if you might just talk about some of the ways that we encounter standards that we might not think have found your discussion about time, and railroads, and the albino rats in the laboratory experiments particularly compelling. Could you pick a couple of those examples, and just discuss them?   Laurence Bush: Sure. Let's talk about the ones you mentioned, and maybe we'll move on to some others. If you take the example of railroads, obviously one realizes immediately that in order to have a system of railroads that crosses your entire country, you have to have the same track gauge. That part actually didn't occur in the United States until the 1880s, and was largely the result of building the transcontinental railroad, and deciding that a particular gauge was going to be used for that, and then gradually moving towards that being the standard gauge for all railroads. More complicated than that, and equally important, perhaps maybe even more important, was the fact that until something that used to be called railroad time, and that we today call standard time was developed, riding on trains was an extremely dangerous affair. Let me give you an example. Most railway tracks were single track lines, so that meant that if a train were to leave one end of the line, it had to arrive at a crossing somewhere, where there would be a siding. It would pull off, and wait for a train coming the opposite direction to go past. Since you didn't have standard time, that is to say, every little town had its own time, what that meant was that it was very difficult to predict where those two trains were going to come to the crossing point, where they have to go past each other. The result was an enormous number of head-on collisions. There were several ways to solve that. The most obvious way to solve that was to build two tracks, but to build two tracks was quite an expensive proposition, especially if there wasn't sufficient freight on the line to justify a second track. The ultimate solution was the creation of standard time, which allowed a given train to leave at a particular time that would be immediately knowable to people on the other end of the line and thereby to ensure that the trains would manage to pass each other at a point where there was a siding, and wouldn't collide head-on. I think that's just a few of the standards, but to that we would of course have to add that there needed to be standards for the track bed, so that trains that were heavier wouldn't sink into the mud. There had to be standards for bridges. There had to be just an enormous array of standards for the railways, and they had to be distributed across an entire nation, at the very least across an entire nation. In Europe, of course, they had to be distributed across many nations. Even today, there are several European nations that have standards that are not compatible with the most common standard, so Spain, for example, accepting its high-speed trains that have just recently been put in, all of the other lines in Spain are simply not compatible with the standards in the rest of Europe. You literally have to get off a train at the border, walk across, and get on another trainer. Obviously rather time-consuming and clumsy kind of thing to have to do. One of the other cases where you find standards is in science itself, so for example, in order to produce rat studies, of which there are literally tens of thousands now, you had to have standardized rats, and starting in the 1930s, it was a major effort to create standard rats. Standard rats were not your typical sewer rat. That would probably be rather nasty. It would be of enormous genetic diversity, would have a rather poor diet, and an enormously variable diet, and the idea was to produce rats that had a standard diet, had a standard amount of exercise, had a standard genetic base, and that were relatively gentle in their demeanor, and would not resist human care. Doing that required the actual production of a detailed manual that went through everything from cage size to the position of water dispensers in the cage, to the kinds of specific nutritional elements that needed to be in the feed, and specific genetic types that were desirable. Today, if you are a scientist who uses rats in the work, you will have to go and buy those rats from one of three or four companies that produce particular rats that are designed for particular kinds of scientific studies. Picking the rat that you find out of the sewer would actually make your results rather useless.   Brady: I think what's so compelling about those two examples is that if standards play a central role in coordinating our understanding of time, and developing our knowledge, i.e., the albino laboratory rat is central for scientific study, it's not surprising that we're seeing the role of standards in all of the issues that we're addressing. What this word standard, how is it ... How do you differentiate it? How is it associated with other similar words, like regulation, or law?   Laurence Bush: I think there's undoubtedly an irreducible ambiguity there. Standards, for example, may be produced. A good example would be building codes. The standards that are used in building codes are developed by the private sector. They're developed by architects, plumbers, electricians, and so on, and those are then adopted by government agencies and turned into law. There's a rather ambiguous border between standards and laws, but of course most standards are not legally required. That is to say, they're not written into law. They are at least in principle voluntary, although avoiding those standards is often nigh impossible, or extremely difficult and expensive. Even if the standard is not a legally regulated standard, it is necessary to pursue it. I think, again, I don't think there's any way you can clarify this. This is an ambiguity that's built into our behavior, so at certain times, certain things are seen as standards. For example, until recently, whether or not smoking was allowed in a particular restaurant was up to the owner. These days, in most cases, smoking is legally prohibited in restaurants, so what was a private standard, what was a voluntary standard, becomes a law. The reverse, of course, occasionally occurs, although that tends to be relatively rare, where things that were in law are deleted, and left to the product sector. The other point I would emphasize here, too, is that given the enormous amount of technology that's constantly being developed, enormous number of products, processes, services that are constantly being developed, that there is a continuing and extraordinarily important need for new standards, without which these things literally can't function. A good example would be all of the IT information that ... I'm sorry, all the IT products that are available, which require literally thousands of standards. If I developed a new super duper computer that could do many, many things that are currently unavailable on existing computers, but I couldn't plug that into the larger system, so I couldn't connect it to the internet, I couldn't make it talk to other computers, I couldn't share files and so on, it would be essentially useless. It's all those standards that allow compatibility, and what in the computer science community is known as interoperability, that make that kind of stuff possible. These are constantly changing, constantly being updated, constantly being modified as new technologies arrive.   Brady: Do you see that the role of standards has changed over time? Are there more of them, or are they changing in character, or have they always been this essential means by which we construct order in the economy, or amongst relationships between people?   Laurence Bush: I think there are two parts to the answer to that question. First, I think there's no question that over time, the number of standards has increased markedly. That's partially a function of the production of, mass production of various kinds of goods and services that starts in the 19th century. Once you start to produce things en masse, you wind up producing things that are in some sense standardized. Late 19th century, you see a huge movement to create publicly available standards, to do things like, for example, reduce the number of different kinds of screw threads, to reduce the number of track types that are used by trollies in the streets. You see a massive effort starting roughly in the 1880s to standardize these things in order to make markets function more effectively, but what you then see in the late 20th century is an explosion of standards, because while standards were used to standardize up until roughly the mid-20th century, and to some extent they still are, starting in the late 20th century, you also see standards being used to differentiate. The auto industry is probably the place where this first starts, if you look at the switch from Henry Ford's famous any color as long as it's black to General Motor's differentiation of the market by virtue of having different standards for different vehicles, and has of course different prices, different characteristics of different vehicles. You can also see it of course in the agricultural area, with Heinz's development in the late 19th century of his famous 57 varieties of pickles. Those varieties, each of which was standardized, and remain standardized, changed the market for pickles rather dramatically from a single product to 57 different kinds of products.   Brady: Since we're heading in that direction, let's talk about the role that standards have played in the agriculture sector, and perhaps let's start with a general discussion of that, and then we'll move into some more specific questions.   Laurence Bush: Standards actually played relatively little role in the agricultural sector, with a few exceptions until the 1930s. The first area where standards developed, which was really early in the century, was in the grain tray, where it became obvious that trading grains sack by sack was an extremely laborious process, and the sheer volume of grain that was being moved around made it more and more difficult to do that. Standards were developed in Chicago that allowed grain to be treated as liquid, and allowed grain to be standardized by using a certain set of characteristics, such that any sack of number two wheat was the equivalent of any other sack of number two wheat. That was a huge change in the way in which the agricultural, the wheat, the grain sector was organized. It changed the way in which people treated grain. They didn't treat it anymore as something that had to be inspected sack by sack. They treated it as something that could be bought and sold at a distance. If somebody told me they were going to sell me so many bushels of wheat of a particular grade, we could negotiate over the price, but we didn't actually have to physically inspect it after that point. That only was, that was confined largely to the grain sector, even up through until the late thirties, early 1940s. In fact, one of the USDA yearbooks in the 1940s is a long article that talks about how standards for various kinds of agricultural commodities are incompatible across state lines. They talk about I believe it was peaches, and how peaches from the state of Washington had to be removed from the boxes they were in, and regraded in order to be brought into California. This was of course enormously expensive, enormously time-consuming, and it blocked the movement of many, many agricultural commodities across state and sometimes even city lines, because what constituted, say, a grade A egg in one city might be considered a grade B egg in another city. It was very, very time-consuming. Gradually, most of this, though not all of it, most of this kind of unnecessary differentiation disappeared, and you wound up with a set of common standards for most widely-traded agricultural products.   Brady: The grain was, were those initially private standards or public standards, and your book describes this distinction a lot, so maybe you can help differentiate the two of those.   Laurence Bush: In the case of grain, we started off with private standards, and the problem that you had was the difficulty in coming up with ones that would be acceptable over the entire nation, and perhaps even globally. It was all too easy with private standards to claim one thing, but actually deliver something else. For example, the US has been exporting grain since even the late 18th century to Europe. By the mid-19th century, we were exporting fairly significant quantities, and Europeans complained that they thought they were getting one thing, and they got something else. Finally, in the early 20th century, the state entered into that, and the US government took standards that existed, modified them a bit, and produced a set of official, legally-mandated standards for use in the grain trade. What that meant was that if you put a label on a particular quantity of grain, whether it was a truckload, a rail car load, a ship load, and you said, "This is number two wheat," you had to be able to demonstrate that indeed it was number two wheat, or you wound up paying a rather significant fine.   Brady: One of the issues that you kind of brought out there was this role of, well, private standards are facilitating trade by essentially reducing the costs of transacting, but your book argues that that is one explanation of the increasing role of standards, but that's just one dimension of it. What are the other ways that we should be thinking about the role of standards?   Laurence Bush: Again, as I mentioned as implicit in the title of the book, standards are ways in which we produce realities. Today, in the US grain market, nobody thinks twice about buying and selling grain that have particular standardized characteristics, and there are no or almost no quarrels over those kinds of things. In contrast, prior to that, there were constantly quarrels about the qualities of things that were delivered. Moreover, if you want something ... Let's say you wanted to use the grain for some very specialized and unusual use. You might discover that those standards actually are an impediment to you, because it may be that the particular characteristic that's of interest to you is not measured by the standards at all. In that case, you have to basically start from scratch. You have to develop a set of specialized standards that allow you this new use, and of course, I should emphasize that one of the paradoxical things about standards, and grain standards are no different than others in this respect, is if they're constantly being revised. There are new uses. There are changes in the product itself. There are, for example in the case of grain, there are obviously genetic improvements that are made. There are improvements in harvesting equipment, and as these things take place, the standards have to be revised in order to keep up with the changes that occur in the world.   Brady: I think that's a very important point that your book draws out, and I was reflecting a bit on USDA organic as I was reading the book. There was 10 years of fairly contested discussions about what would actually constitute organic. Yet most of that discussion is lost perhaps on the people who purchase organic. One issue that you raise is that these standards are kind of invisible until you are dealing with the creation of perhaps a new standard, or the standard itself is being contested. I'd like to read you a headline, and just have you reflect on it a little bit in the context of our discussion about the movement from private standards to more public standards. This is from the New York Times, July 7th article written by William Newman, and I'm just going to read you the title. Egg Producers and Humane Society Urging Federal Standard on Hen Cages. What's going on there?   Laurence Bush: What's going on here is that there are already standards available. There are so-called enriched cages that have been developed, and that the United Egg Producers and Humane Society have pretty much agreed are an improvement from their vantage point over the previously-used cages. The problem is that what is happening here is that different states, California, for example, have passed laws that have different specifications in them. I think what United Egg Producers was concerned about, quite understandably, was that if you have different rules, different laws in different states, it's going to be extremely difficult to move these products across state lines. It's also going to be difficult for companies that operate in several states to operate in conformity with the law. I think part of this move is to head off a proliferation of laws that are contradictory in character. The other aspect of it is that while the majority of layer producers produce according to the standards that are currently available, that are private and voluntary, there's a still a significant number that do not, and so making this into a law is a way of ensuring that basically all have to compete on the same, if you wish, level playing field.   Brady: All right. In contrast to that, I want to read you another headline about the local food movement, and your ... One of the things that we can't go into as much detail in your book is your book spends a lot of time helping you understand types of standards, and what you call a tripartite standard regime. A good deal of your book helps us break down these kind of issues, and I wonder ... I'll read you this, and I can read it to you again if it's not clear. If you might just reflect on it with respect to the tripartite regime of standards that's developed in your book, and by tripartite, you're talking about standard certifications, and accreditations. This is from the Globe and Mail, Saturday, July 2, 2011. The title is The Local Food Movement Goes National, and the excerpt I want to read you is as follows. "Local Food Plus, a nonprofit that issues its private certification to progressive farmers who conform to a tough set of sustainability and production standards written for the agency by a crack team of agriculture and environmental experts." They're describing the nonprofit that issues private certification to farmers who conform to standards that are written by, as the writer Jessica Leader notes, a crack team of experts. What's going on there, Larry? Can you unpack that a little bit?   Laurence Bush: I think what's going on here, I'm not familiar with this particular case, but what's going on here is an attempt to improve the production conditions, improve in the sense of making them more sustainable, by a particular group. What they're doing apparently is using scientific information, and probably other things as well, but scientific information to develop a set of standards which they're then certifying, particular farmers are using. Let me back up a minute here. You mentioned the tripartite standards regime. Basically, what has occurred mainly in the latter half of the 20th century up to the present is not just an explosion of the number of standards that are out there, but an explosion of certifications, usually third party certifications, that is certification by somebody who's not a party to the exchange, that a particular producer, for example, is producing in conformity to a particular set of standards. Then an accreditation system that accredits the certifiers as being knowledgeable and competent enough to actually do that certified. What's interesting about that is that's all taken place in the private sector. If you wish, it's the creation of a new kind of governance that did not exist until relatively recently, with a few minor exceptions, but which is now becoming quite commonplace, so commonplace that in fact there are two major international accreditation organizations, the International Accreditation Forum and the International Laboratory Accreditation Cooperation, that accredit certifiers of various kinds, so for example, in the agricultural sector, it might be somehow like, say, Davis Fresh, that is certified to go around and see to it that the standards, whatever those standards might be, are being used by the farmers who claim they're using them, and they're being used correctly. That then becomes, in some instances, a particular selling point on the market.   Brady: I thought this tripartite regime of standards was particularly useful in understanding all of these systems of standards and labeling that are becoming increasingly commonplace in 21st century agriculture. I had in mind the organic example, where if a farmer is claiming to have an organic produce, they must be following a certain set of standards, and they must be certified, and then there's this process whereby they're checked, and that's what you're talking about in terms of accreditation. What I was interested in is about, is there's a variety of different ways that that person gets certified, and you talk about first party certification, second party and third party certification. I guess the one we hear the most commonly is third party certification. Can you discuss that in the context of perhaps organic?   Laurence Bush: Sure. If I am a farmer, and I want to produce to the organic standard, I can obviously, just like anyone else, I can read the standard, and I can attempt to implement that standard on my farm. What certification does is that it says that you must be certified before you can use that organic label. You have to find an accredited certifier, and that certifier has to come to your farm, and inspect it. It has to do, engage in a variety of tasks. They might be checklist tasks. They might be the examination of the way in which the farm is managed and so on, a whole series of things that are in that list. They will say, "Yes or no, you are either certified organic," that is to say you are meeting the standards, or no, you are not meeting the standards. You need to do the following things in order to be able to comply and use the label. That kind of certification has become fairly commonplace, and of course, while for purposes of this podcast, you're interested in agriculture, it's worth emphasizing that if you type in the word "certify" or "certification" into a search engine on the web, you will discover literally millions of certifications of people, certifications of things, certifications of processes, so this is something that's taken place across society as a whole. It's not in any way unique to agriculture, although obviously it has some rather significant effects on agriculture, as it does on other sectors.   Brady: A good portion of your book examines the idea that these standards are a form of governance, are a form of creating order in the economy. You link it to a certain period of time, I think what you term as neo-liberalism. Could you just discuss that briefly?   Laurence Bush: What occurred in the late part of the last century was a move away from government regulation, direct government regulation, and you see this with the Reagan presidency in the United States, with the Thatcher regime in Britain, and a variety of other things going on in other nations. As you certainly remember, when Reagan was president, he talked a tremendous amount about deregulation, and many government regulations were relaxed or eliminated during the Reagan regime. What's interesting, however, is that in almost every instance, they were replaced by private standards of one sort or another, because without private standards, it's extremely difficult to operate in the marketplace. For example, corporate community talks incessantly about what they call freedom to operate, that is to say the ability to engage in various kinds of activities without finding that their path is blocked in one way or another. Indeed if markets are relatively unfettered by regulation, the positive side from a corporate perspective is freedom to operate. The negative side is the possibility that you're going to wind up with enormous amounts of goods that are of shoddy quality, or that are unsafe, or that have other problems associated with them. What's happened is that corporations, especially the largest ones, have used the supply chains that they're at the end of, and I'm talking here mainly about retailers, they've used those supply chains to coordinate and lock in producers to particular sets of standards. They've used that by virtue of that tripartite standards regime we talked about. For example, if you're a Wal-Mart, or a Kroger's, or any of the other large supermarket chains, you are setting standards for your suppliers. They may be standards that have to do with productions. They may have standards that have to do with packaging. They may have maybe standards that have to do with stocking the shelves, all sorts of standards that are developed. Basically they are take it or leave it standards. That is to say if you want to trade with us, you conform to these standards. Otherwise move on, and I would argue that what's happened is that many of the things that were being done as government regulation are now equally regulated, maybe even more regulated, but they're regulated by private entities of one sort or another. Individual companies, groups of companies for example, in Europe, in the agricultural field, there's what's known as global gap, which is a collection of supermarket chains that have an agreed upon set of standards, but whether it's individual companies, or it's groups of companies, the point is that this is a kind of governance that looks curiously very much like government regulation, but actually doesn't have some of the positive things that we associate with government regulation, such as appeals processes, separation of powers, and various things of that sort. One of the problems I see with this tripartite standards regime is that it doesn't conform to some of the basic notions of democracy that we would normally expect to see if things were done in the public sector.   Brady: One part of your book that helps us examine this emerging world of standards is that you provide some, what you call general guidelines for thinking about building new and assessing standards. I was wondering, I think there's roughly about 11 in your book, but I thought they were very interesting, and I was wondering if you might pick a couple, and just talk about them. One of the areas, for example, is actionable standards, and path dependence, but feel free to pick the ones, any one that you like and maybe develop it a bit.   Laurence Bush: One aspect, I would argue, is that in some instances, maybe even in all instances to some degree, standards do violence to someone, and therefore one of the points that I make is that in developing standards, one ought to try to do minimal violence. What do I mean by that? I mean that certain kinds of things are going to be very costly, certain kinds of things are going to be problematic in terms of meeting the standard for some subset of, for example, producers. One of the things that I argue is that one, in developing those standards, ought to ask, "Is this going to do minimal violence to producers?" That is to say, is it going to have the effect of putting some class of producers out of business, or requiring them to do extra work that is really not going to have much effect on the final product, but is going to meet the standard nevertheless? Doing minimal violence, it seems to me, is one of the key criteria that ought to be co-imposed or at least requested of standards developers. Another is whether or not the path dependence of the standard is problematic. All standards to some degree that is path dependence. That is to say once you start down the line with a particular standard, it's awfully hard to deviate. We talked about railway tracks, and standard time. If tomorrow morning we discovered that a railway trackage that was an inch wider would actually be more effective, it would be virtually impossible to implement that without major changes. Similarly, standards for example, things like 110 volts electricity, changing that to some other unit, say, 220, which is commonly used in much of the world, would be an extremely expensive and difficult task. The reason is because the path dependence, once you've gone down a particular line, once you've gone down a particular standard, it's very difficult to back up again. One of the questions I would argue ought to be asked with the creation of all new standards is, is the path dependence here going to be such that it narrows the possibilities, narrows the kinds of things that we're able to do, or is it going to be one with relatively minimal path dependence, allowing us to move in other directions? I guess a third one I might mention is that standards need to be actionable. There are enormous numbers of standards out there that are really not actionable. You look at the standards, you scratch your head, and you say, "Well, now, just exactly what is it that I'm supposed to do with this standard? Is this standard actually going to be actionable in the sense that I know precisely what it means that I need to do in order to conform to it, or is it so general that indeed anyone could conform to it with minimal change in their behavior?" That's sort of the flip side at which, if you wish, of doing violence. Violence is often done when standards are over-specified, standards that are unactionable, or standards that are under-specified.   Brady: When I'm in the airport, and I hear that we're at yellow warning, and I have no idea what that means, that might be an example of a-   Laurence Bush: I think that it would be an excellent example. [inaudible 00:37:56] What are you supposed to do? It's entirely unclear whether there's any way you could or should change your behavior based on that warning. In fact, most people who travel frequently listen to that and basically ignore it, because there isn't anything you can do about it.   Brady: Larry, I think we're approaching the end of the podcast. Your book covers a tremendous number of issues, some of we've only really scratched the surface. I wanted to give you an opportunity, if there was one or two issues that you wanted to discuss, that maybe we haven't covered.   Laurence Bush: One of the things we haven't talked about, which I think is really important, is how it is that standards are always symmetrical, that is to say, a standard for some thing or physical process is always a standard for people, and standards for people are always linked to various kinds of material objects of one sort or another. For example, if we have a standard for, say, organic production, it's a standard, on the one hand, for physically what you have to do in order to produce organic goods. On the same time, it is a standard for the people who produce those things. There's no way around that. Similarly, if we're talking about standards for education, or healthcare, those are standards on the one hand for people, but they're also standards for myriad physical objects, textbooks, tests, the way in which classrooms are organized, and so on. The point is that all standards are both about people and about things. Even if the standard says nothing about people, it makes all sorts of implications about people's behavior. Similarly, standards would say nothing about things, and only talk about people invariably involve various [inaudible 00:40:03] of physical objects.   Brady: When I finished reading your book, and I got to the last paragraph, I thought you eloquently captured what your book set out to accomplish, and I'd like to congratulate on that, and I thought one way to end the interview might be to ask you to read that last paragraph.   Laurence Bush: I'd be happy to do so. It goes as follows. So the next time that you tie your shoe, drive your car, go to the hospital, drink a cup of coffee, take a class, or engage in any of the activities that together make up everyday life, think of the myriad standards that are involved in those activities. Think of the power that standards have and must have over all of us. Ask yourself who established those standards, and what justifications they used in establishing them. Think of who wins and who loses as a result of standards. Think of what virtues and vices are made manifest through standards. Ask yourself whose rights are supported and whose rights are abridged as a result of standards, and perhaps most important, ask yourself how standards might be used, modified, or transformed to produce a more just and caring world.   Brady: Larry, thanks for joining us.   Laurence Bush: It was a pleasure, and good luck with your series.

Ray Bollman discusses terms, trends, and policy issues relevant to understanding rural Canada. Transcript Brady Deaton: My guest today is Ray Bollman. He and I will be discussing issues related to rural Canada and policy. Ray has been the focal point in Statistics Canada for rural research and analysis since the 1990's. He initiated Statistics Canada's rural and small town Canada Analysis Bulletins in 1998 and there are 62 of these bulletins now available. We'll provide a URL to them on the website. Before his retirement, he was the Chief of the Rural Research Group at Statistics Canada. Hi Ray and welcome to FARE Talk.   Ray Bollman: Yeah, thanks for calling.   Brady:  Ray, let me begin by asking you, how should we think about rural? What is rural?   Ray Bollman: Well different people, we do it differently. I'm an economist, so I would look at the price of rurality and I would look at distance, density and the distance to density. And that's sort of the way the World Bank Rural Development in 2009 on Reshaping Economic Geography clearly stated the issue of regional geography as in density and distance to density. And so density then is the advantages of glomerated economies and the distance to density, there's economic distance, price and time to get there, but there's social distance and psychological distance to density. So I look at it as distance in density. Some people will talk about is as identity. So if you feel rural, even if you're living in a city, you might behave differently. I would say gee, you're facing the same relative prices in the city, whether you feel rural or not, so I don't think you'd behave differently. Maybe that's an empirical question.   Brady: So for some folks, when you talk about glomeration effects being associated with the density character of urban and then lower density in rural, what are we talking about? A glomeration effects occur in urbanized areas ...   Ray Bollman: It's because it's a lower cost of people living together and working together. Firms, if they're beside each other, in much the same industry have lower cost because they have better access to specialized labor force. Their employees would go to the same church, or drink at the same bars, or curl at the same curling rinks, and over the conversation just exchange of tasset knowledge. They would just exchange tidbits on how things are done in their particular occupation or their particular industry. And if that firm was in a more remote area, that exchange of tasset knowledge's could not take place. You could read on the internet the written knowledge but the embedded or tasset knowledge that the specialized workers have, that they do not write down, just cannot be exchanged over the internet, you have to do that at the elbow of the master, if you will, and that's a big advantage of a glomerations and having both people and firms being close together.   Brady: So, I guess, part of the idea, is if you're in an urban area, if you take the same person, or the same firm, from a rural area and move them to an urban area, they may be more productive. Because of the exchange of this tasset knowledge and the interactions with experts in the area.   Ray Bollman: Yep.   Brady: Yeah.   Ray Bollman: Yep. More productive or lower cost unit output, same thing. That's right.   Brady: Okay so that's part of the density issue of rural. And the distance, can we think about that, and you mentioned this is cost, takes longer to transport good and information to rural areas.   Ray Bollman: Yeah, to rural areas and from rural areas. So in some sense, the high price distance is an advantage for some rural firms, cause they have a distance tariff and so you might be able to set up a business in a rural area because it's too expensive to import that service, or that facility, yeah that service from an urban area. So the distance is a nice tariff barrier. But the other side is, if you're producing something in a rural area, it's going to cost you something to ship it to the urban market. And it's going to cost you something that you're gonna have a harder time finding out how that niche, or that product, or that market, is developing and how you should change your product. If you're living in the middle of the market, you have an intuitive feel how that market is changing but if you're living away from the market and shipping it to that market, you have harder time just being with the market and I don't know ... what color you have to do, what your promotion should be, how fast you have to change your good or service. So it's just not being aware of the changing market if you're at a distance and so there's a bit of higher cost on the market research side.   Brady: Now I notice in a number of your writings, and we'll makes these available on our website, but you make the point, I think it's a really important one, that rural is not necessarily low density and remote, sometimes it can be high density and remote. And talk to me a little bit about those two issues.   Ray Bollman: Yeah well, and one of the papers you might reference there set up a little grid, and so two by two table, and you could be, if we think of rurality as density and distance to density, so on the table, one dimension is from high density to low density, so as you get to more low density or more rural. But some of those low density places, those small villages, could be in the commuting shadow of a big city. So some of us, if we took our spouses to these small villages that are within the commuting shadow, they would see a cow out the front window and say gee, this is really a rural place. And your kids would probably go to a fairly small school and have the benefits of a small school, but maybe the cost of a small school. But there might be benefits of a small school. If you wanted to become the editor of the school newspaper, I'm sure you could get on the committee at least. And if you wanted to play basketball, I'm sure you could get onto the team. And but your spouse would have access back to the big city for a big city job, you know brain surgeon, NHL trainer, or whatever. So if you're a small community, small density, low density community, within the commuting zone of a big place, you have the benefits, if you will, of low density, and the advantages of short distance to density. So you could go the other way on that grid, from high urban, that's big places, to high rural, which would be long distance. So you could be a long way from a metro center and have a pretty dense town or city. And maybe you think Dawson, Manitoba, or Mattawa, Ontario, or places like that 6, 7, 8. 9,000 people, you might have two high schools in those places that are very competitive basketball teams, and you'd have trouble making the teams. But it's a rural, and small town economy, a small town labor market and there'd just be no jobs there for your professional [inaudible 00:07:34]. And if you became the teacher or the principal of the school and your spouse was a dentist, there's probably already one dentist in that town and there'd just not be a job for your spouse. And they'd be too far away from the metro area to commute. So there's a fairly high density place, looks a bit urban in some sense, but no distance, long distance to a metro job. So you can have small towns close to areas, or you can have big towns away from metro areas, two different types of rural places and different types of options, different types of opportunities, I guess different types of policy options too.   Brady: I think that's really important point. When I was working, in Central Appalachia from 1995 to 1997, I was confronted with this issue, that there were pockets of real dense housing in relative rural areas. And this was particularly challenging, because the issue that we were working with was trying to address sewage runoff into the river. And the primary way that was being thought about how you deal with this in rural areas, is to put in septic tanks. But in this area of Central Appalachia, where there were pockets of very dense housing, as a result we refer to them often as cole camp areas where houses were developed, basically row houses in a rural area, to house workers that were working in the mines, there wasn't the kind of space to put in a septic tank.   Ray Bollman: Right, right.   Brady: And when you met, often times, with people that were involved in it, their approach to the problem was, oh well this is a rural area, and the way you deal with a problem is to put in septic tanks. But the density was such, within this rural area in the sense it was remote from major cities, that the density was as challenging as any urban area.   Ray Bollman: Exactly. And the general rural observation is if you seen one small town, you've seen one small town. And they're all different. And if you're sitting in the 13th floor of the metro center worrying about rural policy, the capital city worrying about rural policy, rural areas are so heterogeneous that you just can't say, well if it's rural, obviously it's low density and sparse and therefore septic tanks. Because it's just a lot of differentiation out there. But trap sets the first law of statistics, right? The within variability is always than the between variability, so the between variability between urban and rural, on average, is not very big. But the variability within rural is big, and of course the variability within urban is big. Which is to say within variability is always bigger than between variability.   Brady: And I think it's also important to note, and you note this elsewhere, that if you go and you talk to residents of a quote unquote rural community, they will reflect that variation of understanding in their own discussion. So you might be in what you think is a rural community, and ask them what rural is and they'll refer to a different place in their own county as rural.   Ray Bollman: Okay and it's all perception. You could be the urban center of the county and you are the urban center of the county, and I don't know 2,000, 4,000 people or something, and some of us might think, or some of our spouses might think, that's a very rural town. And colleagues at Brandon University, a number of years ago, were doing some of this, and they were asking people in the countryside, it was more of a health issue, but do you consider yourself rural, what do you consider rural? And one of the conclusions was, I think one of the conclusions was, well I think rural might not be the right word. But the other conclusion was Brandon was a rural city. Brandon was 40,000 people in Manitoba and many people decided it was a rural city. So it's perception is important, and it's not clear one should ever use the word rural, you want the local people, or the residents to define it from their point of view. That's fair.   Brady: I want to move into a discussion, just about general trends, and feel free to add numbers where you like, but talking about, in general terms, will be fine I think. But before I do that, give me a historical context, or what aspects of history, maybe starting from whatever point you feel comfortable, should I understand, to think about rural Canada? And here I'm thinking about things like the initial settlements.   Ray Bollman: Yes, I would observe, I guess, some of the first elements in Canada, were quite self-sufficient. But most of the history of rural Canada is people move in to export things. Labrador, wheeling stations, the cod fishery, up and down the major rivers in Canada the export lumber, the prairie wheat economy, the nickel, gold, copper mines. And so none of those towns, none of those societies were ever designed or started to be an internally, or locally self-sufficient. They were all importing food and importing goods and services and exporting generally raw commodities. So talking about a sustainable rural community is a bit difficult, given that that never really started that way. It seems to me, I've sat around meetings saying gee, what's so problematic in rural Canada. Well it seems to me, if you think of that history, one idea of the problematic is the increasing value of human times, T.W. Fultz's Nobel Prize lecture, The Increasing Value of Human Time. Well, it's one ongoing constant trend for a long, long time, that the price of labor is going up relative to many other things, certainly the price of capital. And it's good that our real wages are going up. And for rural community, well, there's such an incentive to substitute machines for people in all these exporting industries, that the exports of wheat is up, and lumber is up, and nickel is up, very few people underground in nickel lines anymore, and so on. So increased output, increases export with less and less labor in the towns of fewer people working in these industries. Now, can you sustain your former population level? Yes, but only if you find something new to export. Cause you need fewer and fewer people to export more and more, or the raise on debt to the community in the first place. And that's the problematic, in my view, is that the communities were started to export products, export commodities, you need fewer people to do it, often, there's nothing else you can imagine to export from this place, therefore the population has to go down. And that's a long run trend in Canada, certainly since the second World War.   Brady: Now are there any trends in labor movements or the labor market, with respect to the aboriginal populations that you can talk about or that we should be aware of?   Ray Bollman: Well certainly, the aboriginal population is younger. And so they're going to be contributing more than their share, perhaps, of their workers on the labor market over time. A couple of examples, as a baseline you might consider Yukon. In Yukon, there's about one person coming onto the workforce, per person leaving the workforce, looking out 10, 15, 20 years. So it's quite a stable demand supply situation for labor. In Nunavut, for every person retiring, there are four people coming onto the workforce, just been looking at the demographics. Much younger society, lot more people coming onto the workforce, relative to those retiring, tremendous demand for jobs, or a tremendous demand for our migration from Nunavat to someplace where there might be jobs. We could talk about, just in prairies, you probably know from just reading newspapers, the prairie population, certainly in Saskatchewan, maybe 10, 15% of the population's aboriginal now, it may be 20% in 2017, so in the south, the southern provinces, Saskatchewan is the most intensive in aboriginals. But if you look at the absolute numbers, Ontario has the most aboriginals of any province in Canada, partly because of the big northern expanse of Ontario. You go back to the demand for labor and the supplied labor coming on the market, in Saskatchewan, right now, about 20% of the new people coming onto the labor market, 20% of the population 20 to 29 years of age, 20% of them are aboriginals now in Saskatchewan, and looking out 2017, about 30% of this age groups will be aboriginal. Therefore, out 2017, almost a third of the new workers in Saskatchewan, will be aboriginal.   Brady: I'd like to direct some questions now to the relationship between agriculture and rural.   Ray Bollman: There's a different between the landscape and the people scape. If you fly over rural Canada, sometimes you'll see a mine, sometimes you'll see forest, and in general the airplanes are flying over agricultural land. So you say gee, everybody down there is farming. Well, back to the time of the second World War, maybe, and you got the numbers in front of you, I think maybe two-thirds of all the people in rural Canada were living on a census farm, some of them are quite small but still living on a land holding that was included in the census. And that's two-thirds in agriculture are farm, and that was including all the rural areas where people weren't mining, and forestry, and then the few in the [inaudible 00:17:52] maybe even back then. And over time, that people scape has changed. Now if you're in a rural area, maybe 10% are living in a census farm. So it's really a major change in the local politics; used to be farmers on municipal councils, and farmers on school boards and so on cause the vast majority of people in rural areas were in farming families. And a major change over time, so maybe 10% in rural areas, and therefore on school boards, and municipal councils, and buying things in town, 10% of the families are agricultural. And it's a complete change in the people scape, but the landscape still looks much the same. And so, the Windchill survey versus the fiscal survey has changed a lot. And you can imagine the culture, certainly the political culture, has changed a lot over time.   Brady: You know, that's really interesting. So we think about agriculture policy, we think it's certainly probably still affecting the landscape of rural areas, but not necessarily having the same impact that it had when two-thirds of the rural residents lived on census farms, prior to World War II, on people.   Ray Bollman: That's right. Back then, if you put some agriculture policy out there, it hit two-thirds of rural people. And now if you put an agriculture policy out there, it directly hits 10% of rural people. Might be a bit of a spinoff in linkage, if people driving trucks or in the truck sector, and they're shipping more commodities. But it directly hits 10% of the rural people.   Brady: Now, one other thing that I note, in your article with Bill Rhymer, is that you point out that 20% of agriculture takes place in municipalities, within census metropolitan areas.   Ray Bollman: Yes, those are metro labor markets and back to my distance and density thing, if you're in the commuting zone of a metro labor market, your spouse will have access to a metro type job. And that type of job opportunity means that the rural development problematic, the rural development opportunities, the rural development approach, should be quite different in the sense that you have access to non-farm jobs in larger urban centers. And that's important, and I don't know if you should be surprised that maybe 10% of agriculture is within those zones, cause that would include greenhouse, and nursery, and so on, that have a big advantage being close to big cities.   Brady: Okay so we've talked a little bit about the trend of agriculture, in terms of employment in rural areas, are there other sectors that we should take note of?   Ray Bollman: If you go to these rural areas and look at the numbers, you'd find that up til recently, manufacturing, in Canada, was a bigger sector, in terms of employment, that agriculture. In fact, manufacturing was the biggest sector, all depends how you split up the numbers. So the numbers in the paper with Bill Rhymer and myself, we're looking at if you can put wholesale and retail trade together, 15% of people in rural and small town areas, were working in the wholesale and retail sector. And 13% in manufacturing, and 8% in agriculture. So if we split wholesale and retail separately, then of course, poof we win, manufacturing is bigger. If wholesale and retail are together, then now manufacturing is number two. It was number one four and five years ago. So one thing Bill Rhymer and I were asking, gee, if manufacturing is such a big sector in rural and small town Canada, would you put a rural secretariat into your agriculture ministry or in your industry ministry? Just to think about that. And it was only two or three provinces still where manufacturing is the biggest sector, certainly in Quebec and in New Brunswick, and Ontario, manufacturing and wholesale and retail trade look much the same. And in the west, there's couple of provinces, certainly in Saskatchewan, and I think in Manitoba, where agriculture is still the biggest employer across all the different sectors. But, Canada as a whole, manufacturing is a big sector, almost as big as shopping, the wholesale and retail trade. The other interesting thing is that when manufacturing goes up, it goes up faster in rural, when manufacturing goes down, it goes down slower in rural, and over time, oh since 1976 in one of the charts in that paper, the share of manufacturing in rural and small town areas, has slowly and continuously gone up over time. So rural areas are getting a bigger market share of the total manufacturing employment in Canada. Which I have to admit, has been going down for quite a few years and just started recently going up again. But if you define competitive as increasing your market share, rural is getting a bigger and bigger market share of manufacturing employment in Canada, which may not be a big thing to wave a flag at, because you're just getting bigger part of a declining pie. But still, depends how you look at it. And it's still an opportunity for rural, because manufacturing is an exportable, and rural is relatively competitive in manufacturing employment.   Brady: And why is that? Why is it relatively competitive?   Ray Bollman: Well, part of it is connection to the resource sectors. So saw mills, paper mills, would tend to be near the resources. Not all agriculture processing is in rural areas, cause sometimes you need a big labor force for a big processing plant and you want to ship the raw products there, whether it's beef, or cattle, or ketchup. But the mining, the smelting, would have to take place right near the mine, to reduce the wait, and oil production, pipelines, oil exploration, is largely in rural areas. And the spinoffs, a big share of the spinoffs, certainly in agriculture, forestry, mining, and gas and oil, is services incidental to. Which is all of the background consulting work, the PhD's in geology, the forestry people growing small trees and planting small trees don't really get into the forestry sector, they're usually in services incidental to it and those sectors are growing. But then are driven by the local resources, so that's, I guess switching to manufacturing, but they're connected to the primary sector but not the cutting of the tree. But it's the management of the trees and the replanting of the trees and so on.   Brady: Oh thanks, that was really helpful. We're already basically in the interview, just a couple minutes and I've already learned a lot, so thanks.   Ray Bollman: Good.   Brady: Are there any other trends in terms of income, age structure, that you think we should talk about?   Ray Bollman: Well, lots of people say gee, rural is ... there's a big socioeconomic deficit between urban and rural. And so we started these series of bulletins back in 1998, we often would show the rural urban gap in educational attainment, or average wages, or then so on. And a colleague said come on Bollman, you're never going to get rid of that gap. And you look at the numbers, for 20, 30, 40 years, in constant dollars the rural urban gap in income, I think as we found, in income is $10,000. Family incomes in urban are $10,000 above incomes in rural, in constant dollars, over time. And that's seen almost a constant straight line. Well couple of ways of looking at that. One is that maybe that's just a competitive equilibrium, some jobs in rural Canada and some jobs in urban Canada pay more, just because of density and you want all your brain surgeons in the city, so they get well practiced up in brain surgery. And the other thing is maybe rural people accept lower incomes cause the cost of living is lower in rural. And if you look at the incidents of low incomes, the incidents of low incomes in rural areas is less, depending on the measure, that the incidents of low incomes in urban areas. Incidents of lower incomes in rural areas is less because the cutoff lines are lower, because the cost of housing is lower. So there's no difference there, between rural and urban areas, if you look at [inaudible 00:26:58] or if you look at the incidents of low incomes, but the average incomes are lower. So back to the point of what do we do with the socioeconomic gap, I don't think we wanted to close it, therefore we switch around, and from a policy point of view, we say gee, we don't want to try closing the gap, cause I don't think that makes sense. That's too hard, maybe the point is it should never happen. Probably the point is it can never happen. So then you want to say, well look, there's a lot of diversity across rural areas, and policy people will do asset mapping. What are the assets in your community and what assets can be valorized or what assets are underutilized? Where can policy and where can local communities invest in an underutilized resource to increase the community's strategies and options? But don't try to close the rural urban gap on measurable outcomes like incomes.   Brady: One other issue, before moving out of the trends maybe, and I think directly into policy, and I think we'll touch back on some of the issues that you've discussed, is what's immigration in general? It's a big part of the increase in population and it appears to be something that's gonna increase. How does that work, in terms of rural and urban issues?   Ray Bollman: Certainly, historically, immigrants largely prefer the bigger cities, which are Metro Town and Vancouver, and they get the vast share of new immigrants. And you talked immigrants, you look at the numbers and read the history, and if you were going to move to, I don't know pick Australia or South America or something, you would use your connections and you would talk to some comedians or Americans that you knew there, and give me some information, what's a good community to live in? Well that's exactly how people move to Canada. They all know somebody that knows somebody that's here, give me some information, and they'll often in end up on the same street or the same apartment, and so on. So there's a much lower risk and a lot more information for immigrants to move to where other immigrants already are. But you can't say the rural areas are losing cause Metro Town and Vancouver attract a lot of immigrants. Downtown Toronto, typically, 1 in 30 people, 3%, arrived last year. There are some rural areas, and this year it's Winkler, Morton, Altona and Manitoba, go to downtown Winkler, walk the streets, 1 in 30, 3% of the people arrived last year. Winkler and area is just as competitive in attracting immigrants as Toronto. In fact, last year it beat Toronto. So if you look at where immigrants are moving and what share of the population last year were immigrants, what share of the population were immigrants in the last five years, certainly the big cities rank highly. But the smaller cities, often do not. Quebec City, or St. Johns, or even Halifax, tends to rank much lower than some of the rural areas, Fort McMurray, Brooks, Alberta the beef processing plant. Neepawa, Manitoba, with the hog slaughter plant, many areas in rural areas are attracting immigrants at a higher rate than the bigger cities. Now, overall vast numbers still go to the big cities. And a minute ago, you asked about demography, the one interesting thing about demography is to say rural is not a basket case in the sense of let's not focus on this rural urban gap. The other evidence that rural is not a basket case is that since 71 or 76, right up to the most recent census, rural areas attract more people in each age class from 25 to 69 than they lose. People vote with their feet, can move to rural areas in each age group from 25 to 69. After 69, well maybe I should move back cause there's a bigger cost cut. Before 25, you're moving for either jobs, or fun, or entertainment. Jobs, education, or fun. So rural is a preferred location for living, on a net basis, migration, voting with your feet, for each age group from 25 to 69.   Brady: So Ray, I'm really interested in, from your standpoint, what are the objectives, how generally do we think about the objectives or rural policy?   Ray Bollman: Well I guess I would start with Economics 100 book but it's generally, I would say, can you make the pie, or can you make the economy bigger. And then the second point of policy is can you, or are there places you want to, redistribute the pie? I don't know from the rich to the poor. So making the pie bigger is making your economy more efficient, or increasing the input in more labor, more capital, better land quality, and so on. So making the pie bigger, job one, I think, and then the second job is making redistribution to improve social welfare.   Brady: So an education policy that improved the capacity of folks in rural areas to be more productive would be an example of efficiency in production. And then a policy that, potentially, redistributed taxes to support education programs in rural areas might be an example of this redistribution or this re slicing of the pie.   Ray Bollman: Yes, I think that's a good example. So I think the way I answer your next question is, what is rural about development in rural areas?   Brady: Mm-hmm (affirmative).   Ray Bollman: And if I can restate the question. And some people teach economic development, even Michael Porter was trying to say in one of his publications that well, economic development is economic development. Yeah, it might be a big different in rural and urban areas, you always situate yourself in your geographic situation. So whether you're in New York, or Guelph, or Brandon, they all have urban functions of some sort, but they're all different in terms of linkages and density, and so on. So but maybe even say economic development is always the same, you want to invest in human capital, you want to lower transaction costs, all the same things you want to do. But then, the next question is, okay what is rural about doing development in rural areas? And then I come back to the definition of rural, well what is rural, is you gotta think low density. And what is rural, you gotta think long distance. So maybe Brandon, certainly is long distance to the next city, a couple of hours at least to Winnipeg for example. And maybe it has high enough density, it has a high enough density for a small university of 3 or 4 thousand people. But it does not have a high density enough for, I don't know, a faculty of engineering, who you might have spinoffs in various high tech innovations. So what is rural about development in rural areas, then you want to think okay, economic development is economic development, but it's different in low density and it's different with long distance to density.   Brady: So in terms of policies that have kind of dealt with this issue, and you mention a couple, there's infrastructure, there's transportation investments, education investments. Are these different, do they have different effects in rural areas than they have in urban areas?   Ray Bollman: First, I've never done any studies on that, cause there's not good numbers on that, so I have to give a short answer, I think the really short answer is I don't know. Some things I think we might agree on, that it's expensive to put in a road if there's only a few people going to use it. So how big is the road, do you put a road in and then hope it develops, or do you wait for the place to develop and then put in a road? And it's a catch 22, I don't know how you decide that. But general issue is, is that infrastructure matters and the price of the infrastructure, on a per capita basis, might be higher. Whether it's a water treatment plant, whether it's putting in community college and education function, whether it's putting in a small, mini size airport for transportation function, all of those things can be somewhat higher cost per capita in a rural area. And then, is there an equivalent benefit from efficiency point of view, and is there a benefit from the wealth redistribution point of view? And those are answers I do not know and maybe if I read more of the studies, I'd know more, but probably should pass on that. We could have a good discussion on that, but I don't know any good facts for it. I don't have any facts to contribute.   Brady: Sure, sure. Fair enough.   Ray Bollman: Some of the stuff we've done on price of rurality, one of the pieces done with a colleague here at Statistics Canada, was the price of transporting goods has been going down. But the price of transporting people has been going up. The price of transporting communication, transporting information, has certainly gone down, except the price of stamps is going up, or not going down, so the cost of mailing a letter hasn't gone down. But the price of moving information has certainly gone. But the tasset knowledge obviously you don't, we talked about that before, it's hard to move that over internet, or whatever. So moving people is up, moving goods is down, moving information is down, and so on. So some prices of rurality have fallen.   Brady: So that really brings one issue up that you hear mentioned a lot. And I actually have a colleague in Ethiopia, and he was telling me that in rural Ethiopia, even where there aren't landlines for telephones, people have cell phones. So that seems to be, in a broad international sense, the price of information. Or at least, some aspects of some information, is going down. When I hear broadband, typically, is a big issue that comes up a lot of times when people are talking about rural development and the cost of information, the advantages that might give. Can you talk a bit about that?   Ray Bollman: Well, again, I'm not too familiar with it. Certainly, the bigger your metro center, the higher the feed of your broadband. Cause the bigger the return to investment for the first person building the faster networks, and so the connectivity in rural areas is increased dramatically over the last 10, 20, 30 years. But the speed in urban areas is always faster. So the urban connectivity prices are always lower, the capacity is always higher in urban areas. They're always gonna have a quicker, faster, bigger, ability to transfer pieces of information than in rural areas. All these rural areas, in my view, is going to be increasing fast, they're always behind urban areas in terms of broadband coverage and whatever the big words are for faster and faster and bigger and bigger broadband these days. It's a good news, bad news situation. Things are getting a lot better, but we'll never catch up to the urban. Something like the income situation.   Brady: Okay so the speed is getting faster everywhere, but the relative speed of access, internet access, is going to continue to be cheaper in urban areas.   Ray Bollman: That's right.   Brady: Than in rural areas.   Ray Bollman: Yeah, you said it better than I. That's good.   Brady: One thing that you've mentioned, that's always seems to be attention in rural areas that I've worked with, has been this both wanting to educate and better the people in this area, and this fear of losing them. And that's a real challenge, because as you mentioned, for most of these areas, they were settled for the export of commodities and the relative price of labor has increased, so people are incentivized to leave, in part because of the history of the area. But the people there, often, one of the challenges they face, is to stop, to almost stem, this out migration. And what can places that feel like they're losing, how should ... have you run into, or are you aware of any policy or approaches that help address that situation? Or do you have a take on it?   Ray Bollman: Quick answer is probably not much. Certainly the statistics say gee, a lot of quote unquote kids, teenagers, leaving rural areas. And so I put up numbers, and I say isn't that terrible, oh yes, it's terrible. And I say yeah, it should be 100%, kids leaving rural areas. They should go out and get education and world experience and then you want to try to attract them back. Therefore, I have to quickly run for the backdoor of the rural hall because obviously, I don't know what I'm talking about. And some of them are absolutely right, I don't know what I'm talking about, because somehow you want to keep people that are not interested in getting a PhD in socioeconomics, cause you'll never move back to a rural area, you want to try to inform kids, or I shouldn't say kids, youth and young adults, what are the opportunities in this area. And in this article, Bill Rhymer reported a couple of articles where analysts had gone into high schools and asked people in high schools, tell me about the jobs in this community. Well they didn't know that there were four accountants, two dentists, five people with MBA's, at least bachelors in business administration running garages and so on. And they didn't know that if they took these professional programs, that there was not a job opportunity back in their community. And so one way is to help kids understand just what are the options in this community. One community I was in, in Russell, Manitoba, I was sitting around the outside, I was gonna give a talk later, and a fellow asked the chair, who was also new to the community, looked around, 20 people I think sitting around the table, quite an impressive turnout for somebody to only list statistics. He said how many people grew up in this community? How many people were born and grew up in this community? 20 people around the table. 1 person, these were all business owners, generally, or business development officers, 1 person out of 20, in Russell, Manitoba, had grown up. And the other person said well can I put up my hand, I moved here when I was 2 years old.   Brady: That's an amazing story.   Ray Bollman: So two ... amazing, he was surprised. I think a lot of the people around the table were surprised, that there was so much immobility and that was community was so attractive to both, business owners and community development officers. And Russell, Manitoba may not be on your radar as a successful rural area. It is. And there are a whole bunch of places like that. So can you keep, or can you get people going away to get your bachelors in business administration, and coming back to your community? I don't know. That's one thing you might focus on. Cause some communities can bring in people that did not grow up there. So there are options.   Brady: Well on that up note, Ray, I think I'd like to give you the opportunity, if you want to, to raise any issues that maybe I haven't asked you about. But also, if you look back over your career and your own thinking about rural issues, and you look to the future, I'd be interested if there's any lessons, or issues that we should be thinking about for the future, or lessons that maybe people might forget in our worth, kind of always keeping in the fore of our minds as we work on these issues.   Ray Bollman: That's a good question. Have I learned anything from all this? And I guess one thing, I think we talked about this, people go around and we talked about a study done a while ago, why do youth leave rural areas? They said number one, jobs, number two, education, number three fun. And then for the people that had left, they asked, what would cause you to return? Jobs was not number one. Jobs was not number two. What would cause you to return to rural area, if you'd already come from a rural area, was number one was family, number two is community and I'm not sure the difference between family and community. But it was a nice place to call home. Nice if your raising kids, or having a family. Just a good place to do that and you want to be back into your social networks. So maybe one thing to learn is communities want to build on their diasper, find out who was in high school five years ago, talk to the parents. What would it take to get these kids that have been away from the town for five years, get them to come back. So that should be one opportunity.   Brady: Well Ray, thank you so much for joining us today.   Ray Bollman: Well thanks for the call and thanks for the good questions.

Dr. Murray Fulton and Dr. Brady Deaton discuss the Canadian Wheat Board (CWB) Transcript Brady Deaton: Welcome to FARE Talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Jr. Of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I'll be your host. Today, Dr. Murray Fulton and I will be discussing what's going on with the Canadian Wheat Board. Murray is an agricultural economist and a professor in the Johnson-Shoyama Graduate School of Public Policy at the university of Saskatchewan. He has a long interest in Agricultural policy and in marketing systems. He is the co-author of a report by the Economic Council of Canada titled, Canadian Agricultural Policy and Prairie Agriculture, and has extensively studied the structure and behavior of the agricultural marketing systems. Murray, thanks for being with us.   Murray Fulton: Oh it's a real pleasure.   Brady: Murray, what's going on. How do we start this. How do we start to understand what's going on with the Canadian Wheat Board. Keep in mind there'll be people tuning in who aren't aware of the current situation.   Murray: Good starting point Brady. Here's what's going on. What we're seeing in Canada over this next year, I mean, by next summer, we will have in place in Canada a completely different marketing system for wheat and that includes Durum and Barley for human consumption, malt and barley. When I say a completely different system, I mean that in the strongest sense. What is happening is the replacement of a marketing system that, while it's evolved in some considerable ways, has retained the major fundamental structure that it acquired back in the 1930s and the 1940s. That's a mixture of an administrative and market system with Canadian Wheat Board playing a key role in that grain handling and transportation system for those grains, wheat and barley, in Western Canada. What we're going to have by next July is some kind of much more market oriented system without the Wheat Board, at least without the Wheat Board as a compulsory marketing agency, which has been the case since the 1930s. There is still a question, I'll come to this at some point about whether or not a voluntary Wheat Board might be in place. But regardless of that central role, that the Canadian Wheat Board was playing, will no longer exist. There is considerable discussion going on by farm organizations, the industry participants, these are the railways, the elevator companies, the millers, as to exactly what kind of rules are going to be put in place come next July and August.   Brady: All right. One of the terms that's often used this Single Desk Selling Authority. My understanding is that that ensures that the Canadian Wheat Board can basically purchase all of the wheat and barley for export or human consumption. Is that for all of Canada or just particular provinces.   Murray: The Wheat board only applies to the Western wheat growing area. This includes the grain growing areas in [inaudible 00:03:40] Saskatchewan, and Alberta and up into the Peace River area as well. Wheat growing in Ontario does not for instance, does not come under the auspices of the Canadian Wheat Board. You're right the term that is used is the Single Desk Selling. This is actually key to that central role that the Canadian Wheat Board has been playing. Just very quickly what this Single Desk means is that all farmers in the [inaudible 00:04:14] Wheat Board area are required by legislation to deliver their wheat or durum or barley for human consumption to the Canadian Wheat Board. The Canadian Wheat Board then on behalf of the farmers then markets that grain, both domestically and internationally. What the board then .... This is an additional element in its, it's not strictly connected with the Single Desk though it's grown up with it. What the Wheat Board has done for the most part then is take that grain, all the receipts from that grain that it sells and offers back to farmers a single pool price. All farmers, basis the export position get the same price. Regardless of whether the grain that the farmer delivered to the Canadian Wheat Board was sold in November at a particular price or in May at a different price or even sometime in the middle of July at perhaps at a third price, all farmers would get exactly the same price. Now, what I need to say is that, that's adjusted, the price that an individual farmer will get will be adjusted for where that farmer is located in the grain growing region. The reason is that, off of that price that the Wheat Board provides, has to come the cost of grain transportation and grain handling. Depending upon where you are and the kinds of distance you are to port, or the degree of competition that there might be between grain elevators, farmers will end up having a different deduction, one from another.   Brady: Okay, I want to work through, maybe a simple example of that, but I also want to then talk a little bit about the change that's coming because as I understand the change actually hasn't happened yet. I think there's some interesting nuances there. First let me just make sure I've got it straight. If I'm a wheat farmer right now, under the Single Desk Selling Authority. Say, I've harvested my wheat crop, walk me through really quick, how I'll work with the elevator and the price that I'll receive. Again building off of what you said abstractly but say, I'm done with harvest, what happens to me now.   Murray: What farmers will have done and I won't give you all the gory details, but what they would have done in spring is signed a contract with the Canadian Wheat Board indicating roughly what their planting intentions were going to be so that they said, "Well, I'm going to be roughly seeding this much wheat, this much durum, for instance and malt and barley if that's what they were doing. The Wheat Board has an indication of the amounts of grain roughly that are going to be out there. They adjust these planting intentions of course for yields that are occurring. The Wheat Board, if you like, has a basic idea of how much grain it has. It keep pretty good track of the quality that's coming in, if there is an early frost in a particular area, they know that that grains maybe marked down to a Number 2 or something like that. As the Wheat Board, as their customers come forward and say, "We need grain of a particular type." They will go out to farmers and ask the farmers to deliver on those contracts that they had signed back in the spring. They may come and say, "In November, we want you to deliver 25% of that contract that you had signed." Farmers then would deliver that grain. Here's where it's interesting. The farmers now have complete choice as to which elevator company they would like to deal with. What's happening at the same time is as the board puts out these calls to the farmers for grain, they, at the same time approach the elevator companies and have the elevator companies bid on the right to fulfill those contracts. For instance, Viterra, the largest grain handler may decide to bid on a particular amount and it is then up to Viterra to make arrangements with the railway to have sufficient cars in place. Now, the railway also has to coordinate with the Canadian Wheat Board and I'll come back to that in just a second. At the same time the elevator company has to go out and make sure it's offering the right kinds of incentives to farms to get that grain delivered, in this case to the Viterra elevators rather than to a competitor elevator. You have, what I'm calling a mixture of an administrative system with the Wheat Board providing the broad demands that the system needs to meet and then having bidding going on or ordinary market competition to actually get the operational components to fit to those macro demands. Let me just continue on that. A farmer will then say, "okay, I'm going to deliver to Viterra." They may for instance have a trucking subsidy in place that has encouraged them to go to Viterra, rather than to say one of the competitors. The farmer would deliver that. They would get, what's called and Advance Payment that pays them some proportion of what the wheat board anticipates will be the final payment due. The reason the board doesn't pay out the entire amount is that the board has to keep that contingency in place, in case the market should tank sometime in the future, the board would not be able to meet its obligations without incurring a deficit. This procedure occurs over the year, with farmers getting their Advance Payment. At the end of the crop year, at the end of, sometime in July, the board totals up all the revenue that it had obtained, divides that through roughly by the amount of grain. This is done by various classes. You'll look at a top grade versus dropping down to a second grade and so forth and each of those will be done separately. They will take that total revenue, divide by the total number of bushels or tons that were sold and come up with that average price. The farmer then will get the difference between that final price and the initial price that they had been paid. Now, often the board knows or has a pretty good sense part way through the year that they are going to be able to pay out a final price. They'll have some interim payments to farmers that get a little bit closer to that final price. Now, meanwhile, the farmer also then has to pay the elevator company and the railway for the grain that they are hauling. They will have a bill that they will pay at the elevator that will break out the amount that the elevator company is collecting for storage and handling as well as the amount that the railway has charged the elevator company to haul that grain to port. At the end of the day, the farmer gets that average kind of world price, which is the price at the port position, typically Vancouver but occasionally Thunder Bay, minus their costs of actually getting it to that location.   Brady: What this typically contract, so in the absence of then the Single Desk Selling Authority, farmers would deal with the grain handling and the transportation and typically bring it to a grain elevator and then get the price on that day. Is that too simplistic or ...?   Murray: Not too simplistic at all. That's exactly what will happen. Typically, the elevator company will have contracted with the railway. Once again the farmer will simply see a ... In this case they'll simply see a final price at the elevator that they would get. If they deliver the grain that day they would get that price. If they wait the next day, they'll get whatever that price is. That price is typically based off of futures market with what's called the basis subtracted off which is the difference between again, that price at the port minus all these additional costs.   Brady: Now. One thing I did want to touch on because I think it's really fascinating in a real difference between what's going on in Canada in terms of this and what might go on in a similar situation in the United States. The actual change that we're talking about anticipating is occurring in August 2012. As I understand that the legislation actually hasn't come up yet. But, we can anticipate it because the current government has a majority. I wonder if in the United States, even if some say, the Democrats or the Republicans control both houses, if you would be as certain that a policy would go through, as certain as we are that this one is going through. In other words we're talking about it as it's going to happen because the conservatives have said that it's part of their policy and we expect it to go through without a hitch.   Murray: Yes. I guess what I would just add to that, you're absolutely right. I think this is actually one of the real advantages of perhaps our political system in this particular case is that one of the worst things that could happen is having uncertainly over what kind of marketing system we were going to have. There is lots of debates going on in the countryside these days as to whether or not this is a good move or a bad move. Regardless if there is going to be a change, what you want to have is a situation that we have where we know that it's going to be one way or the other. This allows at least the opportunity to plan and to get expectations, at least somewhat in order before the change actually occurs. It would really be pandemonium, I think if it was uncertain as to which system was going to be in place come next August.   Brady: Real interesting difference. I want to move to a little bit of the debate about the capacity of the Wheat Board to increase prices. What I'd like to do is kind of ... I've reviewed some of the literature and I think I'd like to just lay out my understanding of it and get your comment. You may feel like this isn't actually where the conversation needs to be and that's find and we can move on. When I was looking through as an agriculture economist it seemed like there was generally conceptual agreement on what needed to be done in order for the Canadian Wheat Board to actually help producers through its Single Desk Authority. That's one thing just to review is Canada is a small producer of, relatively small of, the total wheat production. Just say roughly 5% but a much larger percentage of the export market. It's like, in there it's roughly around 20%. In order to that it seems that economists generally conceptually agree that it needed to be able to discriminate between different buyers of wheat between, let's say Japan and I don't know, another major importer, Indonesia. There seemed to be agreement on that. Then, they had to be able to discriminate and then they had to be able to stop the arbitrage, which basically just means that they can't sell a lot of wheat to Japan at a relatively lower price and then they turn around and sell it to Indonesia at a higher price.   Murray: That actually would be the other way around. What the Wheat Board would like to do is, and I think, has been practicing is selling, if you like shorting the Japanese market a little bit, keep the price up there selling at ... The Indonesians won't pay quite so much. They have a much more elastic demand receiving a lower price in the Indonesian market. What you don't want is, that grain going into Indonesia to find its way back into the Japanese market.   Brady: Okay sure. The key is that they can give different prices and then you're saying in this case it would make ... They won't want Indonesia to ship it back to Japan.   Murray: Exactly.   Brady: I think in our field there's general agreement about that and that if they can do that and also ensure that their cost, let's say, of handling the grain don't increase relative to an alternative system, then they can provide benefits to producers. That was kind of the conceptual issue. I thought, "Well there's broad agreement." Then I thought from looking at a bunch of the articles and I'll make some of the links available to various articles on the website. Then, I thought well, there's few studies and they generally seem to disagree. Is that a correct characterization of again a little bit of the backdrop about how the Ag economists have tackled this issue.   Murray: Yeah. Let me just take that even a little bit further, I think, Brady because you're right. This issue about whether the Wheat Board had the ability to be able to as a single seller, whether it was able to get higher prices for farmers, in part is a reflection of the situation that was in place certainly at the time that the Wheat Board was formed in the 1930s. What we have to do is cast our minds back to the debates that were going on, not so much actually in the '30s but in the '20s. The farm movement in Western Canada at that time had prior to the first world war had dealt with what they thought was the immediate problem, which was a lack of competition amongst the grain elevator companies. One of the major concerns by farmers say in 1900, 1905 was that they were getting squeezed on the amount that they were being charged for just handling that grain. The fees that they were paying were too high. There was also concerns about the power that the railways had and the prices that they were charging and the access that they were making available. The farmers responded to those problems by creating a whole set of elevator cooperatives. These were by province and some of them were Pan-Western Canada with the consequence that by the beginning of the war, there was a consensus, I think that, that problem had been addressed. Then there was a hiatus with the war and when the world came back to normal commerce starting in the 1920s the problem that the farmers saw themselves facing was no longer the same one that they had before the war but, it was a different one. They now felt that they weren't getting as good a price on the world market as they should be getting. They felt that there was, if you like, some market power being exerted. They were having their prices depressed, even at the same time that these companies were turning around and getting a very nice price on the world market. Classic case of both monopoly power that relative to the farmers and then these traders having some monopoly power on the world market. The precursor to the Canadian Wheat Board was actually a voluntary marketing system established by three of the cooperatives in Western Canada, what eventually ended up being called the Three Prairie Pools, one in Alberta, one in Saskatchewan, one in Manitoba. They formed something called the Central Selling Agency where they agreed to take all of the grain that they were handling through their elevator systems. These are the same elevator systems that had been established earlier, and market that grain centrally on to the world markets. At that time, the major market was Liverpool. That scheme was in place for about four years or maybe three. Then it collapsed, with the collapse of the stock market in 1929. What happened was that the Central Selling Agency and then these co-ops had made promises to farmers and in fact had given initial payments to the farmers, worth X amount and all of a sudden, the world price had fallen dramatically below X and They weren't able to cover off these ... They weren't actually able to raise the money that they'd already committed the farmers. They essentially had a debt on their hands. The Board then was actually ... The first Canadian Wheat Board was actually created by government to take ownership of this grain that the Central Selling Agency had accumulated and to dispose of it in the world market. This of course was in the 1930s. One of the things that the Board did at that time was to dispose it in some kind of fashion that didn't aggravate the already very, very weak prices that the world was seeing at that particular point in time. I say all of this because this was the environment and the mindset that the wheat board was then, when it was finally created in 1935 and then again reaffirmed in the 1940s that this was the mindset that farmers had that the board was a vehicle for getting additional market power and for practicing price discrimination of the kind that you so nicely described. That view continued and I think for those of us who are interested in how marketing systems work, this is a great example where norms and, if you like institutions, get established. They're very hard to get rid of. Because this view actually prevailed then up until, I think roughly about 10 or 15, 29 years ago. Interestingly it was still prevailing in the 1980s when there was actually a period of time when it was documented and this is part of this debate that was going on, in the 1980s about the role of the Wheat Board. It was actually documented in the 1980s that the board was able to price discriminate and get some higher prices. This of course was happening though at the time of the United States Export Enhancement Program where the Export Enhancement Program was in fact creating some quite dramatic divisions between the prices in the consuming countries around the world for grains. The Wheat Board because of its Single Desk Selling, because of the fact that it could stop some of that arbitrage from occurring was, I think was able to actually obtain some of those benefits from price discrimination. You're right. This was a focus of a great deal of discussion and part of the debate where people saying, "Well the board is able to do this and board is not able to do this." Part of the debate actually is because, I think in retrospect people were talking about different things. Some people were talking about, "Was the board able to do it when the Export Enhancement Program was in place." Other people were saying, "Can it do it generally?" There is always the case of when you're not debating the same thing it's quite easy to come up with opposing views. That's not to say that there weren't some sort of fundamental issues that were present between the economists that were debating these issues. I think here it's, I guess I would take a look at the current debate around what's the appropriate macro policy for instance in particular the US today. You have the one group saying, "It is imperative that we have an expansionary, some kind of expansionary policy, government spending needs to stay fairly high to provide some extra demand." Then, there is another group saying, "No, in fact what we have to do is get our fiscal house in order, cut back dramatically on expenditures and for instance perhaps even lower taxes." In one way, that debate, the one today isn't ... It's partly about the economics. There's no question about that but it's also ... This current debate is about an ideological position. Do you believe that government has a role in the market or not? Do you believe in freedom of choice as the highest order or are there other considerations that need to be taken into account. I think that same ideological debate was alive and well in all of the discussions of the team, of the Wheat Board historically. It wasn't just a debate about whether or not the Wheat Board was able to price discriminate, though it was about that but it was also about fundamental ideals about how society should be put together and what kind of rules should govern society and whether or not people should have ... What degree of freedom should people have in the choices that they make.   Brady: This seems to be a long standing debate in our field starting with ... Continuing from Adam Smith on to Hayek and Keynes. What is the appropriate economic role of government?   Murray: Very, very much so. It's funny Brady, at least funny droll kind of funny that, on the one hand we have some tools and concepts to say something about, which I think all economists would agree upon. We say, "Yes, let the market work, but if there're externalities then maybe we need to pay attention to this. If there's public goods that need to be provided, we need to think about that. We have to be concerned about issues of market power. That may be a reason for government intervention. If information needs symmetries, can certainly be another reason for government intervention. As well as I think some sense of keeping some kind of equity amongst citizens in a society." That one's much less agreed upon but there is certainly some people that would include that on the list. Despite the fact that, we have that agreement on those concepts and how they might be used, it's fascinating how often it steps over into, what I think is another debate, which is, "Should government be involved at all." That's often how it's framed. It becomes black and white rather than shades of gray.   Brady: The American institutionalists they, I'm speaking mainly of Warren Samuels, and Allen Smith and Dan Bromley, it seemed to me, of my reading of what they were saying is, they didn't find this comparison of a market without government and a market with government so useful because they argued that government was ... We were always usually comparing different forms of government and governance as opposed to the absence of one. You think that's ...?   Murray: I think that, that's absolutely correct. The more that I've looked at this and in particular ... Again you want to come back to the Canadian Wheat Board. The Canadian Wheat Board provides a really good indication. It's a very good little case study of this where it becomes, when you really start to think about this, you can have a so called free market, marketing freedom. This is the way that the new system that we will be going to is being portrayed. But, what is forgotten by many people is that that only works because you have government doing a whole range of things, making sure for instance that there are courts that if there are disputes, they can be settled. The government of course is providing a whole set of property right that are absolutely critical to the operation of not just this market but, in fact all markets. In addition, there is a set of social services that are being provided by government to farmers, to the workers that are employed by the railways or the grain elevator companies that are all hinged on some kind of government intervention. To take out that government completely, we don't know what that picture looks like unless we take a look perhaps at the transition that occurred say in Russia as it moved from the Soviet Union to its current state where you saw that almost complete breakdown of the system until they needed to put something back in place. What they've put back in place of course is something very, very different than what we've put in place. They have put a set of rules in place. This is a set of rules largely determined by a very powerful oligarchy as opposed to government in the sense that we know it.   Brady: Let me, even if we kind of agree, I think conceptually that government will be in play in either system, with and without the Wheat Board, the change in government or the change in governance structure usually benefits some and hurts others. What is your thinking about how the change, this change moving from the Single Desk Selling Authority to its absence, how will these different interests be affected and what are those different interests from your standpoint?   Murray: Let me just step back. What we're seeing here, it's a fascinating change. As an economist, as a social scientist, this kind of natural experiment of a fundamental change in a marketing system doesn't happen very often. This is an interesting thing to be able to watch if you like in real time because ...   Brady: Sorry, but is this substantively different than for example the change in other, the Australian Wheat Board or something like that? I mean, have there been other examples of this or this ...?   Murray: Oh yeah. Yeah, there are lots of other examples. The Wheat Board in Australia would be an example. You can go into developing countries around the world, in the last 20 years, one of the big things was the dismantlement of some of these state owned schemes for say, the marketing of coffee or what have you, where they were replaced with markets ... Those were equally as fundamental. We're not unique in that, but it is our chance to see one of these things up front and personal. At least what I've learned over the years, as I've looked at these things. I can take a look at what's going on in Australia but, at some level I just don't understand what's going on because I don't know all of the institutions. I don't know the history, I don't know all of the little things that actually make a big difference to the story. I certainly don't know that when it comes to what's going on in a developing world. I can get the broad sense but to be able to really see the more micro changes that are going on, you have to know the system quite well. For me, this is my own, I guess personal one. These kind of major structural changes, the political scientists call them Episodic Changes where there is an abrupt change, you move from one system to the next and then you go for a substantial period of time where you don't have any ... You have change then there is modifications and so forth but the basic structure stays more or less the same. These things occur in large part because, and now I'm going to the political science literature. These structural breaks occur because typically one party that has been opposed to it, either opposes what was the existing system or believes that a new system would benefit them substantially. They get to the point where they have sufficient political power. The political scientists call this, they express this in terms of de facto political power to actually be able to change the rules of the game. That's what we're seeing today is, a change in the rules of the game and it's come about because finally there was, and this was a combination of the electoral results plus the interest of particular groups in supporting a change and making that case to the government where there's been a group that now says, "We want change." And there is the actual political means to be able to do that. This suggests to me that these are difficult changes to bring about. To bring this about means that there must be a group that sees this as being highly beneficial to them. I think those groups are fairly well understood. I think it's clearly the railways. I think clearly the grain handling companies feel that they are going to benefit from this move. There will be other smaller players in the system that also see a benefit. They typically have not had a lot of effect in terms of the lobbying the system. I'm thinking about consulting companies that are providing services to the railways or to farmers or so forth. They see a new market for their goods and services but they weren't particularly influential. I think some of the grain traders, if we can separate them from the grain companies were certainly in favor. If that's the case you're getting this push to change the system from a group that believes that they are going to benefit. They will then likely put a set of rules in place that in fact will benefit them over what the current system is. Otherwise, why make the change. Does this tell us anything? Well it says that if all we have is a zero sum gain, a zero sum gain is one where when you change the system from one if you like from A to B, the total size of the pie remains the same, then, if one group benefits then the other group or groups or whatever group has to actually become worse off. That suggests that there are some other players if it's a zero sum gain and I'll come back to that, that there is other players that are going to not benefit from this. My guess is that, that's going to be perhaps certain grain handlers that aren't able to compete with some of the big companies like Viterra and Cargill. I think some of them may find themselves at a disadvantage in this new world. I think you also have to put into that group of people who are likely not to benefit some of the farmers. Some of the farmers I think will find themselves better off but I think there's going to be a group of farmers who are going to find themselves less well off. These are going to be farmers who probably are located further away from places where they can get some competition from grain elevator companies where they are not located near the main lines of the railways. These are perhaps some of the smaller farmers who don't have a large volume of grain with which to bargain. These are probably some of the people who would end up not benefiting from this change. Now, if this change that we're about to see is not a zero sum gain, but in fact it's positive sum gain, then, it is possible for, if you like, all groups to potentially benefit. Now, how could this be a positive sum gain. Well, the only way it can be a positive sum gain is if by making this change you create an opportunity. Well one you reduce some of the transaction costs and so forth in the system and you're able to make the system operate more efficiently. If there is efficiency gains that comes with this, then, that would be one source of potentially some gains by all of the participants. The other possibility in addition to efficiency gains is that the system could create a better set of incentives for innovation and creation of new value. That new value then would be one that could be distributed amongst all of the players. I think there's been a lot of discussion around whether or not ... This is implicitly, it hasn't been an explicit discussion around whether or not this transformation is zero sum or positive sum. We won't know the answer to this until well off into the future and even then it's going to be very hard to go back and do the [inaudible 00:37:56]. In my mind the more interesting thing is the rhetoric that's used. What us see is the group that is clearly lobbying and pressuring for the change, they cast almost all of their discussion in terms of there being either efficiency gains or gains in terms of innovation. This becomes almost a mantra that they repeat. This could well be true, but it is an unexamined position that I think is repeated almost by [inaudible 00:38:30]. I think it's because there is this recognition that the way to sell this is to paint it as a positive sum gain. Whether it is or not I don't know. Certainly from those people that want to make the change it's highly beneficial to paint it as a positive sum gain because that at least allows the potential for everyone to gain. Now, let me just finish this off by saying even if it is a positive sum gain, that doesn't mean that everybody gains. The new rules of the game will determine whether or not everyone gains or not. I think if we take a look at most of the changes that have gone on not just in grain handling but in other systems, there are inevitably groups that are left behind. The rules simply are not conducive to a particular ... Some groups are benefiting and I think that, that's likely to be the case here. There will be some of the players that won't benefit from this change.   Brady: I always use this example in my classes of asking students why basketball players get paid different salaries. The normal set of responses are some are fast, some jump high, some can pass the ball, some have charisma, some don't. You rarely hear them mention that the height of the rim is 10 feet.   Murray: Yeah, that's right.   Brady: Because clearly if you change the rim from 10 to five feet, you would set in motion immediately a very different set of comparative advantages. I always, because I love basketball, always think, and I'm not that tall, had the basketball rim been shortened, I would have been in the NBA.   Murray: Yes   Brady: I think, if I hear what you're saying, you're saying, well we've got a rule change and it's very likely that it will change the comparative advantages amongst farmers and grain handlers. We'll have to wait and see whether that change of the height of the rim actually ends up expanding the number of people who watch or the money coming into the NBA or to the Basketball League.   Murray: A very nice analogy Brady. I may use that if you don't ...   Brady: Feel free. As we go forward Murray, what kind of questions should we be asking ourselves as people who are watching it and are involved in it? What are your thought? How are you going to watch? What do you think we should just take with us though this entire experience, as you put is unique to us to get to watch up close at least?   Murray: Yeah. Very good question. I am going to put my economist's hat on and say, I think this is a wonderful opportunity to actually address a question that has intrigued economists almost since day one but, really certainly since Coles wrote his classic paper on the nature of the firm, that is ... This discussion actually goes way back before Coles and that is, "How should we organize a system?" If we think about a grain handling transportation system, what we need is, if this is going to operate effectively and make people better off and provide incomes and livelihoods and careers for people, it needs to operate efficiently and effectively. To do so, there's a whole host of coordination and cooperation problems that have to be solved. You have to go back to the beginning of our conversation of that whole process involving getting grain from a farm to port and then off to a miller half way around the world. In fact, it's even bigger than that because you have to think about what the farmer was growing and why they were growing that particular crop and were they growing the right crops that year to meet the things that consumers were going to be looking for. How do you organize these systems so that they behave in a way that creates the incentives for people to do the things that need to be done but also creates something that's beneficial to society. This is in my mind the question that economics has been trying to answer for the last 300 and some years. We've got some ways along that. We say markets are one way a very good way of allowing this to occur. We have Adam Smith, you mention Hayek. Hayek in his 1945 paper does a masterful job of saying here is why the market will work. All you need to do is pay attention to price, you don't need to know why the price is going up. All you need to know is the price is going up and you adjust your actions accordingly and by doing so you will make the system operate and coordinate in a way that is beneficial. This is, if you like Hayek's version of the invisible hand and I think his presentation of it is really astounding. But, and here is the but, what Hayek overlooks or let's put it this way, Hayek's story works fabulously as long as you don't have what we now come to look as the reasons why markets might fail. Hayek's story works wonderfully well if you don't have externalities. If, people's decisions based upon solely on price don't have negative impacts on other groups. If that price ... This is of course is why we've moved, tried to internalize into prices some of the environmental impacts that particular decisions are having. We need to worry about externalities. We need to worry about public goods. Public goods don't work ... You can't watch prices and make good decisions about the provision of public goods. Information asymmetries where you need to know more than just price, you need to know something about the quality of the individual or the quality of the product that's being produced. This quality is difficult to observe then, that market system may not work very well or it has the potential not to work so well. Then, finally, this system relying on prices works very well if you have lots of competition. Take away the competition and you start to have some significant problems due to market power. What I'm going to be doing is, I look at the [inaudible 00:44:51] transformation or the transformation of the grain handling and transportation system is to take a look at what are the externalities in the public good, in the information asymmetries and the market power factors that are in play in this particular sector. Do we need to worry about some of those or can we just let the market work? What I find fascinating right now is that this debate is very much in its infancy. That's probably to be expected although people knew that this might happen. Until the conservatives really announced their intentions, it wasn't real. People, now I think are really coming to the table to debate these issues and discuss these issues. Where I think we're still at on this looking forward and I think this is where the work needs to go in, is to say, which of these issues are really important and, which, they're not so important. What we've seen so far is a bit of a fall back to that ideological position that we discussed earlier. For instance there is just here a week ago there is a Working Group on Marketing Freedom that presented their report to the Minister of Agriculture Jerry Ritz. That's and interesting title. Working Group on Marketing Freedom. This seems to me to put the ideological perspective up front and center, rather than saying, what are these economic things that we really need to think about to make sure that this market operates efficiently and effectively down the road. If I take a look at that particular report, they have taken account of some of the public goods. They have recognized that there're some public good that are no longer going to be provided once the Canadian Wheat Board disappears.   Brady: Murray could you just give us an example of one of the ... Sorry to interrupt you but example of one of those public goods.   Murray: The one that they actually paid particular attention to is the funding for research and development and market development. Right now the Wheat Board is collecting a levy on the part of farmers that goes to those activities. Without the Wheat Board in place that levy wouldn't be collected and there would be no way to fund some basic crop productivity research for instance. Interesting this working group has recognized that, that's an issue and they've got some recommendations that I think are pretty good on that score. On that other hand if you take the issue of say, market power, they have for the most part said, "No, market power is not going to be a problem. We are going to have a perfectly competitive market and we don't have to worry about access of producers to produce cars in short lines, access of groups that are outside the major grain companies to say the port facilities, so that they can actually sell to international buyers." That issue has largely been ignored. Largely because I think there is a built in sense that there's going to be a fairly competitive market operating. This is in spite of what we know particularly about the rail industry. This is a highly monopolistic industry with significant market power that has actually been commented on in number of successive reports over the last 10 years. This is where I think we need to get the debate is, we have to actually really think very, very hard about whether or not there are market power issues and how we might address them in this new system. I guess Brady to kind of wrap up, what's interesting is there's a set of issues that I think the industry is now just getting their head around. They're looking at the question, "What can we do to put in place a system for next summer that addresses some of these potential imperfections?" Now, there's a lot of debate as to whether or not these imperfections are going to be there or not but the debate around this is starting to happen. What's of course interesting is that it will be exactly the same issues that will be the focus of ongoing discussion in the grain handling industry for probably the next 75 years if we go back to what I said earlier, we probably won't have a regime change for at least that length of time. In a sense it is those set of issues that ... I would say, as well, as well as, this question about who ultimately wins or loses from this change in the rules, whether the pie does get bigger and to what extent it gets shared. These are going to be the issues that are not just on top of mind here for the next nine months but in fact on top of mind for the foreseeable future.   Brady: Well, I think that is a perfect ending point for this podcast. Murray I've learned a lot and I really appreciate you spending time with us, talking about your thoughts on the Canadian Wheat Board.   Murray: Thanks Brady. I've really enjoyed this.   Brady: Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcasts.

Dr. Glenn Fox and Dr. Brady Deaton discuss Glenn's longstanding interest in property rights and his recent publication in the Canadian Journal of Agricultural Economics. Transcript Dr. Brady Deaton: Welcome to FARE Talk, where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture, and the environment. My name is Brady Deaton, Jr., of the Department of Food, Agriculture, and Resource Economics at The University of Guelph. I'll be your host. Today, Dr. Glen Fox and I will be discussing his long-standing interest and research on property rights. Glen is an agricultural economist at the University of Guelph. He was recently honored as a fellow of the Canadian Agriculture Economic Society and his fellow address, recently published in the Canadian Journal of Agriculture Economics. This address will be linked to this podcast. Glen, welcome to FARE Talk.   Dr. Glenn Fox: Thanks Brady.   Brady: In your paper, you point out the many long-standing controversies in agriculture and natural resource policies are really debates about the nature of property rights. That's the issue that I want to tackle in today's podcast, but before I do, I wonder if there's some kind of story or anecdote that you can give that kind of sets the stage for our listeners.   Glenn: I started working on this topic about 20 years ago, actually, Brady, with one of my master's students named Mike Ivy. And Mike and I were interested in a topic which had become sort of visible or had emerged in importance in the late 1980s, in the early 1990s on the question of when or under what circumstances does a regulation become so costly or so burdensome to a landowner to become the equivalent of a taking, to become tantamount to expropriation. And so we started to read legal literature, economic literature, read some case law, and we very quickly were confronted with a paradox. And the paradox was that most of the literature, whether or it was being written by economists or by lawyers or by political scientists or ethicists, dealt with a small number of cases typically that had gone to the U.S. Supreme Court. They used apparently the same words and concepts, but when they got to the punchline, this critical question, does regulation constitute a taking, the answers were all over the map. And we had a great deal of difficulty figuring out why when there's only so many cases and they appear to all be using the same words, that the interpretations or the conclusions could be so divergent. And after staring at this for a while, we realized that there was something else behind the scenes. And the something else behind the scenes was that each of the authors was invoking a different theory of property rights. And initially we identified three different theories of property rights. Subsequently, we've refined that and now have a list of five theories of property rights that I think exist in work that economists do, but also that legal theorists do. And the five are: classical liberalism, pragmatism, utilitarianism, legal positivism, and then modern libertarianism.   Brady: Now in the regulatory [inaudible 00:03:10] situations in the United States there's this reference to the Constitution. So, the Fifth Amendment of the Constitution. In the Canadian context, is there something like the Fifth Amendment there?   Glenn: That's a good point. The reason that this word "takings" came up, the reason it's in this literature is because of the one clause referred to as the "takings" clause in the Fifth Amendment to the U.S. Constitution. There is no equivalent to a "takings" clause in Canadian constitutional law. There is another paradox and this is still something that puzzles me today and I don't have a good answer to this is that while there is a "takings" clause in the U.S., there is not a "takings" clause in Canadian constitutional law. The practice has generally been in Canada, when regulations have been found to be excessively burdensome that property owners were compensated whereas the practice in the United States under "takings" clause has been generally that property owners have not been compensated when they've subject to certain types of regulations. So that's a bit of a mystery to me, but -   Brady: I mean I think one of the [00:04:18] in our area, one of the things you hear referenced a lot is this Crow rate subsidy. And that's an example of where farmers or landowners were ultimately compensated for the fact that their guarantee of basically lower shipping rates was taken away by an act. Is that something that comes up in your understanding of this topic and kind of contrasting the U.S. situation with Canada?   Glenn: I think that's a related development, but it's really somewhat different from the regulatory takings. In the case of the Crow rate, which were these grain transportation subsidies off the prairies, those subsidies meant that the price of grain at the farm gate in the prairie provinces was higher than it otherwise would be because essentially those farmers were price takers so whatever price they got was the world market less the transportation cost. If the transportation was subsidized then their price went up. So grain farmers had a higher price. Livestock producers in the prairies were at a disadvantage because their feed costs were higher. So when the decision was made to phase out these Crow rate subsidies, there was compensation ultimately that was paid to farmers because of this sort of entitlement that had emerged, particularly to grain farmers. They had that built into their cost structure and really, I think for sort of reasons of political expediency, the government said, "We need to get away from this policy and we recognize that there are people whose livelihood has been helped by this policy and who will be hurt when we take it away. But we're going to take it away so we'll compensate them for that. The regulatory takings issue is really something quite different and maybe an example of wetland policy, might be an example. So you think of a farmer who's got a wetland or a marsh on his or her property. Then there's some policy measure that designates that as some sort of protected area under a wetlands protection policy. Once that designation is imposed, then that restricts what the farmer could do. Up until that point, maybe the farmer could drain the wetland and turn it into a mock gardening agricultural operation. Well, now that option's off the table and the farm is arguably worth less than it would have been, because the option to do that has been removed. And so the farmer might say, "My farm was worth a million dollars before and now it's worth half a million dollars. I need to be compensated for the imposition of that regulation to protect the wetland on my farm.   Brady: So just to make sure I've got it straight. In Canada, if the government compulsory takes the land, actually takes it, then there's the tradition of compensation. But if the question or the line that you've been kind of working on is when you change the economic value or the market value of something through regulation, then at what point does that constitute something that should be compensated for? And of course that's the big debate in the U.S. literature examining Supreme Court decisions. And it's still [inaudible 00:07:35] your observation of things that are going on in Canada. Let's take a couple of cases that you think - That you cover a number of actually applied situation in the Canadian context to examine the origin of property rights and how that helps illuminate the controversy around different natural resource issues. Let's take a couple of those and maybe just illuminate this idea of the origins of property rights being very helpful in illuminating aspects of that controversy.   Glenn: Well, one of the examples that I understand you've done a previous podcast on this subject already, but- One of the long-standing controversies in Canadian agricultural policy has to do with the Wheat Board. And under the framework developed by federal legislation for the prairie provinces, producers of certain types of grain had to sell that grain to the Wheat Board. It was called a [inaudible 00:08:30] selling agency. It was the monopoly buyer that was then tasked with the job of marketing that grain, particularly to export markets. There are numerous sides to that debate, but I think two of the sides that I think illustrate these different property rights are on the one hand, some farmers and some agricultural economists and some people at the Wheat Board argue essentially a utilitarian theory of property rights. And the utilitarian theory of property rights says that an arrangement, a policy, an institution is a good policy or a good institution if it maximizes the sum of utilities in some net sense, it maximizes the net benefits for everybody that's affected by the action. So the utilitarian pro-Wheat Board argument would be that farmers on net gain, even though they've had this restriction on their ability to sell grain to any customer that they choose because of the operations of the Wheat Board. Because of counter[inaudible 00:09:41] market powers or economies of size or scale or whatever. And so there's a net gain even though some individual farmers might be disadvantaged. And so that would be the utilitarian perspective.   Brady: You know, in the previous podcasts we discussed this a bit and we look at our own profession, agriculture economics and its debate about whether or not the Wheat Board was able to increase net returns to farmers. And so that would be an example of our literature, would you characterize as being kind of utilitarian in origin?   Glenn: Yes, and when I'm saying that there are these different theories of property rights, it's not to say that there aren't what I'll call "intermural contests" within each theory of property rights as to whether or not a particular policy or a particular action is a good one or not. And certainly in the agricultural economics literature there have been some researchers have said, "No, there is not a net gain in utility," and others have said, "Yes, there is a net gain in utility." But what's common to all of them is the utility scale and this idea of adding up the benefits accruing to the winners and subtracting away the harms imposed on the losers and coming up with some sort of net calculus from that. An alternative perspective, and I think that some of the farmers in Western Canada who protested and some ultimately went to jail over the Wheat Board's monopsony on grain purchases took more either a classical liberal or a libertarian point of view. And their argument went something like this. "We own our own labor. We own the land. We own the equipment. We bought the seed. And it was the combination of all those things that we own that went into the production of the grain. And now we own the grain. And one of the prerogatives of ownership is we should get to choose to whom we sell the grain." And having an institution like the Wheat Board, utility calculations notwithstanding, is a violation of a property right that a modern libertarian or a classical liberal would say, "Because I produced it with my inputs, with my resources, with my labor, then I should have the prerogative to sell it to whomever I choose. And therefore the institution is a violation of those property rights." And unfortunately, those two perspectives kind of pass each other like two ships in the night. We talk past one another, failing to recognize that they're fundamentally different ethical theories, the fundamentally different property rights theories that are involved in the controversy and we end up with these skirmishes about your utility calculations versus my utility calculations versus my rights and somehow we're not really understanding what's at the core of the disagreement.   Brady: That's interesting because in some cases there could be a convergence. In other words, you could do a utility calculation and at the same time, it could be consistent with the libertarian. But also there could be divergence and in this case, there was a divergence between those two. And I think you're right that we often don't spend time looking at the nature of that controversy in the articles that we write.   Glenn: Certainly the five different theories that I've enumerated earlier can reach the same conclusions under some circumstances. But I think it's important to be clear on the process through which we're reaching our conclusions, because I think a lot of the times when we disagree, it's not clear why we're disagreeing. Obviously, there're easy cases. If all the theories point in the same direction, then there's usually not much of a controversy. There's not much of a fight.   Brady: But that's interesting because that's almost like there's this [inaudible 00:13:20] ethical superior situation and if you can get all of the ethical theories kind of coming together, then you can argue at least- That's an interesting point.   Glenn: But you have to be lucky. That's kind of like winning the lottery, right? It's a wonderful outcome if you can get it, but in a lot of practical cases, we don't have them line up like that and the different theories will give us quite different answers.   Brady: Now that's the utilitarian position versus the libertarian position. Are there other parts of the theories that fit into this example? Or maybe it makes sense to go on to another example if you want to illuminate the other-   Glenn: Well, another example that's gotten a fair amount of attention in Ontario and in some other jurisdictions is the question of raw milk consumption. And most milk goes through a pasteurization process, but there are some people for a variety of reasons that would like to have- To be able to consume raw milk.   Brady: So pasteurization, we're just basically heating up the milk to kill certain bad things, bad bacteria.   Glenn: And sort of the long-standing public health argument, which essentially is the utilitarian argument says that there's a net gain in utility, there's a net benefit even though it does impose some costs. There's a net benefit to pasteurization and everybody should drink pasteurized milk. And there's also a legal positivist argument that says that currently, in the province of Ontario and in many jurisdictions, it is illegal for a farmer to sell raw milk commercially to a customer. So there's a legal positivist argument that says that's what the law is and so that should be what is followed. But there's a case very similarly in Ontario where a farmer- Let me back up a little bit. Because one of the important aspects from a legal positivist point of view is that there is an exception to the rule and the exception is that a farmer can drink raw milk from his or her own cows. And that's a long-standing exception, but you can't sell it to somebody else. There was farmer in Ontario and he introduced what was called a "cow share" program. So that people who were not part of his family could buy shares in a cow and then they were cow owners and he argued that they would then be eligible to drink raw milk from the cows that they owned as a cow share in this cow share arrangement. And there was a court case about that. And that court case is going to be appealed, apparently, to higher levels. The farmers and I think the cow share owners who've generally been unsuccessful in making this case that they're trying to make tend to come at it more from what I would call a classical liberal or modern libertarian point of view, which goes back to this ownership. "I own my own body, I own my own cows. I can go into a contractual arrangement with somebody else to share cows. And if I choose to consume milk from my cows that's unpasteurized then that's my business and it's not anybody else's business." The utilitarian public cow argument tends to hinge on this estimation or calculation of net benefits. So there will be costs to non-pasteurization of maybe diseases and those diseases would have to be treated and so by pasteurization we eliminate that and save those costs.   Brady: One of the things that comes out of your paper is this discussion of legal positivism, which has always been- We've talked about this before. I'm always interested in this issue where ... I think to a legal positive they might define property as the word given to a protected set of interests. So I'm just thinking of phrases from someone like Warren Samuels who might say, "Property is protected not because it's property, but it's property because it's protected." And in our discussions, you've always had a somewhat different, I think, perspective than that. And I wonder if we can just talk about that a little bit.   Glenn: Well, I think that's a very good recapitulation of legal positivist theory of property rights and that is that legal positivism and I think pragmatism and utilitarianism characterize rights in general as political. And that is, people have rights because the legislature granted them those rights. In contrast with classical liberalism or modern libertarianism which tend to view rights as pre-political. That is, you have rights because you're human not because a legislature or a king or some other political organization declared that you had those rights. But certainly legal positivists say that your rights are whatever, in the Ontario context, whatever the legislature says they are. And if you can point to chapter and verse in current statutes and laws in Ontario that say you have a particular right, then a legal positivist says you have that right. And if you can't point to that chapter and verse then a legal positivist would say that you don't have that right. Sometimes legal positivists use the term "presumptive right." Which is, you think you have a right, but in fact there's no legislative authorization that declares that you have that right, therefore it's presumptive. You don't really have it, because the legislature hasn't granted it to you.   Brady: And how does that contrast with the Lockean or the natural law position that you talk a little bit about in your paper?   Glenn: The classical liberal and the modern libertarian views tend to be based on natural law, which views rights as pre-political, which is you have rights because you're human. And that would exist even if you were the only human being on the planet and there was no organization called a government or a state or a legislature or what have you. And so those are rights that we acquire by virtue of being human. Because we exist, we have these rights. John Locke was one of the leading proponents of that particular view of the origin of human rights. And then he devoted quite a bit of attention to an explanation of how these rights become rights to property, which is a claim of authority over something in the external world, external to my body. So if I say I have a property right in this pencil, that's something in the external world, I'm claim authority over this pencil, by virtue of Lockean rights claim.   Brady: So when we look at- You've given two examples we could talk about agriculture zoning or things like green belts. All of these things tend to influence the debate by discussions about whose right is it to decide how property should be used. Do you see, coming from your own research and your own experience and your paper, do you see a research agenda or an extension role for academics or even maybe for government people in using the kind of work you've done or plan to do to illuminate the issue further? What should a graduate student listening to this podcast think about as a research area? Or what should a government official listening to this perhaps think about, "Okay, well, I'm looking at this issue in Ontario. How might I use this information?   Glenn: I don't know that it's a research issue or research agenda or an outreach agenda, but I think it would be good if we could have a higher level of awareness of, first the existence of these different theories of property rights and an ability to recognize them in the wild. I teach these in some of the courses that I offer, particularly my undergraduate courses here at Guelph. And by the end of the semester, I tell students that my essay on five theory of property rights is kind of like Peterson's Field Guide to the Birds. When you go out into the woods, if you were to study Peterson's Field Guide to the Birds, you should be able to recognize the different species of birds when you see them in the forest. And what I hope my students would be able to do is to be able to recognize these different theories of property rights when they encounter them in policy discussions, in research documents, in speeches, and in even in things like movies. Because there's a lot of popular culture that makes reference to some of these things. So that's sort of an awareness thing. I think the research agenda is to start to focus on what I'll call the comparative analysis or the comparative evaluation of the five theories. If we don't even know we have five different theories and we're having these apparent policy debates over things that look like facts and they're not really about facts, they're about the five theories. Then we need to at least be aware that there are these different theories. But once we get to awareness, then what? Because if we're having this debate among theories, then we have to be able to evaluate. We have to be able to compare. So one of the things I talk about at the end of my paper is, I kind of start to sketch what I call a comparative evaluation of the five theories of property rights. And I think that that's an important research agenda item for, not just applied economists, I think, legal scholars, political scholars, even ethicists. We need to take more seriously the evaluation, even to think about what the criteria are. How are we going to measure the performance? What's the evaluation scale going to be to measure these five theories and to decide- Is there one theory that always dominates? Or does one theory work well in one set of circumstances and not work so well in another set of circumstances? Then we need to figure out what's the distinction between the sets of circumstances that influenced the applicability of one theory versus another. So I'd say that's where I see the research agenda going on this topic. And a few years ago, Per Pinstrup Anderson, who was giving the presidential address at the American Agricultural Economics Association really challenged our discipline, which tends to be a very utilitarian-oriented discipline in terms of its implicit theory of property rights. And he said, "We need to be aware, and we need to understand non-utilitarian theories." And so I see my essay as really responding to that challenge that he made and kind of fleshing out in more detail what the non-utilitarian alternatives are. And then we need to figure out as ag economists or as natural resource economists, what are the implications of these different theories for the types of policy analyses that we typically do in our work.   Brady: Well put. We will have links up to Glen's paper and additional links and references to issues discussed in this podcast. Glen, thank you so much for speaking to us today.   Glenn: Well, you're very welcome.   Brady: Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcasts.

Jennifer Stevenson and Dr. Brady Deaton discuss farm succession planning. Jennifer is the Business Finance Program Lead with the Ontario Ministry of Agriculture Food and Rural Affairs (OMAFRA). Transcript Brady Deaton Jr.: Welcome to FARE Talk, where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture, and the environment. My name is Brady Deaton, Jr. of The Department of Food, Agriculture, and Resource Economics at The University of Guelph. I'll be your host. My guest today is Jennifer Stevenson, she works for The Ontario Ministry of Agriculture, Food, and Rural Affairs as The Business Finance Program Lead. She is very involved in supporting farm tax and business seminars, as well as ongoing efforts to enhance the capacity of farmers to develop succession plans. Jennifer, welcome to FARE Talk.   Jennifer S.: Thank you.   Brady: I recently heard you speak in Fergus about succession planning, particularly as it relates to the agriculture sector, and it was really interesting to me. I hadn't read that much research on it, but I was aware of the issue, and I was hoping that we could explore that in today's conversation. So, just to kind of get the ball rolling, talk to me a little bit about your role with the ministry in looking at succession planning?   Jennifer: Actually it's a recent role that I've taken on, as one of my colleagues went to a different role. But what I'm seeing in talking with producers and producer groups, is that succession planning is definitely top of mind. There's a lot of concerns, and there's concerns most on the technical side, because there's obviously some tax implications, but also on the human dynamics side. A lot of people have, shall we say, a reluctance to talk about the human dynamics problem. So what I try to do is demystify that, bring it right out on the table, let's talk about it, and having them recognize that they all really share the same kind of problems, and also to find some solutions, maybe sometimes some out of the box solutions, to those problems.   Brady: Breaking down this whole idea of succession planning, when I hear it talked about and when you talked about it, there always seems to be two kind of components to it. The succession planning, which is about the business of farming, and passing that to the next generation, and the estate planning. Are those important or what do I need to understand about those two?   Jennifer: Yeah. I don't know if you remember when I actually gave that seminar, but one of the things I said right off the top is you've got to separate wealth from income, because the thing about farming is that most farmers actually live where they work. So, their wealth is actually tied up into their business, as well as their home, and a lot of that wealth has been accumulated on what I call an emotional basis. Meaning, that's where you've raised your kids, that's home, that's comfort. So, what you have to do is be able to separate the business assets from those emotional or home type assets. Look at what's really generating income, as opposed to what's accumulating wealth over the course of the business? If you take a look at farm wealth in particular, I mean let's be honest here, we'll talk about land assets. They have tended to appreciate to a higher degree than has the S&P 500. So, there's been a fair accumulation of assets within the agricultural community. So, you're talking about a substantial amount of wealth that's been accumulated, so when you're looking at the next generation coming in, you have to ask the question, "Are they ready to take over the wealth? Are they capable? Are they able to get financial backing?" Let's say from a traditional source, let's say from a financial institution like a bank or whatever. If they're not, what do you do? Are you able just to gift it? Or, do you have to look at some other scenarios? I think that's the big problem out there.   Brady: Right. So, I mean, and then that probably gets into the emotional sensitivity. If you think about a farmer thinking about a succession plan, but also thinking about how they're going to deal with their estate, or bequest their estate, and they're looking at land as you mentioned, as one of the big, if not the biggest item, they're often dealing with children that are both active potentially on the farm operation, but then often times a lot of children that aren't on the farm.   Jennifer: Well also, what you're talking about is protecting assets, because we take a look at the divorce rate of being 50%, they're also looking at protecting assets from divorce. I mean, let's be honest. If you've built up this emotional capital that you've put a lot of blood, sweat, and tears in over the years, it's really hard to envision that this is going to come apart. So, you're absolutely right. There's a lot of investment, a lot of thinking, and some people just don't even want to deal with it. They just want to avoid thinking about it. But understanding that avoiding doesn't make the problem go away, so we have to try and think of a way to get people at the table talking about these issues honestly and openly. And also bringing their stakeholders within their family, and the potential stakeholders, so that they can put these issues or ideas in a gentle sort of way, but one that will get everybody not at a perfect result, because I understand that succession planning is not a perfect process, but at least something that a compromise that everyone can live with.   Brady: One of the issues that was brought up there was a great site and I'll provide a link to it. I'll provide a link to your sites on OMAFRA as well, as links to the site I'm about to mention, which is the [Burmont 00:05:43] Extension Program, but they talk about one important aspect of farm succession planning, is these farm business agreements which in one way or another have to account for the five Ds. Death, disaster, disability, divorce, and disagreement.   Jennifer: Absolutely. Farmers have a tradition of, "My handshake is my word" so a lot of it is changing the culture to recognize that, hey, this is a business. You are the CEO of your business, so we have to make things formalized. The nice thing about formalizing an agreement is it takes the emotion out of it. So, putting things on paper, having people sign agreements is a way to be able to secure your assets, in terms of you know exactly what your rights and responsibilities are, as well as the other person's rights and responsibilities. Again, it comes down to getting that culture shift in people's minds.   Brady: Well, let's take a scenario that I imagine is out there where a farmer is in a sole proprietor situation, but they have several children. One of them who may have a handshake or an informal agreement, that they'll get the farm. If that isn't written down, and the person were to die without say a will that guaranteed the land to the individual, then I imagine that person is no longer, despite the fact that there was an informal agreement, that that informal agreement is not the formal agreement that actually occurs, and that person's in a whole heap of trouble.   Jennifer: Oh, yes, yes, yes. When I give any kind of workshop on succession planning, I say, "Hear this. If hear nothing else, hear this, that if you die without a will, what you're doing is handing over control to a person you've never met to make financial decisions on your behalf." So, it's extremely important to have a will. Also, if you're planning on bringing kids into the business, why wait? Bring them in as soon as you possibly can, and bring them into financial discussions. Bring them into the bank, bring them in when you have a discussion with your accountant. It's incredibly important to have that level of commitment and allow them to establish a level of commitment in the business.   Brady: I know land is interesting to us both, and land is so expensive, and in a lot of places in Southern Ontario, its value is not only reflective of its farm productivity, but also of its potential future non-farm activity, which makes it hard for the next generation to actually maybe afford the land at its market price. How do people account for that in their succession planning?   Jennifer: Yeah, I mean you're talking about extrinsic versus intrinsic value, and again, it comes back to wealth versus income. You've got to make sure that you can provide yourself with an income before even looking at your business plan. Make sure that the idea at the end is that there's going to be enough income to be able to provide for your wants and needs. The other thing to remember, too, is that we've been I think lulled into a certain level of complacency that the level of interest rates right now are so low that looking at the future, are they going to be this low in the future? Might not be, right? Just looking at the past, and in fact, I was talking ... Sorry, I was listening to Dr. David Kohl who had a presentation yesterday about this issue. Said that what he called normal interest rates were only about 6 or 7%. So, if you had for instance, a mortgage at 2%, and it went to 4%, you're actually doubling your interest expense. So, I think a lot of kids coming in, or young adults coming into farming right now have to recognize that these interest rates that we're seeing right now are not "normal" interest rates, and that if they go to refinance in 5-10 years, they have to consider what that interest rate will likely be.   Brady: So, in terms of succession planning, I guess there's two ends to this. The first end is if you're the current owner looking into the future, trying to either asking yourself what you're going to do with your land, whether you're going to give it to your children or whether you're going to sell it, one of the challenging is how are you going to provide for yourself in your retirement? That's the one end, so I'm retiring, what do I do? How do I pass on this farm business? Am I going to get some share of the farm profit? Am I going to get some rent? Am I going just to hand it over? Am I going to get a job off the farm? But then the other is if you're a child and you're about to inherit this portion of land it's, "Can I really make this farm business operation meet? What is the quality of the assets I'm about to inherit, the non-land assets? Am I going to have to make major investments in barns?" So, I guess when you put that business plan together and the succession, you've really got to have both ends of that worked on, and failure to do that really probably makes it very difficult for the farm operation to continue, and probably leads to a lot of conflict amongst family members.   Jennifer: Well, conflict yes, and that's another thing I say to people is have a disaster plan, or emergency plan in place. Because yes you can plan, put a succession plan in place, or plan to have a succession plan, but what happens if something happens? You have a medical emergency or whatnot, that the person who's currently running the farm is no longer able. So, it's important to have a long term plan, but also have an emergency plan in place, yeah.   Brady: Now, one of the things I noticed on your website, and it seems to me really important when you're dealing with trying to plan for how you're going to pass land down from one generation or own it, what form you want to own it, is a discussion of capital gains taxes. I think you mentioned it's the question you get the most often. What are maybe capital gains 101 and relate that to succession planning, if you wouldn't mind?   Jennifer: Okay. So, again, it comes down to being able to either pass your assets to the next generation or to sell them outside of the family. What you're looking at is the value at which you acquired them, so let's just say you acquired, I don't know, a farm at a million dollars. You sold it for two million dollars, so the capital gain would be the two million dollars at which you sold it for, minus the million dollars that you acquired it for, meaning net a million dollars. So, the Canadian Revenue Agency has a capital gains exception of $750,000 for qualified farm property, so in this case, there would be an exemption of $750,000. However-   Brady: Now I'm paying capital gains on 250,000, instead of, if I-   Jennifer: Correct. So, but the thing to remember, too, is that is qualified farm property. There's a whole bunch of rules that have to be adhered to, so it's good to talk to someone who's a financial professional or an accountant who's familiar with farm property if you're [crosstalk 00:12:55].   Brady: I guess then there's situations then where the way I put my succession plan or make a farm plan agreement, that could jeopardize the ability of that land to be qualified property?   Jennifer: Absolutely. Cause I'm certainly getting a lot of calls recently from kids of farmers who they think that their parents were farmers, but in fact they were just renting out land on farm property. They're saying, "Well, do I get the capital gains exemption?" And the way that the rules work is renting out farm property's actually not considered farming income. So, in that case, it would not be qualified for the capital gains exemption, so it's pretty important to understand what the criteria is to be able to be eligible for the capital gains exemption.   Brady: Are there any, in terms of choosing the business entity, as we think about a succession plan, so I'm a sole proprietor, I can maybe move into a partnership with my children, I guess there's limited liability relationships, and there's corporations. How does that figure? Have you got any thoughts on how the business ... Is the choice of business entity a key aspect of the succession planning, or?   Jennifer: I wouldn't say it's a key aspect, but it's definitely something you should think about if you're a sole proprietor, and you want to pass the farm onto one of your kids. Certainly you want to think about business strategy or business structure. You want to think, "Well, do I want to bring the child in and perhaps transfer some of the assets to them in a partnership? Do we want to establish a corporation?" The thing to remember is that there's tax implications on each of the business strategies. For instance, in a partnership, you have to declare all of the income. You have to actually take all the income for the year, whereas in a ... For a corporation, sorry, what you can do is defer some of the income. I'll give you an example. Let's say a farm makes $100,000, okay? And you had two partners, each with 50% partnership. Each of those partners would have to take in $50,000 of income. However, if it was in a corporation, and that corporate farm made $100,000, the farmer would have a choice to take a salary of 0 to $100,000. So there's a little bit more flexibility in terms of how much income you could recognize in a corporation, as opposed to a partnership. But what I say to farmers thinking about this is don't just look at the business structure, and don't just look at the taxation aspects of it. What you have to look at is what you're trying to do with the land down the road, because in a corporation for instance, it's a lot more difficult to be able to realize those capital gains exemptions, because a corporation is not eligible for the capital gains exemption. Only an individual is. So, what you actually have to do is sell the shares of the corporation in order to be able to get that capital gains exemption. Again, there's things that people have to be aware of and it's important in your decision-making to bring some of those financial advisors or accountants, bankers, whatever, into the conversation so that you're well aware of all of your opportunities or all your choices out there.   Brady: What are the expertise you want to bring to the table? What are the ingredients of putting together a good succession plan in terms of people? Sounds like an attorney is needed.   Jennifer: Yep. In a lot of cases, an attorney. Certainly if you want to get a will together. You probably want to talk to your accountant, be able to get things like cash flow statements or projected cash flows. You probably want to talk to your banker to see what sort of line of credit, or what sort of credit can be extended to the next generation. Again, you might want to talk to some farm advisors to see if there's any way that you want to look at some of the scalability of your existing farm, and any expansion potential or changing in farming practices, to be able to accommodate the next generation. There's a whole host of people potentially you can bring to the table.   Brady: Now, from your experiences or from talking to people, it seems to me like one big scenario, and we talked about that earlier, is a situation where you have one child who wants to work on the farm, but you have all of these other children who may not, and then you're trying to deal with the ongoing farm business versus selling the land and dividing up the proceeds from that. Are there any kind of ways you've seen people creatively deal with that issue?   Jennifer: Yeah. Well, one of the things I do mention is that you don't have to be equal to be equitable. So, you can look at things like for instance, insurance might be one way. I heard of one farmer in Eastern Ontario who decided that what he would do is give his children who didn't want to participate in the farm each $100,000 as kind of a kick-start to their careers or whatever, and that the child who'd stay on the farm would actually get the farm assets, and they would also get some sort of assets when the parents both died. So, there's different ways of looking at it. There's also some trusts that could be set up to be able to pass down some of the farm profits to non-participating children. Again, it depends on what the parents want to do, how much the parents want to be equitable or equal. It's also tough when you have the interests of spouses of kids who suddenly come to the table and might not have the same values as the kids or as the farm family. That's what I talk about, is that a lot of times it comes down to ... How should I say? Accommodating different people's values, and how much you want to be accommodative, how much you want to have peace. Because for a lot of people, having that Sunday dinner with everybody around the table is really important. So what I say is, can you put a price tag on that? Are you prepared to put a price tag on that? So, those are the kinds of questions you have to ask, because again, there's an emotional component to it that you can't necessarily integrate as you would with other types of businesses.   Brady: So, you mean that the harmony that whatever your decision has to be, if there's not harmony there, then it can really come back to bite you and you may not be having Easter dinner in a year or two together. That's quite a challenge, isn't it?   Jennifer: It is.   Brady: I guess the temptation would be just to put it off.   Jennifer: Well again, that's a huge temptation, right? But the temptation of putting it off can be offset by saying, "You know what? If you don't control it, somebody else will control it." So, it's a good idea that at least you try to work it out, and no, it's not going to be perfect, and yes, it's probably going to take a lot of time. It might even take a few iterations, but it's worth the effort. The important thing is to get people around the table as soon as possible. Meaning that at least people, if they feel like their voice is heard right from the start, and they feel like they have a stake in it, they're less likely to jump in afterwards and say, "I hate what you're doing" or, "I really don't agree with what you're doing." They're less likely to do so, so it's really important to get people started, get them involved, get them invested right from the beginning.   Brady: Jen, for the last time we spoke, we talked about some ideas that you were percolating and thinking about that might not be so well known, but might enhance succession planning for farmers. I wonder if you can just talk to them a little bit?   Jennifer: Okay. So, what it really comes down to is having a big enough pool of money such that it can support the ongoing business as well as the exiting parents. So, one of the ideas that I've been talking to farmers about is bringing in potentially a local investor from outside the family. So, maybe you've got let's say a family who've they've got a job outside. They're not a farming family, but they're really interested in farming. They'd like to make an investment in farming, and hey, maybe they even have some management expertise. So, they might be brought in to make an investment in the farm so that it would ease the burden on the incoming farmers to be able to raise enough capital to be able to pay the parents for the assets of the farm. So, I'll just give you an example. Let's say the parents need a million dollars in order to get what they need to be able to retire, and that the incoming, the new generation, goes to the bank and they can only get funding for $250,000. That leaves a deficit of $750,000, but let's say that there's, I don't know, a doctor and his wife who happen to live on the next concession over, who are really interested in farming, really believe what the family's doing, and really believe in what their goals and aspirations are, and want to invest in that farm. Maybe what they'll do is invest $750,000 into that farm, and it allows the outgoing generation to have enough money to retire, and as well, it puts less of a financial burden on the incoming generation. Because they have some liquidity, plus they have some potential management expertise coming onboard. Another idea is the use of long term leases. Typically we think of leases, we think of, I don't know, one, two, three years. What happens in the farming community the lease rate tends to be tied to the price of commodity. So, we see commodity prices go up, and then all of a sudden you see, "Oh, these prices go up." So, one of the ideas that I've been talking to farmers about is don't just look at it as a one, two, three year event. Look at it as maybe a 20 year event, a 40 year event, and then tie the escalator clause to something absolutely unbiased, like for instance, core CPI. Meaning that when food prices increase, then the CPI would increase, which means that they would have potentially a bit more money coming in because the food prices increase, therefore their profitability would increase, so it helps both parties. But also, the interesting thing about having a longer term lease means that you can actually bequeath it to the next generation, so you would have land rights potentially for a 40 year period. Meaning that you would have a better understanding of the land, you'd have more ties to the land, better potential for good water and land stewardship, because that effectively becomes your land without owning it. So, separating ownership of land and the control of land.   Brady: It's interesting because in some ways, these leasing ... Already a good portion of land, of course, is being leased. So, what you're recommending in order to create greater surety, I guess, and for people that are actively using the land, is to explore the option of longer leases.   Jennifer: Exactly, because it's almost like owning the land. If you know that you have access and control of that land for 20 years, I mean, it's as good as owning it. What you're also taking out of it is that speculative value. What you're saying is you're basically having surety of the intrinsic or the farming value, as opposed to the speculative value.   Brady: Do you think landowners, there are landowners out there that would be willing to do that, to make these long term leases?   Jennifer: I've certainly spoke to landowners who are open to that, because what it does is actually provides them an annuity effectively that's tied to inflation. So, it works for both parties.   Brady: That's great. So that would do two things, I guess. It potentially could provide liquidity to the people who were retiring, some kind of payment. Then, it brings expertise and I guess some ability to deal with any debt or new investments that had to be made on the farm. That's interesting. Okay, Jennifer. Thank you so much for joining us today. We will make all the links that we've discussed available and on our website, and thanks so much for joining us.   Jennifer: Thank you so much. It's been great being here.   Brady: Thanks for joining us at FARE Talk. We hope that you will continue to check our website for updates and the latest podcasts.

In this podcast Jeremy Leonard and I discuss a paper that he and his colleagues - Mohammad Shakeri and Richard S. Gray - recently published through the Institute for Research on Public Policy. The paper is titled, "Dutch Disease or Failure to Compete? A Diagnosis of Canada's Manufacturing Woes," and is available for download. Transcript Brady Deaton Jr.: Welcome to FARE Talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture, and the environment. My name is Brady Deaton, Jr. of the Department of Food, Agriculture, and Resource Economics at the University of Guelph. I'll be your host. Today my guest is Jeremy Leonard. Jeremy is a research director at the Institute for Research on Public Policy. He and his co-authors, Mohammad Shakeri and Richard Gray, have just recently released a study titled, Dutch Disease or Failure to Compete, A Diagnosis of Canada's Manufacturing Woes. Jeremy, welcome to FARE Talk.   Jeremy Leonard: Good to be here, Brady.   Brady Deaton Jr: Jeremy, before we start, talk to me a little bit about the Institute that has published this study.   Jeremy Leonard: Sure, I'd be pleased to. The Institute for Research on Public Policy is a national think tank based in Montreal, Quebec. We're just celebrating our 40th anniversary this year. We were created in 1972 as an independent think tank. We don't have members and we do not have supporters. We're supported by an endowment fund, which basically allows us to produce studies that are evidence based, and try not to take ideological or political sides in debates. Our role is really to inform and spark debate; pose the questions before we come up with the answers. We study a diverse array of issues including economic issues like the one we're going to talk about today, as well as more social issues like immigration, aging, and a whole host of other issues.   Brady Deaton Jr: All right, and I should say that we will link the listeners up to your site so that they can download this study if they want to read it more fully. Let's start off just by impacting your question. The paper's question, Dutch Disease, or Failure to Compete. What generally is prompting this question?   Jeremy Leonard: What's prompted the question is two facts over the past several years that are undeniable. One is the fact that the Canadian dollar has strengthened considerably over the last five to six years, going from about 60 to 65 cents to parity today. That's a fact. Another fact is that the manufacturing sector has been shrinking in Canada over the past five, six, seven years. That shrinkage started happening well before the recession, and it happened at the same time as this appreciation of the currency. There's a natural question because the issue of the Dutch disease is really just that. The one, appreciation of the currency, causes the other, problems in manufacturing. We're clearly seeing these two things happening at the same time. We thought it was important to sort of dig a little bit deeper on the question, is one really causing the other or are they both happening at the same time for some other reason that we haven't taken account of.   Brady Deaton Jr: One of the things that I was trying to work through in kind of preparing for this podcast, was a better understanding of exactly this term, the Dutch disease. When you first hear it, it sounds like it's something that's damaging to the economy overall or having some kind of miserating effect on the economy. But, in wading through it, and I'd like to get your thoughts on this, it seems more like an effect than a disease. What are your thoughts about that?   Jeremy Leonard: The term Dutch disease comes from Holland as the name suggests. There were discoveries of natural gas off the North Sea off the coast of Holland, and that created tremendous demand for those energy resources. That energy demand can be a good thing for an economy because it brings in dollars; it increases exports; and a whole host of other things. One of the things it also does it that the people who are interested in buying these resources are using Dutch currency to do it and it causes an appreciation in the Dutch currency which did raise the cost of exports to Dutch manufacturing exporters. And, in fact, the Dutch manufacturing sector did decline considerably. You could argue that the term Dutch disease is really an effect of something which can at the base have some positive effects. Since then, the Dutch disease has come to be a convenient shorthand to say, it's the exchange rate that's causing problems in the manufacturing sector. In some sense, in Canada, you can say the same thing about the developments of the oil sands. People can have different opinions about these aspects of it, but one thing that's absolutely clear is that it has brought very large amounts of money and economic resources into the country from the many other countries who are demanding these energy resources. That still leaves us with the question that we try to address in this study, which is, to what extent does that boom and those economic good times for the energy sector by force mean economic bad times for the manufacturing sector. That was really the goal of the study.   Brady Deaton Jr: Right. So, it's not, isn't bad for the economy. The whole idea of your paper as I read is really focused on this effect on the particular sector, in this case manufacturing. So, is there a negative relationship between a resource boom and manufacturing output. That's really what's going to drive the research that we're going to talk about. Talk to me a little bit about the theory, the abstraction, that drives the argument for there being a negative effect between a resource boom and manufacturing output.   Jeremy Leonard: Yeah, sure, and I touched on it a little bit, but we can go into it in a little bit more detail. The issue really boils down to the effect that there are some goods in the economy that are tradable and some that are not tradable. What happens when you have a boom of any sort, whether it's a natural resource boom or any other kind of boom, is you have a sector where there's very rapidly growing demand for services and production. That tends to bid up wages because the higher your demand is, you need to hire more workers, and anyone who has studied Economics 101 knows that in those conditions wages are going to rise and they can rise rapidly. So you'll have upward wage pressure in the booming sector, which is then going to trickle over into other sectors. People will be drawn into the energy sector, that will mean fewer people wanting to work in the non-energy sectors. The main result is you have this upward pressure on wages. This upward pressure on wages causes problems in industries that are exporting goods. Their costs are going to go up and they will not be able to raise their prices. Essentially what it causes is an increase in the terms of trade, which causes problems for exporters. We see this has manifested itself in a rising currency. That's sort of a very complicated way of explaining it, but it really has to do ... It's much more than just about dollars floating around the economy and whether the Central Bank is creating too much money or not creating enough or issues like that. It really has to do with some pretty fundamental economic effects that come about from this resource boom. We know the economic forces at play and the question then becomes, what's driving those economic forces, and then there are a number of things that can effect that. That's sort of the theory behind it. It's very well developed and you can look at it in terms of how flexible sectors are. In other words, how much labor mobility there is in sectors and things like that. Invariably what you find is that there's a possibility that the manufacturing and trade intensive sectors will be adversely effected, but it's not a necessity. In other words, you can certainly envision scenarios where you can actually see a resource boom and you wouldn't necessarily see an adverse effect. Given that the theory doesn't give you a definite answer on whether a resource boom is going to cause problems in manufacturing, we decided we needed to look at the actual numbers in Canada to try to answer that question.   Brady Deaton Jr: All right, so let's get into this. As you pointed out earlier, Canada's energy sector has experienced a boom; oil production has increased; gas has increased; Canadian exports have increased. We've got the first part. Talk to me about how you examine then how this effects manufacturing.   Jeremy Leonard: What we did was we basically did a two stage process. The first thing we wanted to get a handle on was to what extent is the strong Canadian dollar being driven by energy prices. There are many, many things that can affect the exchange rate besides energy prices. It can be prices of other commodities. It can be the stance of monetary policy. For instance, if interest rates are higher in Canada than they are in the United States as they have been for quite a few years, that's going to encourage investors to invest in Canada, which will also put upward pressure on the exchange rate. So the first stage was to examine the extent to which energy prices are associated with high exchange rates. The answer is that there is a linkage there, but the interesting finding there was that it's not just energy prices that are driving this exchange rate. It's also prices of other commodities like wheat; other commodities that Canada produces like industrial metals. So there is a partial effect. Stage one was simply to establish what piece of the strengthening of the Canadian dollar could be attributed to rising energy prices.   Brady Deaton Jr.: Before you get to the second stage, first stage you're basically just saying what is the relationship between the Canada and U.S. exchange rate and energy prices and controlling for a bunch of other factors.   Jeremy Leonard: That's right.   Brady Deaton Jr.: What time period are we talking about that you're looking at here?   Jeremy Leonard: We looked at the 1992 to 2007 period. We wanted to look at a longer period than just the boom to get a sense of trends that were happening earlier on. What we found was actually that the effect of energy prices on the exchange rate was about the same and possibly even a little bit less than that for other commodities. That, to us, was an interesting-   Brady Deaton Jr.: That is interesting.   Jeremy Leonard: ... observation. The other thing that we didn't talk about but other researchers have looked at is the fact that there are two things that drive the Canada/U.S. exchange rate. One is the strength of the Canadian dollar, but the other is quite frankly the weakness of the U.S. dollar, which may have little to do with what's going on in terms of resource prices. We cite in our paper some work that's been done, it's not published yet, but basically indicating there's a piece of the strength of the Canadian dollar that really has to do with the weakness of the U.S. dollar related to the fiscal and economic problems south of the border. All that to say that the energy piece of the appreciation of the Canada dollar is a lot smaller than the total appreciation that we've seen. Another way of saying that is even if we had not had such an energy boom, we probably still would have seen a strengthening of the Canada/U.S. dollar for other reasons. I think that's an important observation to make, that we can't just attribute this 40% to 50% in the Canadian dollar 100% to energy because that's not what the data tells us.   Brady Deaton Jr.: This seems to be some evidence against the argument that there's a petrol currency here. If I understand you correctly, you're saying that energy prices effect the exchange rate but so do non energy commodities and other factors and relatively more so than this energy price effect on the exchange rate.   Jeremy Leonard: That's right. That's absolutely right. It comes down to the fact that you can ... you know, many of us have seen these charts where you plot the Canadian dollar against the oil prices and you get a nice match. The fact of the matter is you can actually plot it against a whole of different price indices and you can get a similar match. So one of the points of doing this research was to try to take all of these factors into consideration and ask ourselves, how much is the one effect when controlling for the other. It would be just as incorrect to call the Canadian dollar a petrol dollar as it would to be to call it a nickel dollar or a wheat dollar or any other commodity you might like to call it. Again, stage one was really a kind of cautionary tale in the sense that, yes, we do see this positive link as the Dutch disease theory suggests, but we can't draw the conclusion that energy prices are driving exchange rates and by extension, weakness in manufacturing.   Brady Deaton Jr.: That takes us to the second step. If you've established some effect between energy prices and the exchange rate, but there are a lot of other things that are effecting it, and energy prices are a smaller perhaps than expected driver. And, now we're moving to the second step. Okay?   Jeremy Leonard: Right, because really the ultimate question we want to know is, to what extent have the energy induced strengthening of the dollar adversely effected manufacturing. The way we go about doing that is we actually looked at 80 different manufacturing industries because we wanted to get down at a pretty fine level of detail because you lose a lot of interesting differences and constraints if you look at the sector as a whole. We looked at 80 different industries. For each of those industries, we essentially estimated outputs using a model that ... You know, output estimation models have certain standard elements to them, but we added this energy price induced appreciation of the exchange rate that we've calculated from stage one. That was one key element that went into that statistical estimation. The second one that we put in, which was very important, was the trends and output in the corresponding industry in the United States. Now, why did we do that? We did that because we wanted to kind of use the United States as a control country, as a country that is not a large energy exporter, certainly wasn't over the time period we looked at, with the notion being that if the Dutch disease, if this exchange rate induced adverse effect on manufacturers, if that's really the explanation, then we shouldn't see kind of similar trends in output in manufacturing in the United States. They are not afflicted with this Dutch disease. When I talk about the results, I'll talk about why that's important. It was important for us to have a kind of control case to say, how is output evolving differently in Canada relative to the United States? We looked at all of these 80 industries. It was quite an arduous task punching all the numbers.   Brady Deaton Jr.: I'm going to say something. For those of you listening, in their paper they actually do a great job of providing a lot of data and a lot of tables that actual allow you to look at the different industries and the various effects on them. That's something that's really well done that I know you're not going to be able to go in details in this discussion.   Jeremy Leonard: Yeah, and really it's because the nuts and bolts of the detailed results are not as interesting as kind of the overall fundamental result of the question we're after, which is what is essentially this variable we're looking at; this kind of Dutch disease term, if you will. Is it significant? Is it statistically significant in these equations? The answer was obviously nuanced, but I guess a little bit perhaps to our surprise given the popular discourse about the Dutch disease, is that the majority of industries that we looked at really didn't exhibit a strong adverse effect of this energy induced increase in the exchange rate. What do I mean by that? Even if you accept that energy prices have had an upward influence on the exchange rates, that has not generally been associated with declining manufacturing output once you control for other factors effecting output. It seems a bit counter intuitive because ... and, that's something we've kind of heard in the political discussion in recent weeks is how can that possible be because we've seen the dollar has strengthened and manufacturing output has declined. So, how can you possibly say that the two aren't linked? The answer comes back to this notion of the control variable in the United States. There are other factors that have happened that have been going on over the past, during the 2000's, that have been at the same time as the resource. The most important of these is really the rise of China and other low cost producers in global value chains. In fact, most listeners may not know this, but China has actually passed Canada as the United States' number one source of imports into the United States. This competition is not just happening in traditionally in t-shirts and toys and other things that we've known the Chinese have been exporting to us for decades. They're moving into higher value industries like machinery, like fabricated metals, things feeding into the automotive sector. They're actually starting to compete head-to-head with Canadian exporters in U.S. markets. This factor, I'll kind of just call it the globalization of manufacturing, has actually been a much more important negative effect on not only Canadian manufacturers, but American manufacturers as well. So what do the results tell us? They tell us that there are certain industries that have indeed been adversely affected by the exchange rates. The other industries where we don't see an adverse effect from the Dutch disease, these industries are still having problems but they're much more related to trying to compete with the South Korea's and the China's and the Brazil's, and the other emerging markets of the world. Not only within Canada, but more importantly in markets where Canada exports, mostly notably the U.S. market.   Brady Deaton Jr.: Are there any characteristics of those industries that were negatively affected by the exchange rate; do they have any characteristics that are worth noting?   Jeremy Leonard: Yeah, well, I'll just highlight two extremes really. The ones that had the largest negative Dutch disease coefficients in absolute terms were the clothing and textile industries as well as leather products, which is basically namely footwear and handbags. This kind of comes back to what I was saying earlier. These are industries for which there's not much product differentiation. They're sort of commoditized industries. I like to just use the example, a t-shirt is a t-shirt is a t-shirt and there's not really a lot of opportunities to diversify and add value to your product. Secondly, these industries are very, very trade intensive. They have a very high proportion of their product that is overseas and they also have a very high import penetration rate. It's sort of not surprising that they would be most affected by the exchange rates and least able to adapt to it, I guess is the way I would put it. These industries, you have to remember, textiles, apparels, and leather together probably make up ... they certainly make up more than 5% of Canadian manufacturing. They are relatively small sectors. The other sector that was kind of interesting was actually a piece of the chemical industry, the pharmaceutical sector, which also showed a significant negative Dutch disease effect. It's hard to know why this would be the case because pharmaceuticals are often proprietary products and so they may not have direct competitors. It may be that a lot of these companies are global and they may have moved production around, moved production out of Canada. That's just speculation on my part. The reason I touched on that is because pharmaceuticals is a pretty high value added industry. It does a lot of research and developments, and in general contributes to innovation, certainly in the medical field but also in other endeavors as well. I think that's of some concern because that's one of the things that people worry about with the Dutch disease. If there are certain sectors in manufacturing that are very innovation intensive that contribute to benefits in terms of advancement of knowledge, things that might be beneficial to other sectors. If those sectors are declining because of the high exchange rate, then there is some reason for concern. Those are kind of two examples of sectors where we didn't find the specific significance. If I can just go on to a couple where we didn't, which was actually-   Brady Deaton Jr.: Sure, sure, that would be great.   Jeremy Leonard: ... because the auto sector was one. That kind of is often held up a poster child of the ... Here is the prime example of what the strong dollar is doing to Canadian manufacturing. Actually when you look at the numbers, you see that the Dutch disease effect really isn't there. It's not statistically significant. Why is this the case? It comes back to what I was just saying about increase in competition. The interesting thing is that we've seen a decline in the Canadian automotive sector over the 2000's. We've also seen decline in U.S. automotive sector over that same period, which kind of illustrates the point that the problems in the auto sector are not unique to Canada and they're not caused entirely by the high Canadian dollar. What they're being caused by is companies like Kia and Hyundai. Kia and Hyundai weren't even on the radar screen 15 years ago and they have become pretty big players in the automotive market here in North America. That's just to illustrate that some of our common perceptions of how the exchange rate is effecting various industries really aren't quite in agreement with what the empirical evidence tells us.   Brady Deaton Jr.: When we return back to your paper's title, Dutch Disease or Failure to Compete, I'm reading your results and you tell me if I've got the story that you're telling correct. There are some, but not most, industries in the manufacturing sector that have been effected and perhaps slightly, but most are not, and so the manufacturing woes that Canada is experiencing are largely a failure to compete and not the result of Dutch disease. Is that-   Jeremy Leonard: Yeah. That's a fair way of putting it. I think we have to be fair to say that when you add up all of the industries for which we saw a negative Dutch disease, it's about one quarter of the manufacturing sector that has been significantly adversely effected by the high exchange rates. When one quarter is large or small is a matter of taste, but that's what the numbers tell us. From our perspective, what that tells me is that if we want to address the bigger problems of manufacturing, which are real. I guess I want to emphasize that in this discussion, and I said it at the outset. The manufacturing sector has shrunk in Canada quite significantly since about 2005. That is a real problem. The issue is that if we want to resolve that problem, we need to have the diagnosis of what's causing it right. Our results certainly show that the majority of that is being caused by something other than the exchange rates. As I was saying earlier, that something is a failure to compete, which is coming both from an increase in competitive pressures from abroad. It also, quite frankly, simply reflecting the fact that productivity growth in manufacturing, which is really what you need to stay cost competitive, has been very, very sluggish over the past 10 to 15 years. Just to give you a couple of data points, in the United States, productivity has increased by the order of 2% to 3% per year. In Canada, we're basically flat lining. These numbers don't sound like much, but when you compound them over 10 or 15 years, you just realize that there's no way to be cost competitive unless you can make the investments, change the ways you do things so that you can become more productive and you can compete, quite frankly, with the dollar at any level it might be whether it's at 80 cents or parity or anywhere in between.   Brady Deaton Jr.: Do you have any policy suggestions?   Jeremy Leonard: There are a couple in the paper. I think the first thing to preface is what shouldn't be done. This really talks to some of the stuff that's been talked about in the political discourse. Our study shows that it's really not an either/or zero-sum game in terms of the well-being or the boom of the oil sands and the challenges in manufacturing. To frame the debate that way and to organize policies around the notion that if only we could keep the energy boom in control or maybe even reduce it, that would solve manufacturing's problems. That just isn't borne out by the data. That would be something I would not be in favor of, nor would I be in favor of trying to manipulate the exchange rate even if you could. One, I don't think it is easy to do. Secondly, I think it would be counterproductive. Thirdly, it really would not address the core issue. We get back to this issue of productivity and innovation. This has been a tough nut to crack for policy makers for years. One issue is connecting businesses, especially small businesses, to universities and other sources of potential innovation. There are many, many firms in Canada who do not do any research and development in house because they don't have the resources to do so. So, creating networks to connect them with best practices is one thing to do. A second kind of more broad, strategic direction is to think about increasing competitive pressures within certain industries. There are still may industries in Canada that are critically important in term of innovation that are protected. Look at telecom as one, although changes are sort of in the works there. Air travel, the financial sector, there are very high barriers to entry. These are all very important sectors, and innovation in these sectors can have implications for productivity and innovation in other sectors. So increasing competitive pressures generally in the economy. On a related point, it all comes back to competition, is sort of broadening marketing opportunities for Canadian firms. This is something the government has started to do. Kind of diversifying potential markets. There are a lot of different reasons to want to do this, one of them is to obviously to tap faster growing markets. A second effect that I think is just as important is it puts Canadian firms in contact with firms that have very different cost structures; that have very different management styles; techniques for production; and other differences, which I think can sort of be fertile ground to get Canadian companies to think about maybe there are different ways of doing things; maybe we can do things more cost effectively; and we didn't know we could do it because we never really had to. Competition ... I mean if necessity is the mother of invention, competition is the mother of innovation, and by extension, productivity. I think in terms of a manufacturing strategy, the government would be much better served to focus on those issues rather than focusing on how do we try to control the exchange rate or the development of the energy sector as a manufacturing strategy.   Brady Deaton Jr.: Jeremy, thank you very much for taking the time to speak us today. I really appreciate it. I really learned a lot. Thanks for the time you and the co-authors took to write the article.   Jeremy Leonard: I appreciate being here, Brady. It's a pleasure.   Brady Deaton Jr.: Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcasts.

In this podcast Chief Robert Louie and I discuss the management and control of First Nations Land. Chief Louie is the Chief of the Westbank First Nation. He is the chairman of the First Nations Lands Advisory Board since 1989 and a member of the Order of Canada. Transcript Brady Deaton Jr.: Welcome to FARE-Talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture, and the environment. My name is Brady Deaton, Jr. of the Department of Food, Agriculture, and Resource Economics at the University of Guelph. I'll be your host. Today Chief Robert Louie and I will be discussing the management and control of First Nation's land with particular focus on the Framework Agreement on First Nations Land Management. Chief Louis is the Chief of the Westbank First Nation. He is the Chairman of First Nations Land Advisory Board since 1989 and a member of the Order of Canada. Welcome to FARE-Talk, Chief Louie.   Chief Louie: Thank you very much Brady. It's a pleasure to be here.   Brady Deaton Jr: I want to begin by mentioning something that's on the Land Advisory's Board website and have you kind of discuss it; and there's a statement there that's very powerful. It says, "For the first time in history of First Nations, we'll gain a window of opportunity to have the power as a Nation to manage its reserves, lands, and resources, and eliminate the bureaucracy of Justice and Indian Affairs." Talk to me a little bit about that.   Chief Louie: Well, it's extremely important for First Nations across this country that First Nations be recognized with inherited right to manage their own lands and resources; and for us this land management process and the implementation of land codes does exactly that. It recognizes the jurisdiction. It recognizes that First Nations are the lawmakers on their own lands, that they have the power to make laws over their lands and their resources; and that's fundamentally important. And it is the first time in the history of Canada, that such an accomplishment has occurred. First Nations were historically self-governing before the Europeans came to Canada, and now with Land Codes and with the Frame Agreement initiative, it recognizes that First Nations again have the jurisdiction to look after their lands and their resources.   Brady Deaton Jr: I think there's two big terms that will probably be used a little bit interchangeably, but I wouldn't mind if you could just unpack them a little bit. There's the Framework Agreement, and there's the First Nation Land Management Act. The Framework Agreement, of course, come into being in 1996. And the Land Management Act is in 1999, I believe. Talk to me a little bit about the difference between those, and how they came into being.   Chief Louie: The Frame Agreement is a government to government agreement that was negotiated by the First Nations and with Canada. And that Frame Agreement, back in the 1996 timeframe, at the time of signing, sets for principles that recognizes First Nations to have the inherited right to do such things, as manage their lands and resources. It talks about principles to protect lands, so reserve lands cannot be sold. It recognizes that third party interests are going to be protected. Principles of that nature. It's a fundamental document that set for strategy and set for the process, so that government could eventually pass its legislation, and that legislation was passed in 1999, the First Nation Management Act. By Canada passing that legislation, it ratify the Frame Agreement. What's unique about the Frame Agreement and the First Nation Management Act is very simple. It says and it recognizes that unilateral changes cannot be made without the consent of the other party. That's fundamentally important from the First Nation perspective, specially when we're looking at how laws are developed and the negotiations that took place to put forces [inaudible 00:03:54]. That's very, very important and it's very unique in Canada.   Brady Deaton Jr: The process leading up to the Framework Agreement it's quite interesting. It's something that emphasized discussions of the First Nations Land Management Act. The Westbank First Nation was one of the original signatories, what was that process?   Chief Louie: In the early 1990's, and even going back to the late 1980's, there was a movement by First Nations at ... We had to see the recognition of the inherited right of First Nations recognized. We had the constitution that was passed prior to that. It's spoke of, in section 25 and section 35 in that constitution, spoke of the inherited right of First Nations, but it wasn't implemented. This was a very serious contention by First Nations. When government look at, and it was about time of the changing government, it was the election process in the early 1990's that led to the liberal government, who wanted to come into power. They said to First Nations in their background, in the election process, saying that we would want to have First Nations recognized with certain inherited rights. We capitalized on that. Our process was "Let's do that", to do that we needed to get ourselves out of the Indian Act. We worked with the government when it became government and we negotiated the Frame Agreement. That really was the starting point to say, "Yes, there is a process, and if the government says they would support it, then, let's see the reality of it." The reality of it was the Frame Agreement and the eventual passage of the First Nations Land Management Act legislation. Of course, since then we have been [inaudible 00:06:09] First Nations who have passed land codes, who were now self-governing to the extent that they can now manage their lands and their resources.   Brady Deaton Jr: How many First Nations have opted in to the Framework?   Chief Louie: Right now we have 37 First Nations to actually become operational, that have passed land codes and are fully operational. We have 25 that are in the developmental phase today. We have a total of about 83 First Nations on the waiting list to become involved. When we add up all those figures, it boils down to about one in six First Nations in Canada are either involved or want to be involved in the Land Management.   Brady Deaton Jr: What are the steps if a First Nation wants to basically enter into the Framework Agreement? What are the steps by which that would be done? I wanna talk in a minute about the Indian Act, because I think that's important. If you wanna to move out of the Indian Act into the Framework Agreement what generally are the steps that First Nations would undertake?   Chief Louie: The First Nation that is interested in this process first of it has to have the genuine interest. And that interest would normally, and usually comes from the council of the First Nation. It has interest, it's heard of the Land Management initiative through one process, step, or another. It says and it feels, "Yes, this is something that could work for our community", that First Nation would then look at passing a bank council resolution to set the process, to say, "We have interest, we'd like to become involved, we have interest here, accept our resolution saying that we have that interest, it's signed that we wish to proceed." Now, in the recent years, last couple of years, government of Canada has said, "well, that's fine, but now we have to go through a process, you're going to have to fill out some application forms and let's take a look at all of the varies things that have to now be considered. Are you in third part management for example, do you have economic development needs, do you have any environmental issues or matters of serious concern, are you [inaudible 00:08:30] Canada?" Questions of that nature. Then Canada, once it has that application, will make a decision. It has the control, if you to will, to accept or reject the First Nation now coming into the process. If it accepts that First Nation, then that First Nation is recognized "Yes, you will now have an opportunity to participate when the funds and when time permits." Recently, in the Spring of 2000, the minister of Indian Affairs accepted to have that [inaudible 00:09:07] of First nations, another group, 18 new First Nations, from coast to coast, were then agreed upon to enter into the land measurement process. That opened the doors for those 18 First Nations. They're now in the developmental phase of their land code development. We still have many other First Nations for waiting. You can appreciate that cost money to have First Nations in developmental process. Canada has to set aside those [inaudible 00:09:38] and has to budget it. Right now, we're under certain budget constraints. Even though that we have KPMG studies, and studies of that nature, that suggest and support the fact that if a First Nation becomes operational, we can show and demonstrate through past history and review of the economical findings that that First Nation is going to bring a return to the investment into that First Nation going into developmental phase. It's been estimated that at least 10 times the return on that investment. By Canada investing into the First Nations to support them to become operational. Once it becomes operational, 10 times the return of the investment. And those investment returns grow every year.   Brady Deaton Jr.: Do the First Nations vote on whether they want to accept the new developed land codes? How is the community participation in this process?   Chief Louie: The community is very, directly involved. To [inaudible 00:10:40] the process is one thing. Then the First Nation, once it's gained entry into the developmental phase, it has to go through an internal process of ratification by its members of their land codes. Land Code is the laws that the community sets that follows the principles of the Frame Agreement and follows the legislation. That has to all be put together and the community is involved in that process, step by step. Both on reserve and off reserve. Any First Nation that has a minimum of 18 years of age and older and confident to vote is eligible to be involved. The First Nation community deals with all of its community member, which is out to everyone of the voting age and its able to vote. And says, "let's now make a decision. Do we do a majority of vote or ratification vote?". That community has to decide. The fact is that every First Nation member of that community has the right to vote, and it's encouraged to vote. That First Nation community must provide all of the information that is necessary for that individual member that's going to vote to make that informed decision. If it votes, if that community votes, "Yes", in effect you'll have a ratified land code. If it rejects the land code vote, of course, there is non entry into the operational phase.   Brady Deaton Jr.: I think many of our listeners will be less familiar with the reasons why a First Nation might want to move and develop its own land code, instead of following the land code set forward in the Indian Act. I really appreciate and I think it'll be really helpful, could you just step back and discuss the Indian Act and why that constraints First Nations in a number of ways, including maybe economic development?   Chief Louie: First Nation clarified that the Indian Act, that legislation is not allowed for land codes to take place. What the Indian Act does, and it's done so historically ... there're basically 34 sections in the Indian Act that deal with one form of administration over lands and resources. The fact is that the Indian Act divides the ministry of Indian affairs, the government general, the department of Indian Affairs has all the powers and controls over the First Nations' lands and resources. Yes, First Nations can have certain bylaws. But bylaw is a subset of laws that exist in Canada through the department of Indian Affairs. There's no inherited right that's recognized. If, for example, a First Nation say "Look we need to have a dog parking bylaw", it's jury can pass that bylaw in the chambers of the council, but that council must submit it to Indians Affairs for their approval. It's not ratified or approved, unless the Department of Indian Affairs says it can be ratified. This is totally different from a land code. A land code is such that it recognizes the First Nation as a law maker. It has the jurisdiction, without seeking permission of the department of Indian Affairs, minister or anyone else. It has the power to do things that is necessary to manage its lands and resources. Those powers are very, very extensive. For example, how development takes place, how leases are registered, how deep you put the water lines and the sewage lines, what are the building code restrictions, how it's going to be developed, how is the process going to take place as far as a law making, is it going to be first, second and third readings in the passage of laws. All of those matters that are [inaudible 00:14:36] to government falls into the hands of the community. It makes the community the decision maker, the jurisdictional body, who determine the affairs of the First Nation that affects its reserve lands and resources. That is absolutely, total differentiation between the Indian Act, how it's administered, how the First Nation would act with its land code in place.   Brady Deaton Jr.: We're discussing the Indian Act, just to be clear, the Indian Act and the Federal Government doesn't currently allow First Nations to basically self-govern with respect to land. My understanding of that's correct?   Chief Louie: That's absolutely correct. The Indian Act, the way it was developed back in the 1860's, 1870's, and amended from time to time, strictly recognizes the authorities of the government of Canada as represented by the governors, general or the minister of Indian affairs, or his or her agents to make the decisions over the affairs of the First Nation. The First Nation has certain capacities, that have been allowed under the Indian Act to make certain bylaws. But those bylaws, for example, must be approved by Canada through the department of Indian Affairs. In effect, there's no self-government recognition, no inherited right is recognized by First Nations. First Nation peoples are seem really as [inaudible 00:16:08] of the government, they're seem to be communities that must be supported by government, and that includes all of the affairs and the decision making. There is a complete difference between the Indian Act process and the land code and land measurement process that were currently discussed.   Brady Deaton Jr.: Under the Framework Agreement, does the land still though remain under Federal protection?   Chief Louie: Yes, it does. With the land code in place, the First Nation chiefs, at the time of conception of Frame Agreement, had agreed, and Canada agreed with those First Nations that the land would remain, what is referred to as section 91 (24) lands, that's 91 (24) of the constitution of Canada. It really recognizes the federal domain. The First Nation work within that federal domains. The provincial government has no law making capacity on the reserve, in so for as lands and resources are concerned, and that was the wishes of the First Nations at that time, in the mid 1990's, and remains the wishes of the First Nations today. It's very clear that the 91 (24) jurisdiction is the process that's been supported by the majority of First Nations in Canada. Almost at a 100 percent.   Brady Deaton Jr.: If you enter into the Framework Agreement, can the land be sold to members outside the First Nation or there's certain rules of the Framework Agreement requires of all First Nations' land codes?   Chief Louie: The individual First Nation has a choice to do certain things, it's [inaudible 00:17:40] to sells or leases its lands, if you do so internally. But one thing is very, very clear, reserve lands as such cannot be sold to diminish the reserve land size. That was a concern that was expressed by First Nations at the assembly of First Nations levels, and expressed as [inaudible 00:18:01] country from time to time, because in the past, First Nations have had things, like expropriation take places, roadways, hydro lines, seaways, you name it, lands cut off from their reserve lands. So, this process, fundamental process that recognizes, and the principle that's recognized is that lands cannot be diminished in size. As such, they cannot be sold to anyone that's a nonmember of that First Nation. It can, however, be leased, which allows for economic development, and allows for interest, it could be registered and protected, and allows for the economy to proceed on the First Nation. But that's the fundamental difference. It's a concern that was looked at in places like United States where, in the past, First Nations are tribes in the United States were allowed to sell off portions of their reserve lands to raise money for certain purposes. Here, land cannot be sold to diminish reserve land size.   Brady Deaton Jr.: With the land codes that have been adopted, is there a significant variation amongst the First Nations, in terms of their land codes or are they relatively similar?   Chief Louie: They're unique in the sense that there's no two First Nations that have identical land codes. There's always variations and changes. For example, some First Nations may choose to have land's committees that will be involved in the law making processes. It has to go through that committee, and the committee makes the recommendations and that's how laws are proceed ,and how laws may be administered without the involvement of the First Nation's committee. Other First Nations may decide that "no, we do not need committees", once we have land code in place, we have the process in place, First Nations may act much like, let's say, municipalities, where you have, let's say, a director of lands who will make that decision, and will keep the politics separated from the government and matters proceed. Every First Nation has a variation in one form or in other. Some will have historic land that needs to have protected for various religious purposes or cultural purposes, certain lands may have different statuses to the extent that they may not be certificated possession lands, but they have the recognized ownership level by certain individuals, and it has a method to allow for lands to be mortgaged through leases. Every First Nation is slightly different. Some First Nations have [inaudible 00:20:41]lands in common, that is the total reserve, there's no individual recognized land. Its land's held in common by every member of that community. Other communities have a mixture. There's reasons for the uniqueness of every First Nations land code.   Brady Deaton Jr.: You mentioned certificates of possession sometimes I think about three primary sets of varieties on First Nations, I wouldn't mind if you kind of comment on certificates of possession, leases and customary rights. What are the kind of differences between those?   Chief Louie: Let's take it from this perspective. A certificate of possession, first it's an instrument that is referred to quite often, that recognizes that individual member has certain beneficial rights that pertain to the land. It's a form of title, if you will, that says that person [inaudible 00:21:34] has that in their possession. And certain First Nations will allow 100 percent of the revenue proceeds from the land lease, for example, to go to that individual. Some communities will say "No, a percentage goes to the land in common, the remaining balance goes to the individual". There're different interests that might pertain to that instrument. It's really an instrument to recognize the rights that pertain to the wishes of the community. A lease is an instrument that allows for mortgages, let's say, banks to take the mortgage on that particular lease and say "this is either for housing purposes or it's for developmental purposes" and recognizes the form without losing the land, but having a timeframe set to that land, where the rights are set for a particular term, and a particular purpose, to allow for loams and for [inaudible 00:22:30]. Protects[inaudible 00:22:32].If they wish to say "live on lands and live on First Nations' lands", and to have a valid instrument that is recognized by banks and other financial institutions. The customs vary of course, from one First Nation to another. Customs of land use, there may be certain land set aside strictly for customs of the First Nations to recognize things like graveyards, or particularly events that take place. These lands are always been protected. There's variations in all that.   Brady Deaton Jr.: I'd like to talk a little bit now about economic development. There's obviously a number of reasons, and you've mentioned them, why First Nations might wanna adopt the Framework, including things like the right to self-governance. But one area that always interested me is, with respect to land, land is a factor of production. It's a way of generating wealth and transacting land requires secure property rights. It also requires that the transactions cost, the search and information cost associated with insuring a transfer of land aren't prohibitive. And this is an issue that I believe that the Framework Agreement sets out to address in 1999, when the First Nation management Act was being passed. The minister of Indian Affairs and Northern Development said something to the effect that this means that, "First Nations will no longer have to turn to me for their approval. They will have the opportunity to move quickly when the economic opportunities arrived or when partners approach them." How does the First Nations Land Management Act or the Framework Agreement reduce these costs? How does it allows First Nations to act more quickly?   Chief Louie: The land code and the land measurement process that is adopted by First Nation allows the First Nations to take advantages of things like economic development potential. It really at speed of business. And by speed of business I mean that there is no [inaudible 00:24:40] red tape that [inaudible 00:24:41] that the department of Indian Affairs is required to do. For example, let the Minister of Indian Affair and send it to members of [inaudible 00:24:49] have commented on through varies hearings. And they recognize that there is a process for the First Nation that operate under the Indian Act that has to go through step by step approval. And that step by step approval involves varies regions. For example, in British Columbia and Vancouver region that has to involve the regional director, it goes to a land process, and that particular process land reports to the headquarters' office in Ottawa, they then make the determination there, department of Justice is involved, it's kicked over to Surveys, where you have the Natural Resources involvement, so you have a very [inaudible 00:25:28] process of approvals. Sometimes it's granted, sometimes it isn't. That boils down to huge delays, red tape that's involved, so a particular First Nation that says "we want to do a particular development, we got a partner that wants to [inaudible 00:25:45] with us.". They get involved and in those discussions and they go through the Indian Act process. That development may well be shell because after a couple of years or sometimes longer, the [inaudible 00:25:59] partner says "I give up, I cannot perceive, we got to move elsewhere." With this land code process, you don't have that red tape. The First Nation can develop its laws, its procedures to ensure speediness to allow for the speed of business to occur. It can have a voting process internally with the First Nation community, if it involves lands in common. It could have processes that are set up that can actually deal with it in a matter of weeks or a few months, as opposed to years and perhaps never. We got all kinds of examples throughout Canada, where you had First Nation development[inaudible 00:26:38] because of the red tape and the bureaucracy that the department of Indian Affairs, that whole process under that Act brings.   Brady Deaton Jr.: What are the kinds of outcomes you mentioned earlier that you've calculated the return or high return on the investment for First Nations that opt in to the First Nation Land management Act or the Framework Agreement? Can you tell me some of the outcomes that have gone on that you believe would not have occurred if it weren't for the First Nation having First Nation Land Management under the Framework Agreement?   Chief Louie: Yes, it's been demonstrated through varies studies. I mentioned earlier the KPMG report for example. KPMG did a study, I believe was 17 First Nations that they chose at random to look at, to say "Has the land code and the Frame Agreement process made a difference to those First Nations?". The answer is a definitely "Yes". Some of the examples are such that some of the First Nations who had unemployment at varies high levels, there was a significant reduction in those social assistance needs. One community was reported to go down from a 67 percent social assistance dependency down to five percent. In the timeframe it was shown that more 10,000 employment job opportunities for non-members came into effect, pumping hundreds of millions of dollars into local economies. Not only the local economy of the First Nation, but that money spreads to the adjacent municipalities and other non-reserve regions. Benefits like administration cost to register land transactions reduced and the average reduce of 500 dollars by the First Nation, compared to Canada's cost more than 2,500 dollars per transaction. Processing delays at the speed of business, compared to Canada's months or years or perhaps never. These types of benefits [inaudible 00:28:37] and those findings are very remarkable, it shows the worthiness of a land [inaudible 00:28:44] reasons, why land codes are needed in this country.   Brady Deaton Jr.: As you mentioned, the Framework Agreement and the First Nations' Land Management Act is historic and one of the first, if not the first, to address self-governance with respect to land on First Nations. More recently, there's been a fair amount of discussion about something referred to as the First Nations' propriety ownership, can you give us some background about that initiative and what are your preliminary thoughts, how is it different, how it's similar to the Framework Agreement?   Chief Louie: My understanding that the First Nations Property Ownership Lands Act is a process that is to recognize that reserve lands would in effect not come under federal jurisdiction. That would become provincial jurisdiction and as such fall under the provincial regimes of ... by provinces. What is concerning with the First Nations involved in the Land Management process under section 91 (24), as I understand it, with First Nation majority, the vast majority of First Nations in Canada, is that they do not want to have the jurisdiction from the federal domains switched over to a provincial domains, fee simple or not. Fee simple was proposed to the Frame Agreement First Nations, back in the mid 1990's, and it was promptly rejected. It was rejected, [inaudible 00:30:18]very, very careful consideration however. In the fact that First nations see the responsibilities of reserved lands falling under the 91 (24) jurisdiction. So that laws have been clearly stated, as far as the land codes are in place, that provincial government do not have a say, nor do they have law making capacity over the First Nation. Once you get in to fee simple and registration of First Nation lands in the provincial registry system, that brings in to place the provincial laws of registration. That is quite a serious concern. It's something that has been vastly rejected by almost unanimous [inaudible 00:31:08]. There's only a handful of First Nations, that I know of in Canada, who are supporting the First Nations Propriety Ownership Land proposed legislation. It's something firmly rejected by the vast majority, clearly.   Brady Deaton Jr.: Now, one thing I'm uncertain on in the proposal to transfer to the province or is it to transfer the under align legal title to the First Nation?   Chief Louie: The proposal under the Property Ownership legislation is such that it would transfer the lands to the ownership of the First Nation, but having done so, the lands would then be registered in the provincial system. Not the federal system. There isn't a process federally that allows for lands to have fee simple ownership, it doesn't exist. We discussed the issue many legal councils and from my understanding, from the legal council [inaudible 00:32:03] there isn't anything in the constitution that really properly allows that, unless you somehow get it over into the provincial domains. That's what being firmly rejected.   Brady Deaton Jr.: We come into the end of this interview. It's been very informative for me and I appreciate it. Is there anything ongoing or anything that you think that you would like listeners to know about or to be aware of that you would want to discuss that we haven't discussed already?   Chief Louie: I think the listeners and that would include the government of Canada. I believe that with the demonstration and the proof that there can be very fine returns, that can be created by the investment into the Land Measurement process. That Canada has to really, seriously consider that in the long term it will be well worthwhile for Canada to invest in First Nations to allow ... Right now we have a [inaudible 00:33:04] 83 First Nations on the waiting list. They're waiting patiently, they want to be involved, I receive telephone calls, I receive letters, continuously, asking when they can be involved. If Canada [inaudible 00:33:18] recognize that very simple request and to understand, and I believe that there is understanding that is taking place now, that by investing in First Nations in the one regimen process, we'll give a return. Not only to the First Nations, but to the local economies, provincially, and nationally. I think that's something that really has to be really understood. And I think that we will see [inaudible 00:33:44] by First Nations [inaudible 00:33:47]. They can be self-sufficient. And I think that's the goal to the future and that's the wishes of First Nations across this country.   Brady Deaton Jr.: Chief Robert Louie, thank you so much for discussing the First Nations Land Management Act and Framework Agreement with me today. I appreciate that and good luck in all your efforts.   Chief Louie: Thank you very much, Brady. It's been a pleasure to be part of this interview.   Brady Deaton Jr.: You've been listening to FAIR-Talk with Brady Deaton, Jr. of the Department of Food, Agriculture, and Resource Economics at the University of Guelph. Thanks for joining this.

In this podcast Barrett Kirwan and I discuss his research on two issues crucial to understanding agricultural policy and rural economic development in the twenty-first century. Transcript Brady Deaton Jr.: Welcome to FARE Talk, where we set out to provide enduring discussions on contemporary topics relevant to our economy, with particular emphasis on food, agriculture, and the environment. My name is Brady Deaton, Jr. of the Department of Food, Agriculture, and Resource Economics at the University of Guelph. I'll be your host. Barrett Kirwan is an assistant professor in the Department of Agriculture and Consumer Economics at the University of Illinois. Barrett, welcome to FARE Talk.   Barrett Kirwan: Happy to be here.   Brady Deaton Jr: I think the issues that you are examining, ag subsidies and the effective quota, are really critical to understanding both the historic and the future effects of ag policy. I want to start by discussing your first article, which was published in the Journal of Political Economy.   Barrett Kirwan: Okay.   Brady Deaton Jr: Which examined the incidence of US agricultural subsidies on farmland rental rates. You make a point that a primary goal of US agriculture policy is to support farmer income. Why does it lead you to examine the issue of rental rates?   Barrett Kirwan: The traditional theory, the story that I've always heard was that the subsidies get capitalized into the land value. I grew up on a farm in Idaho where we rented most of our land and so the idea that all the subsidies were getting capitalized into the land value meant that the subsidies was going to the landlord, who was not a farmer. It got me thinking about why are we giving all this money to landlords? I naturally looked at rental rates.   Brady Deaton Jr: I think the idea of that the public wants to support farmers is generally accepted, but the idea that that support could be going to landowners, many of whom are not necessarily farmers, that may be an issue of more debate. Were you surprised when you started looking into the data on farmland ownership, farmers versus non-farmer owners of farmland?   Barrett Kirwan: I was. In fact, I didn't realize that there were so many non-farmer owned acres. It turned out that during the time period that I'm looking at, about 45% of the farmland in the US is not owned by a farmer. It's owned by a non-farmer. I was surprised that the number was that big. It seemed to make the issue much more important.   Brady Deaton Jr: Why then ... Let's talk a little bit about the theory. You mentioned that you had heard this story that the value of any increase in farmer income would get bid into the, or capitalized, into the value of farmland. Break that story down for me a little bit. How do economists generally make this argument. Why is that a story that you heard before?   Barrett Kirwan: This I think was something I heard growing up just talking, listening to farmers, but then getting into economics, it was probably one of the very first theories that I learned that if you have an input into production and that input has no elasticity, it's unresponsive, but will the rents will ultimately go to that input. I think it may have been in my very first semester of microeconomics that I learned about Ricardian rents and this idea that ... Farmland was the example that was given and this idea that the more productive farmland that is given, earned, returns above what's the average land would earn. This idea that any productivity that the land has gets capitalized into this value, and if you think about subsidies, it's just, in terms of value, it's just adding to the value of what's being created from the land. Because the land isn't [inaudible 00:04:23], the subsidies get captured by the landowner.   Brady Deaton Jr: When you were reviewing the literature on this, did you find a lot of empirical work that had researched this question? There was a theory here that if I have a more productive farm and I'm renting that out, that I'm going to charge more for it. I'm going to get more money for it, and if you have a policy that provides more profits, than I'm going to capture the value of that policy, but had there been a lot of studies that empirically examine this question?   Barrett Kirwan: Surprisingly there haven't. There are a couple very early studies that actually looked at tobacco quotas [inaudible 00:05:05] a subject that [inaudible 00:05:07] we're going to talk about today, but they were looking at tobacco quota in terms of, as an asset, does the value of a quota get capitalized into the value too. The subsidy gets capitalized into the quota itself. Based on that early work, it confirmed what economists had presumed and it's funny, but it seems like that was about all they needed. From then on, it was just everybody knew that some, almost all of the subsidy would go to the landlord, and the amount of empirical research on it though was really quite small. It was a little bit surprising.   Brady Deaton Jr.: It's somewhat surprising also that policies that were designed to help farmers would persist in light of that theory, especially when we started to understand that so much, nearly 50%, or you say 45%, of the farmland wasn't owned by farmers. I wonder if people just didn't understand the degree of non-farmer ownership of farmland or whether they really accepted that basic tenet.   Barrett Kirwan: Yeah. I'm not sure. I think that was one of the things that was most disturbing to me, and even before I knew the extent to which the farmland was rental land, it just didn't seem right to me that ... It seemed liked decades you had agricultural economists testifying before Congress, telling them that these subsidies are ineffective, they go to the landowners, and Congress never really responding. I wanted to dig into that. Either way, because the theory is not true, that's interesting. If it's because the theory is true and somehow the landowners have more political power, and that's what's driving policy, that's interesting too. That was one of my key curiosities in getting into it.   Brady Deaton Jr.: All right, what do we need to know? Now you study different policy periods. It seems to me the one you describe, and maybe you could just give us a basic overview of those policy periods, but it seems to me that in each case, you're concerned about explaining whether or not the landlord and the tenant could anticipate the amount of subsidy that would be paid and maybe you could describe that subsidy, and also the magnitude of that subsidy.   Barrett Kirwan: Right. One of the big issues during this time period was the decoupling, as they've called it, of farm payments where it went from a period where the subsidy was dependent on the price of the commodity. If the price was low, the subsidy would be high, and vice versa, if the price were high. They turned it into a subsidy that was not dependent on the price and not dependent on production. The idea was that there's this niche timing in terms of you sign a rental contract in the spring, but you don't really know the price or the subsidy that you're going to receive until the fall. In the beginning when there was this uncertainty about the price, it wasn't clear that you would actually find ... The empirical result would actually be valid because you didn't know what the farmer was anticipating. As time went on, as the subsidy became less dependent on the price of production, it became much more certain to the farmer in the spring and to the landowner what the subsidy would be. Over time, you could see that the likelihood that the subsidy would get bid into the cash rental rate would have increased because the farmer would've been more certain about the subsidy that was going to be paid at the end of the year. Trying to I guess "fix" that problem at the beginning, and then using later periods to verify that that fix works, that was part of the work into the paper.   Brady Deaton Jr.: Right. Just [inaudible 00:09:47] maybe one example, in the 1996 Federal Agricultural Improvement Reform Act, before that, how would a landlord ... What would a landlord and tenant have known about the subsidy, before that reform act of 1996? What would they have known about the subsidy that the operator or the farmer actually working the land would have gotten?   Barrett Kirwan: Probably the most important, in my eyes, the most important thing that they would've known in the ... Not only was the subsidy dependent on the price, but the subsidy was attached to a specific acre of land, and the subsidy also depended on the productivity of that land. Before 1996, they might have a general good idea about the price based on future prices and their expected bases [inaudible 00:10:49] may have been able to form some pretty good expectations that way, but in terms of the analysis, knowing that you have a more productive piece of land that ... As a landlord, your more productive piece of land is being rented out. Not only can you charge more because it's more productive, but you could charge more because the subsidy is a function of that productivity. The subsidy's going to be even greater on the production land than it is on the less productive land. Being able to control for that actually, being able to account for the fact that a lot of the variation we see in the subsidy is caused by the productivity of the land. Early on, that was I think one of the key insights into answering this question.   Brady Deaton Jr.: Right. For those listeners, there's a lot of effort in this paper given to the technical aspects of measuring them, and I'm sure we're not going to do it justice in this podcast, but there will be a link to this paper and the second paper we're going to discuss. It's worth taking a look at exactly, for those of you who are interested exactly how Barrett tries to take into account of these differences. After 1996, it was a little different, right? After the-   Barrett Kirwan: Right.   Brady Deaton Jr.: ... Fair reform. How is that?   Barrett Kirwan: Right. After 1996, everything from the analyst's perspective got easier, but after 1996, the subsidy was just essentially frozen at the 1996 level. Now it was on a schedule that was supposed to decline, and by 2002, there was supposed to be an end of those subsidies, but because it was frozen and fixed, not only did the tenant and farmer know how much the subsidy would be, but everybody else did as well. It became more possible for other farmers to know how much the subsidy's going to be and start bidding against the farmer who already rents the land, and it's that competitive bidding process that one would expect that subsidy to get capitalized into the rental rate. Having great [assurity 00:13:04] that that was going to happen increased the likelihood that that subsidy would be captured by the landowner instead of the farmer.   Brady Deaton Jr.: Right. After 1996, everybody knows what the subsidy's going to be. I'm a landlord and a tenant calls me up and gives me a rental price. We both then, with certainty, basically know what the farmer, operator, or the tenant is going to get in terms of subsidies. So does everyone else.   Barrett Kirwan: Exactly.   Brady Deaton Jr.: If they bid too low, someone else comes along and bids a little bit higher. You're really expecting then after this 1996 to have a much clearer insight into the effect of subsidies on rental rates, is that right?   Barrett Kirwan: Exactly. Yeah, which solves as many of the technical problems.   Brady Deaton Jr.: Right.   Barrett Kirwan: I think it makes the conclusion the answer that I get. Very interesting.   Brady Deaton Jr.: All right, let's get to that. Let's get to your conclusions and your answers, but before we do that, break down in general the data you got and the general method. I know you used a fixed [inaudible 00:14:17] method, but we're talking about cash rent and-   Barrett Kirwan: Right.   Brady Deaton Jr.: ... We're talking about things that happen over a different time period, so maybe just walk us through that.   Barrett Kirwan: Okay. Part of I guess the fun of writing this paper was that I managed to get access to farm level data from the USDA. I had access to the micro files of the [inaudible 00:14:43] of Agriculture, which took a lot of work, especially since I had to be in a room in Washington, DC, a specific room, in order to use the date. I was at the time living in Boston. It made it a little bit tricky. Having access to those farm level data really allowed me to look at this relationship between the productivity of the farm and what the farmer expected in their subsidy. It turns out that that's really vital because if you ignore that and you just look at a county level map with darker shading for areas that get higher subsidies, it matches very closely to a map that looks at the rental rate for the land where a darker color would be a higher rental rate. Looking at that, it looks like there's a very clear relationship, but what that ignores is that underlying productivity of that land. By getting down to the farm level and being able to control more specifically for the productivity on a very specific piece of land, once you control for that productivity because this productivity is really what's driving the rental rate and it so happens that the productivity is also [inaudible 00:16:05] the subsidy, once you control for that, the relationship really falls apart. That was very surprising. I guess the funnest part was getting those microdata and then being able to do something that everybody knew that needed to be done and everybody would have liked to been able to do, but without those microdata through a time period, I had to use multiple years of the census and connect farms over time in order to be able to do this, getting those data was really the fundamental part of answering the questions.   Brady Deaton Jr.: Okay. The key thing here is the amount of subsidy is going to be associated with the productivity and so is the rental rate, is that right?   Barrett Kirwan: Right.   Brady Deaton Jr.: You're able to control for that productivity, which other people weren't able to control for, and that's going to allow you to better understand who's capturing the incidence of this subsidy.   Barrett Kirwan: Right.   Brady Deaton Jr.: What did you find?   Barrett Kirwan: I found that contrary to what has been presumed for decades, that instead of the full subsidy dollar going to the landlord, and I guess here I should mention that there are several different kinds of subsidies in the US, and I was focused on one specific subsidy, the one that we "decoupled." It was one that was really attached to the land. There's another production subsidy that's not attached to a specific piece of land, but just based on the farmer's total production. I was essentially ignoring that one. I got lucky because the time period of the investigation, those production subsidies were really small and almost all of the subsidy was coming through this land-specific subsidy. I found that instead of the landowner getting the full subsidy dollar, that in fact they were only getting something like 20 cents out of subsidy dollars. It wasn't even close. It wasn't even yeah, they get most of the subsidy dollar. It was so low it took me hours to actually ... I guess it's funny now that I look back on it, but it probably took me twice as long to write the paper because the conclusion was so different than I had anticipated or anyone else had anticipated. I had to keep going through it and checking it, and getting more data, and making sure that I didn't make a dumb [inaudible 00:18:45] mistake somewhere and make sure this is really what's happening. Only 20 cents of the subsidy dollar is getting passed through to the landlord via the rental rate.   Brady Deaton Jr.: I guess I don't know if mentioned it, we should probably make it explicit. The subsidy works, it goes directly to the operator on the land, right?   Barrett Kirwan: Right, yeah. I guess that's, yeah, that's important it turns out.   Brady Deaton Jr.: Yeah, okay.   Barrett Kirwan: If a check gets mailed to the operator, whether or not the operator owns the land, it gets mailed to the farmer who's physically growing their crops, and that's who receives the checks. The only way that the landlord, through cash rental rates, the only way the landlord could get the subsidy is by raising the rental rate.   Brady Deaton Jr.: Right, but the theory had been, the theory is I think to some extent, that under these competitive conditions, under this inelastic assumption about supply of farmland, that the landlord would capture that subsidy. In a way, your finding is surprising from that sense, but I wonder from the other sense that we discussed earlier, from the political economy sense, the fact that these persisted for so long and the goal of that policy was to help farmers, maybe you solved a bit of a conundrum there.   Barrett Kirwan: Right, exactly. It almost seems like everybody else was in on the secret except for the ag economists. The congressmen know that their constituency was okay with the subsidy and they weren't worried about it being passed onto landlords, even though Congress kept saying that no, it's really the landlords that are benefiting from this. One really interesting thing, as we thought about why this resulted, one interesting thing is whenever I've presented this paper, I always, and it's funny because every single time there's been at least one person who has come up to me after the presentation and told me a story about a relationship that they or their mother or their neighbor has with the landlord and how important that relationship is. Having this I guess cold or this market mechanism determining the rental rate, the stories that I kept hearing was no, of course it's not the market that's determining it. It's these personal relationships. That becomes really difficult to measure.   Brady Deaton Jr.: Yeah, actually I should say your research has inspired several of us here to examine that issue in Canada. There's similar story in some respects. A great deal of the farmland is rented and a great deal, it appears with more analysis of the land that's being rented is not necessarily owned by people that other farmers identify as farmers. There's a lot of ... Maybe the issue of land ownership and non-farmer ownership of farmland I think is going to persist as a question continually as we try to develop ag policies that generally-   Barrett Kirwan: Places like Illinois and I'm learning [inaudible 00:21:56] lived here for a few years, but the vast majority of land here is not owned by the farmer. As any time goes by [inaudible 00:22:04] even fewer acres are actually owned by the farmer.   Brady Deaton Jr.: I found that data on that in your paper alone to just make the paper worth reading. It was just really a succinct gathering and discussion of that issue and [inaudible 00:22:17] subsidies and the relationship between the theory or abstraction of what's going on, and then testing our theory, which is really important, and then finding a finding that seemed consistent with what you would expect given the persistence of these policies to support farmers. Your story in some ways is a good news story. These policies have been passed on to operators. Former operators. I'd like to move to a second paper that you've written, which our colleagues, Shinsuki Uchida and Kirk White, that was just recently published in the American Journal of Agricultural Economics. The title of that is "Aggregate and Farm-Level Productivity Growth in Tobacco: Before and After the Quota Buy Out." I think there was a couple of ties, other than ... First obvious tie is that you were involved in both papers, but the second one is it's tackling a real important policy issue. It's a very important policy issue in Canada. The third, which I thought is interesting, is again as you mentioned, at the time, before quota was bought out or the quota program ended in Kentucky, most of this quota wasn't, or a great portion of this quota wasn't owned by people who were necessarily producing tobacco.   Barrett Kirwan: Yeah. Right. The inception of this paper, the idea was how to [inaudible 00:23:52] the funnest lunchtime meetings I've ever had with Kirk White. We started talking about different ways to assess the effect that subsidies were having on productivity or production. Are [inaudible 00:24:08] production decisions and that makes it [inaudible 00:24:11] unproductive farmers in production. It's just really brainstorming and coming up with how would we answer that question, which was really, really fun. This is [inaudible 00:24:22].   Brady Deaton Jr.: I want to just begin with ... I love the first sentence of the paper. The Tobacco Transition Act of 2004 ended a 66-year-old federal farm program and replaced it with nothing.   Barrett Kirwan: Yeah.   Brady Deaton Jr.: Let's start there. Where does this study take place, what was going on before and after 2004?   Barrett Kirwan: The tobacco quota program ... One of the oldest I guess subsidy technology programs. It originated in the 1930s, in certain new deal registration. It was one of the attempts to address low and falling prizes by limiting production. Tobacco producers agreed to limit their production based on a quota system. Over time, that system evolved to where the quota, the right to produce a specific amount of tobacco was no longer part of the land that was being used. Those two things got separated. The quota became separate assets from the farmer, but in Kentucky, some of the restrictions about where that quota could be used stayed in place. The quota had to be used inside the county in which it was originally issued. That in and of itself is going to keep tobacco grown where it may not over time keep productive to grow it, but then [inaudible 00:26:03] the whole tobacco settlement issue and everything be I guess. [inaudible 00:26:11] the government wanted to get out of supporting tobacco prices. A few years before ... In 2004, the government bought all of their quota from the ... Basically paid off the farmers and eliminated this production.   Brady Deaton Jr.: Did that come from taxpayers or was that a settlement? Do you know how ... What financed that buy out?   Barrett Kirwan: Yeah, it was settlement dollars [inaudible 00:26:38].   Brady Deaton Jr.: Okay. We're in Kentucky and if I want to produce tobacco and there's not enough quota in my particularly country, let's say that I'm in [inaudible 00:26:53] County, and I want to produce more quota, I can't borrow from another county. I can't borrow from Allesley County let's say.   Barrett Kirwan: Right.   Brady Deaton Jr.: Okay.   Barrett Kirwan: You look at the productivity of the land in Kentucky. In the east, you have the Appalachian Mountains that are, soil's not great, and in the west, you've got some really productive soil. If you were in the west, you would prefer to buy some quota from the east. [inaudible 00:27:22] in the east, I think you would prefer to sell your quota because it would be so much more valuable in the west, but these county restrictions [inaudible 00:27:31] limited that.   Brady Deaton Jr.: That's important. The idea is that they're these gains from trade, the same idea that your kids can sit down after Halloween and trade their candy with each other and be better off with a fixed amount of candy because one likes chocolate, another likes peanut butter. The same way as if I'm a more productive farmer and I'm a different region, if I can get quota, then I can produce more and pay you the less productive farmer. You're better off as well.   Barrett Kirwan: Exactly. There are different dimensions of productivity. You might be a very productive farmer, but you're stuck with quota in the eastern half of the state so that ultimately, the land's not as productive as you are, but you can't take good quota and move.   Brady Deaton Jr.: Now just to re-emphasize this, about at the time, probably initially, and my grandfather had tobacco quota and it was in land, and then it got decoupled if you will from land, and into pounds that they could sell, but at some point in your paper, and I guess I mentioned this at the beginning, but the quota owner and the tobacco grower are not necessarily the same thing, just like the land owner and the farmer operator.   Barrett Kirwan: Yes, it's very much the same way where the tobacco quota owner and the tobacco producer are typically two different people.   Brady Deaton Jr.: Did the quota owners, when the buyout occurred, did both the quota owners and the producers receive a payment or was it only to the quota owners?   Barrett Kirwan: Some of the interesting dynamics that we find in the paper that is just completely counterintuitive, unless you understand the policy, was that a few years before in 2004, before the quota was bought out, it was announced that they would pay both the owner and the producer, but if you were a producer who also owned the tobacco quota, and you would get a bonus. It was this producer bonus that actually caused a lot of these non-farmer tobacco quota owners to become tobacco farmers for a few years in order to capture that bonus. That drives a really weird dynamic that you see in the data.   Brady Deaton Jr.: They would've known, these owners would've known that there was going to be a payment to both the owner and the operator?   Barrett Kirwan: Right, yeah, because it was announced and the payment schedule was from the set years in advance of the ultimate buy out in 2004. You see a couple of things. You see the least rates for the quota increased during this time period because suddenly, you were getting [inaudible 00:30:38] work more, and the productivity of the ... The average productivity of tobacco farmers fell as more of these non-farmers decided to take up farming for a few years in order to get the bonus. You see, it's a really weird dynamic where the productivity falls, and at the same time, the price of the rental rates for the quota increases are all being driven by the anticipation of the policy.   Brady Deaton Jr.: After the quota buy out, what are the general dynamics? What happens in the tobacco growing sector?   Barrett Kirwan: Right. It's just a time when we have all these smoking bans in public places and the demand for tobacco within the US is just falling precipitously during this time period. Even if there was no policy change, the number of tobacco farms was decreasing greatly, but what you see that, yeah, it's that in Kentucky, the fall ... Again, it's very clear that there were a lot of people who are just hanging on until 2004. In 2004, you get this precipitous drop in the number of tobacco producers. At the same time, you get this huge reallocation where in some counties, almost all of the tobacco production stops. In the east, you get a lot less tobacco production and in the west, you also get less tobacco production just because this demands is going down, but you get relatively more. You can see basically all of the tobacco quota. [inaudible 00:32:26]. You see, all of this relocation where people who had been constrained on how much they could produce because of the limited number of quotas in their county. Suddenly, those particular farmers would stop producing a lot more in the west, while in the east, you just saw tobacco farms just shutting down and the barns being used for something different.   Brady Deaton Jr.: One of the things I thought was really interesting in your discussion here was this distinction between people who continued on in tobacco production in 2017.   Barrett Kirwan: Yeah. That honestly caught us just as a bit of concern and just how to deal with that because we actually saw people entering and in the data, we see people becoming tobacco producers during this time when there's just precipitous drop in demand. We get a lot of exiters, people leaving, but you also get several entrance where people who are no longer ... I'm sorry. Who previously didn't have access to quota, since there was no requirement, we're able to answer tobacco production. Yeah, this strange dynamic going on between the productive farmers who want to grow tobacco and the unproductive farmers who are happy to get rid of their quota and retire on the payout.   Brady Deaton Jr.: Right. Now we're going to talk about your results. You talk about your results in terms of agriculture productivity growth, and I think that's where I wouldn't mind ending the discussion, reviewing your findings in terms of that, but for a more general audience, how should we think about these findings when we say that was an increase in agriculture productive growth. What do we mean by that term.   Barrett Kirwan: I think it's important to keep in mind that if the difference between production, growth, and productivity growth because production is falling everywhere, but at a specific farm level, and again, we had benefits of using farm-level data in this analysis. At the farm, an individual farmer, can produce more tobacco. That's productivity growth. Individuals using essentially the same inputs [inaudible 00:34:57] to produce more output than something's happened to the productivity, technology has changed, their knowledge [inaudible 00:35:05] something has changed. That's what we call productivity growth. For it to be I think about it is the productivity is more individual producer aspects of production, where production itself is an overall aggregation of cross producers. Yeah, we're looking at how does the productivity of the individual producer change during this time period?   Brady Deaton Jr.: I'd like to move on to discussing your results, but before that, let's review the time periods that you're examining with your empirical analysis.   Barrett Kirwan: Right. Again, this is limited by the data [inaudible 00:35:47] agriculture every five years. We take a look at what's the trend and what's going on in tobacco before the buyout happens. We looked from 1997 to 2002. Leaving two years of [inaudible 00:36:01] agriculture to get a sense of what's going on. Not surprisingly, there's not much growth in productivity there. What's interesting I guess is that we, and we did struggle with this for a while, is that we actually find negative productivity growth. We thought we [inaudible 00:36:22] because how can you decline in productivity and continue to produce. This is where it really became apparent that there were farmers who really shouldn't have been producing, but were producing because the incentive to get this extra payment if you're a producer. We think that the negative overall [inaudible 00:36:47] we find in that time period being driven by these other people who are hanging on entering when they really don't have the skills or the equipment perhaps. In the second time period, we look at 2002 to 2007. A period that bridges those 2004 buy out and see how the productivity changes there. What we find is there's a relatively huge productivity growth where productivity increases by 44% during this time period. During across the buyout time periods.   Brady Deaton Jr.: Productivity changes what, how do you break them down then. What's causing that change in productivity after the quota buy out.   Barrett Kirwan: Our intent is to [inaudible 00:37:33] like you said, is just break that [inaudible 00:37:36] number down into the different. See how much of this is because of the removal of the quota. In some sense, our target is what we call reallocated efficiency, or it's [inaudible 00:37:52] where it's searching for it. If we reallocate the inputs, and in this sense, we're thinking about moving production from unproductive regions to more productive regions. If you allow that to happen cross county boundaries, how much does that contribute to productivity growth, and that really is our fundamental measure of the distortion, because if there were no distortions, productivity growth is going to come from entering and exit. It's going to come from technical progress, but it's not going to come from moving the inputs around because if there's no barrier, you would've already moved them around. We decompose it into how much of the growth is caused by unproductive people exiting versus more productive farmers entering. How much is caused by just the technical change in efficiency? How much is caused by the reallocations, which is a measure of distortion. It [inaudible 00:39:01]. We find that the reallocation is a big chunk of the productivity growth that we observed.   Brady Deaton Jr.: Barrett, I really enjoyed this conversation, and I've learned a lot. Thank you so much for joining us today.   Barrett Kirwan: Thank you, Brady. It's been a pleasure. I hope it's been insightful.   Brady Deaton Jr.: Yes. Thanks again. Thank you very much.   Barrett Kirwan: Thanks.   Speaker: You've been listening to FARE Talk with Brady Deaton, Jr. at the Department of Food, Agriculture, and Resource Economics at the University of Guelph. Thanks for joining us.

In this podcast Dr. Tom Flanagan, myself, and students from the University of Guelph discuss Tom's research examining First Nations and private property rights. Transcript Brady Deaton Jr.: Welcome to FARE-talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture, and the environment. My name is Brady Deaton, Jr. Of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I'll be your host. Tom it's my pleasure to welcome you to FARE-talk. Tom Flanagan is professor of political science at the University of Calgary. He is the author of numerous books, many of which have won prizes. The book that we'll be discussing today he co-authored and the title of that book is Beyond the Indian Act, restoring aboriginal property rights. Tom, welcome to FARE-talk.   Tom Flanagan: [inaudible 00:00:53] good to be here.   Brady Deaton Jr: I should also for those people who will be listening to this podcast, this is a bit of an experiment. We're doing this podcast with Tom over video in a classroom setting where students from Land Economics will be participating in the podcast discussion. Tom, just to get the ball rolling, give us a bit of a background of property rights on First Nations and the consequences that have motivated your interest in this area.   Tom Flanagan: Yeah. Well I think many of the problems that people point to that First Nations have - low incomes, bad housing conditions, various social pathologies, high rates of alcoholism and drug abuse and family breakdown and so on - a lot of these things have deeper causes in the absence of property rights. To give an example today is National Housing Day and Shawn Atleo the grand chief of the Assembly of First Nations published an editorial in the National Post this morning talking about the sad state of First Nations housing. He says there's a shortage of 85,000 homes for First Nations people on reserves. He also cites the Statistics Canada figure that 42% of existing housing is in need of repair. Now that's an astonishing figure, over 40% of housing is, and we're not just talking about a new coat of paint. Statistics Canada talks about needing repair they're talking about more serious structural features. Well, why is that? Well surely one of the main reason is that all the land on the Indian Reserves is owned by the government. Indians don't own the land, either collectively or individually. They can own a house but most don't. The houses are mostly provided for them by [banned 00:02:53] governments. There's never enough supply of housing and what there is, is not well maintained, in contrast to the larger society where shortage of housing is sometimes an issue, but pretty much a marginal issue. There's maybe 1% of the Canadian population at large that don't have safe, warm housing. So you can talk about housing as a problem, but the underlying problem is an absence of property rights which would enable a housing market to operate. It's housing markets that give us owner occupied or rental housing in the rest of the country, but those housing markets don't operate on reserves. So there's one example of how standard of living is impacted in a very real way by an absence of property rights.   Brady Deaton Jr: So, if we were to look at the lay of the land on First Nations reserve areas today, what would we see in terms of those underlying property rights? There's leases, what other ...   Tom Flanagan: Well there are some, there are sort of quasi property rights. There's very little of free holder or fee simple land of the kind that is the main property right off reserve in Canada. Fee simple does exist in a few special cases like on the [Iska 00:04:08] Reserve. But it's pretty marginal. So there are three types of existing property rights. One is customary rights which are widespread, but nobody really knows how widespread. Nobody keeps a complete record of them. But these are just based on occupation of land, often for generations, by families who may have houses or may have farmed it. But it's never been approved in any formal way by Band Council or the Minister. It's not enforceable in court. It may be recorded. Some bands keep registries of land, but if it hasn't ever been legally approved, it's not enforceable in court. Nonetheless, there's a lot of it and many people lives are based on it. Second form is the certificate of possession, which is formally approved by the Band Council and the Minister. There are about 44,000 certificates of possession in operation now on reserves. So that's a lot. And some reserves are almost entirely certificated like the First Nations, Six Nations Reserve close to, not that far from your university. And certificates are enforceable in courts. So they are a pretty strong form of title. The main limitation on them is that they can only be sold to another member of the same band. So there's virtually no market for certificates of possession. So that means that if you're on a reserve where certificates are accepted, you can get one and you can perhaps build a home on that piece of land, and you might even be able to get a mortgage if you can get the Band Council or some other third party to guarantee the mortgage. But the home doesn't become a savings vehicle. It's a place to live and you can leave it to your heirs. And that's good but it's - for most of us the home is the best investment we'll ever make because your wealth grows in it as the price of housing increases. But that doesn't happen where there is no housing market. And then the third form of property right is the lease. And the Indian Act has several provisions that underlie leasing arrangements. Certificates of possession can be leased and that's the basis of the prosperity of the Westbank Band in British Columbia is leasing of certificated land by individuals. Or the band can lease band land for major projects. There's lots of examples of that in Canada. It could be to casinos or hotels for golf courses, shopping centers, industrial parks, or residential housing developments. The lease is in some ways the strongest form of property, because once it's signed it's tradable in the market. It can be sold. And so there is a re-sale market for leases, so they don't have the weakness of certificates of possession. However the weakness of the lease is by definition it's time limited, 39 years, 49 years, 99 years, whatever. It's not as strong in that sense as fee simple ownership. The best guess is that under good conditions a 99-year lease might be worth about 80-90% of the value of fee simple ownership. But conditions aren't always that good. Some leases are written only for 39 or 49 years and they are worth quite a bit less than the fee simple value of the land would be. So anyway, these are the three existing forms of property rights on First Nations land. So the suggestion of our book is that the fee simple ownership should become a fourth option. Nobody would be forced to adopt it but ought to be possible for First Nations who want to, to have that chance.   Brady Deaton Jr: Just for some of the listeners who might be listening in. When you think about fee simple, how do you define that or what's the kind of lay version of what you mean by that?   Tom Flanagan: Well, fee simple ownership like any form of ownership is the right to use the land, have the right to exclude others from use of it and the right to dispose of it through sale or gift or lease or whatever. So it's a complete ownership restricted only by the laws of general application such as zoning laws or environmental laws, nuisance laws and things like that. That's the normal form of ownership of land in the rest of Canada so all the students I'm looking at probably - You're probably too young, most of you to own your own home but I suspect in most cases your parents own homes. And that would be fee simple ownership. And so it hasn't been available to people on First Nations land up to this point. So we would like to make that available as an option because it's a more flexible form of ownership. It's a better store of value. It appreciates over time because you can have a resale market for it. You can get a mortgage based on it. You can build a home on a reserve if you have a customary right or a certificate of possession but the bank won't give you a mortgage to do it unless some third party guarantees the mortgage because they can't seize the land because no outsider can own the land. But if the fee simple regime were introduced a bank would be able to seize land for non-payment of a mortgage as it would for anybody else because under that regime an outsider would be able to own land on an Indian reserve, which is presently impossible.   Brady Deaton Jr: Alright. I'm going to turn it over to students for questions in a minute. But before I do that let me just ask you to maybe state the essential elements of the reforms that you and your co-authors are suggesting.   Tom Flanagan: Well, the first step would be to pass legislation and that legislation is currently being drafted. It's called the First Nations Property Ownership Act. At one time we were hopeful that it might be introduced by the end of 2012. Now I think probably early 2013 is more likely. But anyway, the government is working on it. Once the legislation was passes that would make it possible for First Nations to opt into that regime. And that would mean opting out of the Indian Act with respect to the various land provisions in the Indian Act, which is a big part of the act, not the whole thing but it's a big part of it. So First Nations could choose to come under the new legislation. If they did that the first thing that would happen is that they would get a collective fee simple ownership to all of their reserve land, which at the present time is owned by the crown and held for the use and benefit of the people who live on it. This would make it possible for the First Nations as a collective entity to own the land on which it's lived. First Nations already do own some fee simple land collectively. For example, there was a piece in the news yesterday about the Musqueam Band in Vancouver what wants to do a land development project on what used to be University of British Columbia trust land. The Musqueam Band owns that piece of land in fee simple because it was given to it by the province as part of a land claim settlement. So there is some collective ownership, not a lot but there is some already collective ownership by First Nations of lands in fee simple. But this bill would allow a First Nation to own all its land in fee simple, not just sort of add pieces that they have picked up along the way. So they could own all their reserve land in fee simple. And that would mean they could do what they want with it without having to get ministerial approval. If they wanted to enter into a leasing agreement or a development agreement, they could do it on their own without having to get it approved in Ottawa. And then finally the legislation would also allow a First Nation to create individual titles in fee simple. Again, this would be optional. They wouldn't have to. But they could. And I think those ten or twelve First Nations that are interested in getting into this do want to create individual titles. Not for all of their land by any means, but for a part of it, mainly for housing purposes, perhaps other purposes as times goes on. And so individuals could then own land on an Indian reserve and they could sell it to whoever. Now there might not be a big resale market at first. I think people would wonder "Well what is it like to be an outsider owning a piece of land on an Indian reserve?" Well, the answer is it's kind of like if I decided to invest in real estate in Guelph. I have to take my chances with Guelph City Council, which can enact zoning by-laws and sets property tax [mill 00:12:30] rates and things like that. Well First Nations government would have the same kind of powers, local government powers and as an outside owner you'd have to deal with that government. So if the First Nations government can establish a reputation for competence and honesty I think over time external people would be willing to invest in that land, and there's no legal barrier to it in any case. So we can't say how quickly the market would develop. It would depend to a considerable extent on the behavior of the First Nations governments as to whether their behavior encouraged outsiders to buy in or not.   Brady Deaton Jr: Okay. Let me ask students to ask any questions that they might have.   Male Student: I just had a question about how you perceive the implications of an incompleted option of the ownership act in regards to the inconsistency in income disparities that may arise across the different First Nations that participate or not.   Tom Flanagan: Well, if I understand your question correctly, we believe, we don't know because nobody knows the future, but we believe that the adoption of this act would benefit wealth creation for First Nations who adopted it. We think that their land would become more valuable. They could deal with it more expeditiously. They could engage both as a collectivity with Band land and as individuals with individual fee land. They could engage in economic transactions more freely so we think that this would lead to greater prosperity for the bands who adopt it. We also hope there'd be a demonstration effect so that other First Nations seeing the positive results might want to opt into the legislation also. It might in the short run produce some disparities between bands, you know those already exist because some bands like Westbank have been much more aggressive in using the opportunities that do exist under the Indian Act. These are somewhat limited, but they do exist and Westbank has been very aggressive in making use of those, and consequently has a high level of economic prosperity there - at least for those who own the certificates of possession. Now there is a kind of a disenfranchised group at Westbank that didn't have any certificates to lease. A lot would depend upon the initial distribution of titles. This would have to be - I haven't seen the legislation - It's still being drafted, but there will be a process for opting in. It will have to be approved by the band in some kind of referendum and I think that there will have to be an approved method for distributing land to make sure that it's not all grabbed by people who are politically influential within the First Nation. You know we don't want chief and council grabbing all the valuable land for themselves. So there would have to be some kind of more broadly approved distribution at the outset, and what happens after that? Well then you get into the market and trades become possible. Have I answered your question?   Male Student: Yeah. You did. That was good. Thank you.   Tom Flanagan: Okay.   Female Student 2: I wanted to address the fact that some would view communal land and the right to private land ownership as being in direct contradiction of one another. If you believe this to be true, what is the reasoning behind your support of peaceable ownership regimes over supporting the rights of those who wish to share in communal property?   Tom Flanagan: Well, we don't want to force anybody to adopt individual property. I would be opposed to that. Something like that was done in the United States in the Dawes Act in the 19th century and I think it turned out to be a big mistake. So our proposal is only for those First Nations that want to adopt a regime of private property to make it possible for them to do so. But I think it's important to recognize, and there is an historical chapter in our book, that prior to contact with Europeans coming to North American there was a wide variety of individual property rights among the native population. Most of the eastern part of North America was farmed - certainly the Southeast and the Atlantic seaboard and the central part up into Ontario, southern Ontario and Quebec, and the American Midwest, and the American southwest - There was high developed agriculture in all these places and with that went forms of - it's not fee simple ownership - it was, we understand that's a British concept, but there were forms of family ownership of farming fields. Similarly, in fishing people of the coast there was family and sometimes even individual ownership of choice fishing stations and spots, shellfish beds and things like that. There were individually or family owned traplines once we get into the era of the fur trade in the northern forests. So the cultural traditions of First Nations people include lots of forms of individual and family property. It was not all just communal. The closest to a pure communal model would be the buffalo hunting people of the prairies. And it's interesting that the reserves in the three prairie provinces have the smallest number of the certificates of possession I mean it'd be almost none, very few. There is probably a cultural mismatch there. But certificates of possession are very common in British Columbia, southern Ontario and southern Quebec where the way of life was more sedentary and there was a tradition of family ownership of certain real estate assets. So anyway, we think that there's a cultural, a good cultural fit, for private property for at least some First Nations. So we want to say that those who want to go that way ought to be able to go that way. The trouble with the Indian Act is that it imposes the communal model on everybody.   Female Student 2: Thank you. So the next question is, if First Nations adopt fee simple ownership, what, if any, implications could arise relating to environmental degradation and how can we mitigate against or account for these potential environmental problems?   Tom Flanagan: Well, I don't know. Your question seems to imply that individually owned land is more likely to be environmentally degraded than communally owned land. I don't really think the evidence supports that. If you want to go back to the famous parable of the tragedy of the commons, which I'm sure you've studied in your course, there's a couple of different ways of getting out of that tragedy. One is through collective oversight that we might say government regulation. But another is to privatize the commons and let it be individually owned so that owners have incentives to manage the land to retain its benefit for the future because they'll get the benefit. They're the owners. So I don't think there's any reasons to that individual ownership is more likely to lead to environmental degradation than communal ownership. But in any case our proposal envisions the existence of a First Nations government. This is a chief difference from the Dawes Act where the Dawes Act didn't provide for tribes in the United States to continue with some form of tribal government. The whole plan of the Dawes Act was to get away from tribal government. But our proposal recognizes the existence of First Nations governments and those governments would have a variety environmental regulatory powers, including zoning and nuisance legislation and setting environmental standards. They would have all the same powers that local governments have now under provincial legislation. They have the same kinds of powers. Now if they chose not to exercise them, I suppose it's possible that there could be environmental degradation. But they would have the tools. Fee simple would not take the land out of the control of the First Nations government. Individuals could have ownership just as I own my house in Calgary. But that doesn't mean I can do whatever I want with my land. There's a huge set of Calgary zoning and environmental and nuisance legislation or by-laws which govern what I do with my land. And the same would be true on a First Nations. So individuals might own it but they would still be subject to whatever rules their local government made and there would be - the First Nations would not be tossed into this on their own. The First Nations Tax Commission would be there to help them. The First Nations Tax Commission has been there now for, what, 25 years to - and it helps the roughly 130 First Nations that have adopted some form of property tax. At the present time property tax is being levied on leaseholds which are mostly owned by people who are not members of the band. But in the future property tax will also be applied to freeholds if freeholds are created. And so the First Nations Tax Commission will be creating, like they have created model tax codes, so they'll be able to create model local by-laws for various purposes that would be required once you get into the era of freehold ownership.   Female Student 2: So in 2010 the Assembly of First Nations spoke against the property ownership act due to enforcement of [inaudible 00:22:28] title and its impact on sacred responsibilities held by bands. In your opinion what is the state's role in protecting against infringements on these rights?   Tom Flanagan: Well the opposition - Let me make one statement and then come back to the last part of your question. I'm not sure I totally understood, but I do want to make one statement about this. Under the current regime the resources of the band, including land and resources connected to the land, like timber or subsurface things like gravel or minerals or oil and gas, these are largely at the disposal of chief and council. Chief and council would have to approve any certificates of possession. It's chief and council who can confiscate customary holdings. It's chief and council who make all the decisions about band land. It's not surprising to me that the Assembly of First Nations, which is an organization of chiefs, would be opposed to a democratizing measure. Creating private property is something that benefits individuals and lessens the power of chief and council over the lives of individuals by allowing them to own their own property. So it doesn't really surprise me that the AFN would be skeptical about this. It's kind of in their self-interest to defend the status quo. Now what was the - you said at the very end of your question, I didn't quite catch that?   Female Student 2: I said that - I was asking what should be the state's role in protecting against infringement on these rights, these sacred responsibilities?   Tom Flanagan: Is what you mean the state's role in protecting infringement against the responsibility of the First Nations government or infringement on the rights of individuals?   Female Student 2: On the First Nations bands.   Tom Flanagan: Yeah. Well First Nations have all kinds of rights now. They're entrenched in the constitution because section 35 of the Constitution Act of 1982. Aboriginal and treaty rights are considered to have constitutional status. They can't be unilaterally abrogated and we have a court system to interpret and enforce them. So First Nations governments have all kinds of protection right now as constitutionalized entities. It's actually First Nations individuals who in my opinion need more protection. I think their governments have lots.   Male Student 2: So you said it's pretty important that they adopt it or opt in.   Tom Flanagan: Yes.   Male Student 2: But what was said in the last bit. How do you think that people in the AFN - will they voluntarily accept it still, or may it need to be imposed?   Tom Flanagan: Well the opting in would require a band council resolution and also some kind of referendum vote, whether it was done through a meeting or a mail ballot, but some kind public approval. So if the leadership of a First Nations is opposed to doing this, it's not going to happen. The legislation is completely optional and right now something like 10 or 12 First Nations have expressed interest in it. They've already passed band council resolutions expressing an interest in it and supporting the concept. So that's 10 or 12 out of 630. So most are not yet ready to go forward. Some others have said they're interested but not quite there yet. But we're talking about a small minority, most of whom are in British Columbia, not all, but most. And so this will be a very small and gradual thing, which I actually think is right. You know I don't believe in large scale experimentation with people lives if we can avoid it. I believe in slow and incremental change, kind of an experimental approach to see what works and what doesn't. So right now this is a proposal. It's a brainwave, although it's based on a lot of experience with property rights around the world. But it is at the present just an abstract proposal. So we make it optional. A few bands get into it and if it's not working, they can terminate it. The rest of us will get a chance to see if it actually works in practice. We think - the authors think it will but you know I've seen an awful lot of abstract proposals which don't work out the way they were intended. And that's why I favor a kind of gradual and incremental approach to reform.   Male Student 3: Many of the ideas that are in your proposal - the hoped-for consequences seem to resonate with ideas and objectives of some recent reforms like the First Nations Land Management Act. And when I hear you speak and when I read the book I don't view you as thinking that these are in conflict. Your proposal seems to be thought of as offering another option within the portfolio of options for First Nations. Is that correct or is there ...?   Tom Flanagan: Yes. Oh, yeah. Absolutely. There are ways already for First Nations to capitalize on their assets in land and natural resources - leaseholds, as I mentioned, are widely used. Entering the First Nations Land Management Act makes the process more efficient once your own local land code is approved. Then you don't have to keep going back to the department for approval of everything. So that's a good idea. Other possibilities are self-government agreements as Westbank has. Again, you can get out of the ministerial oversight that way. Negotiating a modern day treaty, you know there's about 200 First Nations of British Columbia that have never signed treaties. And so the Tsawwassen Nation which has signed a treaty has a provision in there for fee simple property. They now, through their treaty, they now own their land in fee simple. And the treaty allows they to create individual titles if the wish. So Tsawwassen has achieved through treaty pretty much what we are proposing in this new piece of legislation. So there're many ways to skin the cat. And we're not opposed to any of them. And I would suspect that some of the First Nations which are most advanced would, you know, might not be interested in fee simple because they may think they're doing okay with certificates of possession or leaseholds. So Westbank is not interested right now. Squamish is another band in Vancouver that's had an aggressive property development program. I don't think they would switch over to fee simple because they've got all kinds of plans drawn up on the basis of leasehold. So this will fit the needs, we think, of some. There clearly are some interested in it. I'll give you a concrete example of how it would be beneficial in the short term. The big proponent of this is Manny Jules former chief of the Kamloops band now chief of the First Nations Tax Commission. And basically what happened to produce this book is that Manny and I joined forces. Andre Le Dressay is the economist who does all the research for Manny and Chris Alcantara is a former grad student of mine. And so we all got together on a common project. A lot of thinking in this really comes from Manny. And what the rest of us have done is to put it into more of an academic form. But on the Kamloops Reserve there is already a large real estate development of about - I think it's up to about 2000 homes I mean it's not finished yet. So I'm not sure how big it will be when it's completed. But there are a large number of very nice middle class homes there which are for sale on the real estate market. But they're based on 99 year leases. And Manny believes that if this legislation is passed the band could then offer the lease holders the right to buy the fee. And their best guess is comparing it to real estate values in comparable areas of Kamloops that lease holders would probably pay another - oh like another 10% or so, 10 or 15% of what they paid for the lease - they would pay that extra amount in order to have the certainty of fee simple ownership. And that would add up to millions of dollars that would go straight into the treasury of the band that they could then use for whatever purpose they want, possibly building lower cost housing for their own people. These middle class homes are mostly occupied by non-Indians although in fact there are some members of the band, or other bands, who have bought them as well. They are very nice places to live. So Kamloops has a concrete incentive to do this. They can see the immediate short term profit of converting leaseholds to fee simple ownership. So they think it will work for them but if other bands don't think it will work for them, well then they don't get into it. I forgot what the question was I rambled on for so long. I'm not sure what question I ended up answering.   Male Student 4: Hi there, Mr. Flanagan. I was actually just wondering what you thought about the possibilities of this seeming as though it's just one step closer to assimilating the First Nations population into western society and considering that maybe this is part of the reason that they are - well the Assembly of First Nations in particular - so opposed to this issue despite the fact that possible individual First Nations are quite receptive to it?   Tom Flanagan: Well, assimilation in an emotional word. Nobody likes to use it, but you know First Nations people are, you know they're already speaking your English or French, mostly English, some French. They eating the same foods as we do which is too bad actually since we eat a lot of junk. They'd be better off with the diet of moose and wild rice but it's not really feasible anymore for large numbers of people. They attend our schools and our universities. They vote in our elections. They have jobs either working for employers or they're self-employed. I mean, they've already adopted 99% of the practices of western civilization. Fee simple ownership would allow them to make better use of their assets within that context. So that's how I see it. You go around talking about assimilation, everybody gets their back up. I mean you know what has happened? First Nations people are Canadian. They're Canadian citizens. Their lives are not that much different from the rest of Canadians except that for many of them their lives are not prosperous. They have bad housing and low incomes and poor health. So if a legal change can help them to achieve better lives for themselves I'm all for it.   Brady Deaton Jr: Tom, I think we're about coming to an end. I didn't know if there was any kind of last thoughts that you wanted to leave us with?   Tom Flanagan: Well, I feel privileged to address an economics class. I'm not an economist. But Andre Le Dressay, one of the collaborators in the book, is in fact - has a PhD in economics from UBC and makes his living as a professional economist, runs a consulting firm. So even though I'm only a political scientist there is I think professional economic views represented in the book. So it's great to talk to an economics class and you know that's the kind of audience that we're - in writing the book we're looking for this kind of audience. Politicians aren't going to pass legislation because of the book. That comes about through other processes, but it's also important to have a more - a discussion at a more intellectual level of the basic concepts. So I'm very grateful that you'd invite me to talk to you today.   Brady Deaton Jr: Well thank you very much.   Tom Flanagan: Okay. Bye-bye then.   Announcer: You've been listening to FARE-talk with Brady Deaton, Jr of the Department of Food, Agriculture, and Resource Economics at the University of Guelph. Thanks for joining us.

In this podcast David and I discuss the U.S. farm bill. He reviews the history of U.S. farm bills and the current political setting surrounding efforts to pass a farm bill in 2013. Transcript [0:05] Brady: Welcome to FARE Talk, where we set out to provide enduring discussions on contemporary topics relevant to our economy, with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Jr. of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I'll be your host. [0:22] [Music fades out, ends.] [0:25] Brady: Today I'll be talking about the U.S. Farm Bill with David Schweikhardt, professor of agricultural, food and resource economics at Michigan State University. David, welcome to FARE Talk. David: Thank you. [0:37] Brady: David, I want to talk about the current setting and the current dynamics around the U.S. Farm Bill, but perhaps before we start that, for this audience, tell us a little bit about kind of what the Farm Bill is and where are it's origins. David: Well, modern farm bills are rather large pieces of legislation. We give them the name Farm Bills as if everything that's in them had to do with farm policies directly at the farm level. But over time, farm bills have become very comprehensive in that they include a lot of different programs. They do of course include commodity programs, price supports and other programs for farmers. They include conservation programs for farmers that make payments for certain conservation and resource preserving practices. But it also includes a wide variety of other topics, all the way from nutrition programs such as the supplemental nutrition and assistance program, SNAP program, used to be called to Food Stamp program which is basically an income supplement for lower income persons. That was added in 1973. You have programs like Women, Infants and Children which is a nutrition program aimed at pregnant and mothers, pregnant mothers, and at children and infants. We have school lunch programs, which are aimed at feeding of school aged children. We have some elderly feeding programs, we have farmers' market programs. Much of it is related to food but it actually encompasses many different parts of what we might call the food system, which includes everything from the input supply level all the way up to the retail level. And so there, we call the Farm Bill basically is a historical shorthand, but we, it encompasses much more than simply the farm level. [3:00] Brady: Alright, and these, you know, the origin, this is a twentieth century, in the 1930s this emerges, or? David: Right. The first Farm Bill was passed in 1933. It included basically two elements, price support programs for farmers and supply control, acreage control programs. And it had one simple objective; it had the objective of increasing farm income. That was the start of the policy, that was the end of the policy. So it was entirely focused around the farm. That continued basically through the late 1960s. In 1973 we had a significant change, we still had the programs for farmers, they were converted into income support payments rather than price supports in 1973, but the 73 farm bill was the first farm bill that included the food stamp program on a national basis, which again, is the forerunner of today's SNAP program and it's an income supplement essentially for lower income persons. So, in 73 we combined farm programs and nutrition programs. Then in the 80s we added several environmental and conservation programs aimed at a variety of environmental problems associated with agricultural production. Then in the 90s we added even more programs ranging from, you'll see amendments in the 1996 farm bill dealing with a variety of animal welfare issues. Crop insurance then in the 2000s began to replace or exist alongside price supports for farmers. And so, over time, this thing evolved basically in the same direction as society evolved. We added policy targets because society added policy targets. The first policy target back in 33 was a simple one, increase farm income. By the 2000s it had become increase farm income, but don't have too much effect on consumer prices, support incomes and food consumption for lower income persons, deal with a limited set of animal welfare issues. In economists' lingo, we added an increasing number of policy targets. Now there's an old rule in economics called the Tinbergen rule, and the Tinbergen rule says that you have to have at least as many policy tools as you have policy targets. That no one, that if you have more than two policy targets you cannot hit both targets any more than you can hit two birds with one stone. And if you get to the 2000s where we have 5, 6, 10 or more policy targets, you're going to have a larger number of policy tools and it becomes a much more complex piece of legislation. So over time this has been a matter of legislation that has gotten larger in its scope because the problems that society cares about have gotten larger. [6:57] Brady: Alright, and so normally these bills are passed every five years, but we're not in normal times now. What's going on right now? David: Well out last farm bill was in 2008 and it was a 4 year bill, and as you noted, we usually write these bills for four or five years. So it's a four year bill, and so we were supposed to rewrite it in 2012. In 2012, the Senate agriculture committee passed a farm bill, and the entire Senate then took that bill up and passed it largely unchanged from what the Senate ag committee had passed. So the Senate got their job done in 2012. The House agriculture committee passed a bill in the middle of 2012 and the leadership of the House, the Republican leadership of the House never brought that bill to the floor. Why that was, we can go into a bit later, but they never even brought that bill to the floor for votes. So as we reached December of 2012, Congress passed a one-year extension as part of a larger budget package. We called it the fiscal cliff back in December of 2012. So there's a one-year extension. That brought us into 2013. In 2013, the Senate once again passed a bill. The House voted on what was essentially the 2012 House bill and it was defeated when a large number of Republican members voted against the bill because they considered the cuts in nutrition programs, especially cuts in the SNAP program to be too small. After that defeat on the House floor, the House leadership brought back to the House floor a bill which includes only farm programs, did not include any nutrition component. That bill passed on a very narrow vote, vote of about; I believe it was 216 to 208. Virtually no Democrat, very few Democrats voted for that bill, a handful of them did. So it's basically along party lines. So where we stand now is the Senate has passed a Farm Bill that includes both farm programs and nutrition programs. The House has passed a bill that includes only farm programs, does not include any nutrition programs. Now normally when both Houses have passed a bill, they then go to a conference committee that works out the differences between the two Houses, and they produce a final bill that is sent back to both Houses for final vote. That conference committee formation has not occurred and Congress is on vacation until after Labour Day. Speaker Boehner is saying that the House will take up a nutrition bill immediately after Labour Day. I have my doubts that that will happen, but we can talk about that later. [10:47] Brady: I want to get into some dimensions of this gridlock we talked about when we were recently together in Washington, D.C., about your thinking about a way of characterizing this gridlock. But before I do, just give me an idea of what we're talking about in terms of size of the farm bill. Do you know roughly about, you know, how much money are we talking about here? David: Well over, they score farm bill over a ten year period even though it only, legislatively, exists for a five year period. And, the House version, the version passed by the House ag committee and the Senate version both cost in the range, of say, 950 billion dollars over ten years [Brady: Okay]. So, we're talking about, Department of Agriculture budget then that would be somewhere in the range of 100 billion a year. [11:51] Brady: Alright, and let's compare that to maybe the budget, the defense budget. I imagine it's much smaller than the defense budget. But how does it, so I'm just in order to kind of put it in some perspective, it's smaller than the defense budget, but it's bigger than or comparable to, what budget might it be comparable to? David: Right. Well, if you look at the U.S. budget it's actually pretty simple. Defense, social security and entitlement programs such as Medicare take up about 75% of the U.S. budget. Everything else the government does is about 25%. If you look at farm programs, commodity programs plus crop insurance, that equals maybe 20 billion a year. Now that 20 billion a year, in addition to that 20 billion a year, then you'll have about 80 billion dollars mostly for the food stamp program. That's roughly the way the budget breaks down. If we look at that 20 billion we spend on farm programs, that is significantly larger than the entire budget of an agency like the EPA, the environmental protection agency. It's significantly larger than the budget of the Federal Bureau of Investigation, the FBI. So we're talking about a significant amount of money here in comparison to a lot of other agencies in the government. We're talking, it is small relative to defense or social security or Medicare, but it's large in relation to a lot of other things the government does. Like I said, that, you take away the big three of defense, social security and Medicare, and you've got about 25 percent of the budget left for everything else the government does, and agriculture is still a large chunk of that 25 percent. [13:59] Brady: Alright, that really helps me put that into perspective. So the stakes, you know, are relatively high, especially when you compare it to spending on other departments. So, what's your theory about, well I guess two things. One, I imagine this is kind of unchartered territory with respect to not being able to pass the farm bill? And two, why is, why is this happening now? David: Well, let's first begin, in terms of what's so different about this year. Farm bill politics in the United States has traditionally been geographic politics. And by geographic politics, that geographic politics was driven by commodity interest. A Democrat from a cotton growing region often had the same basic policy views on cotton policy as a Democrat, or excuse me, as a Republican from a cotton growing district. A Democrat from a corn growing district often had the same basic policy views as a Democrat from a corn growing district. Why? Because it was commodity interest that mattered. Alongside that commodity and geographic politics, you had beginning in 1973 this politics of an urban-rural coalition. And that urban rural coalition was built around a recognition by the agriculture committees at that time, that in an urbanizing society, which the U.S. was in 1973, the mass movement of people from agriculture into urban areas was pretty much complete. In this urbanizing society, you could no longer pass a farm bill that had nothing except price supports and other income supports for farmers. In an urban society, you began to get an increasing number of urban and suburban legislators who began to ask "What's in this for me? What's in this for my constituents? If it's all about subsidies for farmers, I'm not interested." And the agriculture committee at that time made the decision; we've got to have some coalition between urban and rural interests. And the agriculture committee at that time was the one that led the drive to build that urban-rural coalition, and that urban-rural coalition was around farm programs for rural areas and nutrition programs for urban areas. And so farm politics, under 2008, and especially since 1973 was driven by a) geographic interest and b) urban-rural coalition. What has happened with this farm bill in 2012 and 2013 is that that coalition appears to be under dramatic political pressure that is breaking down that geographic politics and that urban-rural interest. In other words, many rural legislators have decided that they are prepared to take on the nutrition programs on an ideological basis. Basically, and it's an issue of whether people who receive SNAP benefits deserve to receive those benefits. And if that part of the coalition decides that it is no longer willing to make that compromise, it's difficult to see where a farm bill comes from in this atmosphere. So what we've seen is a dramatic shift from the old geographic politics of agriculture to a new perhaps ideologically driven politics of agriculture. And that's a very dramatic shift for the United States. [18:43] Brady: And then of course, how does that play itself out then, in this gridlock? Because the Senate is controlled by a different party than the House is controlled? David: Yes. But the fact that the House could not pass a farm bill that included a nutrition program and now is talking about, well we're going to go back and pass a nutrition bill program, which I'm very skeptical that they're going to be able to do it, means that you have a House that has passed a bill that only provides for farm programs and a Senate that's sitting there saying "We want a farm bill that has both the farm programs and the nutrition programs." Now think about that way the House and the Senate are structured. By definition, the Senate tends to take a broader societal view on issues. Trade bills for example, often are treated much friendlier in the Senate than in the House because in the Senate, when you have a trade issue, a Senator hears from both winners and losers in that issue. If you look at a trade issue in the House, the members, because they represent smaller districts, tend to only hear from winners or only hear from losers. And that makes the politics of trade very different in the House. What we're seeing is the Senate is sitting there, basically saying "We expect to have a nutrition program in this farm bill. We can talk about the sides of the cuts that are needed in nutrition, but we expect there to be a nutrition." And the House is saying "We're not so such that we really want a nutrition," or a significant number of members of the House are saying "We're not sure we want a nutrition program in the House and we're hearing from our constituents that they want larger cuts in nutrition and we're listening to those voices." And so you tend to have a very different political structure in the House and the Senate because of the different geographic sizes of the two. [21:09] Brady: Now if they can't work out a farm bill, what happens? David: Well, now there's something called permanent legislation which was the 1948 farm bill, which stays on the books. Every farm bill since 48 is an amendment to the 48 legislation. If we don't pass a farm bill, then technically, if we don't pass a farm bill before this one expires, which is sometime in September, then technically we would revert back to the 48 legislation. The 48 legislation has dramatically different programs than what we have today. Today's programs are much more market oriented than they were in 1948. In 1948 they consisted of what would be very high price supports for commodities today, price supports that would be well above prices that we have today, and if that really came into effect you would expect that those price supports to establish a dramatically higher price floor, under the world price, under the world market price and the government would end up having to buy large stocks of those commodities. Now, that's a very troublesome scenario for a lot of members of Congress and one of the reasons that some people have speculated that Congress has kept the 48 farm bill as permanent legislation is that that scenario is so scary that it's a hammer that the ag committees can use every four years to write a new farm bill and get it passed. If you don't vote for this new farm bill the 48 bill comes in and boy is that going to be scary. Perhaps that's true, perhaps not. I don't think Congress, I think if we get into later in the year and we've not passed the farm bill, I think Congress will find ways to delay that 48 bill from coming back into existence because it would be disruptive. [23:32] Brady: Okay, so that's if, if they don't make something happen then you imagine they will pass some kind of legislation that allows them to delay having to move back to that 1948 farm bill. Is that right? David: That's what the normal process would be. If you don't pass a new farm bill you would go back to the 48 bill. I guess what I'm saying is I think Congress will find ways to stall the return of that 48 bill. It's a possibility we had in 2012, we had a one year extension of this farm bill. There's a possibility I suppose that there might be another 1 year extension. Now Senator Stabenow now, from here in Michigan, who is the chair of the Senate Agriculture Committee has made it very clear an extension is unacceptable to her. I think it would be unacceptable to a large number of Senators. They've passed this bill two years in a row, they've done their job and I don't think they're going to let the House off of the hook this year with an extension. Now, how did we get that 2012 extension? Well it got rolled into the fiscal cliff deal at the end of 2012, a large budget deal that had nothing to do with agriculture. It's possible we are going to have another one of these large budget debates and government debt limit debates before the year, this year is over. It's possible I suppose that another extension could be rolled into whatever that deal becomes this year but I don't think it's as likely as it was in 2012. Let me also say this, without going into the details, I think America, U.S. farmers are going to begin to work their pencils a little bit, and when they do, they're going to figure out that the provisions of the Senate and House bills are going to be much better for them than another extension. We're seeing commodity prices significantly lower than they have been the last couple of years. The 2013 bills, if they pass, will provide much more downside protection for U.S. farmers than an extension bill. [26:12] Brady: Okay, let's talk a little bit about that if you will. So, the proposed programs have this shallow loss type of [David: Mhmm] coverage in it. What does that mean? David: Well the basic principles of the House, both the House and the Senate bills that have passed are basically very similar. They move agriculture, U.S. farm programs from what used to be a price based payment system, that if prices fell, farmers received a payment, if prices rose they did not, or they received a smaller payment. That is being replaced by a revenue based system in which farmers would have a benchmark revenue guarantee, based on, say, the last two years average price and on the last five years average yield. And whenever a pay- whenever a revenue because of a decline in price or a decline in yield, whenever revenue fell, farmers would be below the benchmark, farmers would be eligible to receive a payment. I think farmers are going to begin to look at that and say that that looks a lot better to me than the old fashioned price based system that we used to have and I guess from a Canadian perspective, we've had these relatively high world prices the last two or three years with good weather, in the U.S. at least, corn stocks are likely to be rebuilding a little bit this year, not hugely, but a little bit, and we're seeing prices come down somewhat. Don't be surprised if within a year or two, if we continue to have good weather and good yield, don't be surprised if we are soon hearing Canadian farmers and other country farmers saying "U.S. farm program payments are too generous given these low market prices that the rest of us are getting." [28:31] Brady: Why would, why would that, would that affect Canadian competitive ability in the market? Why would that be a concern? David: Well if you look at the rules of the World Trade Organization, payments are supposed to be non-trade distorting. That means that they cannot encourage production in a way that then decreases the world price because it increased the world supply. In other words, if I provide payments because you're a corn producer and you plant more corn than you otherwise would have, then that tends to depress the world price. This has been controversial in U.S. programs dating at least back to the 1990s and we're having about a 10 year long dispute with Brazil on cotton payments. And so, the essence of the issue for other countries, including Canada, would be if U.S. payments encouraged U.S. producers to plant more corn, for example, then they otherwise would, is that depressing the price of corn producers in other countries, including, say Canada? And that's when often times the WTO dispute arises. What I'm saying is, we're coming off a period of about two or three years of especially high prices. We're seeing yields and weather return to a bit more normal stage. We've absorbed the increase of production of ethanol. Corn yields are higher than they were ten years ago. Agriculture always out produces the market level, the market price that exists and I'm just saying, if the U.S. passes a farm bill along the lines of what the House and Senate have passed, we could be in a situation where the U.S. is making some significantly larger payments here within a couple, three years, assuming normal market conditions, and that's going to be something that rubs producers in Brazil and Canada and Australia, usually, rubs them the wrong way. [31:02] Brady: Alright, let me see if I can recap, and you tell me where I'm kind of missing the mark, or if I've basically got the essence of the issue between the Senate and the House. The Senate and the House are basically in agreement on this program to support farmers' income. David: Correct. Brady: They are not in agreement in this case, the House does not want to have a program that provides supplemental nutrition or food stamps to low income households and the Senate does. David: Correct. Or, you might say that the House wants to cut more [Brady: Okay] out of nutrition programs. But that's the essence of it, you're correct. Brady: Alright, and this is in a stalemate. You're prediction is that if they can't figure it out through this conference committee soon, it's probably going to get kicked down the road. If they do come to an agreement than in an era of potentially low commodity prices other countries or other places in the world might look to this program and argue that it is, it allows the United States farmers to continue production in an era of low commodity prices and actually contributes to driving those down. David: Correct, except the one thing I would add is [Brady: Yep] you made a statement there about the conference committee can't work it out [Brady: Right]. And I want to be clear we do not yet have a conference committee [Brady: Oh]. The House, after each House passes a bill, they then have to pass a motion to have a conference committee. The House has not yet passed a motion to have a conference committee because they say they want to consider a separate nutrition bill, with larger cuts than what were in the earlier version of the farm bill. So other than that, I would say that's a pretty good summary of what I'm arguing. [33:05] Brady: I just want to maybe tackle an additional issue. Now one of the program targets is to improve farmer income [David: Right]. But, my understanding is that, pretty much in recent times since the mid-1990s, certainly since the 2000s, is that both median and average farmer household income is on par, or I think above non-farm household income. Is that [David: Yes], do you understand me? David: If you look at the U.S. data, farm household income right now, average farm household income from all sources, both farm and non-farm sources, in other words you might have one spouse who farms and one spouse who works off the farm. Average farm household income right now and for the past 5 years or so has been greater than average nonfarm household income. In other words, to the extent the tax payer money is being used to pay for farm programs in the U.S. we are to some degree taxing persons of lower farm, of lower income levels to provide payments for persons of higher income levels. Now, having said that, part of what happened in this farm bill that can be applauded I think, we did ask some fundamental questions about farm programs. What's the purpose of a farm program? Is it simply an income transfer? Back when the farm programs started in 1933 there was no question that is was about an income transfer. A large portion of the U.S. population lived on farms. They had significantly lower incomes than the non-farm population, and there was no question that farm programs were about income transfer. As we move to today, the question rises, should farm programs still be about things like income transfer? Or should they be about things like risk management? This is also applicable in Canada, where you've had a movement towards things like revenue insurance, for several years before the U.S. What the 2013 farm bill that both the Senate and House have passed, both represent I think, a significant move in the U.S. to make farm, U.S. farm programs more connected to the objective of risk management as a policy objective, and moving them somewhat away from their old historical role as an income transfer mechanism. And that's partly a recognition of this equity issue. If there's a public interest in farm programs, it can probably be justified on the risk management issue. It probably is less justifiable as an income transfer, simply because farm incomes are comparable to, or higher than non-farm incomes. [36:40] Brady: Okay so David, what is going on here? Is this symptomatic of a larger U.S. political program or is this particular to the U.S. farm bill? David: Well I would argue that this is symptomatic of what's happening in U.S. politics. And here I would refer your listeners to an excellent, short but excellent book by Thomas Mann and Norman Ornstein, two political scientists, and their book is titled It's Even Worse Than It Looks. And they trace recent U.S. political history, and they argue that there is a fundamental mismatch in U.S. politics right now. And that mismatch right now is U.S. political institutions, which are based on a theory of separation of powers, you have an executive office and you have a legislature, each of whom run as individuals and, they argue that a system of power structure is basically designed to protect the interests on political minorities. In other words, the only way that the majority can make a political decision is by compromising with the minority that has the power to block that political decision. They say we have a separation of power structure, but we have increasing, political parties that are increasingly acting like parliamentary parties. Now Canadians are very familiar with parliamentary parties and Ornstein and Mann say look, "In a parliamentary system, the majority party has basically entire control of the legislative and the executive functions, and they are judged on their success of failure as a party. They do not have to listen to much of what the minority party has to say or compromise with them. The majority party adopts its policies. Their policies fail or succeed, and the majority party is rewarded or punished at the ballot box." They argue that what we now have are parliamentary parties in a separation of power system. And what this has done has given the minority power incredible power to block what the majority party wants to do, but refuses to compromise with the majority party on what needs to be done. And they argue this is a recipe for disaster. This is a recipe for complete and total gridlock because of this mismatch of parties and governing structures, and I think this is very relevant if you're a country like Canada that is looking at U.S. political behaviour and trying to deal with U.S. political behaviour. Mann and Ornstein argue that U.S. political behaviour becomes very unstable in the situation that we have right now. And it's very difficult for an outside country then to understand and predict how the U.S. is going to behave on a particular issue. [40:33] Brady: That uncertainty I imagine is a much bigger issue than the farm bill, but perhaps it captures the challenge that the uncertainty is U.S. politics has for all countries in the world. I mean, when Standard and Poor's downgraded the long term sovereign of the United States from triple A to double A, one of the issues they raised are the problem of gridlock, basically pushing through important legislation. And I suppose bigger than the farm bill, this particular farm bill passing, Canadian farmers interests are served by a stable functioning U.S. political process. David: I think that's true for virtually any country dealing with the U.S. and you're exactly right. If you go back and read the Standard and Poor's report in which they downgraded the U.S. debt, they said and I'm quoting virtually word for word here "We have not changed our economic assumptions on the economic outlook for the United States in any way. But recent political events have convinced us that the political system in the United States is so unstable, and that policy outcomes are so random that we can no longer assume that the U.S. will deal with its debt issues through the political system [Brady: Hmm]. So it has nothing to do with the U.S. debt level, it had nothing to do with U.S. ability to tax itself to pay itself to pay its debts. It had nothing to do with the state of the U.S. economy. It's tragic that so few people have gone back and read that Standard and Poor's report, and it's been so misinterpreted as to why Standard and Poor's did what they did. But essentially they said "United States, if you want to behave like a Banana Republic, we'll rate you like one," [Brady: Mhmm, mhmm]. So this is, the farm bill is merely a small piece in this much broader picture that Man and Ornstein talk about, that Standard and Pores talk about. And Man and Ornstein talk about several ways in which it has arisen, and it has arising right now on things like immigration and the immigration bill that Congress is considering. We're still having, we're about to have another showdown on a debt limit issue, which is what triggered the S and P downgrade in 2011 and we're about to go through it again. So, this is a much bigger picture than simply the farm bill. [43:34] Brady: Alright. When you look in your crystal ball, do you have any predictions about what's going to happen, or are there any kinds of ideas that you want to hit on that we haven't, discussed so far? David: Well let me sort of draw I think a couple of scenarios about what might happen the rest of the year. One scenario would be that the House does pass it's, a nutrition bill and then sends their two bills to the Senate for conference. Presumably, that nutrition bill in the House would have much larger cuts than the Senate bill. That means that a final bill would come back with a probably smaller cuts than what the House now would pass. It would be very interesting to see whether Republicans might vote against a final farm bill that had larger cuts, or had smaller cuts, than what they had passed in their nutrition bill. So that's one scenario. The second scenario would be that the House decides not to pass a nutrition bill. It sends the farm only bill to the Senate for conference. If that Senate, if that conference bill comes back with a Senate nutrition bill that's much closer to what the Senate has passed, now I think you would see almost a total rebellion among the Republicans against a farm bill that had something like the Senate nutrition program in it. However, you would see, I think, a significant number of Democrats who would enthusiastically vote for a farm bill that had something like the Senate nutrition programs in it. So you can see a total switch on a final vote, where you would have a large number of Republicans breaking away and voting against the final bill, a large number of Democrats supporting a final bill, and you might actually be able to put together a coalition of a large number of Democrats and a few Republicans and pass that final bill. The third scenario of course would be the extension scenario that we've already talked about. I think that's somewhat unlikely. And the fourth scenario I suppose would be that nothing at all would get passed and we would fall back to the 48 bill. I still think that's probably the least likely scenario. [46:19] Brady: Okay. Thank you very much, David. David: Thank you. [46:25] [Closing music begins.] [46:35] Brady: Thanks for joining us on FARE Talk. We hope you will continue to check our website for updates and the latest podcast.

Dr. Jayson Lusk and Dr. Brady Deaton discuss Jayson's most recent book - The Food Police: A Well-Fed Manifesto About the Politics of Your Plate, and his concern about government led efforts to promote local food, tax soft drinks, and diets in a particular direction. Transcript [0:05] Brady: Welcome to FARE Talk, where we set out to provide enduring discussions on contemporary topics relevant to our economy, with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Jr. of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I'll be your host. [0:25] Music fades out, ends. Brady: Today I'll be speaking to Dr. Jason Lusk about his recent book The Food Policy: A Well-Fed Manifesto About the Politics of Your Plate. Jason serves as Regents Professor and Willard Sparks Endowed Chair in the Department of Agricultural Economics at Oklahoma State University and also serves as a Samuel Roberts Nobel Distinguished Fellow at the Oklahoma Council of Public Affairs. Jason, welcome to FARE Talk. Jason: Hi Brady. Thanks for having me on. [0:53] Brady: Let's start off with just talking about who are the food police and what are they doing that concerns you? Jason: [Laughs] Well, I kind of like to think about them as the back seat drivers when it comes to food. So it's sort of group of people that think they know better about how you and I should be eating, how farmers should be farming and, you know, it's not a huge group of people, but they've been incredibly influential in affecting how our cultural, how our nation thinks about food and recently also having some impact on public policy or at least public attitudes about public policy. And I think the challenge is, both, from my perspective, is the mis-characterization that is fostered about production agriculture on the one hand, and then also the sort of lack of recognition of what the economic research, and not just economic research, but science in general says about some of the policies that are being advocated. And I think that the unfortunate reality is that many of the policies that are advocated are going to be more costly than they are beneficial and sometimes do more harm than good. [2:05] Brady: That's, before we get into some of these specific policies, which I do want to serve as the fulcrum, really, of our conversation, one of the things that I noticed at the start of your book is that their characterization, or who you termed the food police, a group of people that are commenting somewhat pejoratively about the current state of agriculture in North America, is very different from your own perception of contemporary agriculture. And I was wondering if you could draw that out a little bit. Jason: Right, so you know, the sort of popular narrative that most people have about food is that, it's been fostered by these folks I'm calling the food police, is that, you know, sometime in the 50s or 60s something went wrong. And that thing that went wrong, often the finger is pointed at agribusiness, and various technologies that agribusinesses developed and that led to this process of farmers becoming bigger. They claim there's corporatization of farming; small farms are being run out of business. Farmers can't get a break; they're being manipulated by these big companies. And at the same time, the consumers are getting fat, we're not eating as healthily as we once were, and this is all a result of this out of control, sort of corporatization of agriculture and it's also a result of the farm policies that we have, subsidizing these big corporate farms and agribusinesses. Now that's the story that's told, and that's sort of the characterization that many people have about our food sector. And part of what I'm doing is pushing back against that a little bit. Some of that is true of course, but I think a lot of it overlooks some really important facts and misses some really important benefits. So, just to take a step back, you know, they, to read these popular writings about food, everything is bad with food. We have all these terrible environmental consequences, these terrible social consequences from small farmers going out of business, and then also these terrible health problems. And so, part of what I'm doing is saying, "Well let's just look at what is actually going on out there," and I think when you look at a lot of the statistics about the state of food and agriculture in this country, and in Canada, what you see are really positive signs. And now I'm not claiming that there aren't any problems, or that there aren't things we need to think about, but what I am saying, is that we need a sort of accurate picture of the world that surrounds us before we start advocating all kinds of changes. So, just to give some examples, you know, one is that life expectancy is increasing, it's been dramatically increasing over the past 100 years, but even in the last 20 years alone, while there's been all of these supposed health problems, life expectancy has continues to rise. In addition to that, and I don't know the statistics on Canada, but in the US there are actually more farms today than there were 10 years ago, there are more small farms today. The farms that do exist are making more money than they once did. It used to be the case that being a farmer was an occupation of a popper, but today the median income of farmers far surpasses the median income of, you know, regular households. That's not to say anything about the assets that those farmers hold too. So, financially, farmers are doing well off, and small farmers are also doing relatively well off. I'm sure they wish they were doing better [laughs] but they're doing well. And I think whenever we look at even other things like food safety, it's also getting better. The, you know, for example, the number of confirmed cases of E. Coli, for example has gone done significantly over the past decade or so. People in the US are eating more fruits and vegetables than they were in the 70s. Women are spending much less time in the kitchen than they did in the 60s. I think there is some shocking number, like 80% less time in meal clean-up and preparation women spend today than they did in the 1960s. Now I know some people like Michael Pollan, in his recent book Cooked, he's trying to get everybody back to the kitchen. I think that's a fine thing to suggest, but I think if you actually looked at the lives many of our grandmothers led, you know, it was not all that romantic [laughs] and to feed that family, they had to spend a lot of time in that kitchen. They didn't have microwaves, they didn't have easy to prepare meals, so it really did take the bulk of a day getting ready for a meal and cleaning it up. And I think that's, of course there are a lot of reasons for this, but one of the reasons many women today can now enjoy working outside the home is because a lot of the tasks you used to have occupy a lot of the time for women are now obsolete, and I think that's a great thing. So, you know, I could go on and on but I think the overall picture that I'm trying to paint here is that the state of food and agriculture in our society is great, it's never been better, and it's never been better in the history of humankind. I mean the biggest challenge for humans, historically, has been finding enough food to eat. And yea, we have some problems now about maybe eating too much, but in my opinion, that's the lesser of two evils. We might need to think about ways we can get better at that but in a lot of ways, I think we're really enjoying absolutely amazing abundance [laughs] of food both variety and quantity and quality that's never been witnessed in human history. [7:24] Brady: In a previous podcast that we did with David Schweikhardt, we looked at the history of farm bills in the United States. And this history starts in the 1930s and contemporary, what we call the contemporary food system as you know, has built a lot of government policies, some which we might be more critical of than others. But in its initial, in its starting point, Dave Schweikhardt mentions in the podcast that really the main goal was to raise farmers income, that is was decidedly less than others and it was perceived as a social goal. And that sort of motivated many of these initial government policies, and that was the starting point. When I read the book, and I looked at a lot of the policies that you were critical of, it seems, perhaps unlike where we were in 1930s, that you just aren't buying the starting point of what the appropriate role for government should be. In other words, in the 1930s when these farm bills started, the objective of supporting farmer income might have been something that was generally perceived as an appropriate role of government. But that's something different from the set of policies like local bands on certain food groups, and fat taxes. You seem to be saying this isn't an appropriate role for government. Is that a fair characterization of the difference between, you know, the role of government historically in supporting agriculture and the set of policies that you tackle? Jason: Yea, I mean I think I would be critical even if some of those policies with the goal of supporting farm income back in the 30s. So, you know, in general some of those are sort of philosophical issues about what is the appropriate role of government. You know, should the government be involved in, sort of, redistributing wealth to those people who sort of, you know, out of economic favour with the times. And you know, some of those things are sort of philosophical issues that are a little hard to argue with but I think one of the things that I try to point out in this book is that once you kind of go down that road as it happened with farmers, it's hard to get out of it. And indeed, I think that's what we've seen is we have these policies and they might have addressed a, you know, a need of the time in the 30s, but what you find is they actually had all kinds of unintended consequences even at that time. You know, one of the ways they tried to prop up prices back then was by destroying commodities, restricting the supply, and this was at a time, in the Great Depression, where there were big soup lines. So it was, you know, ironic sort of convoluted set of policies that persist today and in fact a lot of the arguments of the, sort of modern day foodies, the food police that I call them, are actually, you know, their problem is with those same policies and they blame them on a lot of the problems that we have now. I think, I'm not a fan of the farm policies, but I think they're ascribing all the problems that the, sort of, food police see to those policies is also misplaced. The research doesn't seem to support that. But I think there is one distinction that is important, and a lot of the policies that I sort of take up in this book that I find, you know, problematic, things like fat taxes, subsidization of local foods, you know, Pollan's new book Cooked, he's advocating for subsidies for people to get back to the kitchen, and these kind of things, is that I think at a fundamental level, these policies are being driven by the desires of a particular set of people who have a particular view about food. And this is a characterization, it's not true of all of them, but they tend to be middle-class, upper-middle-class people that have a particular aesthetic preference about food and how food should be produced. And my concern, is what they're doing is imposing those sets of preferences of everybody else in the country who don't have the same incomes that they do, the same desires that they do. It's all great to say that you want local, you know, heirloom tomatoes. That's fantastic if you can afford to do it. But to say that that's how everybody should be eating and that we should be spending our tax dollars to make those outcomes happen, I think is really mistaking the challenge that a lot of people are actually dealing with. And one of the things I try to remind readers of this book is that even though, yes, we have done a great job providing more food than we ever have using fewer inputs than we ever have, it's still remains the case that at least in the US, 15% of US households are food insecure. In the United States there's a record number of people on food stamps. And globally, which is of course where the bigger problem is, there's just under a billion people that the United Nations today says is starving. So, you know, being able to produce enough food inexpensively is, remains a big challenge and it will continue to be a challenge that population, we're supposed to add another billion people, most projections say, in the 25 to 50 years. And so being able to supply enough food in a cost effective and high quality manner is a different objective than the one of, you know, providing niche high quality food to those people that can afford it and that's sort of, I think the crux of thinking [laughs] or at least my critique of a lot of the modern, sort of fashionable food policies. [12:57] Brady: Alright, let's hop in to one. There's one that's very local, if you will. Currently in Ontario, Bill 36 which is being considered to promote local food establishes a local food week and it allows the minister to set goals to which public organizations should strive to in terms of their provision of local food, and also allows them to audit their material. Now, you're somewhat critical of these kinds of bills. You start of one of the things, and you kind of address some of the tenants that are often behind these bills, and suggest that they don't really stand up as much as advocates might suggest. And I thought could just go over some of those tenants. So one is that local foods are good for the environment. Jason: Right. So if you don't mind I might take one step back and just say [Brady: Yea] I don't have any problem with people buying local foods. In fact, I do it myself. I buy things from my local farmers market here in Stillwater, Oklahoma. My former students run stands at the farmers markets, so I think those are all nice things and there's nothing inherently problematic with it. But what I am taking issue with are these kind of policies like the one you're talking about in Ontario that, you know, are going to restrict or subsidize activities or are going to require, there's been some proposals here in the States to require schools or hospitals to purchase a certain percentage of their foods locally. Those are the kinds of issues that I take issue with. And the reason I do gets back to the question you asked, Brady that you asked about, what is the appropriate role for government? You know, normally as an economist we have, you know, a set of quote unquote market failures that would sort of justify government intervention and I think the list that you're sort of about to lead us through here are all the sort of normal things people would say is this a reason for government intervention? And when I look at the actual evidence and the research on these topics, I just don't see them adding up. So the first question you asked me was, okay, surely we should subsidize local foods because they're good for the environment, right? That's a very common argument, and I think people think this, because what they think is well, if we're buying local foods those foods have travelled fewer miles, and so therefore there must be fewer environmental problems, less carbon emission, less energy use to get the product produced to market. And of course, that's partially true, but what that perspective is missing is that the transportation phase of the food delivery or the food production process is a relatively minor part of the overall energy picture in food production. In some, the research seems to suggest that about 80% of all the environmental consequences that occur, at least in terms of like greenhouse gas emissions, occur during the production phase, where the food is grown. And so what that says to me is that what you what to do are find places where you can grow the food most efficiently and then ship that food to market, because that shipping phase it consumers relatively smaller amounts of energy. I think one striking example of this is a study that was done several years ago and they compared the amount of energy that would be used if people that lived in London bought lamb that was grown in, around London, or if they bought lamb that was from New Zealand. And they actually found that the New Zealand lamb, those Londoners would be better off at least in terms of energy expenditures, buying that lamb that came from New Zealand. How is that possible to have lamb travel 10,000 miles and use fewer, you know, less energy? And the reason is because New Zealand is naturally endowed with all those things that make rearing sheep especially easy. Lots of grass, lots of sunshine and moreover, you put that lamb on a boat and shipping by boat is incredibly energy efficient. You've got to remember we had ships sailing the ocean before we ever had fossil fuels, and so you can get on the currents are really be able to transport food very efficiently that way. And so the argument that buying locally will save energy, I think it just doesn't stand up to the facts, and moreover, it could actually be worse because if you think about a lot of small farms, farmers driving small pickups to a market, actually will often generate more energy, will use of more energy or create more environmental pollutants than will one large semi-truck backing into a grocery store, for example. We're over [laughs], if you look at the amount of energy expend, that you and I expend to get ourselves to the supermarket, that is often a bigger energy cost than all, to get that food to the market in the first place. And that's just one argument, there are a lot of other agreements that surround there, but I think when you look at the whole picture, the one that emerges is we really want to think about growing foods where they can be most effectively grown and in that, if you're worried about environmental issues, is the way you want to think about it. [18:14] Brady: Another argument that is commonly set forward is while we want food security, or we want to make the agriculture sector more robust locally. You're somewhat critical of that suggestion as well. Jason: Yea, I think it's a little short sighted, to think in those terms. Now, you know, there's one argument that farms should maybe be more diversified. Okay, that's fine and good but that doesn't necessarily mean it has to be local. But, you know, one of the problems with this sort of food security argument is, you know, the nature of production agriculture is that when something, you know, it's cyclical, it comes in seasons. And so what happens is all the produce in an area is likely to come to market at about the same time, so you have these series of times in the year when there's a glut of food, whether its corn or potatoes or tomatoes or whatever it might happen to be, and so, yea, you've got a lot of abundance at one time of year, but you don't at another time of year. Not only is that wasteful, cause what ends up happening, and if you look at the data this is what happens in a lot of farmers' markets, they throw out large amounts of produce, so it's not particularly good for the environment. But if you go to bigger production regions where you have big processing plants for example, packing plants located next to the fields, than that kind of waste is not nearly as likely to happen there. But the challenge with this sort of food security argument is, you know, what happens if a drought occurs, or a hail storm occurs and destroys the crops in a region? Then you might say, "Oh we can rely on our neighbours." But if you set up the system where everyone is looking only at themselves and only planning to supply for themselves, then you can't count on your neighbours anymore. They weren't planning on you needing anything from them. And I also think this sort of gets a little bit to maybe one of the arguments that might come up in a minute, but the sort of, you know, economics of it are that you know, it sounds great, let's just buy from those people that are close to us, and that'll be good, it'll make them healthier. But what happens when you're, when the people, you know, a hundred miles from you decide their going to do the same thing, and now they're no longer buying from you? That then hurts your farmers and hurts their economic potential. And so it's not really all that clear to me that this argument, if we just supply the food ourselves, would be somehow more economically secure, and I think that's just a way of, a really long winded way of saying trade is good and I think we all know that. If we only were able to consumer what we could make ourselves, we'd be terribly poor, and not only would we be poor, we wouldn't be particularly secure either. What makes us wealthy is our ability to do something well and trade that with others for what they do well. And this is the stuff of course we teach economics 101. [21:14] Brady: Yea, along those lines, I thought one of the interesting things that I think would surprise many is that you make an argument that local foods are not necessarily healthier. Jason: Right. That's exactly right. So you can have healthy foreign food, you can have unhealthy local food. In my opinion, I don't really know what local has to do with it. I suppose the argument is people say, "Well if you ate more local food, you'd eat more fruits and vegetables." Well, maybe, that's an argument for eating more fruits and vegetables. It doesn't matter whether they're local or not. Yea, there is some argument that if you eat fruits and vegetables that are picked ripe that there is more nutrient content in those fruits and vegetables, but that's ignoring the fact that in big areas of production, say California or Florida or something like that, when they pick these vegetables what they'll often do is quickly freeze them and that locks in a lot of those nutrients. And indeed, if you look at the research of these topics, that the, you know, the nutrient content of a frozen fruit or vegetable that you could find in produce aisle, or I guess in the frozen food aisle at the grocery store, often has more nutrients in it than a vegetable or fruit that was picked and's been sitting on the shelf for a day or two. And so, the absolute recommendation that it has to be fresh, I think is ignoring the fact that frozen and also canned vegetables have a lot of nutrients. Actually, even the can does pretty well if you look at the nutrient profile relative to fresh stuff that's been sitting out for three or four days. And I think that again that kind of gets back to one of my points about the fact that when you have a lot of fruits and vegetables come to market at the same time, and I know a lot of people like to participate in these CSA's, community supported agriculture. They might buy shares in like, a co-op, where they're delivered a certain amount of food. And what I read on people's blogs, you know, one of the big things you read about is people say, "What do I do with all this kale?" [Laughs] You know, they get all this stuff delivered to their house, and not only does it sit on their shelf for a while, all the while the nutrients are degrading, but often a lot of it just gets thrown away which is not terribly, you know, beneficial when you think about sort of environment and waste and those sort of things. But the other issue too with regard to health, is that there is one metric that many nutritionists use to measure the quality of someone's diet, and that metric is the diversity of foods that people eat. And I think the absolutely amazing thing to me is if I go in our grocery store here in Stillwater, Oklahoma, any time of year the availability of different kinds of produce is absolutely astounding. I mean it doesn't matter what time of year it is, I can find a jalapeno, I can find a lime, I can find.. Brady: [distorted speech] Fruits that I don't know if I've never seen before, picking them up in the grocery store aisle, I'm always amazed at the diversity of things they come up with. Jason: Yea, it's amazing. And the way we get that diversity is by trade. By trading with people that don't live near us where they have a different climate than we do. And yea, maybe we get to send them some stuff when it's, you know, the opposite time of year for them. But yea, I think if you're limiting yourself to those things that can be grown only locally, I think you're really limiting the variety in your diet. [24:44] Brady: Now I want to come back to a point before we move to say one of the next policies. But to just refine our discussion a little bit, I hear, it's not so much that you're critical of eating local food, it's that you're critical of the reasons given for government intervention. [Jason: You're actually...]Maybe not, government intervention's the wrong one, but for a certain set of government policies. Jason: Yea, you're exactly right. In fact the way I like to say it is, I'm not against local foods, I'm against bad arguments for local foods [laughs]. And so that's what really I'm taking issue with, and really it's not that big of deal. You know, so what, a few people go into farmers market? But when you start talking about these policies like the one you have in Ontario, now all of sudden you're spending my tax dollars, your tax dollars to implement these policies, and I think that's really when you want to step in and say "wait a minute, does this make much sense?" And there also is this culture too, at least among some subset, that despite the policy issues there is this feeling that you should be buying local food, that it is the morally righteous thing to do. And I'm also, that sort of grates on me a little bit too, for the same reasons that a lot of the arguments that are presented are not as compelling as they might at first seem. [26:05] Brady: So what is there, is there certain government policies with respect to food that you're supported of? So, forms of labelling that allow people to identify the proportion of a certain food parts, or different nutrients in say, processed food. Are there..? Jason: Yea, so, you know when I think about sort of the appropriate role for government, one way I think about it, and I know there will be others that think differently about this, but I like to think about the government as sort of being a referee. You know, I don't think the government should be in the laugh [laughs] picking winners and losers for example, because if they can pick you to be a winner today, they can pick you to be a loser tomorrow. And so what I think about, as being an appropriate role for government is providing a fair playing field, even playing field once those rules are established, enforcing the rules, and then also making sure that people have the information to know what the rules of the game are. So, with regard to food labelling, I think, you know, that is a role for government potentially, that I don't necessarily like all forms of labelling, but especially when there's a demonstrable safety risk, for example, or a demonstrable health impact, that seems like a relatively benign role for government. And again, what I see that doing, is sort of stepping in as a referee. They're not saying you should buy this or you shouldn't, but they're saying "here's the information, now you decide whether you think this is an appropriate thing to do or not." So, for example, putting a label that says this product contains, you know, X % trans fats for example. You know, trans fats is something that is a legitimate health concern and it seem imminently reasonable that people might want that information and that seems an appropriate role for government. Similarly, I think, you know, providing information on research, what we actually know to be sort of the state-of-the-art in terms of knowledge, seems a reasonable goal. So I mentioned the trans-fat. You know, when sufficient evidence comes about that something like that might be dangerous, at least if consumed in too high of quantities, then making that known, educating the public, seems like a reasonable thing to do. Now I think turning around and vilifying people that still make that choice is perhaps a bit mis-headed. But at least, you know, letting people know what the risks are seems reasonable. And then I think there's, you know, a whole other set of issues, you know, personally, you know, I think, you know, investing in research in food and agriculture is an enterprise that has paid off very well for consumers. And the investments that have been made in agricultural production and technology have made food much less expensive than it would have been otherwise. And it's not necessarily all that clear that its research that would have been done by the private sector. So I think there are lots of things, I agree, there are some areas and important roles for government to play. I think one of the main things they can also do is provide a, you know, the court system that we have, and a lot of the harms that people point to with regard to food and things, you know, if you're being harmed by a big agribusiness and you can prove it, then they should be liable for that. And if you can prove your case in a court of law that you were damaged in some way by some activity of a food company, than I think that's a perfectly legitimate thing for someone to do, and I think providing that court system and the legal role's that surround it is an important role for the government. [29:50] Brady: Alright, let's now let's again focus on some of these particular policies that you're worried about in your book Food Police. Let's talk about fat taxes [Jason: [Laughs]]. So, I mean maybe you want to make is specific to a particular case, but in general you're critical of a number of sort of [distorted speech] consequences that may result from the fat taxes. And in a sense, you discuss that it maybe not even achieve its main objective. Let's discuss that a little bit. Jason: Yea, so, you know I think one of my problems with these sort of policies, the fat taxes for example, is somewhat philosophical, and the version that is now quite popular is the soda tax [Brady: right, right]. And indeed, I think in the US at least 33 states have some form of taxes on sodas, but they're being proposed at even higher levels in more locations as we speak. So on a philosophical level, there's you know, one problem that is that a tax is somewhat akin to reducing someone's income. It's like taking money away from you. And generally, not generally, I think it's safe to say most of us like more income to less. So under what scenario is someone better off by taking money away from them? If that person thought they would be better off by consuming fewer sodas, they could make that choice now, and then use that extra money they were spending on sodas on something else. But the fact that consumers are not currently making those choices says that they like to drink soda. That it's something they prefer to do given the cost and even the potential health consequences that result. So, on a philosophical level it doesn't seem to make a lot of sense to me. Moreover, I think anytime we talk about food taxes, taxes on foods, these are policies that tend to be quite regressive, meaning that they taxes are borne primarily by those people that who can least afford to pay it. So the poor spend a larger proportion of their income on food, so as a consequence, when you tax something like food, you're taking that money from some of the least fortunate among us in society, and I think that's problematic on another level. But as you pointed out, you know, even if you disagree with me on those two things, you might wanna just take a step back and say "well are these things even gonna work?" And I think what you'll see is, if you look at the economic research on the topic, that all the taxes that people have proposed will have, according to these studies, very small impact on weight. And yet, they'll pull a lot of money out of the backs of people's pockets, so they'll be pretty effective at raising revenue, but they're really not gonna change what people weight very much, unless you really, really, you know, impose, you know, exorbitant taxes on food, which I think is, you know, both bad for the regressive reasons that I mentioned earlier, but also it would be politically infeasible. Not only does the research tend to suggest they're not very effective, the ones by the way, I should say, the studies that do show them to be effective, often are a little misguided, they're based on simulations and don't really take into account how your body responds to changes in calories as it should. But there are some studies that suggest that not only will it not change weight by very much, it actually could increase weight. So for example, with a tax on sodas, one study out of Cornell showed that such a policy might actually increase consumption of alcoholic beverages, at least among adults, or fruit juices, which naturally some of them have more sugar than say, a Coca-Cola or a Pepsi or something along those lines. So, you know, my own take is that it is, you know, a soda tax would probably reduce weight but just not by very much. And I suppose the lingo that we economists would use it to say "it's going to create really large deadweight losses" because, you know, it will cause this change but it's gonna extract a lot of money out of people's pockets. And so, I just don't find them to be terribly, you know, effective policies either philosophically or also just even empirically in terms of the, what the studies show to be their effects. [34:04] Brady: What about, you know, you might hear in this regard someone say, "Well, you know, we've taxed, we've heavily taxed [distorted speech]" and then they try to equate that with, for example, some of these really sugar intensive foods. Jason: Right. And so, you know, and that argument gets carried even to another level, which you see a lot now, which is to sort of equate sugar and tobacco on an even deeper level by saying "well sugar is also addictive." Now, in fact I did a debate with Michael Moss who wrote the book Salt, Sugar, Fat recently, and I really pushed him on this issue about the addictive nature of sugar. And in my reading of the research, you know, calling sugar addictive is really stretching the science to fit an agenda. You know, I even, just speaking for me anecdotally and personally, you know, I used to drink 4 or 5 cans of Dr. Pepper a day, full sugar. And, you know, I decided when my weight got to a level that I didn't like anymore, I gave them up, and I personally did not experience any shivers or withdrawal systems. And that of course just an anecdote, but I think what you see when you look at the research evidence is that this argument that these foods are addictive in the same way, that for example a tobacco or something like that is is really not very well supported. And in fact the reason I mentioned Moss is he said "well I wasn't really pushing that argument very far" and I pointed out to him though, on the cover of his book is a little sticker that says, you know, "hooked." And so he, how the food companies hooked us, or something like that. And so I think that's, you know, a further step down this road of trying to justify sugar, soda taxes, by making an analogy to cigarettes. But I think the analogy is a very weak one and a not very compelling one, because as admission in my assessment, sugar doesn't have the same kind of addictive properties. Of course we like to eat it, and sometimes when you, you know, you need kind of a food, we build up desires for those things, but I don't think it's addictive in the same way that tobacco is. But, I think the other issue too is, unlike for example, tobacco, the case, the argument that consumption of these products is imposing a cost on others, is also more tenuous. So with smoking, there were issues associated with second hand smoke and these sorts of things, and, at least with regard to sugar and sodas, I don't think that same argument is there. [36:38] Brady: So this externality basis for government getting [distorted speech] is just not something that you think is important enough. And with respect to the sugar intensive goods to motivate or justify government action, is that right? Jason: Right, yea, that's basically my argument, that and, you know, there are costs of course, associated with being obese, but what I argue in the book is that most of those costs are personally borne by the individual themselves that, there are health consequences associated with obesity, those are costs that you personally bear, it's a problem for you. And there's a lot of other evidence with regard to being overweight for example, at least among some groups of people, being at least morbidly obese can reduce your wages, it's going to increase your chances of dying. You know, all those things sound to me like, not to mention the sort of just social stigma of being overweight, all those things to me sound like these are ample private incentives for you to worry about your own weight and for you to consider the trade-offs of, you know, am I willing to run a few higher health risks for the extra tastiness of the soda? You know, that's the kind of trade off I think, that I don't want to be making for people, that I think that they should be able to make for themselves. You know, and I don't think its necessarily and issue that we want to go into here, cause it's a pretty nuanced and long discussion, but you know, the counter argument I suppose is that, well when people are overweight and there's a public health insurance, or public health care like there is in Canada, with the state run, you know, public health care system, then there, you know, some people make this argument that now you being overweight imposes cost on me because it increase all of our taxes. And that argument is not one that is also very compelling for a number of reasons, but you know, we can go there if you want. [38:34] Brady: But the last issue that I do want to address because it's really interesting I think to our field, agriculture economics, and I think it will be interesting to a lot of people is this area and your concern about the research area of behavioural economics and its suggestion to use nudge approaches, which we'll try to break down. And I thought that was a really interesting part of your book, and so, you know, if you wouldn't mind just stepping back and maybe first just talking about what behavioural economics is and what is meant by a nudge, and then maybe we can get into some particular policies that seem to fall under this approach. Jason: Sure, yea. So I though this, you know, I really enjoyed actually writing that chapter, and I felt like, you know, this is maybe a topic that a lot of people don't know about. And so, you know, I looked at it as a good opportunity to sort of, maybe, you know, shed some light for the public on a topic that's become quite a big deal I think not just in agricultural economics, but economics in general. So, on one level, what behavioural economics is, is sort of a merger of the fields of psychology and economics. It's trying to take the insights that psychologists have and the insights that economists have, and try to bring them together to better explain how people make choices. So that sounds pretty benign, and kind of interesting, and it is. And, the sort of next layer to this sort of area of research is it's also sort of an area of research that tends to point out how people make mistakes. And it, a body of research did a number of studies that show that we, consumers, are sometimes not perfect and we, for example, are influenced by things that shouldn't influence us, for example, the lighting in the room, or the ambience, or the temperature, or sometimes even the labels that people put on food will influence how we taste it, even though they're the same. So it's sort of this idea that people are making decisions that are somehow not optimal, or not best and that we're sometimes too impatient relative to the way we wished we'd behave, or we don't save enough sometimes, or that we're too prone to paying attention to really low probability risks. Or that we value something too much just because we happen to own it. So it's a body of research that shows that we, humans, make mistakes. And on that level, I think also it seems somewhat uncontroversial [laughs] that we're not perfect. I think where that challenge comes in, and where I sort of, and I should take a little bit of a step back and say that you know, so far so good. This is just what science does. We know we're trying to explain the way the world works and the way people make decisions, and so I've written papers where I've done studies where we find yea, consumers do some kind of silly things, or the way we frame the question really changes how people answer, even though objectively it shouldn't. And so that's all fine and good but I think the trouble comes, and where I sort of start criticizing, is the implications that people draw from this research. I shouldn't say everyone, but at least a very influential set of people have drawn from this set of research. And the implication is this: if you as a consumer do not make decisions that ultimately make you better off in the long run, that are somehow mistakes, than there is a role for some third party to, you can call them a paternalist or regulator, for that third party to come in and either make the decision for you, or to frame the choices in a way that gets you to make a difference choice, so that, ideally, you will actually be better off in the long run. So it's this idea that a paternalist, a government, a third party, can alter your decision making in a way, either making the decisions for you, or nudging you in a direction of a certain choice to help make you better off. And it's that particular issue that I take issue with. And I think with regard to a nut that we're nudged, that comes from a book that was written by a couple of professors at the University of Chicago, Thaler and Sunstein. And just I think as a way of saying how important the topic this is, Sunstein has worked in Obama's administration. He was, I can't remember his exact title, but he was the so-called regulatory zaar. So here's a guy wrote a book called nudge whose working in the White House, there are several countries that, I believe the UK for example, has a whole new government agency that's sort of set up to try to, I think they call it behavioural insights team, or something of that sort, to use these findings from behavioural economics about how people make mistakes to try to design better policies. But the word nudge comes from the idea that, at least in Sunstein and Thaler proposal, they advocate something called libertarian paternalism which sounds like a paradox, or a sort of oxymoron, but their proposal is, you know, we don't want to government telling you what to choose. We're going to make it libertarian so we're not gonna remove choice options from you, so we're not gonna ban those sodas, but what we're gonna try to do is create the choice environment in a way that nudges you towards what we think is gonna be best for you. So maybe we will make the sodas a little harder to reach. Or sometimes, what they advocate often is just changing the defaults. So, at least in the US for example, if you want to be an organ donor you have to choose to be one. So the default is I'm not going to donate my organs I die. And they say "Well, you know, one thing you could easily do is just change the default, make everyone automatically an organ donor, and if you want to opt out, you can, the choices are still the same." So they argue, it's freedom preserving, and yet by using the government's role of picking defaults or picking the way things are framed, you can nudge people in the right direction. And I will admit, their version of paternalism is the lease objectionable of them, but theirs is on one end of the spectrum and there are people on the other end which have no qualms at all with restricting people's choices. So banning sodas, based on the argument that people are not capable of making good decision, they're not able to make good decisions. So the more coercive type paternalism is certainly something that's still be one the table, and this is really a change for the way economists have thought about the world, because the sort or paradigm that economists have been working in for the last, you know, probably half century at least, is that, you know, the choices consumers make reflect their best attempts to make them better off. And so, unless there's some external effects, like an externality or something like that, there's really not a lot that can be done by some third party. These behavioural economic insights, you know, have now opened up this door to say, "Oh, well people really aren't making the decisions that make them better off." So there's a role for us to step in and so something to ultimately increase their long term well-being. So, that's sort of the backdrop of, you know, sort of, what I attempted to critique. [46:03] Brady: I think there was two issues that I wanted to explore with you. One is that it's based on, it's based on research that may or not hold up over time. So here I was thinking if you retrospectively thought about nudging people to the old food pyramid for example, when I guess grains were much more favoured then they are currently, those would have been, maybe not policies that we would look back on proudly. And I'm wondering if that's, if it's just that you don't feel that the government should be involved, or is it, you don't, I guess I wouldn't mind just discussing this a little bit. We're always being nudged, but is it the role of government that you're concerned about, or is it just the idea of anybody interfering in anyone's right to nudge? So businesses are nudging us all the time. Jason: Yea, you're exactly right. You're right, companies advertise to us all the time. I go to church and I get preached at, you know, there. So, you know, people are always trying to influence what we do. And what I think is a challenge for government is that unlike that grocery store, and unlike that church, the government has a monopoly on a number of settings. And whereas I can choose to go to a different grocery store, for example, I've got two young kids too, and if I take them to the store, they're being nudged to pick up the candy bars when I'm checking out. You know, there are other grocery stores I can go to, and some of them don't offer those options right there. And so, you know, I think one of the key distinctions between, you know, business nudging and government nudging is competition. And whereas I can easily, you know, give up going to a business, maybe not easily, I might incur some costs, but there will be other businesses that might come along that would offer me a different set of services, a different variety of options, if indeed the ones that I currently have too obtrusive or that I don't like. You just don't have those same kinds of abilities to escape the government nudges, and as a consequence what happens is, like when companies are trying to nudge you, they are also, you know, have an economic incentive to nudge you to those things you're actually going to want to do and buy, and those same kinds of incentives aren't necessarily there with the government too. So, that's part of my thinking there too, is the difference and the ability of competition to affect and offer choices to you that's different with business nudging versus government nudging. But the other issue is one you kind of alluded to, and that is, so there's two, this really multi-faceted issue but, one of them is that, you know, the behavioural economists who see these mistakes we make, they can design a policy on paper that sounds fantastic, maybe even on paper it sounds like it's going to work and help solve this, say, decision making problem that we have. But the challenge is that they're real life politicians that have to implement these things. And when that policy actually gets implemented, there are all the sort of public choice issues that come about, and my worry also is that when it gets into the political arena, and all of a sudden you have the government that's empowered to nudge people towards certain directions, you can bet that, you know, the fast-food chains, other lobbyists are going to be at the table and trying to have some say in how that policy actually gets implemented, and it's not all that clear that nudge is going to work out in as effective a way as the advocates really desired. But, that's also presuming even that we have perfect knowledge, and I don't think we do. Again, I think a lot of the policies people advocate come from simple little experiments that we do as students. I would bet, I would wager a bet that at least 80% of all the studies in behavioural economics were done with college students. , and often done in a little classroom or laboratory setting. And I think that's one of the challenges when you look at the research is that, yes sometimes the findings that people, that are generated in these lab settings do also appear in the real world, but not always the case. And what I think the more careful studies, the more nuanced studies, what they find is that, at least when decisions are really consequential, they're important decisions, that often in the real life we find out, we find ways of avoiding mistakes. Sometimes even the markets themselves come up with mechanisms and institutions for helping us avoid decision making biases. And if you look around us, you know, we have all kinds of things to help us make good decisions. There are consumer reports, for example that tell us about, you know, the quality and about the ups and downs of the different products. And the nice thing about those is we can choose to ignore those particular pieces of advice if we choose to, but I think this idea that somehow there is this third party that is better informed and in a better position to know what choices you would be better off making, to me strikes me as somewhat elitist and also strikes me as arrogant, to presume that there's a third party that's living in, I don't know, Washington, D.C. or in Toronto or where have you, that has better information about your particular setting and your particular, you know, constraints facing you in your life to know what would be better off for you, you know, I guess just strikes me the wrong way. I think's it's also, I think at an even deeper level, I think the problem with a lot of this paternalism, whether it's the nudge variety or something even more coercive, is it's really a bit of a philosophical problem, I think. And that is, that the argument again is that if people are making mistakes then there's a chance for this third party to come in and either nudge or get rid of choice options to make them better off, to make their long term self better off. And the challenge is, I think that, you know, once you've foregone the idea that the choices that people are making are being made with the pretense of that person making themselves better off, then you've basically admitted that that person doesn't know what makes them better off. And so for you to say that "I'm stepping in as a paternalist and making them better off with my decisions," I think all you're doing is substituting your judgement for theirs. The paternalist is deciding what he thinks you would be better off with, what would make him happy as a paternalist, not what you actually, would make you happy. And I think that the challenge is people, and this is exactly the evidence that, for example Sunstein and Thaler present in their book, is they go out and they interview people, or they do a survey and they ask people on the verge of retirement, for example, "Do you wish you would have saved more for retirement?" And what do you think most people say? They say "Oh, yes. I wish I would have saved more." Or they go to people that are overweight and they say "Do you wish you would have gone on a diet a couple years ago, or that you weighed less?" And most people of course say "Yea, I wish I weighed a little less." And so they say "Ah! There you see, people wish, you know, they don't have enough self-control. If we'd only stepped in five, ten years ago, made them save more, forced them to save." And actually, our governments do that. Or in the case of health, if we would have forced them to go on a diet or changed their food choice five years ago they would only be better off now. But I think that's totally a mistake to use that kind of evidence, that sort of survey responses, as evidence of some decision making bias, because if I ask you today, if you wish you would have saved more ten years ago, and you say yes, well of course you're going to say yes. You're now in the position to be reaping all the benefits of all that saving that you would have done, without incurring any of the costs. So, it's presenting a false choice to people and so often, what a lot of these paternalistic policies, what they're doing, is they're privileging your future self, your hypothetical future self, over your current acting self. But to me, that's just an arbitrary choice. They're saying the choices you're making today are wrong, and the only, you know, real logical reason I can give for that is I, you know, that, you know, my preferences for what your future self will look like are really the only things that can guide me in terms of justifying restricting your choices today. So, you know, I think, you know, a lot of this is really just sort of skimming the surface of what's in the book, and probably not nearly as logically present [laughs] as what's in the book. But I think there's both some empirical issues with the paternalistic policies, as I've mentioned. You know, they're coming from lab studies that sometimes don't hold up in the real world. But it's also somewhat philosophical, this idea that there is a third party that both knows more and knows what your future well-being, how it will be affected. And I think both of those, from a philosophical and an empirical issue are somewhat problematic. [55:02] Brady: I think one of the really challenging points that you raise in your book that's worth thinking about is, okay, people might have an opportunity to nudge, the question then really is on what basis does government force an institution to, for example, to nudge? So nudging is probably going on in supermarkets, in the private sector, in universities. They're all making lots of decisions where there's nudging going on, it's almost unavoidable. But one of the things you do, and each one of these examples throughout the book, is raise the question of on what evidence, how strong is the evidence to suggest and to support a government policy to sort of, in a sense, force a particular nudge? And I think that'll be a real challenge for policy makers and students who go on to read your book, and policy makers who listen to this podcast and then go on to, perhaps, read the book, I think that's kind of the challenge that you lay out. Now, in that, and I'm kind of winding up a little bit here, but in that regard, what's the feedback been? Do people find that challenging frustrating? Are you getting hate mail or [Jason: laughs] support? I'm just curious. Jason: It's been, you know, kind of all over, all over the board. You know, some of it is, you know, somewhat expected from both quarters. You know, you on the one hand, I suppose most of the interviews and things I've done are with people that happen to support my particular, you know, political persuasions, so you know, the sort of conservative or more libertarian journalists or radio hosts. You know, a lot of that is more rah-rah sort of stuff [laughs]. "Yea, of course you're right, yea, right on." That kind of stuff. You know, interestingly I think too, I sort of anticipated this, but probably not to the extent I probably should have, and that is, you know, really the reaction within the agricultural community has been really supportive and really interested in the things I've been writing. And I think partly that's a reflection of the fact that, you know, I've come to discover, you know, a lot of the large kind of agricultural, and I shouldn't say large, but just people involved in production agriculture often feel beleaguered that, you know, the things they're doing, whether they're using bio-tech varieties, or they're not planting organic, or whatever, you know, I think they just feel under constant source of criticism and sort of social shaming in a way that, you know, you're not farming in the way that you should. And so I think that there's, that was one group I thought would be somewhat supportive of some of the ideas in the book, but I don't think I realized really to quite the extent to which there was sort of that feeling in the agricultural community. Almost a sense of relief that, yea, somebody finally is sort of sticking up for us a little bit, and that's not really the way I viewed what I was doing. I don't see myself as being a defender of, you know, modern agricultural production per se, or of agribusinesses per se. I think about myself as trying to defend consumers and good policy decisions, and that happens to coincide I think with a lot of the choices that farmers are making. So, that's been one, you know, pleasant surprise. You know, and the push back on the other end, yea there's been some of it, as I anticipated, and there's been quite a lot of hate mail too, you know, a lot of it, if I had to be frank, is not particularly well reasoned, sometimes, you know, more of a gut reaction. And I think some of the most interesting feedback I've been getting is, you know, occasionally I'll go give talks on university campuses, and especially when I travel to campuses that are not, that do not have an agricultural college, the particular food issues that we've been discussing are really prominent there. You know, the push for local food, for organic food, this idea that really modern farming has gone astray, is really ingrained in a lot of today's college students, and a lot of courses on college campuses. In fact, even at my university here which is an ag college, you know, we have, you know, courses throughout our university that talk about things like food and culture, and food and history and the kinds of things they watch in those courses are Food Inc., and these kinds of documentaries and read food books that are very critical of our food production system and so, you know, those audiences are fun to engage with because these are bright young people, they're smart young people, they don't know much about food and agriculture. What they do know has come mainly through these sort of muck raking sort of journalist accounts, and so, you know, they're often very hostile to the kinds of things I have to say, and yet they often don't have much information beyond these, you know, handful of fix or six books or documentaries that they've seen. So, you know, I don't know that I'm terribly successful in persuading people that disagree with me, but I sure like the opportunity and have enjoyed the opportunity to try and present a different perspective and sort of challenge some of the notions that people have come to believe about food. [60:21] Brady: Well, as someone who teaches in their class, students to really just try to begin a kind of entry point to examining most policies is thinking about benefits and thinking about costs, and trying to compare them, I found your book to be helpful in that regard, particularly from helping us think about some of the unanticipated sort of costs that might be associated with policies. So Jason, I really appreciate you taking the time to talk to me today and good luck. Jason: Yea, thanks Brady. I appreciate you having me on. It was fun. [60:55] [Closing music begins.] [61:05] Brady: Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcast.

Barry Goodwin and Dr. Brady Deaton discuss Barry's research on the effect of U.S. subsidies on U.S. farmland values and rental rates. They focus their discussion on the effect of U.S. agricultural subsidies on rental rates. Transcript [0:05] Brady: Welcome to FARE talk, where we set out to provide enduring discussions on contemporary topics relevant to our economy, with particular emphasis on food, agriculture, and the environment. My name is Brady Deaton Jr., of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I'll be your host. [0:23] Music fades out. Brady: Today, Barry Goodwin and I will be discussing his research on the effect of US government subsidies on US farmland values and rental rates. Barry is William Neal Reynolds professor in the departments of economics and agriculture and resource economics at North Carolina State University. Barry, welcome to FARE Talk. Barry: Thank you Brady. Good to be hear. [0:45] Brady: I should note to listeners that today's discussion will orbit around a paper that Barry and his colleagues have written, and the title of that paper is The Buck Stops Where? The Distribution of Agriculture Subsidies, and a link to that paper will be made available. Barry, I love the way you start this paper, and I'm just going to throw the question that you pose to your readers, a question that you took from a news report, and I think it's an interesting way to start this podcast. And the question is, what do former basketball star Scottie Pippen, publisher Larry Flynt and stockbroker Charles Schwab all have in common? And what's the answer to that question, and why is it important? Barry: Well they're all beneficiaries of farm program subsidy payments, so, and they're not, you know, individuals that we would associate as being involved in production agriculture. You know, makes for an interesting news story, to find these different individuals that are very wealthy and very influential, and yet are receiving farm subsidy payment cheques. [1:55] Brady: And somewhat related to this, is I was looking at Paul Barkley's centennial history of the American agriculture economics association, and he's talking about four running meetings that four runners of the association, in particular looking at the economics society, and he talks about a session that was put together to examine the rapid increase of the system of land renting, the absorption of small holdings by wealthy land owners, and the abandonment of farms. But what's interesting about that is that it was a session that was put together in 1897 [laughs]. Barry: Wow, that's fascinating, yea. I have seen that but it's, I Believe the farm ownership peaked at some point there back in the early part of the last century, so the number of farmers and that sort of thing has been sort of on the downward trend ever since, so. Brady: Now the numbers, one aspect of this question is, it turns out that a great portion of farm land in the US and I believe the phenomenon is relatively similar in Canada, is owned by people that wouldn't be considered farmers, or non-operators. Barry: Yea, that's right. I mean it's, and even more fundamental to that is the fact that such a high proportion of farm land is operated by a tenant not the owner, and you know, I think in the US now it's approximately 40%, but if you go into some of the main production areas like the middle of the corn belt, I think it goes even much higher. So, it's, you know, an increasingly prominent feature of agriculture in developed countries, in the US, I know it is very similar in Canada. And so, there's that part of it, and then there's the question, well who are these landlords? Are they other farmers? Or I think what we generally think of, you know, sort of think of a anecdotal story that you might be familiar with, it's some retired farmer that's living in the area and renting out their land to their neighbours, but USDA did look at this back, I believe it was about 98 or 99 in one of their land owner surveys, and the found, you know, some really interesting findings that a lot of landlords are retired farmers, but an awful lot of them don't live near the farm, they're not retired farmers, they're you know, retaining ownership of this land that may have been in the family, but they are not involved in production agriculture to any tangible extent at all. So, you know, some very interesting questions. [4:34] Brady: We did a survey actually in southern Ontario trying to figure out that question to, and we found very similar results. Clearly widows and widowers are, that's a big category, and retired farmers. But there's a lot of people, particularly in southern Ontario that are what are identified as residential land owners that may live on the land, but aren't kind of actively farming, and maybe commuting to another job. Barry: Exactly, yea. Brady: So this is a big question, and, you know, there can be pros and cons, I guess, in a variety of ways, but you are really looking at the transmission of the agriculture subsidies to the land owner as well as the tenant. And, I guess, talk to me a little bit about what the debate is, or what the kind of thinking, the general thinking of that, and then we will kind of go over maybe some of your general results and then move into the more specifics of your paper. But what would be the expectation of how that would play itself out? Barry: Yea, so, you know, just to start with, land value, like any other asset, land arises value from the stream of incomes that it is going to earn in the future, and there is some uncertainty associated with those incomes and one thing we do look at in this paper and some others that we've done is really just to consider the fact that different sources, different policies, different types of income may have a, you know, different degrees of uncertainty associated with it, so how they're going impact asset values could differ as a result of that, but you know, the big concern right now, whether it's a concern or just a, you know, a feature of agriculture, is the fact that high prices have driven up land values tremendously. You know, it's just been in the last five to ten years we've seen just a real increase in land values, and that's of course, a capital gain to the land owners, it's, you know, a cost to somebody who's wanting to get started in agriculture and acquire this land, but there's a lot of issues that relate to the fact that these assets have continued to gain value. And then there's also the question of who are these policies really intended to provide benefits to? The legislation requires, in the US, that if it's a cash lease, that the subsidy cheque goes to the operator, the tenant if it's a tenant operator, and because they're technically the ones who are holding all of the production risk, that's the way it's always done and has been done. And, if it's a share lease, which is becoming less common in most areas in the US, but if it's a share lease, then the subsidy cheques would be divided according to the terms of the share. But, you know, one important question is, if the cheques, the cash leases, which are the most prominent way land is leased, if the cheque is going to the tenant, does that mean that the landlord is not benefitting from that? And the fact that so many landlords really are quite far removed from production agriculture now, is that the intent of the policy? Or is that just, you know, a consequence of the way the policies are distributed? It's an important question as to really, if it's a cash lease sort of arrangement, does the landlord essentially raise lease rates to capture some of those additional benefits when policies change. And we believe we do, and I think the literature is pretty clear on that. The debate is over how much of that dollar of subsidies stays with the operator and how much goes back to the landlord. [8:28] Brady: Right. So, the land owner is sitting there, and they become aware of a government subsidy that is going to the tenant. I guess the question is, do they capture that full subsidy or to what extent is it shared? And you kind of, your research focuses not only, in this paper, on the total effect of say government subsidies on farm land values and rental rates, but also you're able to break apart the different ag programs and see if there's differences in these ag programs on how they affect rental rates and land values. I think that's pretty interesting. Barry: Yea, and again, that goes back to, and we have another paper back in, oh I can't remember, 2003. [Brady: 2003, I think. Yea, the H.A., yea] Yea, looking at the, really how we've modelled these, you know, land value determinants and that sort of thing. And what we look at there is the fact that, it's several different things. but different sources of income, if they have different risk associated with it, and certainly policy carries its own risk in terms of whether it will be eliminated, I think, you know, we've seen some pretty big adjustments to the fact that direct payments are gonna, very likely be eliminated if we ever do get a new farm bill in the US. But if something is very uncertain, and the operator is risk averse, then they're going to discount that, value of that, going into the future with a higher discounting rate, and it's going to have less of an impact on land values. What we've looked at is the fact that if you don't recognize that your models of land value, and the degree that benefits are capitalized into asset values are really going to be flawed, you know, because different policies will have different effects, essentially, so. [10:32] Brady: You emphasize in your paper, over and over again, that these land values, for example, are based upon these expectations, and these expectations may vary, not along across what the market returns are, but also with respect to this sort of different portfolio government payments that come in. So, what, in general, what would you say is your big finding, and then maybe we will step back and talk about some of the particular aspects of the study. Barry: Yea, well, one issue related to this, that you mentioned, pertaining to expectations, and again, it goes back, somewhat, to this earlier paper, but there' another econometrics type problem that arises that really just has to do with the nature of the data and the fact that it tends to be very systemically correlated in, across a lot of farms in a given year. So, the implication is, you know, you'd like to say "Well I'll look at what my payments were last year, and that's going to give me a good idea of what they're going to be next year, and the year after, and the year after," and that might work very well for something like direct payments, that are pretty much set for a certain period time. But if you are talking about returns from disaster payments or, you know, price support systems sort, especially ad hoc support, that's not part of the standing legislation, you know, what you actually observe in one year, or another year, or the past five years, may not be a very good representation of what you'd expect to see over the long run. So, it's another issue that I think, you know, causes us to take another careful look at the way land values have typically been modeled in the past. So, I think that's one thing that the paper brings out, probably more so in the earlier work that I mentioned. I guess the real point of controversy with this paper relative to some of the others, has to do with how, in a cash lease arrangement, how a payment is actually shared between a landlord and their tenant, and it goes of course to the tenant in a cash lease, but then the landlord extracts a portion of that back in terms of a higher lease rate, and those adjustments take place over time, and you know, it's a moving target for the producers and the landlords and that sort of thing, but I do know, from some of the work I've done with outreach, that farmers have, you know, felt these pressures from landlords, especially when policies change quite a bit. In 2002, we got, I was up at Ohio State at that time, but we got a lot of calls from growers and they were, you know, having to renegotiate their lease contracts. So, other work has found that, I think we find anywhere from a 39 or 35 cents goes to landlord, or stays with the tenant rather, or no, goes to the landlord, I had it right the first time, about 35 to 60, 50, 60 cents, something like that, and it just varies across the polices of course. But other works found that landlords get a much smaller amount of that. And some fine work that Barrett Kirwen did that came to different conclusions, but you know, it's an empirical question and I think it just depends upon who you are looking at and what the market characteristics are at that point in time, so. [14:13] Brady: Alright, well let me ask, we had Barrett on an early podcast, we were talking about his estimates that the landlord, you know, would get, I forget, somewhere 20 to 25 cents, let's say, and so that would mean that the tenant was getting a substantial portion of the government dollar, let's say that marginal dollar paid by the government. And you find a much higher, I think in general though, you have like you mentioned you have a lot of sensitivity analysis, but you find a much higher return to the land owner, which implies then, that as you suggested, that the tenant is getting less of that. So if the tenant, I mean to me, the magnitudes are really important here, right, because if the tenant isn't getting, if the intention is to help the producer, or who is let's say, a tenant, and the entire subsidy is being passed to the land owner, or most of it, then that has a very different policy implication, than I guess one in which they are getting the majority of the subsidy. Do you lean towards it being, you know, you know, closer to the majority, or how do you lean in terms of the magnitude? I know Barrett's, yea... Barry: Yea, I mean I think, you know, I think, of course I would feel like our estimates are close, just you know, we can't set our biases [Brady: Sure] completely aside on things, but a bigger issue, and taking a step back for a second, I think that as economists, as empirical economists, we really don't have still a real good handle, we know anecdotally how these markets are functioning, but we don't have a really good handle on, you know, exactly what these land transactions entail, because there's tradition involved, there's social linkages, there's, you know, proximity considerations, there's all sorts of arrangements that exist there, and we would like to say, "You know, this is a perfectly competitive market," or "one side or the other has the advantage," and I think its probably just a mix of all of those things. It's far from being a perfectly competitive market, because I think, you know, these things are negotiated by a small group of players. So there's probably some game that would represent this in some way, but I'm not sure you could apply it to every single circumstance. So, I think that's one reason you could see differences [Brady: Mhmm] in some of the results. The period of study has a lot to do with it to, and it goes back to this question of what are the policies, and you know, one thing that really I think we have a difference of opinion on, on some of the research, is some of the assumptions about what the 1996 F.A.I.R. Act in the US really signified and meant, and what the policy environment was at the time, and you know, thinking back, it was a nice time to talk about cutting the support because prices were strong and, you know, the fixed payments were, seemed like sort of a temporary measure to gradually get the government out of agriculture, but we all know what happened, just, you know, a year or two later when the Asian financial crisis sort of tipped markets in a way that caused prices to fall, and congress was very, very quick to jump in with support, price supports, and it's also the case that direct payments were not the only thing going on right then, there was a whole other range of policies. The F.A.I.R. Act didn't eliminate price supports completely, and so, you know, to say that this represented some sort of natural experiment I don't really agree with that because I think the conditions were such that it made the policy change endogenous to what the market situation was, and what the political situation was. So, I wouldn't characterize it as an exogenous shock to markets, and I don't believe farmers for a minute thought that the government wasn't going to jump in if things turned south for them, as they did, and as they typically do, and as congresses always been a, you know, quite willing to do to get out the cheque books. So, that's one of the important distinctions. That's a very long winded answer, but [Brady: Yea, no, no, no] you know, I think, you know, my challenge to some of the younger researchers out there is, you know, help us figure out these contracts and these rental arrangements, because they are very sophisticated, they involve a lot of cost sharing, they're generally hybrids now between cash and share leases, and you know, a perfectly competitive land market really doesn't fit the local situation where these exchanges take place. [19:26] Brady: I think that's, you know, that's really one of the great things about, you know, the profession of applied economics of agriculture economics, that there can be general agreement on the, you know, on the theory but there's a lot of importance to playing these, getting these magnitudes right. I mean the difference between the majority of it going to a land owner, if that's not the intention of policy, versus the majority going to a tenant, have a lot, you know, have a potentially, in the long run, a lot of implications for how we perceive and support ag policy. On this idea of expectations, one thing that I find just terribly fascinating about your paper, and also builds on what you just mentioned about what people thought at a given time was going to happen to government, is it you who find that the marginal contribution of a dollar to farmland values is greater than the marginal contribution of say, an increase dollar in the market return, in the returns to the market to farmland values. And at first blush, that seems surprising, but when you get into this notion of expectations, its, it kind of makes sense. Can you talk about that finding a little bit? Barry: Yea, I mean, I find it still surprising a bit, and you know, like an empirical research, there's some, the results are driven by the data and the analysis that was done, and the assumptions, and so, you know, to be very clear about that, I would have expected a bigger role for the market. But there is an awful lot of uncertainty associated with, especially looking over this period of time, when these data were collected, associated with the stream of income that comes from the marketplace. You know, the median farm in the US and a lot of this has to do with how you define a farm, but I think there adjusted gross revenue each is about negative $15,000 a year or so. It's, you know, a lot of farms operate with a negative margin, and there's good reasons for that having to do with the policies, and again how farms are defined and taxed, tax allowances and some of the special accounting privileges that farmers get. But, you know, if you look back in time, things have been a little different since '07 or so, but you look back, yea there has been a lot of uncertainty associated with market earnings, and maybe less so when you compare it to something like a direct payment or even a loan deficiency payment that puts a floor under prices. [22:13] Brady: I mean, I've found the idea fairly compelling, at least abstractly, that if you're looking at government payments at any, at the point that your data is examined, actually, let's go what years are we examining again? Barry: You know I had to look at the paper, we have looked at this over [Brady: Uh huh] you know, several different periods. I believe here we are looking at from 96 forward on into the, you know, I think 2002 was where our data stopped at actually. Brady: Okay, yea. Alright, so over that period, the expected volatility and market returns could have, you know, been much, much higher than the expected, you know, volatility in government payments is that... Barry: Yea, I think so, yea. That's it exactly and, you know, there's some diagram in the paper that sort of show some of this volatility that, you know, looking at various levels of aggregation. And, you know, this volatility of course as you get closer and closer to the farm level goes up quite a bit because of the idiosyncrasies associated with individual farm earnings. So, I, you know, it's surprising but I think there's an explanation for it, yet as well, so. And another issue here of course is trying to extend these research results into what markets are like today, cause I've just saw today that farm earnings are supposed to be up, net farm earnings in the US, thirteen percent over last year, and that's, you know, last year was a good year, in spite of the drought, so, things are quite different the last few years. [23:58] Brady: When you think about the different kind of payments, and you kind of, I should just mention too, we'll have links to this paper, one of the really interesting things of the paper is, it goes into a fair amount of detail of the various government programs that it's trying to model. And then, you know, you do find differences in the return, the effect, of the different programs on rental rates and farm land values. Can you maybe just take, you talked about a distinction between farm programs that have an insurance component into them, and how those like counter-cyclical payments, [Barry: Mhmm] and how those have affected farmlands values versus, let's say a direct payment that may not be tied to market conditions so much. Barry: Sure. I mean it's really, it's simple as sort of a wealth effect versus an insurance type effect, and if you have risk averse growers, you know, they're gonna value policies that serve to reduce volatility in the market, and volatility of their earnings, you know, just on the shear fact that they characteristic, and even if they're not necessarily increasing incomes. So, you know, there's, we've grown fond over the past several years of trying to break policies down into wealth and insurance effects and these different things. I think, I think there's a lot to be said for that, I don't agree with how some of the, some of the characterizations are made some times, but you know, clearly direct payments, fixed direct payments or direct wealth transfer to growers, there shouldn't be any uncertainty associated with that. Things like price supports and market loss adjustment payments, very, very different type of policy entirely, so. And if you want to understand how, you know how producers are viewing a dollar, a dollar back in policy benefits you have to really consider what type of program that policy benefit came through. [26:11] Brady: So in terms of the effect, the direct payment had a higher basically, or a lower effect than the ones that were kind of counter-cyclical payments, or..? Barry: Yea, I believe it, there's less uncertainty associated with, you know, a direct payment, it's pretty much guaranteed over the life of the legislation, and then in fact, you know, one very interesting question that's sort of sitting there and needing discussion whenever we think about these things, is really did farmers truly believe that fixed direct payments were going to go down until they went to zero in 2002? And, you know Congress, you know, was quite generous in extending those benefits in 2002, and again in 2008, it looks like they are going to go away this time, but you know, there's, it gets back to this question about expectations and really, what's the policy makers intent with these, you know, billions and billions of dollars that they are sending out to a very wealthy segment of society, anymore. What exactly is it that they're doing with this, and you know, what are the intents? And, you know, clearly it's to garner political support, and the fact that so much of the benefits, whether you believe one number from one study or you know, one from another, the fact is, when you start carving up 5 billion dollars a year, you know, even if its 20 percent or something, going to landlords, they're still getting a pretty big chunk of the overall benefit, so, you know, is that consistent with the intent of congress? I would imagine it is, you know, but it's typically not what you hear when you're listening to the policy makers rhetoric at least, so. [28:13] Brady: Oh yea, no, I think that that's one, you know, one real take away that I'd take away from your study, and your earlier studies, as well as Barrett's study, is that regardless, we have a whole lot of land that is owned by non-farmers and they are big beneficiaries of some portion of ag subsidies, and I think the general population, that's not the intent, or I think the general, I don't know, I can't speak for them, but I think most people don't think of that as the intent of ag policy. I think that's... Barry: Yea, it's a good question, you know, just looking at the bigger picture of things, you've seen a real development of, sort of, I'd say that the general public's interest and understanding of agricultural policy, and you know, critical thinking about it in a lot of ways, and a lot of that has to do, that the individuals we started with, Scottie Pippen and everything we were talking about, all that became possible because of the Environmental Working Group and their database that they were able to track down to individual names and addresses, where cheques were being sent and that sort of thing. So, you know, it's, the tax paying public is becoming a little more critical of how these dollars are spent, and you know, I think that's good, I think that transparency is a wonderful thing, though I think it's really being threatened quite a bit by the farm bill deliberations now moving forward, so. [29:56] Brady: Now one aspect that I think is worthy of noting, the way, at least the way I think I'd like to get your kind of thoughts on it, you don't want, I wouldn't want to conflate the idea of concern about who the government payments are going to, with the idea of being critical of the rental market. I mean, non-farmer ownership of farm land and the rental market seem to be really healthy markets of, potentially of the farm economy, that's really different from the beneficiaries of government subsidies, in the sense... Barry: Yea, absolutely, I mean it's, that just one of the benefits we enjoy of living and operating in what is still, largely, a free market as you know. [Brady: right] Buyers and sellers and renters and landlords are able to work out mutually beneficial agreements, so there's no question there I don't think, although you will hear, you know, you will hear criticism from farmers sometimes that, you know, we're being taken advance of, or landlords should not be able to raise our lease rates when you change policy and that sort of thing. [Brady: Mhmm] So it's an interesting problem I think. Brady: Right, right. But I mean to some extent it allows, say farmers to not have to have, to diversify their portfolio. They don't have to have all of their assets in land; they can own a certain portion and still have production on an even larger portion because they are able to get into that rental market. Barry: Yea, and I think, you know, it's not unusual to see, you know, an Iowa corn grower, and Illinois corn grower, that's you know, farming 20,000 acres or something, and has 50 landlords [Brady: right] that they deal with, and the fact is, whether you believe economies of scale exist or not, I mean, I think at some level they have to when you're talking about farm size and farm, the scope of the operation, and you know, it essentially allows for efficiencies to be exploited to the extent they exist and it wouldn't be possible for a grower to be able to produce on that many acres without going into the rental markets, and you know, dealing with a lot of different landlords in some cases. [32:26] Brady: Let me, just ask a kind of, moving from your paper a little bit [Barry: Mhmm], and I don't know if you're really in a position to answer this, but I would be interested in your sense of, you know, what's going on currently with farmland values. We know in Canada, and its similar in the United States, we've had pretty good appreciation in farmland values over the last bit, and I would just be interested in whether you think that's being triggered by fundamentals, or potentially as I think Barry Fox says in a paper, you know, he has a paper on fundamentals and fads, and kind of differentiates between what goes on in the short run and the long run. But do you have any sense of that issue, or do you have a take on it? Barry: Well, I think, you know, a big part of what we're seeing is just a natural consequence of very high prices which are being driven by the bio-fuels mandate, and then to some extent international growth and some of the so-called BRIC countries Brazil, Russia, India and China. But, you know, the EPA is talking about, I think they've proposed in fact, to scale back some of the ambitious growth in the renewable fuel standard and corn prices have adjusted, they've come down a bit, and I think you'll see that impacting land values. So, I think it is all very policy driven, even if it's not, you know, a subsidy program directly, when you have this ethanol mandate, and the effects that's had on markets, you know, it certainly has an effect on asset values. And all you do is look at what the appreciation rates have been lately, yea, to see it, so. [Brady: Alright]. So, you know, I think the question is, back to expectations and the uncertainty of those expectations, are these policies gonna stay, or are they going to change in the future, so. [34:31] Brady: Well put. I think in summary, its fundamentals, but policy is a part of that fundamental and expectations about those fundamentals include policy and certainly that seems to me, a big theme of your research in this area. [Barry: Mhmm] Is there anything that you would like to add, or is there any kind of, you mentioned earlier the younger economists of the podcast gets listened to not only by policy makers but also by graduate students [Barry: Mhmm] and, care to share any suggestions on where this research needs to go and what areas you think are really important in terms of... Barry: Yea, no. It's a good question. You know, I think our paper has got a big hole in it, because we really didn't look at the subsidized crop insurance programs that are becoming more and more and more important, I mean, that's where the money is right now. And the US farm bill, we're talking about 10 billion dollars a year, typically that's spent. So I think that we need to also consider the political economy of those programs, and there in fact have been some very interesting implications, or really, loopholes, in the WTO for how they're treated, so I think a lot of countries around the world are seeing subsisted insurance as a very popular way to subsidize farmers. So I'd encourage, you know, researchers that are looking at it to consider that and again, to the extent we can either through theory or empirics, or combination, to get a better handle on how these contracts actually, you know, are arrived at and carried out and enforced between landlords and tenants. You know, I think you could talk to an extension colleague and they could give you a lot of interesting information about what the common practices are, but it would be nice to be able to quantify that and to put it into theoretical framework in some way. And I guess one last, sort of, overall observation that we've been doing quite a bit of writing lately related to the farm bill, Vince Smith and I and Bruce Babcock's been involved in it too, really just questioning this bigger question, this overall issue of what is the intent of congress with these policies, and exactly what are they trying to do? Who's benefitting from these policies? And the fact is, that in the US, a farm household, agricultural households, have much higher incomes for the last several years it's been higher, and then much, much higher wealth than non-farm households in the US, and a lot of it is driven by this very issue of land values and the appreciation there. And some of that wealth may not necessarily be terribly liquid, but it's certainly does represent wealth, and you have a situation where we're essentially, as taxpayers, subsidizing, providing some rather large subsidy payments to, what in truth, tends to be a very wealthy, very robust, very high income segment of the economy, and as I said, I think the USDA forecasts are at 13% increase in net farm income in 2013. So, you know, it's a paradox. I teach ag policy at the undergrad level, and I tell the students in there, you know, I've been doing this for a while now, and I'm still not completely such what it is that these policies, beyond securing political support, what it is that they're intended to do, because the things that we hear from congressional rhetoric really just, I don't think hold up very well, you know, this is to preserve our national defense and this sort of thing, and there's probably some elements of truth in all of those things, but you know, it's more of a puzzle than that I think, so. [39:05] Brady: Well, that's a great charge for the future, and for our profession. Barry, thank you so much for taking the time to discuss your paper and your ideas with us today. Barry: Yea, I appreciate it Brady, and if anybody has questions or comments, they certainly, I'd love to hear back from them and they can just drop me an email. I'm easy to find on NC States web. [39:26] [Closing music begins.] Brady: Yea, we'll post an email for you. Barry: Okay, great. Brady: Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcast.

Dr. Thom Jayne and Dr. Brady Deaton have a conversation focused on economic development strategies for Sub-Saharan Africa and contemporary issues regarding land use and land ownership in Africa. Transcript [0:04] Brady: Welcome to FARE Talk, where we set out to provide enduring discussions on contemporary topics relevant to our economy, with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Jr. of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I'll be your host. [0:24] [Introductory music fades out] [0:24] Brady: Today is August 28th, 2014 and I will be speaking to Dr. Thom Jayne about agriculture, land pressures, and economic development. Dr. Thom Jayne is a widely respected and well-published professor of international development in the Department of Agriculture, Food and Resource Economics at Michigan State University. Thom, welcome to FARE talk. Thom: Hey Brady, glad to be with you. [0:45] Brady: Thom, you and your colleagues, Derrick Heady and Jordon Chamberlain, recently edited a special issue for the Journal of Food Policy, and the title is Boserup and Beyond: Mounting Land Pressures and Development Strategies in Africa. Generally speaking, what motivated you into this area of research and what in particular is motivating this issue? Thom: Mhmm. That's, Brady, if I, there's sort of a proximate reason, and um, there is a more long standing set of motivations. So if I will maybe start with the longer one, it kind of goes back to how I got into this business working on Africa and agriculture. I was a peace core volunteer after I got out of graduate, undergraduate school in the early 80's and I had an interest in seeing how two-thirds of the rest of the world lived. So, I got my fill of that for two years in a rural village in Ghana, and I was there to help them with agriculture but it became quickly apparent that they knew so much more about agriculture in the tropics than I did. One of the things that really impressed me from my two years there was how their people working in communities, how their hardest efforts could be undermined by a politician in the capital city just by the stroke of a pen. And that's sort of what made me realize that any attempt to do something useful for, you know, to deal with problems of hunger and poverty in Africa, I felt anyway, that I needed to get back into a, sort of a, position where I could speak to policy makers. And that's how I ended up getting into graduate school. But the observation that I came up with after two years in Ghana was that well, I think our textbooks and conventional wisdom about Africa, rural Africa anyway, is that these communities are fairly egalitarian and that land is relatively plentiful. It's not like Asia where you have these really densely populated areas. What it, even in the 1980's, I could see that there wasn't, that really wasn't true. People were constrained in the amount of land that they had, and it seemed to affect their potential to really expand and grow and so forth. You know, sort of the more proximate reason of that, is that having looked at almost every nationally representative data set in Africa, spanning 10 or 12 countries, now that I have really delved into, in every single one of them, we see this huge heterogeneity in land holding size. So most small holder households in Africa may have a hectare or less, whereas a small proportion of households may have 5 to 10 to 20 hectares. And, almost all of the marketed output will come from that top ten per cent of households, so much so that maybe two-thirds of African households sell almost nothing and many of those households are actually net buyers of food in the sense that they may sell something, but they end up buying back more than they sell. And, all of these indicators of welfare, asset wealth, consumption, incomes and so forth, very much seem to be correlated with variations in farm size. And another one of the kind of paradoxes that got us into this work, Jordan and I have talked about this at length before we actually started setting up the special issue, is that when you fly over Africa, and land in one of these capitals, and you look down and there is so much unoccupied land, it looks like it is so sparse. And yet, again, rural households often tell us in surveys that their limiting factor of production is land, and that they can't seem to expand or get access to more land. So there is this paradox of land scarcity amid the apparent abundance. So those are some of the motivations that we had getting into this special issue. And of course, there has been so much done on this, you know, previously, and we wanted to give a nod to Ester Boserup and the seminal work that she has done, and she kind of hatched a cottage industry of subsequent work on this by some of our luminaries in agricultural economics and the economics field including people like Hans Binswanger, Prabhu Pingali, you know, so many other people have done work on trying to explain how land intensification and you know, changes with population growth. [6:20] Brady: And who was Ester Boseup, why is she in your title? Thom: Mhmm. Okay, right. So, in 1965, Ester Boserup wrote a piece that took on Thomas Malthus. And you know, Thomas Malthus seems to have a bad name these days because of his, you know, his pessimism about the fact that population growth would outstrip the ability of the world to produce food, and so there would be these dire consequences down the road as the world became, you know, more populated. So what Ester Boserup tried to turn that around and said, well it's true, that as population density rises it's going to increase the demand for food, but she pointed out that communities tend to respond, much like the induced innovation theories of Vern Ruttan and so forth, and Hayami, communities respond to rising population pressure by intensifying on the scarce factor of production. And so as farm sizes shrink because there is subdivision and more allocation of land, and you know, you reach the land frontier. So Ester Boserup was saying that people would apply more fertilizer, they'd put more labour per hectare on the ground, they'd get more weeding done, so there would be certain forms of intensification that would allow food production to keep pace with population growth. So, that's been widely accepted and empirically validated in most areas, but we start to see that at very high levels of population density, that relationship seems to plateau, this relationship between population density and productivity. So, we're noticing that yes Boserup premises seem to hold, up to a certain threshold. And then beyond then, she never really explored whether this could go on at infinitum, could population density just continue to increase, or, you know, would something else have to happen? And actually, she did sort of talk about the need for off-farm employment to sort of kick in and transform these economies from agrarian societies into industrial ones. So I think most of her writing sort of assumes that once population density gets to a certain point, you're going to have people migrating into urban areas to sort of relieve the pressure. But, you know, one of the defining features of Africa, over the past, you know, 20 or 30 years or so, has been that the industrial non-farm growth has been very limited. And so this is you know, probably discouraged people from leaving rural areas and going into urban areas, even though urbanization is proceeding at a very rapid pace, it would probably be much greater if urban areas were experiencing more rapid employment growth in the non-farm sector. So, anyway, what we're finding is that beyond population density, rural population density of about 500-600 persons per square kilometer of arable land, we see that there's signs that intensification does not increase, and in fact, in some areas it declines. This may be related to over mining of soil, degraded soils, we're noticing that in many densely populated areas fallows have basically disappeared. In Malawi for example, southern Malawi, one of the more densely populated areas of Africa, there are no fallows anymore. So farmers are just intensively, year after year after year, cultivating their plots, and they're putting the same crop, they're not even rotating their crops very well because they have such small farm sizes and they need to grow their staple crop, which is maize in that area, to feed themselves. They end up, year after year, putting maize on that one hectare of land, so there is something like a social trap going on where in the short run, households are doing what's in their best interests, which is, you know, growing as much food as possible on their small plots, but the long run consequences of this are declining systemic productivity, you know, of the whole system which certainly, you know, does not bode well for kind of, future scenarios, unless there's major growth in the non-farm sector. You know, which, you know, there is some signs in recent years, that this, you know, could be picking up. But these are the scenarios that we are trying to address and deal with in this special issue. [11:52] Brady: One of the, one of the really interesting things that you mentioned that I wouldn't mind expanding on a little bit is the, that you have this concern about population densities, and in many other countries, despite the general availability of land throughout Sub-Saharan Africa, for most of the countries, and in particularly in some of the regions within those countries, population is very dense, and so you are really, the land constraint, or the problems associated with the land constraint that you mentioned, are pronounced in those areas. Is that correct, and if so, what are some, you mentioned this in the beginning but, let's go back into some of the issues that are also influencing the land pressures, including some of the issues that you examine in the special issue of foreign direct investment in land. Thom: Mm, okay. So there's, there are two Africas, at least [laughs]. One is the one that, that you see when you fly over Africa. Most parts of Sub-Saharan Africa are very sparsely populated and the majority of land is that first Africa. But then there is the Africa that most rural people live in, and most rural people live in densely populated areas, that's the other Africa. So one percent of the rural land in Africa contains 21% of its rural people, and 20% of the rural lands in Africa contain about 85% of its rural people. So it's incredibly concentrated, and the reasons for this are several. It has to do with high land areas in the region are generally of higher agro ecological potential, so people have kind of historically, settled in areas that are, you know, fertile and rain well. Colonial policies in a number of countries, have, you know, exacerbated that concentration of people on the small pieces of land, especially in, um, Southern Africa, kind of, where there were Colonial settlements, Zimbabwe, Zambia, Kenya, Malaui and so forth, South Africa of course. And there are other factors that geographers have, um, nicely dealt with, about why this region is so nucleated, as you will. But, so, this has led to the kind of, um, paradox, that I think we talked about at the very beginning, that we are trying to uncover, of how could it be that so many small holder farmers complain of not being able to have access to land and expand, despite the fact that there is obviously so much unutilized land in the area. And, when you look at the agricultural development strategies, and even the rural development strategies of African governments, they almost never acknowledge this problem of land constraints. SO there are based on an implicit assumption that African farmers will be able to grow and expand and you know, they obviously talk about yield growth, and yield growth would be the most desirable way of um, expanding food production because it wouldn't involve the environmental cost of expanding into forest land and so forth. But, um, anyway, most government strategies do acknowledge the need for area expansion, uh, about 80 percent, 70 to 80 percent, of Africa's food production expansion over the past forty years have been in the form of area expansion. So, um, there almost seems to be a collision course here, where development strategies are based on certain premises which in reality, uh, may not exist. And so, we're trying, you know, have government because increasingly aware of the fact that area expansion in certain small holder areas where much of the rural population lives is not really a feasible option. And, in our special issue we tried to outline what are the, sort of, behavioural responses that people are taking in response to rising population density. And we identified four of them. The first one of course is Boserup's intensification. We're seeing some evidence of that, but, you know, there are two kinds of intensification, land intensification. The sustainable type and the unsustainable type. And we are seeing signs that much of rural Africa's intensification and response to rises in population density are of the unsustainable type, just reducing fallows, soil mining, more intensively cropping, um, farm land. There's, we are seeing very little response in terms of input intensification, fertilizer. Very little irrigation response, so there are some problems there. So that's the first behavioural response of the four. The second one is diversification into rural non-farm enterprise, so still staying in the communities that they are, and, you know, what's the scope for increasingly diversifying into non-farm employment. There's some signs of progress there, Africa's rural population is increasingly, you know, its income shares from non-farm is rising, but still much of the non-farm employment jobs that we are seeing people in are pretty low, low return, informal sector kind of poverty activities. Petty trading, hawking, um, you know, basket making and so forth. So then the third response that we are seeing is migration to urban areas. And that's occurring at a fairly rapid, plate, pace, in many parts of Africa. And not so rapidly in other places. So of course this sort of depends on the, you know, using the Harris-Todaro sort of framework, where labour is migrating to wherever it's the expected returns to labour are highest. And the, the prospects of migrating to urban areas are very much limited by the expansion of job growth, you know, in urban areas, which is a major problem. And then the fourth and final behavioural response that we lay out is, um, one that's been relatively hidden and under emphasized by research, you know, to date, and that's rural to rural migration. But it looks like rural to rural migration could be the most important response of all in some areas. And there's some evidence in places like Zambia and Mozambique that rural to rural migration is, you know, very important. We're seeing manifestations of that in terms of deforestation on the frontier, land conversion to agriculture at a very rapid pace. So this is basically people moving out of the densely populated areas, into the more sparsely populated ones and trying to make a go of it there. So those are the four responses that we, you know, are trying to document. The, one of the political angles here is that when you look at this rural to rural migration we are seeing the rise of a unique class of, even though the international media has identified foreign direct investment by international firms as, you know, part of this land grad, that is occurring in Africa, and that is, I don't want to mitigate the importance of that, it does seem to be occurring at a fairly rapid pace. What we are finding is that an even more rapid set of factors associated with medium scale farmers. These are domestic urbanites, largely urban people, who are finding land to be a profitable investment. So it seems that an even more important, source of land acquisition is among this group called medium scale farmers, who are farming between 20 and 100 hectares of land. And, when you look at who these actors are, they're, they tend to be not farmers at all. They're mostly urban, salaried employers, people in the public sector, in the private sector, but people with money, probably in the top 5 to 10 percent of the income distribution in urban areas. And ever since 2008 or so, they've found that land is a pretty attractive investment, not only for speculation as land values rise, but also because they can hire someone else to produce to be a manager, and to produce food for them, and that is a fairly high return activity. So we're finding that, that this, this class of medium scale emergent farmers over the past 10 years or so, has acquired land at an even more rapid pace than the large scale foreign investors. So combined, the, these two groups, are really transforming the whole farm sector in many countries. This medium scale group actually controls more land than the entire small holder farm population in three out of the four countries that we have look at specifically. So, they're a force to be reckoned with. And another thing that is interesting is how they are shaping the political economy of agricultural policy. Many of the farm lobbies of these countries, which are historically set up by colonial farmers, large scale, white farmers, these lobbies have now been taken over by medium scale African farmers, many of whom, as I keep reiterating, are actually urban based people. And, they have succeeded to some extent, in shaping agricultural policies, at least in some countries, to suit their interests. They input subsidy programs that are conferred to relatively large farmers and most of the survey data that we have shows that they are major beneficiaries of input subsidy programs where those programs are operating. And we also see, just like in the United States, you know, especially, you know, in the 1970s, 80s, 90s, when world prices were not that high, there was a, you know, price supports that were designed to, you know, improve farm incomes and provide incentives for production. Well, that's done in many countries in Africa via marketing boards, and, so the ones who can capture the greatest benefits from the price supports of these marketing boards are the ones who sell the most, and of course the ones who sell the most are households that have 100 hectares or so, which is, you know, quite a large farm by, um, most, by standards in most parts of Africa. [24:18] Brady: Do we conflate all foreign direct investment with kind of land grabs, or how do we separate that issue, or how have you been thinking about that issue? Thom: I can say a couple of points here. This first one is that, um, yes, some foreign direct investment has most likely had positive welfare effects on most communities in, in the countries where they have occurred. I think that that, that we can point to successful examples of large acquisitions that have had positive effects. Some of the research, especially research that is being done in Southern Africa, is documenting the spill over benefits. So, spill over benefits in the sense that, once a large scale farm starts operating, is there evidence that, that kind of knowledge and marketing services and the availability of farm inputs, do these things improve in the areas around it because the large scale farm attracts other private investment, and in value chain development, input supply and so forth, that has spill over benefits to small holder farmers that are operating nearby. I've seen some evidence that the answer is yes, to that. So then on the other extreme there is probably also, good evidence that some large scale acquisitions have been detrimental in their impacts on countries. So I think as you have implied, there's evidence of both, it's very heterogeneous and of course, it depends on how, you know, the extent to which due diligence is done in the allocation of that land, whether it's, you know, given to people who are really sincerely trying to develop that land and promote synergies with rural communities, or not. So... [26:21] Brady: This seems to me also, just to add in here, gonna be one of the really big challenges because, you know, this issue of foreign direct investment in real assets is brought up in Canada, in the United States as well. But, generally the form of title and land ownership, we view the exchange as at least beneficial between the person who sold and who had rights to that land and the person who bought it. But it is quite a challenge getting back [Thom: Mhmm] to the issue you raised in the beginning when the underlying form of ownership is communal, how that process takes place. And I think, my sense is that that may be a continuing challenge. Thom: Yea, yea. Yes, so, this is a very divided literature here. There is a lot of literature that has shown just what you've said, that the development of land markets is good for development, it's beneficial to both buyer and seller, and there is some evidence showing that. But one of the things that we, that that literature tends not to deal with, and this is something that stein holden and kyosuke have dealt with in the chapter that is in the special issue, is the potential for takings to occur when tenure structure changes. So, to illustrate this, pretend there is a country that characterizes many of those in Africa, where there's land that's under statutory control right now, so there are people right now who have a titled deeds to that property, and then there's big tracks of land that are under, quote, unquote, communal tenure, and what that means is that the structure, the land is owned by the chief, and the traditional sort of power structure. So, these two systems have been, sort of, in tense coexistence for some time, but increasingly, states are trying to wrest control of customary land, and one of the ways in which this is done, is that either the state itself or a representative of the state, or even a wealthy individual will approach the chief and say, "Listen we want 100,00 hectares of your land, and I'm prepared to pay you something for it," and sometimes the insinuation is if you don't take what I am willing to pay you, we're gonna find a way to get rid of you. And in fact a number of chiefs have been dethroned by the state in recent years, in a number of countries. So it's really clear who is in control here. And so many chiefs have complained that they feel like their arms are being twisted to voluntarily give up land, either to the state, or to individuals who then take that land, and they go to the district council, and they convert it into state land. [Brady: Mhmm] There are procedures for doing this. Well this is how land markets develop. This is how, I think all over the world, that we are sort of seeing this in parts of Africa that are still under communal tenure, but most likely in almost all areas of the world, you know, land initially has not been titled, but the process of titling it, means that there is huge bonanza profits to the first recipient and then after that, when they sell that land at market price, they're the ones who make the bonanza profits. And then, that land can be bought and sold to the most efficient, you know, user and you get these optimizing, you know, outcomes, that some of the literature about land markets talks about. But, the point I'm trying to emphasize and some of the articles in our special issue highlight this, that in many areas of the world, so let's say North America during the 1800s, and more recently in Brazil, parts of Brazil, and the Amazon and the Sertao area, and now in parts of Africa, what we're seeing is that, you know, those with the power are able to, you know, eventually one way or the other, wrest control of land that is not, you know, communal land, and converted in some way into property, you know, tenure structures. So there's huge distributional, income distributional effects that result from that, and over time, there is probably some major efficiency advantages. But we're seeing this unfold in many parts of Africa right now. [31:31] Brady: The other issue that I think that you raised, it's fascinating, it's, we've been looking at this issue in actually the Canadian context, is, you know, roughly 40 percent of the land in Canada is, you know, in the rental market, and many of the owners of that land are also not you who, are not necessarily farmers of the land. So this kind of structural issue that you are identifying in Africa is an issue that is also common here, but one of the important, then, questions that that leads us to, is how does that rental market function? Does that allow, um, essentially farmers to not invest all of their assets in land, and then access land to expand and increase production, or, and we find, you know, generally, in North America we think that rental market is fairly efficient though it has some of the political, economic, economy issues that you raised with respect to who gets the benefits of ag policy? The land owner or the farmer? How are those rental markets, you know, are, do you, do you have sense that they are equally as effective, or comparable to the North American experience? Thom: Mhmm. Yea, good question. Well, there has been some recent work that I'm aware of on the effects of land rental markets in Africa. They are rising rapidly. Many governments who, I think, know that the land expansion potential is very very limited, their ostensibly, saying that they feel land rental markets are the desirable way for households to acquire land. So looking at the impacts of that, yes we see some of the efficiency outcomes that you were talking about. So, the renters of land tend to be ones that have smaller holdings per labour unit, so they're labour rich, land poor, and the ones that tend to be renting out land, have fairly high land to labour ratios. So we're seeing that, you know, as theory would predict, we're seeing, you know, changes in land use and land operation, motivated by changes in factor proportions. We're also finding that those who are renting land are able to increase their incomes significantly as a result of doing so. But it doesn't seem to have a major impact on poverty levels. [Brady: Mhmm]. So, you know, while they can do a little bit better as a result of these land rental markets existing, they're not having a fundamental effect on the structural problems that are keeping 60 or 70 percent of Africa's rural population in poverty still. And it, it turns out that from about one-third to one-half of the total value of net output produced on these rented plots has to be given to the landlord. So, a renter has to be very productive in order to, you know, rent land, and have a significant impact, on their, one their incomes as a result of doing so. The amount of land that they are renting, by the way, on average, is about 1 [Brady: Mhmm] to, you know, 1.5 hectares of land. So not a great amount. [35:03] Brady: It seems to me a theme that comes out of the papers, and correct me if I'm wrong, is that you really are advocating in the sense, what you call a small holder development strategy. And, I know you've mentioned that earlier, some aspects of that in the podcast earlier, but if you would, if you wouldn't mind summarizing, you know, what is exactly, a small holder development strategy, and how, you know, contrast that a little bit with, you know, an alternative strategy that may not recognize the small holder. Thom: Mhmm, okay, great. Well, for about 40, 50 years, most development economists and agricultural economists have sort of taken it as received wisdom that structural transformation in Africa would need to follow, sort of, an agricultural led small holder led development strategy. So our, our luminaries, people like John Mellor, Bruce Johnston, Michael Lipton, you know, going through graduate school, it was sort of, I think most of the classic textbooks here taught us that, you know, just like in Asia, where the green revolution was pretty much a small holder based story, leading to structural transformation and transformation of the whole economy, this would be the course that Africa would need to take as well. Now that's been challenged in recent years, and probably one of the more prominent people who has taken that position on is Paul Collier, whose arguing that why should we, you know, continue to romanticize this small holder kind of led development when it hasn't shown very good signs of success over the last 40, 50 years. One of the, you know, obvious retorts to that is that, you know, we have to distinguish carefully between a dead end and just missed opportunities, where the policy environment and so forth hasn't really been favourable for small holder expansion. So anyway, this debate is going on, and I'm trying to be agonistic about it. But one of the compelling reasons I still feel that we cannot ignore a small holder led development strategy is simple demographics. Africa is a, has a very unique age pyramid right now, where 70 per cent of its population is under the age of 30. And 62 percent of its population is under the age of 25. So over the next two decades, there will be 350 million young Africans entering the labour force. And even under the most favourable assumptions about the rate of industrial growth and nonfarm wage expansion, non-farm's only going to be able to absorb, at best, about half of that 350 million people. So that means that agriculture, and the informal economy will need to be able to absorb a huge number of young people coming into the labour force now, or else, there's going to be huge political problems and political risks associated with massive unemployment. There's been some work done on the, what are the elements in common of the Arab springs that have occurred in you know, Libya and Egypt, Syria and Algeria, and so forth, and some of that work has identified three things. One is massive youth unemployment. Second one is dissolutionment, youth dissolutionment with government. And the third one is ICTs and social media. And African leaders are increasingly aware that all three of those criteria characterize many of their countries. But anyways, the demographics here, just to reiterate this point, 350 million people entering the job market over the next two decades, that's greater than the entire population of the United States. So, we have to have a fairly labour intensive form of agriculture, it seems to me. So if I were to speak to Paul Collier about this, the questions I would be asking would be, how can large scale agriculture, that you know, is exceedingly a poor employer of labour, in can only, in general, hire one person per every 100 hectares of grain production, it's got a better ratio, labour intensity for cash crops, but for grain and most field crops, it's about 1 labourer per 100 hectares. That's not the kind of system that is well matched to Africa's labour to land ratios, and its rising labour force. So one would think that a slightly more labour intensive form of agriculture would be needed to help provide this shock absorbed for the demographic boom that is going to be hitting Africa. And then there's quite a bit of work undergoing right now, that's looking at this inverse farm size productivity hypothesis. And this is being challenged as well. You know, the conventional wisdom has been that small farms are generally more efficient than large farms. But, even our work, we're looking at this question as well, medium scale farms versus small scale, and we're actually finding that medium scale farms are more efficient. Sometimes substantially more efficient producers than small scale. It can put more capital assets on, they're mechanizing, and they're doing many things that small holder farmers are not doing. But even with that finding, I still don't feel that there is an open and shut case to support medium or large scale farms at the expense of small holder farming, because there are two other very important criteria, I think, for land allocation. In addition to relative efficiency, the next one is who is a more, what scale of farming is a better employer of labour? And then the third one is which structure of agriculture generates the greatest downstream multiplier effects, and sort of economy wide growth linkage effects. And on this point, the evidence to date generally supports a more broadly based agricultural growth strategy leading to much higher multipliers than one of say, Latifundia, Latin America, where the, you know, you can have rapid growth in agricultural, but if only 1 percent of the rural population is generating that growth, it certainly doesn't lead to the kind of growth effects that stimulate, you know, non-farm employment and so forth. So based on all of that, I think the three of us who edited this special issue, Derek Headey and Jordan Chamberlin and I are pretty convinced that there's, it's necessary to have a small holder led strategy at least as an important part of the mix, even though there may be important complimentary roles for large scale and direct foreign investors, and medium scale farms as well. So we're not trying to say there should be one at the expense of the other two, but certainly a policy that neglected small holder population, which still constitute the majority of the population in many of these African countries, that would be to African leader's folly to do that. [43:15] Brady: And do you have any, any particular policies that you find most attractive in terms of pursuing a small holder development strategy? Thom: Yea, okay. Well, sometimes, yes, let me tick off five. The first one, and probably the most important over the long term, is investing in education. Basic education, secondary school and even higher education, higher tertiary education. And even though most rural Africans will never step foot on a college campus or university, we still feel that there can be such a transformational role resulting from upgrading the university systems in these countries, because there is something like an educational value chain, isn't there? Where investments and upgrading at the university level may flow through to secondary school, to primary school, to the agricultural colleges and vocational schools, and ultimately to the millions and millions of young people who are going to be entering the labour force over the coming years. So I think we should definitely prioritize education as it relates into agricultural value chains and the skill set of young Africans who are going, their, their productivity is going to depend on the level of training of people in the extensions systems and in the R and D systems and so forth. So that's number one. Number two would be investing in physical infrastructure, at a much greater rate. Especially things like rural electrification. We're noticing that major investments, the artificial insemination of livestock, they tend to follow into areas that were recently electrified because they need cold storage. And all sorts of indirect productivity impacts for rural communities resulting from electrification. But more generally, investing in roads, feeder roads, ports, rehabilitating these dilapidated rail systems and so forth, that's number two. Number three would be industrial policy. Industrial, a good industrial policy that expands the supply of job opportunities in non-farm sector could be one of the most attractive ways of relieving the pressures on land and rural areas and improving, the you know, accelerating migration into productive non-farm activities. That's number three. Number four would be focusing directly on small holder agriculture. And given the fact that seventy percent or so of small holder farms are one to two hectares, we need to focus on technologies that they can use. So scale neutral R and D investments, improved seed varieties, fertilizer response of seeds, how to use fertilizer more efficiently, the whole set of agronomic practices that could, you know, restore soil fertility, soil testing, all the kind of nitty gritty but not very sexy interventions to promote sustainable intensification on small farms. And then the last one, I would say, would be urban planning. There are massive dislocations in many urban areas in Africa, and one study that I saw estimated that the seventy percent of Africa's urban populations live in slums. And so given that migration into urban areas is likely to continue, at a very rapid pace, over the next two or three decades, we had better get proactive about this and deal with the sanitation issues, the water, the water access issues, housing, health care, transport and so forth, to sort of allow these urban areas to be more hospitable places to live, and in so doing, that may also relieve some of the social pressures and even the political risks that seem to be associated, well, that many African states, are unfortunately characterized by. [48:12] Brady: Thom, I appreciate you being with us here today, especially really sharing with us a lifetime of both experience and research into this issue. I am aware that undergraduate and graduate students will be listening to this podcast and I wonder if you might just identify a couple of issues that you think are really important for future research in this area. Thom: Hmm, okay Brady, that's wonderful. Well, certainly land and water are going to be increasingly scarce resources globally for some time to come. So trying to come up with, you know, efficient and equitable ways of distributing these increasingly scarce resources seem to be major challenges looming on the horizon, everywhere, even in the United States. So, I would think that to the extent that people coming online, thinking of how they can make a contribution to their societies, dealing with land and water issues in the coming decades I think would be a really interesting and rewarding thing for people to deal with. Just in my own experience, since, you know, at a young age going and living for two years in an African village was so impressionable to me, and I learned so much about, kind of the way people think, and you know, being able to challenge some of the things that I learned in school. Were they actually right? Or do I need to modify my perceptions, kind of based on my own experience here. I went through a lot of that for the two or three years that I spent, kind of, in a village, and I still think that, kind of where I'm at now in, in some major ways, was defined based on that experience. So I would also encourage other people who are kind of getting involved in these field and in similar fields to see for themselves and put themselves in the same position that, you know, many of the people we are trying to help, are experiencing on a daily basis. [50:43] Brady: Dr. Thom Jayne, thank you for spending time with us today. Thom: It's been a pleasure, Brady. Thanks for having me. [50:49] [Closing music begins.] [50:57] Brady: Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcasts.

Dr. Richard Vyn and students at the University of Guelph in Dr. Brady Deaton's 4th year course in Land Economics, discuss Dr. Vyn's recent journal article, "The Effects of Wind Turbines on Property Values in Ontario: Does Public Perception Match Empirical Evidence?" Transcript [0:04] Brady: Welcome to FARE Talk, where we set out to provide enduring discussions on contemporary topics relevant to our economy, with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Jr. of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I'll be your host. [0:24] [Introductory music fades out] [0:26] Brady: Today is November 18th, 2014, and we will be speaking to Dr. Richard Vyn about his research examining the effects of wind turbines on property values in Ontario. Dr. Richard Vyn is assistant professor in the Department of Food, Agriculture and Resource Economics at the University of Guelph at the Ridgetown campus. Rich, welcome to FARE Talk. Richard: Thanks Brady, happy to be here. [0:50] Brady: Rich has written an article recently that has appeared in the Canadian Journal of Agriculture Economics examining this issue, and for those of you tuning in, we will be doing this podcast in a different way, in the sense that we are in a classroom at the University of Guelph, looking and talking with students about this issue, and they will be asking the questions to Rich about his research. So let me begin by handing over the microphone to one of the students who will begin asking the first question. [1:24] Student: Hello Richard. Before we focus on the effects of wind turbines on surrounding property values, can you give us a general background of wind turbines in the province? Richard: Sure, yea. The wind energy industry in Ontario has been developing at a fairly rapid pace, and that has come about for a couple of reasons. One of the main push, the primary push behind this would be the Ontario government with the Green Energy and Green Economy Act and that sort of spurred the push to get more energy from renewable resources. So we have seen a considerable expansion in the wind energy industry as a result. This has led to a number of issues, and we have seen this most recently, there was a study that was put out just last week by the government that looked at the impacts of the wind turbines on health, and they didn't find anything significant there in terms of some obvious linkages between health issues and the wind turbines. But, there still are some concerns. They raised the issue of the annoyance factor. Either way though, this has certainly led to a lot of controversy in Ontario. There is a lot of local residents that have complained about the impacts, either on health or on property values, on the inability to sell properties. Which, all of the issues are kind of linked. But ultimately, it has led to this escalading controversy about what the impacts of these wind turbines are. Added to the mix is the fact that a lot of places where wind farms are put up, the municipality can't really reject it. They can be called unwilling hosts, but ultimately it is up to the province to decide whether or not a wind farm application is going to go through. So that's sort of a bit of the background that's led to these concerns about the potential impacts on not only health, but also on property values and that's sort of led to my interest in this subject area too. To see, we have all of these concerns that have been raised, and you look at any story in the popular press, there's a lot of concerns that are expressed there, so what is actually happening? That's kind of what I wanted to take a look at. [3:41] Student: Can you tell us a bit about why your study focused on the Melancthon township? Richard: Yea, the Melancthon Township, yea. That's where I started because that is what I had data for. It was data that included farm sales and rural residential sales. The time that I did the study I didn't have data for anything beyond that township, at least in terms of where a wind farm was actually sited. I do now, and so that's kind of what I am looking to do in the coming months, is kind of expand this research. But for the current study that we are looking at, yes, it was just for the Melancthon Township. It was one of the first industrial wind farms that went up in the province of Ontario, and kind of made a good place to start in terms of assessing the potential impacts of the turbines on property values. [4:29] Brady: Now Rich, correct me if I am wrong, but when you are talking, Melancthon township would be a township in Dufferin County [Richard: Yes] kind of bordering Grey, is that right? Richard: Yes, Grey country is next and also bordering Wellington County. Brady: And this is primarily an agricultural, rural township? Richard: It is primarily rural, yes. There is, the wind farm itself is situated pretty close to a small town but there are no large urban centres anywhere within visibility of the wind farm. [5:00] Student: Sorry. Your paper reviews previous research on the effects of wind turbine on property value. So our question to you is if you can review any of this previous research to us. Richard: Sure, yea. There has been a number of studies that have been conducted, looking at the same issue in other jurisdictions and the results of these studies have been largely mixed. We haven't seen any particular trend that has tended to occur amongst these studies. Some studies have found evidence that yes, there are significant impacts of wind turbines on property values, where others have not found any significant evidence. So, we have seen, yea, a fair bit of mixed results in the literature, and because of that, it becomes necessary to conduct research on specific wind farms if you kind of want to have an idea as to what the impacts actually are. You can't just rely on results of other jurisdictions, just because those results, you know, with both positive and no significant impacts, it is hard to tell what exactly the results might be, for in the case, the Melancthon wind farm. [6:03] Student: The, some of the previous research used willingness to pay as one of the methods of analysis. Before you get into your method, the hedonic method you used, would you be able to shed some light on the willingness to pay method? Richard: Sure, yea. The willingness to pay is basically more of a survey approach in many cases, where they'll go to local residents, and they will ask "What has been the impact?" or "What do you perceive to be the impact of these turbines on your property value?" or just to the general public, they may ask, you know, "If you were to be sited next to this wind turbine, what do you think the impact would be?" So this approach looks more at, what people think is the impact, rather than looking at any sales data. Now if you go back to the previous question, looking at the results of previous studies, there is a difference in the results when you compare certain types of studies. So, you mention the willingness to pay studies. Those studies are more likely to produce evidence of a significantly negative impact on property values, whereas studies that use sales data tend not to find evidence of impacts on property values. So there is that difference in previous studies. [7:25] Student: Hi Dr. Vyn, My name is Vanessa Cipriani. My question to you is, can you explain the method that you used in this particular study, in order to find out the effects on property values? Richard: Sure. I used the hedonic method, which is a regression approach where you basically make the price a function of the set of attributes that the property has. So, you know, if you have a house on the property it would take a whole bunch of the individual attributes of that house, you know, the square footage, number of bathrooms, number of fireplaces, look at the size of the property itself, the value of any other buildings on the property, sheds and so on. Basically, you take as many possible attributes and it basically determines how much value each attribute contributes to the total value of the property. So that is an approach that has been used for a lot of different valuation studies. It tends to be a fairly effective approach in identifying what the value is associated with a specific attribute. So in this case, I am looking at not only the attributes of the house itself, also the location, you know, how close is it to a city, and then also how close is it to a turbine, or trying to find some attribute that accounts for the potential impacts of turbines. So this approach has been used for other types of studies where you are trying to find, for example, the impact of living close to toxic waste sites, if you are living close to high voltage transmission wires. A whole bunch of different amenities, or perceived disamenities, to determine what the impact might be of living close to those types of sites. [9:15] Student: Were any of the attributes you chose particularly unique to your study, versus other wind turbine studies? Richard: Well, the method I used to account for the turbines itself was a little different than had been performed in previous studies. Typically the previous studies looked at either the distance to turbines, or distance from the turbine to the property in question, or they looked at the visibility. I kind of came up with a metric that combined those two, because if you think about it, well, the distance to a turbine might affect the impact that it has on the property, but on the other hand, if the landscape is such that you can't actually see the turbine, than conceivably there wouldn't be as much of an impact relative to a property just as close where you can see the entire turbine. And then, similarly, if you can see the full turbine, but you're 3 kilometers away, likely the impact would be greater for a property than can see turbine that is just 1 kilometer away. So I try and account for the relationship between those two factors in this study. I also did use each factor, the proximity and the visibility separately in assessing the effects of turbines. [10:30] Student: You touched on this township as being one of the few that had the necessary data. So my question is, what data was necessary to run this study, and where and how did you get it? Richard: The data I used is property sales data, and the reason that this was the one, or at least at the time, the one county where we had sales data, was just based on the data that we received, Brady and myself, from the municipal property assessment corporation. As we have, as part of the University of Guelph, have a data sharing agreement with the municipal property assessment corporation for sharing back and forth of data. So they will send us property sales data, which we can use to run some of our analysis, and we in turn have provided them some additional data that we have created based on their sales data. But ultimately, running this analysis depended on getting that property sales data from MPAC and it included not only in Dufferin county, but some of the neighbouring counties property sales data there as well. So MPAC had provided rural residential sales data as well as farm sales data. And again, this is something that hadn't been done previously, looked at kind of comparing the effects on farms versus properties that are used more for residential purposes. The hypothesis that would be that, you would expect to see more of an effect on residential properties than farms. Farms are purchased, not only to live in but also to generate an income, where you may not expect to see as much of an impact, or as much value derived from the view. I should add that while the municipal property assessment corporation provided the data, the conclusions that came out of the studies are not necessarily the views of MPAC. [12:14] Student: Hi Rich. Megan Moore speaking. You mentioned some key variables like proximity in your paper, and I was wondering how you measured those key variables. Richard: Yea, the proximity variables are measured using geographic information system software, which we ourselves didn't generate; we have somebody who takes the location of the property and in some cases, the location of the city, or the location of the turbine, and generates the distance in meters from the property to each of these locations. So, using the or the distance to the nearest city was based on the road distance. So the most likely path you would take from the property to the city, how many kilometers is that, or how many meters is that. And, a lot of studies that have looked at property values will include some type of location variable, where you would expect the closer you are to an urban centre, the higher the value would be. So a similar approach is used for the distance to the turbine, except in this case, we looked at the straight line distance. So, how far was it from the property to the nearest turbine? So this required having the coordinates, the GIS coordinates for each of the turbines, and then for each property in question, and then using those coordinates to generate the distance between them. And this is sort of an approach that is being used more and more in property value studies, the use of GIS. There is, you know, the data availability there is rapidly increasing, and it really adds to the study, makes it a lot more robust, instead of just estimating what a distance might be. [13:59] Student: Hi Rich. Clarke Stewart. I was wondering if you could review for us some of your key findings from your research, and tell us how they differed from your original hypothesis. Richard: Sure. Now when I started this study, I mean I had heard some of the stories of what people had said were happening to their property values as a result of the wind turbines, and so reading about some of these accounts made me think, well, if this many people are suggesting that these impacts have occurred, than there must be something that would be picked up by the results of this study. That hypothesis wasn't supported by what I found however, when I looked at both rural residential and farm properties, I found that no significant impacts were observed, you know, either by looking at the proximity, or by visibility, or by combination of those factors. So, that was, in a way, based on what we have heard, a little surprising given the rhetoric that has occurred around this issue in Ontario. We may have expected to see more of a negative impact, especially in close proximity to the turbines, but that didn't take effect in the results of this study. What we found is that there is no significant impacts, you know, if you look at the impacts that are there, positive or negative, there is slight either way, but nothing that's statistically significant, so that was a little surprising. But, and not in line with what we've heard from a lot of the news stories, but also its important information to have I think. I think, and that was another reason why I wanted to conduct this study, was, you know, we have heard a lot about what people are claiming to be the effects, but when we look at the actual sales data, what is it telling us? And in this case, the sales data is suggesting that there are no significant impacts of the wind turbines in this case. [15:58] Student: You mentioned that there were no significant impacts. How robust were these findings, and were these findings different for residential and agricultural property values? Richard: Well first of all, they were not different for rural residential or for agricultural property values. In both cases, there were no significant impacts. In terms of the robustness, I did look at a number of different model specifications to try and ensure that the results were robust. So, I looked at different specifications of what the post turbine period would be. So the post turbine period refers to the period of time in which we would expect impacts to arise. And this is one of the trickiest variables to specify, because when exactly would the impacts begin to arise? That depends on what information is out there. I mean, obviously, when the turbines are actually up, you can see them, and you would expect impacts to occur from that point onward. But what about before that? You know, there is, there can be an announcement effect. So I looked at a number of different specifications for the post turbine period. I didn't find any differences across these different specifications, but basically, I looked at, first of all, the impacts starting at, you know, the time that construction began. So, at that point in time, everybody could kind of see where these turbines are going to be located. They may not be up yet, but, if you are buying a house in the area you can definitely see where they are going to be. I also looked at the post construction period, so when all of the turbines are actually up, and you can see them all. So looking to see, or specifying that as the post turbine period. And then also looking at the post approval time period. So as soon as we know this project is going forward, things are starting to move ahead, then people know that there is going to be turbines there. So, it is possible that the impacts will start at that point in time. So for each of these scenarios, I didn't find any evidence of significant impacts. I also looked at a number of other ways to specify the model. I looked at just repeat sales, so basically where property is sold earlier in the time period that the data covers, and then is sold again at a later point in time. The ideal scenario is where we have one of these sales occurring before the turbines went up, and one occurring after. It makes for a great way to determine whether there is going to be significant impacts. And again, the results are the same. Now the number of sales in close proximity is relatively low, not that it is lower than anywhere else, but just when you are looking at a 1 kilometer band around, you know, the turbines, the number of sales is not huge in the post turbine period. And so this may influence the results to some degree. There is other more recent studies that have just come out this year that have included a much larger number of sales in closer proximity, and finding the same results, in fact. But that can be seen as a limitation of the study, the fact that the number of sales is not as high as we would like it to be. [19:18] Student: What do you think are the future needs to research within this area? Richard: Future needs of research in this area? I think that we really need to continue to look at it for individual wind farms. It wouldn't surprise me if we do find, at some point in Ontario, we do find evidence of negative impacts of wind farms. The reason for this is just given the increasing attention this issue has drawn, and just how people value properties. I mean, a lot of the value you place on a property is relatively subjective. So why does one property, you know, exact same house, you put it in a different location, why is the value any different? Because of how people perceive the differences in those locations. SO in the past few years there have been a big increase in the amount of concerns that are raised, the public press articles that are expressing these concerns, and more and more people re hearing about these potential impacts. And so I'm wondering if this will eventually translate into observed impacts on property values. I mean in one sense you can only hear about these impacts again and again for so long before you actually start to believe that these impacts do actually exist. And it's not beyond the realm of possibility when you consider the fact that a large turbine has been put up, that maybe there would be impacts. If you look at the amounts of backlash in Melancthon, after that project was approved, at least from what we can tell, looking at the articles in the local newspaper, there wasn't all that much backlash. There was some concern that was expressed, but relative to the attention that current proposed projects are getting, there certainly wasn't very much backlash at all. So I am wondering if the amount of backlash we see at some of these more recent wind farm, wind developments projects, if that will translate into more of an observed impact on property values, it wouldn't surprise us. I think that is really where I would like to continue my research. Now, I do have some additional data, sales data, to be able to extend this research, so that is kind of what I am trying to do now, is take a look at some of these more recently developed wind farms to see if the effects are consistent with what we observed in Melancthon or if there is going to be some difference there. [21:45] Student: Okay, so you mentioned that the literature has reached some different conclusions than your study, could you further discuss these differences, and can these differences be overcome with future research? Richard: Yea, so there are some of those differences, and as I mentioned before some if it is in part due to the, or it appears to be a result of the type of method used. But that's not even consistent across the method. If you look at the hedonic method, which I used, moth hedonic studies have not found evidence on negative impacts, but there is at least one study that I am aware of that has found some evidence. A study that was based in the state of New York. So they didn't find negative evidence consistently across all locations, but there was some evidence, and that was kind of the first one, at least in the peer reviewed literature that had indicated a negative impact. Previous hedonic studies had not found any evidence of negative impacts. And, whereas if you look at some of the willingness to pay studies, there are certainly more likely to find negative impacts. So, we have this variation in the literature, which makes it hard to determine what the impacts are going to be, and I think that's why further research is going to be necessary. Because, each individual location where a wind farm goes up is sort of a different story, you know, how well it's received by the community, how much community buy in there is, you know, the amount of backlash it gets. So even within Ontario, there is a fair bit of variation in terms of what the situation is as the wind farm develops. And I think that could contribute to the impacts, and that may be behind the varied results in previous studies, just how much backlash was against it, how well people perceived these turbines, you know, if they were happy with the wind farm, happy with the revenue it was bringing to their community. I mean, that's the other side of it. There are those types of benefits that go along with wind development as well that may factor in to how people perceive them. So all this variation, I think, leads to the need for continued research. If you really want to know what the impact is going to be in a given area, you kind of need to examine that area itself, distinct from any other area. [24:08] Brady: Rich I wanted to comment on your title of the paper that you recently published, which by the way, there will be a link up to on the site, that will allow you to go and look at this paper. And the title is The Effects of Wind Turbines on Property Values in Ontario: Does Public Perception Match Empirical Evidence? This is a great question "does public perception match empirical evidence?" So, in summary of kind of what you've just been presenting to myself and the class, what is the answer to that question? Richard: The answer is well, for the most part no. At least, it doesn't match what is the majority of public perception. I mean there certainly are people that, you can read comments, that come online under stories on wind turbines, the majority of comments seem to be from people that believe that there are negative impacts of turbines. But there are comments from people who like the turbines, they have no problem with how they look, they, you know, may actually live by them and not be bothered by them, or be willing to live by them. So, I would say that the public perception isn't consistent across all people. There certainly are those that don't have a problem with wind turbines, but it seems that the majority of people that you hear from do have an issue with it. So, from that perspective, no, the empirical evidence, at least from this study, doesn't match the public perception. [25:36] Brady: Now for those of you listening to this podcast, the first set of questions were questions that we worked together in a class, in Land Economics, to prepare for your presentation. What I would like to do now, is turn over the questions to students who might have developed questions in listening to this presentation, or having thought from, thought more about this issue from our reading or your paper. Just while they think about that I'll just ask a question. Have you had any, your paper was just recently published, so far as I know it's one of the first if not the first peer reviewed publication on this issue in the economics journal, in Canada, have you had much of a reaction to it? Richard: You know, I haven't has as much of a reaction as I would have expected, just given the attention that this issue has received in Ontario. I haven't heard anything from the government, for example, or from Wind Concerns Ontario, or any organizations like that. Haven't had a response, and maybe that will come, and I certainly hope it does, because I want this research to kind of be a stepping stone to further discussion on the issue in Ontario, and I also don't see these study as sort of the be all and end all of this issue. Well, this study finds no impacts, it means no exist. I don't look at it that way, I think this is just one step in, on the path to determing what are the impacts here, and how exactly are we going to address this issue. So, I hope that this study gets some more response, and I also hope to build on this study and take a closer look at this issue across the province. [27:15] Student: Hi, Megan Moore again. You mentioned earlier how you measured your proximity variable and I was really interested in how you measured your visibility variable, because you had three different stages. And how did that affect the public perception when they are looking at wind turbines in their area? Richard: Right, so how I measured the visibility variable is actually going out to Melancthon Township, and driving around and going to each property that I had in the data sets, and assessing what the visibility of the nearest turbine looked like. So, go to the property, or as close as I could get to it, and determine, you know, how much of the wind turbine was visible. So I had a three point scale, four point if you include no visibility. So one point, if you could just kind of see a little bit of it, you know, maybe just the tip of it above the trees. Two points if you could see the hub of the turbine, and three points if you could see most or all of the turbine. And the theory there is that the more of the turbine you can see, likely, the bigger the impact it might have on property values. If you can't see much of it, it's probably not going to affect your view much, so you may not perceive that to have a negative impact on your property. [28:24] Student: Hi Richard. My name is Gabby Nichols. I was wondering if you were aware of any other studies done in other regions or countries that preceded turbine development in Ontario, and if they had similar responses to Ontario, kind of the backlash that we saw here. Was it the same, in say, Germany or something like that? Richard: I'm not actually sure about how, or what the response has been like in some of these other jurisdictions. I know here in Canada, you know, Ontario obviously has a fair bit of wind power, but Alberta has had it well before Ontario ever did. And in Alberta they certainly haven't had anywhere near the kind of backlash that we have had here. It almost seemed to happen without anybody really saying a whole lot about it, and even now, I mean, there is a fair bit of wind power generation in southern Alberta, but there doesn't seem, or at least I haven't heard of any issues that local residents have raised in terms of the impacts on property values, and I don't expect there to be either, because those turbines have been there for quite a while now. In other jurisdictions, I mean, in the US I have heard of, yes similar type of backlash, especially with, it seems more recent wind farm developments have kind of had greater backlash following their, at least their announcement or suggesting that they are going to go ahead with this plan. SO that seems to be more of the trend that I've seen, is that as time goes on, the resistance to the development of wind power is getting stronger, because of factors such as the impact of property values. [30:04] Student: Just another question. Going back when you were talking about future research needs, you mentioned how since the value of a house is largely subjective as we move into the future and more people hear about these potential impacts, even though they may be from unreliable sources, you said it could become sort of a self-fulfilling prophecy, as we start to see these go down. So, alternatively, if you improve the access to information, this information specifically, instead of sensationalists' news stories, do you think that the public perception could improve? So if more people, essentially, read this paper, do you see that improving public perception of it? Richard: I think it could help a little bit. At the very least it would sort of inform public opinion about these issues. But on the other hand, if people believe that there are these impacts, it really doesn't matter what research studies such as this one suggest. We say that even with the Health Canada study on the, linking the wind turbines to health. They didn't really find any significant linkages there. It was immediately dismissed, as I imagine this study will be as well, by those that believe strongly that there are these impacts. So, I think it furthers the discussion, but I don't know that a study like this will turn things around in terms of public perception. I would hope it has some impact on how it's discussed, but I think for those that do believe there is a significantly negative impact on property values, this study isn't going to change. There are certainly some limitations of this study, and I think that because there are limitations, as there are with any study, that may be what gets focused on by those that believe there are negative impacts. [31:59] Student: Hi, my name is Katie Caldecott, and I was wondering how would your results help policy makers or municipal councils decide how to manage wind turbines or whether to install them? Richard: Well I would hope they at least take a look and consider the results of this study. I think, you know, municipalities, do need to have, you know, to get some sense as to what the potential impacts are going to be, not just on property values but on the economy of the municipality of a whole, when they are considering these. So, I would hope they would at least consider it and, you know, when, I guess they're not really the ones, in essence, deciding whether it's going to happen or not. I think they can decide whether they're going to be a willing host or not, but ultimately, it seems that the municipalities themselves aren't the ones that are going to be able to say yes or no. They may put up some resistance, but at the very least I would hope that this would help in their discussion, whether they think it would be good for the municipality or not. [33:02] Brady: Would anybody else in the class like to ask a follow up question? Richard: I have a question. Does anybody here live close to wind turbines? Yes? So how close? Student: Um so, I live about ten minutes away from wind turbine farms near Port Burwell. But, it's a ten minute drive, so I can't actually see them. Richard: Right. But have you noticed or heard anything about, sort of, what the perception is in that area? Student: Um, there's always rumours going around, oh it's making people sick, mentally. Um, things like that, but overall, when they first came to town everyone was quite excited. Richard: Right and that was a few years ago, right? That was one of the first wind farms that were put up in Ontario. Yea. [34:05] Student: Hi. I just have quick question, cause you mentioned that some studies have shown that there were more sales in the post time period of the turbines, and you mentioned that in your study this was a limitation. I was just wondering how much more, like is there a real significant change in the magnitude of the amount of sales? Like, would it be double? Triple? Richard: Actually it is quite a bit more. For example, the study that came out this year, from Rhode Island, had about 3,000 sales there were in about 1 mile of the turbines. It's a little different setting there, it's not, it's mostly individual turbines in, that are considered in this study, rather than a wind farm where, in the example of Melancthon, there are 132 or 133 turbines. So this is a little different setting, but yes, they had considerably more sales that are within a close proximity of the turbines. And as well, a study that came out of, another study in the US, kind of looking all across the US had, it was over 1,000 sales that were within, again, 1 mile of the turbine. So, yea, so a couple more recent studies that have also, that are not bound by the same limitation I think, and produced similar results. So, and that's the thing, I mean I think it's important to acknowledge the limitations of these studies, and I think that the argument could be made, well, there is not enough there to, or people might suggest, there is not enough sales in close proximity to generate significant impacts. And I'm not quite sure that that's the case, as, you know, the study that was done in New York State had probably similar numbers of sales that were within the same distance changes, and did find some significant impacts. But also, another, you know, another consideration is that there may be an individual property here or there for whatever reason seems to be negatively impacted, and you know, or can't sell, and so the owners of that place might argue with the results of this study, and I think that's fair enough. But I think the results suggest that overall, you know, for properties that are close by, there really isn't much of an impact. But, the hedonic method, sort of estimates an average effect across all affected properties. So that is not to say that one of those properties is not negatively impacted if, you know, even if the rest of the properties are not. So that possibility may exist, and that's almost more, you know, I mean, you can look at it more anecdotally there, but overall I think the results of this study are encouraging, just from the fact that, you know, it gives you an average affect, and that average affect in this case doesn't seem to be anything significant. [36:57] Student: Hi my name is Katie again, and I live about half an hour away from wind turbines located in Tiverton. And I can still see the lights flickering at night, and I was wondering, how far of the distance did you go in your studies, to see the effects of wind turbines. Richard: In the Melancthon area, I went about five kilometers away. And I went during the day time, obviously that is a better time to go to be able to observe, to be able to actually see the turbines. But as I was driving around there I found that 5 kilometers, given the landscape there, was about the extent of visibility. You know, at five kilometers, you could, if you could see it, you could barely see it, and it was kind of such that it didn't really impact your view shed. But I wasn't there at night, so I don't know what it looked like in terms of the lights flashing. [37:47] Brady: Dr. Richard Vyn, thank you so much for coming and spending time with our class, and doing this podcast, which I am sure will be of great interest to those in Ontario and throughout Canada and throughout the world. Thank you, very much. Richard: Thanks, my pleasure. [Clapping] [38:07] Music starts. Brady: Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcast.

Dr. Rene Van Acker and Dr. Brady Deaton discuss GM crops. The podcast develops an understanding of contemporary and historic issues associated with the first "wave" of GM crops. They also discuss contemporary controversies and institutional issues associated with GM crops, as well as the future of GM crops. Transcript Brady Deaton: (0:04) Welcome to FARE talk where we set out to provide enduring discussions on contemporary topics relevant to our economy, with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Jr. of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I will be your host. [Music ends] (0:26) Brady: Today is March 11, 2015 and my name is Brady Deaton of the Department of Food, Agriculture and Resource Economics. Today I will be speaker with Dr. Rene Van Acker about GMOs in agriculture. Dr. Rene Van Acker is professor and associate dean of the Ontario Agriculture College at the University of Guelph. He is the Department of Plant Agriculture. He has published over 100 peer reviewed works. His research focuses on the co-existence of GM and non-GM crops, which makes him a perfect guest for today's discussion. Thanks for being here Rene. Rene Van Acker: Thank you very much for having me. Brady: (1:04) The other day, at Environmental Symposium, I heard you answer a student's question, and the question was, "If I walk in a grocery store, what products are GM products?" Rene: Yea, and that's a very good question, and the reason I think it is a good question is because, I think people are unsure as to what is GM or not GM in terms of food. Brady: And I should say, when I say GM, we are talking about genetically modified. Rene: Right, genetically modified organisms or genetically modified crops that are then used to make foods, or genetically modified crops that are ready to eat foods. And on that later point, the vast majority of GM is in field crops. So things like corn, soybeans, in the case of Canada, canola for example. Those will be the key GM crops. Sugar beet would be another one. Very few of the items in the produce aisle would be GM, so papaya, perhaps, papaya sourced out of Hawaii would be GM. Perhaps some squash, although not all. Perhaps some sweet corn, although not all, and that would be about it. There is a pending deregulation of a GM apple, a non-browning apple, which has been deregulated in the US but not in Canada. So that may, in the future, appear on grocery store shelves, but not currently. So, the items that would be derived from GM crops would be things like margarine based on soybean or canola oil for example, or processed foods that contain some element of corn. Those would all be derived from, ingredients from GM crops. And consumers are sometimes wondering about that, and I think they have a perception driven, I suppose, by the media, that everything in the grocery store is GM, and that's not true. And an interesting point, in fact, is that none of our cereals, other than corn, if we consider that a cereal, are GM, so wheat, barley, oats, none of those are GM, rice is not GM, yet. So I think that also sometimes surprises people, they think everything is GM, just GM. Part of that confusion might also be that people know that varieties are bred to superior in some way, disease resistance, better yield, etcetera, and bred varieties, or cultivars, are not GM per se. Genetic modification can be used as a tool in breeding, but it falls under breeding, it is not breeding, and so I think sometimes that confuses people too. Brady: (3:48) Well that's a good point. So genetic modification is some form has been going on for some time. What really distinguishes the way we talk about GMOs starting in the 1990s, with I guess [Rene: Right] the first GMO product was the tomato [Rene: Right] was it the tomato [Rene: Flavour Savour tomato], Flavour Savour Tomato, which didn't make it [Rene: Didn't make it very far, no] but not because of the response to GMOs right, more because it just wasn't Rene: It just wasn't, yea, it just wasn't as effective a product as they thought it would be. Brady: But so, something happened in the 1990s, that was kind of different from the kind of changes in genes that have been going on in agriculture I imagine for some time. Can you walk us through that a little bit? Rene: Yea, and I think that's a very good point, and fundamental to why people are concerned about GM or not. So we have been selecting for bio-types or selecting for cultivars, in agriculture for a long long time. One might argue, you know, for over ten thousand years, since we have been farming, since the human race has been farming. But selecting and traditional breeding is different from GM or genetic engineering. And when we talk about GM, colloquially, genetic modification, we are referring to genetic engineering. And genetic engineering, we take to mean, recombinant DNA technology, and that is a very specific technology that was developed in the 70s, in the US, University of California, San Francisco, in fact, and what it does, it is technology that allows for discreet pieces of DNA to be isolated from one organism and then moved into another. It allows us to move DNA, pieces of DNA, across species boundaries. With traditional breeding, you don't have that ability. One of the traditional definitions of a species is that you, there is central compatibility among individuals in that species, and so you can cross-pollinate to use a colloquial term. With genetic engineering, we are not bound by that. So we can take a piece of DNA from a soil bacteria for example, and then transfer it into a plant or take a piece of DNA. The classic proof on concept was in the mid-80s, where they transformed a tobacco plant with genes from a fire-fly that allowed the tobacco plant to glow in the dark. It wasn't useful, but it was a very compelling demonstration of the power of that technology, and that's the key, is that it is a very powerful technology that allows us to move pretty much any piece of DNA from one species into another. So that opens up the possibilities in a way that we could have never imagined before, and it allows us to go way beyond traditional breeding. Plant breeders are excited by this, because they are always looking for genetic variation, to try and achieve certain ends, let's say disease resistance, for example. So if they can find genes in another organism, beyond the species they are working with, to help them to achieve that, they think that's great, and it can be great. People who worry, worry because we have never done this before. This may happen in very rare cases, in terms of this kind of broad crossing over of DNA from one species to another, maybe it could happen from soil bacteria, for example, into plants, very rare. So if we do this commonly, people start to ask questions like, "What are the unintended effects? What are the things we don't understand about doing that?" And so, you know, there is fear around that. To counter that, we have quite a bit of empirical evidence now, that shows that there are no apparent unintended effects of doing that, as we have been doing it. Brady: (7:54) I think it is interesting to work through, maybe, for listeners, the first, what is often referred to as, the first wave [Rene: Right] of GM seeds, or GM crops. [Rene: Yep]. So, would you mind that and [Rene: Yea] and then talking about that a little bit, thanks. Rene: Yea, so, and that's a good point. GM technology also changed the business, the seed business, because suddenly, in the seed industry, our technology developed in the industry, in agriculture became much more interested in plant breeding because of this new possibility. They also became much more interested in it because, with GM technology came the possibility for absolutely identifying your product. With recombinant DNA technology, development in the 70s, by the late 70s, there had already been a patent put onto a genetically modified bacteria. And so the possibility was there for patenting genetically modified organisms, and so the seed industry became interested in that. And that also drove the first wave of traits, the nature of those traits, because the seed industry understood that the customers were farmers. And so the first wave of traits were traits that would interest farmers, and so they were agronomic traits that provided operational benefits for farmers. And the two that are still, essentially, the predominant GM traits we have out there, almost the only GM traits we have out there are, would be insect resistance and herbicide tolerance. So the Bt trait is an insect resistance trait, and then, the Round-up Ready trait is a herbicide tolerance trait, glysophate resistance trait is also a herbicide tolerance trait. Those are the primary traits out there. Brady: So just to get back to [Rene: Yea] your notion of what makes GMOs distinctly different [Rene: right] from the cross-breeding techniques that used to go on, Bt has I understand it is a bacterium Rene: from bacillus genus bacterium, and so they extract the gene that then codes for what is called a cryo-protein, that resides in the gut of the insect, and in short, kills insects of a certain type, Lepidoptera. For example, the Round-up Ready traits was also derived from a bacteria, soil bacteria, genes that conferred resistance to glyphosate herbicide, common trade name Round-up, and so we were able to achieve those things, we were able to achieve those things using genetic engineering techniques, that they could not have done in other ways. But the traits were relevant to the direct customer, which was the farmer, and there was a rapid adoption of those products by the farmers, because they did offer real operation benefits. Brady: (11:04) Let's talk about that. So with this first wave, it's widely adopted in countries like, with soybeans and corn, countries like the United States [Rene: Canada and the US]. What do we know from twenty years, or? Rene: I think this is the twentieth season, yes. Brady: What do we know about the health and environmental consequences of this first wave of genetically modified crops? Rene: Well of course, these crops do undergo scrutiny in a deregulation process by government regulators, both the US and Canada. And so it's not like their just released without any consideration what so ever. SO regulators looks at what the possible environmental effects might be of a trait like the Round-up Ready trait in soybean. And their determination was that there was relatively no environmental risk, or no environmental risk from these things being released. And that's likely true. If you look at the trait, Round-up resistance for example, how does that trait function in individuals in the environment, and what one might have to look at is how does that trait function in the environment in the absence of Round-up, in that environment. So there would be no selection for those individuals outside of the field where Round-up is applied, and so those traits would essentially be neutral in wild-type populations or in the environment, and so they wouldn't necessarily pose any environmental risk. For the Bt trait, that may not be true, you know, because the Bt trait does impact insects that feed, there is some controversy on what trait the Bt trait was having on monarch butterfly populations in the US and migrating populations of monarch butterfly. Because it is a non-discriminating trait in terms of impacting insects. Having said that, the environmental assessment of the Bt trait, was that the impact would be low, and in fact the scientific literature shows that although there can be some impact the impact would be very low. People do worry about other traits that may be coming into existence, and whether those other traits may have real environmental impacts. In terms of human health, the same is true. These traits are put through feeding trials for example, they are assessed in Canada by Health Canada, for example, and assessments are made as to whether there would be any impact to human health of consuming these. By in large, these traits don't impact the food products that they are a part of, at all. There is no DNA remaining in the food products, or the DNA is fully denatured in the food products that we derive, let's say margarine from soybean oil for example, or from canola oil. So there is no remnant, really, of the modification and so there is no impact on human health and there is no reason to think there would be. There have been a few studies, very few studies, looking at feeding whole-grains, so whole corn, ground, or whole soybean, ground, to rats to see if there is any effects. The studies, I would say, are at best non-conclusive, if we take them in a meta sense. There are not very many studies, but if we take those in a meta sense, it looks like there is really no impact of feeding things raw, and humans never eat these things raw like that anyways. So, I would say, the current consensus out there is that there is no human health risk from GM crops as we currently have them. Brady: (15:01) What's interesting is that this concern is still, in some ways, has been from the very outset of the GM crops in the 1990s, till today, has persisted, and the concern that I am saying is really on the consumer end of it, despite perhaps, the preponderance of scientific evidence, with respect to, and I know you were limiting your comments [Rene: Right] to really the first wave of what we've been able to [Rene: Right] observe. And is part of that because when they first, when the groups first provided these seeds they targeted farmers. Farmers were readily adopted, but most people, the vast majority of people, are consumers, and they didn't respond the same. Why do you think that was? Rene: Yea, it's a very good point, and you know, it has caught companies like Monsanto, for example, off-guard. Monsanto's customers are farmers, so they do not sell directly to the consumer, in fact in the US, fewer than half of Americans even know who Monsanto is, which seems surprising to people like you and me, I know, but it is because they are not a business to consumer company, they are a business to business company, the other business being farmers. Brady: (16:21) So let's just back up, [Rene: Yea] I hadn't thought about that, but since we have listeners who may not know who Monsanto is, who is Monsanto? Rene: Monsanto is the world's largest seed company. Brady: Not the only one right? Rene: Not the only one, no, no. They were a pioneer in commercializing GM seeds, GM technology and GM seeds. And so they have become the target, the poster company for those that are anti-GM, anti-GM activists, and yet, it is not necessarily justified, because they certainly are not the only seed company that is producing GM seeds, but they were the pioneer, they were the first and you know, Monsanto has a long tradition of being an avant-garde technology company, and they have a lot of pride in that, and so sometimes they are viewed as being aggressive in that regard, which I fans the flames, I guess, for activists groups. The other thing that has happened is that activist groups I think have recognized that there is a lot interest in the GM issue, and so one might argue that they have demonized, sometimes literally, demonized, Monsanto, and created a target for them to use to compel consumers, to compel people to pay attention to their activism or pay attention to their organization that is active against GM. But what is the evidence that is driving that, there's not much, it's pretty thin, I would have to say, and yet they can still appeal to people, because it is such a novel technology, because it is related to a food, and because it is somewhat esoteric, that the nature of the technology, they can readily, easily, cultivate fear amongst people, because people don't understand the technology and so they can fear it, they can fear what they don't understand. So you know, you can have a short equation. Esoteric relatively unknown technology that is being used on your food, that alone [laughs] is sufficient to cause concern amongst people who don't know anything about it. Brady: (18:44) And in particular, the first wave isn't targeted to them right? [Rene: Absolutely]. So if your columns say new product [Rene: Right] it's got a novel technology, that is difficult for people that aren't, for example, plant scientists to understand, and then when you pick it up it's not clear to you exactly how it's delivering a product. So it seems like a recipe for a little bit of a problem from the start, in a sense, the design. Rene: Absolutely and you know, and what is Monsanto to do. They have a hard time presenting a value proposition to the consumer who can readily say "Well look, the operational benefits you are providing the farmer are neither here nor there to me, I don't really care, I just don't want it." [Laughs] And, you know, they can, they have right to that proposition. Brady: Just to review, so that is the ultimate kind of demander [Rene: yes] on the other end. The producers that they were selling to readily adopted. What were some of the things that made that so attractive to farmers? Rene: Yea, and these are real things. This isn't made up stuff. We in fact did some work in Western Canada, looking at farmers' adoption of GM canola, Round-up Ready canola in particular and... Brady: (19:55) So Round-up Ready is... Rene: Is canola that is genetically modified to be tolerant to glyphosate herbicide, or trade name Round-up, Monsanto's trade name, Round-up. So you can spray your canola, with Round-up herbicide and pretty much kill all the weeds, and Round-up is very effective herbicide, extremely effective herbicide, and relatively environmentally benign herbicide as well, compared to many other herbicides. So, the value proposition for farmers was very easy for them to understand. They understood Round-up, but they have never been able to use Round-up over top of a crop, because Round-up kills most crops, pretty much all crops, that we commonly grow. So to say to a farmer "You know Round-up, you know how effective a herbicide it is, it's super effective. We are going to modify your canola crop, and then you can spray Round-up on your canola crop and kill all the weeds." That's all you had to say to farmers, and they were like, "What? [Brady laughs] Okay, sign me up," because and not only that, but in canola in particular, somewhat in soybean, but less so in soybean, weed management was challenging for farmers, they were having to use typically a soil applied herbicide and then one or two in crop herbicides to gain, I would say, good at best, good weed control in canola, and to turn that around and say you can do no soil applied herbicide, one shot of Round-up, and you're done, completely changed everything for farmers. They, not only that, but canola was a crop they wanted to crop more of because it was lucrative for them, and so to make it a lot easier for them to do that, really changed things for farmers. The last piece was that it also facilitated farmers growing canola in a reduced tillage, or direct seeding manner, because they no longer had to have the soil applied herbicide, so taking that out of the equation made it much easier for them to grow canola with a direct seeding system, which is what they were all moving to anyways. So you pull all of those things together and you have a very attractive value proposition for farmers, and it took them like five second [laughs] to compute that. Brady: (22:18) About the reduced tillage, just to back up [Rene: right] for some of our listeners, is a potential environmental benefit [Rene: yes] that probably didn't, wasn't featured initially, [Rene: Initially, no], probably wasn't even anticipated [Rene: no, that's right]. But let's go over that, so we used to take a plow, we'd try to control weeds, we'd turn over all the soil. Walk me through then, how that works. Rene: Right, yea. Very typically exactly like that. When you are growing an annual crop, you come in in the spring, and your typical, your traditional weed control method would be some sort of method, where you use a cultivator, a plow, this part of the world a plow perhaps, or a disc or something, and you till that soil up, for a couple of reasons. One is to create a seed bed that, where you can get good seed-soil contact. Two would be to control the weeds that were coming up prior to seeding, so you want to have a clean seed bed, no weeds. With a direct seeding system, or what some call a zero tillage system, you don't till prior to seeding, and you go in with a modified seeder that allows you to create good seed-soil contact through mechanical technology, where you are not tilling all the soil, you are leaving the soil more or less undisturbed. What you then do is you spray a herbicide to control all your weeds prior to seeding. In the case of canola, prior to Round-up Ready technology, you were applying a soil applied herbicide which typically needed to be incorporated into the soil so you had to use tillage, not only to control the weeds prior to seeding, but to incorporate your herbicide. Even if you wanted to move to a no till system, if you had to incorporate that herbicide you couldn't do it, and so to be able to eliminate that step opened up a new possibility for farmers growing canola. They were already doing that with their cereals, wheat in particular in Western Canada, but now for them to be able to do it with canola in their rotation, it just completed their rotation for them. So now they can do their entire rotation in direct seeding or zero tillage. Now I think that the statistics in Canada are that more than eighty percent of the acres are in reduced or no till direct seeding, which is tremendous. And that has been an unexpected benefit. You know, I wouldn't say that Round-up Ready is responsible for zero tillage, that's not true, but Round-up Ready has facilitated a greater adoption of zero tillage, and it has facilitated having your whole rotation in zero tillage. The key benefit of zero tillage is not only moisture conservation, but also building up soil organic matter. And so the first hundred years, farming western Canada, we burned up about 50 percent of the soil organic matter. We are now rebuilding that soil organic matter, which is pretty astonishing, actually. We are rebuilding soil in Western Canada, we are not losing soil, we are rebuilding soil, which is a tremendous accomplishment, has tremendous environmental benefits and has tremendous economic benefits, in terms of the soil is your fundamental resource for agriculture. You know, that and light and rainfall. Those are the three things that you need so. So, there are those benefits, and Monsanto is now pretty quick to claim [laughs] those benefits as theirs. You know, to some extent, they can do that; it will certainly help the situation, yea. Brady: (25:47) Getting back to the controversies, one of them, and I understand you were a bit involved in this, involved a farmer in Canada, and gets back to this identification issue, as well as property rights issues, but the basic story as I understand it, is that he was cultivating a GM seed, and Monsanto took him to court, and this was certainly not good press for [Rene: For Monsanto, no] for Monsanto, or for genetically modified crops in general. Can you just take us through the, you know, a brief version of that story [Rene: Right] and any thoughts you have on it. Rene: It is an important story, because it highlights one of the key characteristics of the technology, which is what I said before. The technology allows seed technology companies, or seed companies, to absolutely identify what they own, because identification of a GM trait, or the DNA that you moved into that crop, you can prove that in a court of law. And so suddenly, companies had the ability to prove in a court of law whether somebody was in possession of their patented trait or not. Monsanto and I think the CEO of the company at the time, Shapiro, understood that very well, and understood the power of that. And they changed the business proposition for seed at the time, and introduced something called a technology use agreement. So now farmers not only purchase the seed and purchase the herbicide, but they had to also purchase a technology use agreement. They have to pay for it on a per acre basis. And in that use agreement, they were allowed to purchase the seed, so they purchased the use agreement first, that allowed them to purchase the seed and then they purchased the herbicide. But in that technology use agreement as well, they had to sign that they would not keep seed for re-use, that it would be illegal for them to keep seed for re-use. And so this changed things for farmers, farmers had a traditional, especially with publicly bred seeds, of buying the seeds, and then saving that seed, good seed from their crop, for replanting next year, etcetera, etcetera. You couldn't do that when you were buying GM seeds, because you were signing a contract that said it was illegal to do that, and if somebody else took that seed, you know, didn't sign a contract, but took that seed and then planted it, used it, they could be sued for possession of a patented entity, and use and possession of a patented entity. That is what happened to Mr. Schmeiser in Saskatchewan. His case is complicated, and I did testify in the original federal case is Saskatoon, on behalf of Schmeiser's lawyer, not that I was a proponent of his or anything like that, but they brought a range of seed samples to our lab in Manitoba, at the time, and we tested all those seed samples to see to what extent they were Round-up Ready or not, what proportion. Very convoluted story on the part of Mr. Schmeiser in how he sourced his seed for his crops (laughs) and it was weird. But, according to our testing, his story holds up (laughs) as weird as it is. According to Monsanto's testing it doesn't. That may be neither here nor there, what's important is that Monsanto was proving through a case like that they they could uphold the efficacy of their patent in a court of law, and that farmers, whether they directly purchased or not, if they were in possession of that patented entity, were liable for using it. That is a very important case. The case went all the way to Supreme Court. Mr. Schmeiser lost, although he lost in a 5-4 split, in Supreme Court. Louise Arbour who was on Supreme Court in the time wrote the dissention, and it's very interesting and she highlights the challenges in patent law when it comes to entities that can self-replicate, self-disseminate and persist in the environment, living entities out in the environment. It's different that you know, an inanimate widget, or some sort. And so, patent law is probably not sufficient currently, to really deal with this, but none the less, the sign went out there that if you illegal use this patented seed, Monsanto will sue you, and you will lose. They have sued many, many farmers in the US and in Canada, most of those cases are settled out of court, a few have gone to court. I don't think Monsanto's ever lost a case, because they can't lose a cast, because they can absolutely prove ownership. So it's interesting, it's changed the game for farmers, of how they've used seed as an input, and it has significantly reduced the extent to which farmers save their own seed. You know, and it depends on the crop, this is more in Western Canada. With corn, farmers haven't been saving seed for a long time, since we've been using hybrid corn in the 40s, because if you save seed off of hybrid corn, it segregates and you get a dog's breakfast. So farmers are used to buying corn seed every year, but with crops like even soybean, for example, you can save seed. Wheat, canola, oats, barley, you can save seed successfully, these are open pollinated species. So it changes the game for open pollinated species, fundamentally. Interestingly, you know, now that we are in the 20th season of GM, the farmer community has a different attitude towards that, by and large, than they did 20 years ago, and I think they are much more accepting of that value proposition, where the seed company has a right to recoup their costs, and profit, because they are providing a valuable product. And I think that farmers are more accepting now of that proposition than they were 20 years ago, and I think you will just see that continue, that culture continue to evolve to the point where there will be very little seed saving anymore, to some point, yea. (32:14) I want to move the conversation, on to something that is particularly sensitive that I heard you say when we were at the Environmental Symposium, talking to students at the University of Guelph, you might have said it to me. But it is, you were concerned that this issue, as important as it is, and is representative of how we deal with new technologies and understand food, might be taking a lot of air out of the room with respect to other important issues, with respect that it is often brought up in the context of. So, food security, for example, how do you feed 9 billion people, in the not so distant future? You know, GM might have a role to play it might not, but there's a lot of issues here, and I was wondering if I am accurately getting you point. Rene: Yea, no, no, I'm glad you brought that up. It is important, and in some ways GM can be a distraction from things that are really important. It's interesting, you know, that we are sitting here in 2015 which is the UN year of the Soils, and so, soil is really important. Soil and soil conservation, soil building, are really important issues, fundamental, critical, absolutely fundamentally important issues for life on the planet, human life on the plant. And so, is the importance of an issue like soil conservation being lost because the media is all talking about GM foods, where there may or may not be anything to worry about currently. But we should be worrying about the fact that, if we don't change our practices on the planet, as a whole, we will lose all of our soils in less than a century. That is really, really important, because soil is not created in human time, it's created, as a whole, in geological time, and I don't know about you, but I don't think I am going to live through geological time [Brady and Rene laugh]. You know, none of the human species will live through geological time. And so, whether we should be discussing the vagaries of meta-analysis on the human health impacts of GM, whether there is something there or not, or we should be really having a global convention conservation of soils, I would vote for the global convention on the conservation of soils, over that. Not that GM is not an important issue, sure it is important, particularly as we go into the future, not least of which the fact that GM is that novel technology, where you can, almost any trait you can dream of, lest perhaps self-locomotion in crops, or something weird like that, but almost anything you can dream of you can do through genetic engineering. And so, for sure, for sure, there will be traits that we will want not released into the environment, and not part of our food or feed stream. Brady: (35:16) When you think about genetic engineering, and you think about the future, do you orient yourself to genetic engineering as a broad concept, or are you going to evaluate these trait by trait? Rene: Yea, I think there should continue to be work done on the unintended impacts of trans genesis itself. So the act of transforming plants. One should, scientist, molecular biologists, should continue to explore whether there could be any unintended effects. I think there is a lot more known now, for example, about epigenetics, than there was 10 years ago. Brady: Epigenetics means? Rene: Epigenetics means not direct genetic effects [Brady: Okay] in a nutshell. But yes, beyond that, for sure, it's trait by trait. Which, to be fair to our regulators, our government regulators, that is how they approach it. They approach it on a trait by trait basis. And so they would say, we are not anti-GM, but we may be anti a particular GM trait, but that does not mean we are not going to accept other GM traits. In fact, our government, and the US government, does not discriminate on process. It says, "We will look at any trait, and assess whether it has a potential environmental or human health risk, regardless of how that trait was put into that crop." Brady: I noticed that, that if you go to Health Canada's website, and you wanted to look at GM or the GMOs that were allowed in Canada, it is listed under novel foods. [Rene: Yea]. Is that part of novel... Rene: Novel traits, or plants, or we know the term PNT which is plants with novel traits, which is a distinctly Canadian terminology. That's right, it's a novel trait, and so regulators are interested in those novel traits. A good example here is about a decade ago, there was an awful lot of interest in plant made pharmaceuticals. Using plants as factories for large molecule pharmaceuticals, using GM technology to be able to transform the plants to produce those. This has been done for a long time, in what might be called white bio-technology, which is industrial bio-technology, you know, using bacteria to produce pharmaceuticals in fully contained facilities. It is a whole other game when you transform a corn plant to produce a large molecule pharmaceutical and then grow it outside, and for sure, these traits can escape. They can move from corn plant to corn plant, and you know, there is some evidence in Mexico that they can move into wild-type teosinte, etcetera. It's one thing if you have the Round-up Ready trait moving, which is pretty much a neutral trait in the environment, it's another thing if that trait is production of a large molecule pharmaceutical, moving into parts of the food stream, or feed stream even, that we don't want it to be part of. That's a whole other ballgame, and we have seen in Canada, for example, less so in the US, although now, more stringently, regulators saying, "No, we are not going to let you produce that large molecule pharmaceutical in canola, because it's a bad idea, because we know there can be some outcrossing, and we can't afford for that trait to escape at all. So why don't you go and do that work, you know, in containment greenhouses in tobacco, where it's never part of the food and feed stream. It's an interesting technology, it has value, yes we want you to do it, we just don't want you to do it as part of the food or feed stream at all." And I think that makes sense, you know. So that is a consideration under trait by trait basis, saying "This trait is potentially dangerous, you know, and so we have to do it a different way." Brady: (39:15) I want to kind of close, and get your thoughts on how we engage this issue going forward, and we are talking here at the University of Guelph, you are involved in administration, you have been the chair of a department. We are engaging students, but we are also by a mere factor doing this podcast, we also view our outreach as much broader, international. There is a range of issues, there's labelling issues, there's moratoriums, there's risk in communication. What do you see as some of the outreach and education, key issues moving forward, with respect to GM? If you had thoughts that you would pass on [Rene: Yea] to anybody listening to this podcast. Rene: Well I mean, one would be, how do we approach this as a university? And my answer to that would be, you know, at a university, the university doesn't hold an opinion on this, because the university is, in fact, a collective of experts. And so, we default to expert opinion amongst our faculty, for example, and the faculty can comment on the basis of their expertise. SO that is how the University approaches it. But in terms of engagement, public engagement moving forward, certainly support of the regulatory system, and support in evolution of the regulatory system is very important. We have to continue to have a very high quality scrutiny on these things, because I think we have to acknowledge the novelty of the technology. I am always upset when proponents, you know, for whatever reason, equate GE with plant breeding, and say oh, we've been doing genetic modification for ten thousand years. That is not true, at all. We need to be very clear, that this is, in fact, a very novel technology that we have only recently been using. And it provides possibilities that are way beyond the realm of traditional plant breeding, and so it can, in fact, present risks that are way beyond the realm of traditional plant breeding, and that has to be acknowledged. Having said that, we do have a regulatory system, that I think is efficacious, in ensuring that we aren't' releasing things that are harmful to the environment or harmful to human health. Beyond that, one might consider the issue of seed ownership, and this has also been a controversial issue for many people, and it is something to consider, and I think farm organizations need to consider it. But I don't think there's, I don't think there's any value in just sticking your head in the sand, and denying that the seed industry has changing from a commercial business perspective, with this technology, and the possibilities this technology brings in terms of identifying property. And so, if farm organizations or activist farm organizations want to proceed in this regard, they have to proceed in the context of this technology existing, and the business models that exists with this technology. You know, maybe they need to form ownership co-operatives, or you know, they might have to approach it in a slightly different way, but they can't approach it from the perspective of, "we want to eliminate this technology." I just think there is no traction there. We will progress will GM in the future. There is way too much potential in the technology, who knows what we might need it for, who knows what it might do for us. But, the last things I will say, is that we also need to be clear that we don't put the cart before the horse. Agriculture is not about GM technology. Agriculture is about the things that are really important in terms of providing food and sustenance for the planet, and care for the environment. GM is a technology in that context, that's all it is, and we need to make sure we have a proportionalized view of that technology. And that goes to my concern about not worrying about soils, and worrying about GM when really, proportionally, we should worrying more about soils than we worry about GM. So maybe I'll leave it at that. Brady: Rene Van Acker, [Music begins] thank you so much for being on FARE Talk today. Rene: Than you, Brady. Brady: (43:55) Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcast.

Dr. Cynthia Scott-Dupree and Dr. Brady Deaton discuss the science that informs understanding of the relationship between bees and neonics - a pesticide that has recently been made subject to new restrictive regulations in Ontario, Canada and elsewhere. Transcript Brady Deaton: [0:04] Welcome to FARE Talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Junior of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I'll be your host. [music ends] Today I'll be talking to Dr. Cynthia Scott-Dupree and we'll be discussing the science that informs our understanding of the relationship between bees and neonics, a pesticide that the Government of Ontario has recently made subject to new restrictive regulations. Cynthia is the Bayer CropScience Chair in Sustainable Pest Management in the School of Environmental Sciences at the University of Guelph. For the sake of full disclosure I note that Bayer produces neonics, I also note that Cynthia is a well-published researcher in the broad area of pest management and in the specific area that we are going to discuss today. Cynthia, thanks for coming and joining me at FARE Talk. Cynthia Scott-Dupree: Thanks so much for inviting me. Brady: [01:02] You're welcome. Alright so let's see if we can just kind of delve in and I'm not sure the best place to start but maybe we'll just talk about neonics and try to break that down and then we'll talk about bees and then let's try to talk about the science, so we'll have some of our terms. So, neonicotinoids and neonics, can we use those interchangeably? Cynthia: Ah yes, neonics is much easier to say than neonicotinoids or neonicotinoids or whatever you want to say, so let's just call them neonics. Brady: Alright then even within neonics there's three of them that are typically talked about and they have pretty complicated names too. Is it important that we understand that there's more than one kind of neonic out there? Cynthia: [01:41] There's certainly several different neonics and there's actually different families of neonics and within those families their toxicity to bees can vary a lot, so again just within the neonicotinoid or neonic family it's complicated, but the ones they speak of most are imidacloprid, which has been around the longest and I would dare say that most of the research studies that anyone wants to read on them has been focused on imidacloprid. The second generation or newer neonics that are also seen, talked about in these research and other articles is clothianidin and thiamethoxam. But instead of just talking about those today I think we'll just talk in general about neonics. Brady: Okay but even in the headlines I probably read I probably could have been referring to a study that was looking at a particular one of [Cynthia: Yeah] those neonics rather than all and that could be important to [Cynthia: Yes] some of those differences. Cynthia: [02:45] It's true they have different toxicities but I think the more important thing here is to understand some of the basic characteristics of neonics and how they are used in an agricultural setting. For example, neonics can be used as a foliar so they can be sprayed on a crop. They can be used in furrow so they can be sprayed in the furrow when the seed is planted. They can be used as drenches, but more commonly they are used as a seed treatment and this is because neonics have a special characteristic. They are a group of systemic insecticides and this means that when they are applied to the plant they move upwards through the plant so they are in all parts of the plant tissue, and in the sense that we are today talking about impacts on bees, what can also happen is that these neonics will then become concentrated in the reproductive parts of flowering plants and that would be in things like the pollen, and certainly also the nectar because that's what bees will forage on. So you'll get residues moving to these sites, and that's the interface where these beneficial insects can be exposed to the toxins. Brady: Alright, just step back a minute. You know we think about bees providing honey and they also are an important pollinator and that's an important input into agriculture production, but so is pest management, right? [Cynthia: Certainly]. Since the plagues of Moses we know that to have food we have to control pests and so [Cynthia: Absolutely] neonics are an insecticide that do that. What came before? How long have neonics been around? Was there another pesticide that they replaced? Is that important to the story? Cynthia: [04:36] I think agricultural pesticides as we know them today were introduced after the Second World War. A lot of the chemicals we now use in agriculture were developed in terms of chemical warfare, and then afterwards after the Second World War they realized the potential use of them in agricultural applications, and so there's a whole raft of classes of insecticides specifically or pesticides that have been introduced over the years. We won't get into those, but the more recently introduced group since about the 1990s, early 1990s, would be the neonics, and as I say the characteristic of systemicity or being systemic is quite unique to them. I won't get into a description of the particular characteristics, but the fact that they move through the tissues is valuable. Another form of applying chemicals, pesticides to crops is seed treatments, and I think I should spend a bit of the time talking about seed treatments I don't think a lot of people will understand this. Brady: Yeah let's do let's talk about the seed treatment, because that adds the value right, to... Cynthia: [06:04] Yeah. Well, seed treatments I've been a proponent of seed treatments for a long, long time because what you do with the seed treatment situation is you take a tiny little seed and you actually apply the treatment on the coating of the seed, and as the seed grows into a plant the insecticide, the neonic, moves through from the coating on the seed into the tissue of the plant, and therefore it's there from the beginning, so if you have insect pests that attack those plants from the time they germinate and they're just tiny little seedlings when they're very, very vulnerable they will be protected, certainly an advantage. The other thing is that when you utilize the seed treatment versus a foliar treatment where you're spraying a lot of product with water all over the crop and everywhere else, a seed treatment uses a tiny, tiny fraction of the amount of active ingredient that would be the toxin. And so it's advantageous in that way because the environmental impact is much reduced and certainly the people applying these treatments are much safer with a seed treatment than a foliar application. Brady: Okay so I want to hit that back again make sure I understand it. So prior to this ability to treat the seed I guess if I all of a sudden saw a pest that was threatening my crop then I would have to go out and spray a foliage application and that had a different set of environmental implications. This way pre-emergent I can coat it and [Cynthia: It's protected] deal with the pest ahead of time, so it's almost an insurance policy. Cynthia: [07:50] It is an insurance policy that in itself makes it a difficult situation because the whole entire seed treatment industry is a complicated one. A grower needs to buy treated seed in the year prior to planting, so by October of this year for example, growers would be buying treated seed to plant in the spring of 2017. So it's really difficult to predict what kind of pest you're going to have in 2017, we don't have this kind of crystal ball, although a lot of growers and pest management people wish they did, so it is an insurance policy [Brady: I see] because you do have to buy it well in advance and the cost of buying them is quite small in terms of the total amount it will cost to put a plant in per hectare. So it's insurance and it's difficult to understand how that fits within a pest management concept, but it's an important application technique in terms of seed treatments and we really need to figure out how to manage it better than we do because it's too valuable to lose. Brady: Alright well before you go we'll talk about the science behind all of this but now let's turn and talk about bees a little bit. Bees, what I am talking about honeybees typically in these studies but it looks like wild bees come into this discussion, bumblebees. How should I think about bees in this discussion? Cynthia: [09:32] Well I would say that a lot of the information people hear about is focused on honeybees because they are our domesticated honeybee the beekeepers have kept for thousands of years, and they are often associated with the pollination of cultivated crops, vegetable crops, fruit crops, any kind of crop that flowers bees will be attracted to and are likely beneficial to that plant in some way shape or form, so the bulk of our information is focused on honeybees but that's not to say that there aren't a lot of other bees out there that are really critically important to agriculture and lots of other ecosystems, not just agriculture, but natural ecosystems. When you go to Algonquin Park or some park and you look at the flowers blooming you will find bumblebees and other bees, bees other than honeybees. Not to get into too much science here, but the Latin name for honeybees is Apis mellifera, and so we call it an Apis bee and all the other bees are called non-Apis bees, just to really divide this quite easily. The non-Apis bees encompass bumblebees, leafcutter bees, orchard bees, stingless bees, there are a lot of bees out there that people just wouldn't even recognize because they don't all look like honeybees or bumble bees. I would say in terms of the non-Apis bees, people would easily be able to identify a bumblebee. Brady: OK, I already just want to say for a minute two pathways of potential confusion for someone like myself that just kind of does a cursory look at this literature that you've already hit on, one is that neonics, there's multiple types of neonics, and when we talk about bees there's multiple types of bees, and the tendency would be for reasonable tendency for people with limited time would be to homogenize these all together but the science that we will talk about I think a little bit more requires that you ... Cynthia: [00:11:30] The differentiation is critically important and the bulk of research is on honeybees even when we talk about submission of information to regulatory agencies that look after pesticides to ensure they don't have an impact on humans and the environment. That would be like in Canada it would be the Pest Management Regulatory Agency; in the US it would be the Environmental Protection Agency, those kind of regulatory agencies. In the past, most of the information to do with bee pollinators was submitted in terms of being represented by honeybees, but there's a lot of research that's been done now to show that different bees respond differently to the same pesticide. And so now there's a thought that we need to look more widely when we're looking at new products that need to be registered, new pesticides that need to be registered and look at their impact on other bees other than just honeybees, and so a lot of the work that I also do in my lab is focused on these non-Apis bees because we've got lots of methodology for honeybees, but virtually nothing for these other bees. It's not so simple; we can't take our techniques from honeybees and apply it to these other bees because they function in a very different way. Brady: [13:03] Alright, before we get into the relationship between the neonics and honeybees I guess we'll be talking about, let me just step back and say in terms of what we know about bee colonies, that's the most popular way it's described, where are we losing bee colonies, are we growing bee colonies? First of all, I just ask two questions. One is, what is really meant when we say bee colonies? What are people referring to? And second of all in Canada and then maybe in Ontario talk to me a little bit about how they've changed over time. Cynthia: The colony that they're talking about, I don't know if you've actually ever seen how beekeepers keep colonies, they have them in these white boxes that stack up. Every stack represents a colony of bees, and it's usually the first two boxes on the bottom that contain the lifeblood of the colony, that's where the queen is and that's where the brood is. Any boxes above that are honey okay so they separate them out and so the beekeeper will extract those top boxes and take the honey off of them, so when we talk about a honeybee colony it's that complete unit, complete functioning unit, with a queen, a lot of workers, developing brood and these honey boxes are super stacked on top, that's a colony. Brady: And is there variation in the population of a colony, or are they typically a certain number? Cynthia: [14:25] They are overwintered by beekeepers. They have special overwintering techniques to keep them alive over the winter, but they're much smaller in the winter than they are in the summer. In the summer you can have up to 60,000 worker bees in a colony and a queen. And so, in all fairness in talking about bee losses we generally talk about it in terms of colony numbers. Occasionally you get media articles that say 20 million bees have died. Well you need to divide that by 60,000 bees basically in the peak of your summer population to determine how many colonies you are talking about. 20 million sounds amazing. [Brady: Colony is the appropriate unit.] Colony is appropriate. Brady: Alright so what do we know about bee colony loss in Canada and Ontario? Cynthia: [15:22] Well there's a lot of talk about honeybee colony decline, but if you look at the statistics from Stats Canada you will actually see over time in Canadian bee populations, we're talking colonies, the number has continually risen, specifically in the last 10 years. There are occasional drops in number, but if you average that out over time it's increasing and it's really critically important to look at these increases over a long period of time, not one or two years, because you get sudden drops and everyone panics, but in the whole scheme of things it's increasing. In Ontario the same thing, in the United States the same thing, so overall we're not seeing massive decreases in honeybee colony numbers, but one statistic you will hear is overwintering losses. This is the way beekeepers determine and government agencies determine how well colonies have done, it's this overwintering loss. You take the number of colonies you put into winter and the number that are still alive in the spring and from that you calculate overwintering losses. In Ontario particularly for the last several years overwintering losses have been around 35%, which is high. Typically we would aim for an overwintering loss of between 10 to 15%. If you look at the statistics provincially Ontario continues to be an anomaly, most of the other provinces are in this 10 to 15% overwintering loss range. Ontario for some reason higher. I can't really answer the question why that's happening, but it is a cause for concern for Ontario beekeepers. Brady: [17:32] Well that's a perfect segue into I think the next section. So Ontario has regulations to reduce the amounts of neonics and presumably one of their concerns is that maybe one reason why Ontario is an exception is because of neonics, and that's what I want to maybe explore a little bit. So maybe I'll ask a series of questions and we can figure it out because there's two terms that are used in the literature, throughout this literature that are kind of used differently, and so one is "hazard" and the other is "risk" and you'll kind of see one like I just read I think one was that honeybees have been shown to be highly toxic, or sorry, neonics have been shown to be highly toxic to honeybees, so hazardous I guess, and then there's this issue of risk. Before we hop in just abstractly what is this distinction between hazard and risk, or toxicity and risk, or is there one? Cynthia: [18:35] And now we peel off the layers of the onion, the complexity comes in and this is the difficulty for people when they read headlines is there's a mountain of information that you really need to understand. So hazard and risk are different and I think often people lump them together and they're totally different. In terms of long-term policy development by government, the concept of hazard and risk assessment, which is an accumulation of different types of information, both of those areas, both hazard and risk, need to be dealt with to develop really strong long-term valuable policy, science policy. Hazard deals with the toxicity of the chemical or toxin you're dealing with, plus the intensity of the exposure, and that would be things like dose and duration. So, if you increase the dose and or increase the duration, the two, if you look at these as two circles, toxicity, intensity of exposure, if you look at them as two circles if you increase dose and duration those two circles overlap more, and where they overlap is the hazard. Okay? But risk is another circle overlaid on top of this. Risk involves the probability of exposure. A honeybee is not 100% exposed to a toxin all the time 24-7 it's not going to happen. So you need to think of the realistic exposure in a field situation. How often will that bee be exposed to those potentially worst-case scenarios of toxin exposure? So that's a third circle of overlay and where all three of those circles overlap, that is your risk. Brady: [20:38] Let's try to break this down into for some people that won't be in this area an example. You tell me if this is a fair example. The child Tylenol in my cabinet is a hazard, but when it's stored properly children aren't at risk. Is that kind [Cynthia: Yeah, yeah that's true] of what we're getting at? Cynthia: If that bottle is locked because usually they have childproof lids and it's placed in an area where they can't get them then the probability of exposure is zero. If they can get at them though there is a hazard because that Tylenol if they eat too many of them like candies then the dose and the duration is high, the toxicity is there, that's a hazard, but you can eliminate that hazard by storing it properly. Brady: [21:43] Okay, so let's use this as the spring load and I'll just ask some questions. What do we know about, and how do we know, I guess I'll ask both at the same time, about the toxicity or hazardness, you can correct me, about neonics, or if you want to get into a particular neonic, fine. But let's just start there at the extreme: how do we come to that knowledge and what do you think we know? Cynthia: [22:04] Okay so when we do and we're really focusing on studies that are done in a toxicological framework here and toxicology is complicated, but when we're looking at these kinds of experiments we divide them into three different categories and the first category we will call tier one category, and these are the laboratory studies. These are studies where we would take a bee and we would expose them to a certain dose of the toxin over a certain period of time in a laboratory situation, so it's very artificial. The advantage of these laboratory studies it helps us determine if a compound is toxic at all to bees, okay? And if there is toxicity and it reaches a trigger value, which are set out in a regulatory framework, it may tell us that we have to do more studies, we need to clear these up, we need to dig deeper and fill in the knowledge gaps. So we would go to a tier two study, and a tier two study is a semi-field study. It's moving more to a realistic realm we'll call it quasi-realistic because it's outdoors, we plant a crop, we put a big screen tent over this flowering crop, it has to be a flowering crop to attract the bees, and then we'll spray that crop in the tent with the chemical the pesticide we are interested in, we put a small colony of bees in that tent and here's the important factor and one of the main differences between your tier one laboratory study and this tier two study is the laboratory study focuses on an individual bee, but how do we know that bees live what do we call bees? We call them social, they live together in large numbers, they live together in a colony. So truly we need to assess the impact of these toxins on the colony not just an individual bee because these colonies can have 60,000 individuals. If they lose 10 or 15 or 20 bees it's not going to impact that colony at all, but if something happens to that colony that really decimates the numbers then the colony is lost that's the living unit that we are interested in. So if we do these tests at the tier two level and at that experimental level we get some indication of toxicity and we reach the trigger values again then it may tell us that we have to do more studies, and we move to the tier three studies. These are the large-scale field studies, totally realistic. The farmers go out, they plant their seeds as they normally would with the amount of chemical on them they normally would in the field and you put the bees out in the field and they're free flying there's no tent. So these experiments are extremely expensive, they're very variable and it's terribly difficult to deal with a bee that may not want to stay in that field. If you're dealing with cattle you can put the fence up and you can keep them there, but with a bee not so. So there are some difficulties with these studies and our idea with these three tiers is that there can be a lot of the tier one lab studies and fewer and fewer of the tier two and tier three studies. Brady: [25:51] And that kind of makes sense to do the tier one if there's no toxicity there's no need to do… Cynthia: No need to do any other experiment. Brady: And they're the least expensive. Cynthia: Exactly Brady: Okay so what do we know from those tier one studies about the relationship between neonics if that's a fair question. Cynthia: It's absolutely obvious from well-done tier one laboratory studies that these neonics are toxic to honeybees and it's not really surprising. Neonics are insecticides honeybees are insects, so having a confirmation of toxicity at this level? Not surprising, but the really negative thing to do is base your policy just on these tier one studies. Brady: [26:42] Sure a lot of people might you know, but you're saying that there's a methodology that has to consider all three, but when I get to the conflicting, back to our kind of our early theme that there could be these conflicting results various quotes out there, one is that there can be two statements can be you can find something in a tier one and not find something in a tier two or tier three. I guess you can't find something in a tier two that's not in tier one. That makes sense. Cynthia: That's right once you're at tier two and tier three they've obviously found some toxicity in the first level. All science, all science at least biologically based science has to be confirmed in the field. Every scientist knows that what they do in the lab has to be taken to a very realistic plane and looked at and confirmed. Brady: In order to understand risk. Cynthia: To understand the risk. Brady: But we can establish toxicity so let's go so that's established. So have there been a lot of the first-tier studies? Cynthia: A lot. In the one paper, the PLOS ONE paper you referred to I think it says just over 70% of all the studies on neonics and honeybees are laboratory-based tier one studies and then there are a smaller group of the tier two studies and fewer of the tier three studies so just as I have indicated. Lots of lab, not so much large-scale field. Brady: What are we finding as we move away from the tier one or the toxicity studies as we move to the tier two and tier three? Cynthia: [28:23] Well based on the research I've done and I've done a lot of the large-scale tier three studying is that what we're seeing in these laboratory studies is not being confirmed in the field. Not in terms of what we would call acute mortality of bees and that means a massive loss of bees suddenly. These large-scale field studies do look at bees over a period of time, but one of the questions that people are raising now is, what happens when bees are exposed to a small amount of toxin over a very long period of time? Does it make them sick? Do they not fly the way they should? Do they not forge the way they should? These are questions that I think in this PLOS ONE paper are discussed as being knowledge gaps. Brady: So that's an area that we will continue to explore. Would you say that the from your understanding of that broad literature I mean it's clearly you're identifying as a knowledge gap do you have a sense of how the small subset of tier three studies have come out? Are they consistent, do you find colleagues arguing with you, you know as economists we're always arguing with each other about everything so I don't know if it's the same in your field? Cynthia: Well I don't think the people who do large-scale studies argue with each other because I think they typically find the same answers and they agree on the fact that what we are seeing in the laboratory studies doesn't pan out in the tier three studies. But the problem is that people who need to make decisions about how we move forward in terms of utilizing neonics in ecosystems don't always consider the finding of these tier three studies they just focus on the tier one studies, which show toxicity and scare people, but they haven't looked at the risk assessment. What is the probability of those insects being in the crop and what residue levels are they exposed to when they are in the crop? That's not looked at in a laboratory study. Brady: [30:40] One aspect, and this is a nuance of the study that maybe we can shed some light on, there's sometimes a discussion of dusting in that planting stage with the treated seed and that there was some evidence that that had affected bees. What is that and what's that mean in this discussion? Cynthia: There's really two ways bees can be exposed to neonics in agro ecosystems and especially when we're dealing with corn for example most of the corn in Ontario is planted with a seed coating of neonics on it. And actually it's not I'm in error it's not a seed coating it's a seed treatment, and this means there's a bit of a powder coloured powder coating containing the toxin that's placed on all the seeds. The corn is planted with very large pneumatic seed drills and this means that a high blast of high-pressure air is injected through these machines to shoot the seeds into the soil, and when this happens you get kind of scarification or dusting off of some of the powder coat of toxin that's around the outer part of the seed, and the exhaust system of these particular machines that you're using to plant shoots this contaminated exhaust dust up in the air and what can potentially happen is it's windy, and it often is during planting, that this contaminated dust can be blown into hedgerows and areas where there might be things like dandelions and other flowering plants blooming that bees will forage on, or it can get into the water or what not. There is a concern about that and a valid concern about that and this first raised its ugly head in Ontario in 2012 and if you go back and look at the information you'll see very high losses of bees around planting time that they associated with this particular contaminated dust off situation. But over the subsequent years they've really focused on mitigating or finding ways of managing this problem and things like putting a fluency lubricant in the machines so that there's less scarification and there's less dust off, modifying the baffles where the exhaust comes out so it shoots it down to the ground instead of up in the air and then another thing that's being worked on is polymer seed coatings so rather than a dusty coating they'll actually seal the toxin in with a polymer sealant so there can be no dust off. And over time since 2012 incidents associated with bee loss during planting have gone down substantially, so it's a really great example I think of how these situations can be mitigated if everyone works together for a common goal. The other side of the coin, and this is where you need to make the separation, is the potential exposure that bees have when they're foraging on a flowering crop, like canola, like any kind of plant that produces a flower, and those plants will produce pollen and a nectar and as I mentioned there's a potential of these neonics accumulating in the nectar and the pollen, and that's the interface for the bees. Most of my work is on the residues and nectar and pollen in flowering plants, my large-scale studies focus on that. We need to really clearly separate the two and because Ontario is a major corn producer in Canada, our particular problems may be focused more on the dust off problem in the spring rather than the residues in nectar and pollen. One thing I'd like to add is that western Canada grows a lot of canola, way more than you would see in Ontario and canola is that bright yellow plant that you see blooming in the spring out in fields it's really pretty to look at. You'll see some of it in Ontario not in the really southern part of Ontario but certainly north of Guelph. If you go to the West we're talking Manitoba, Saskatchewan, Alberta massive amounts of canola just yellow as far as the eye can see. They've been planting that crop, canola, with seeds treated with neonics for 15 years, and in all of those provinces they don't have any problems with high, unusually high overwintering losses of bees and none of the beekeepers out there are concerned about bee losses in association with canola that's very much interrelated with this neonics seed treatment thing. Canada's big growing conditions are big but I'm just bringing this up because agriculture you can't really generalize, everything does not fit into the same hat. Brady: [36:09] So given that do you have any ideas of why this issue has been so contentious, why the Ontario government has moved in a fairly decisive way? Do you have any sense, is the issue the different ways that science is the complexity? Clearly we've laid out this is a complex issue, there's, just to kind of review, I think we've hit a couple you might add in, we have what neonic you're talking about, what kind of bee you're describing, the distinction between a set of hazard studies and risk studies that can coexist, something can be hazardous and that can be true, something can not be hazardous but not risky that also can be true statements. Is that what's going on here or do you have any other sense of why this issue has kind of emerged in the way it has? Cynthia: [36:59] Well I think typically people feel very connected with honeybees. They feel that honeybees represent everything that's good and natural in the environment and any kind of situation where you end up being focused on the demise of the honeybee and any way I think it hits us where it hurts in terms of "oh my God the environment is not balanced anymore" and I think that's why anything to do with honeybees continually concerns the general public and this is great. It's good to see people concerned about the environment, but on the other hand if you want to be concerned about the environment you have to read broadly and educate yourself on the topic rather than just believe everything that you hear and we get a lot of information that's thrown at us. The governments try to protect the environment, they try to protect everyone's interests and sometimes decisions are made too quickly. I firmly believe that science policy or policy, agricultural policy any kind of policy has to be based on a real strong foundation of science and not just the little body of science you choose to focus on, but all that's available, the complete story and this doesn't always happen. Brady: [00:38:26] Well I hope that this FARE Talk if it does anything it inspires the people that listen to this FARE Talk to check out this issue more thoroughly, to challenge the ideas that you've heard here, look into the literature and read more I mean I think that's what at the university we strive to encourage our students and we also strive to encourage this audience to do that. Cynthia: I would say that it's important to have an opinion, but your opinion better be an educated one. Brady: I think that's a perfect way to end this FARE Talk. [Music begins] Dr. Cynthia Scott-Dupree, thank you very much for joining us for a very interesting FARE Talk. Cynthia: Thank you it was great to be here. Brady: Thanks for joining us for at FARE Talk. We hope you will continue to check our website for updates and the latest podcast.

Dr. Valerie Tarasuk and Dr. Brady Deaton discuss the meaning and measure of food insecurity in Canada and the United States. Transcript Brady Deaton: Welcome to FARE Talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Junior of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I will be your host. [music ends] In today's podcast I will be discussing household food insecurity in Canada with Dr. Valerie Tarasuk of the Department of Nutritional Sciences at the University of Toronto. She and her colleagues have been doing cutting-edge research on food insecurity in Canada. Valerie welcome to FARE Talk.   Valerie Tarasuk: Thank you I'm happy to be here.   Brady:  In your research on food security in Canada what is generally meant by the term food insecurity? And give us just a starting point, idea of how prevalent it is.   [00:57] Valerie: What we mean by that term is inadequate or insecure access to food because of financial constraints so it's very, very specific to problems of affording enough food, you know putting food on the table for yourself and your family and the root of the problem being financial constraint. We've been measuring this problem in Canada for years but in 2005 we adopted the Household Food Security Survey Module that's been used for many, many more years in the United States to monitor food insecurity in that country. So the most recent national data we have is from 2012 and in that year 12.6% of Canadian households reported some degree of food insecurity, and to translate that into perhaps a more common unit of measurement that translates into something over 4 million Canadians living in a household that was affected in some way by food insecurity.   [01:53] Brady: You mentioned that this survey has been conducted in the United States as well. Are we able to compare how Canada fares relative to United States?   Valerie: Yes and that's actually a really interesting thing to do because we're using an identical survey module and in both countries this problem is monitored on a population representative survey. Although we code the module differently in Canada and the United States and we apply slightly different labels, but in our research program we apply the USDA's thresholds in order to categorize food insecurity so that we've got perfectly comparable numbers and what we can see is that Canada is somewhere between two and three times lower in its rate of food insecurity than the United States. [02:36] Brady: What why is that? Do you have any thoughts?   Valerie: There was one study done when this common metric started being used in Canada. There was one study done actually by Mark Nord from Economic Research Services Division of the USDA and it is very interesting. I mean there probably needs to be more research in this area but what he found was, I mean part of it is that our populations are different, but another part of it is that amongst particular population subgroups there appears to be higher rates. I think probably to put it in broad strokes overall in the United States I think there is a higher rate of poverty and food insecurity aligns quite closely with poverty so that's part of it, but there are also worse and the subtle differences in terms of the relationship between food insecurity and whether a household had children or not, things like that. So it's an area where we need to do more to really figure out what's going on, but it looks like part of it is about the nature of the policies in this country and the nature of our economic circumstances.   [03:34] Brady: So the conversation we're going to have in general about the methods of figuring out food insecurity are comparable to the United States. How does this metric that you've been using compare to measures of undernourishment and hunger that's used by the FAO? We're part of the millennium development goals in terms of trying to reduce undernourishment in the developing world. Is this a different measure than that?   Valerie: Yes, yes it is and it is important to keep these things separate. We can't assume in an affluent country like Canada we can't assume that what we're looking at when we look at food security is, you know frank undernourishment or malnutrition. When we look at the relationship between food insecurity and dietary intakes, or nutritional adequacy in Canada we can see definitely differences where people report struggles to put food on the table and less probability of having an adequate diet, but the differences are not anywhere near as stark as we would expect to see another in other places. So yeah it's important to keep those things separate. Recently, I guess in April of this year, FAO produced a report that was an attempt to compare food insecurity rates across all kinds of countries using a simpler measure based in some ways on the 18 items that are used to monitor food insecurity in Canada and United States but much, much briefer, I think maybe 8 or 10 questions, and they administered the questions through, well it was administered by the Gallup Poll, so it was a telephone survey I think most higher-income countries and a sample of 1000 so accrued you know quick and dirty kind of measure but it's interesting there to see the differences and it's exactly as you'd expect. Higher-income countries tend to have lower rates than lower-income countries do and then again interestingly we can see the distinction between Canada and the US with Canada coming in at a lower rate but some European countries coming even lower. It's interesting so it's the only example I know of where there's been an attempt to take the idea and move it systematically across the globe, but going back to your original question for sure we would want to distinguish between food insecurity as it's measured in and understood in North America and these notions of undernutrition.   [05:48] Brady: So when we sort of are looking at sort of the world's developing populations roughly the prevalence is I think it's around 13% as well of the population is under nourished that wouldn't be comparable [Valerie: Not at all] to what we're going to talk about so we can make comparisons to the United States but the FAO measures we're talking about something different. Are we talking about the key difference being that one is more of a subjective measure and the other is an attempt to kind of assess whether someone has enough calories to live an active and healthy life? What would be the best way of making the distinction between what we're doing in North America and in the developing world?   [06:36] Valerie: I think that yes, in some ways there are apples and oranges, right? One absolutely is a subjective measure, it's a reflection on a household circumstance over a 12-month period. There is within the survey module there is an ability to strip out levels of deprivations so if someone would answer affirmatively to all 18 of the questions on this module I mean at the end of the day they would be telling us they had gone whole days without eating. If we had very many people with such extreme levels of deprivation we would expect to start to see associations between such extreme deprivation and the protein and calorie malnutrition, or undernutrition. But thankfully in our country we don't see that many people at that level of extreme deprivation, so part of what's happening with measures of undernutrition is they're trapping a state that is an extreme level of deprivation that endures over a significant period of time and that's not what we're getting here. We're looking at a subjective assessment of the household circumstance over a 12-month window where very few members of our population are so extreme as to be reporting absolute food deprivation day after day after day.   [07:54] Brady: You mentioned this and I think this is important. Let's go through the nature of the survey and how it lends itself to gradations of food insecurity so when we've been talking so far about food insecurity we've been lumping and, correct me if I'm wrong, three groups three measures I guess that build on each other: marginal, moderate and severe. So maybe one way to do it is to just talk about what it would mean if someone was marginally food insecure and that's about 4% of the 13% that we're talking about.   Valerie: So those are households where people only affirmed one item on the 18 and typically in this list of questions I mean the questions vary in severity from the most mild level being "do you ever worry about running out of food or have you in the last year ever worried about running out of food and not having money to buy more" on through to questions about compromises in the quality of food intake and then compromises in quantity. So someone who's, or a household that's classified as marginally food insecure would have said yes to probably only one question and that question typically would have been that question about worrying. So they're expressing some concern about their ability to make ends meet but they're not saying that they have systematically compromised the quality of their dietary intakes or those of their children because of a lack of food or money for food and they're not telling us that they skip meals or gone without eating. So they've said enough to indicate that they are different from other Canadians and that they are worried about not being able to manage or they have been worried in a serious way about not being able to manage and that's a very significant distinction but it's not at the level of them telling us that they've actually not been able to eat.   [09:47] Brady: And then as we move to say moderate they would be somebody who was both marginal but had answered a different type of question. Is that right?   Valerie: When we classify people as moderately food insecure, or households, I keep saying people, but the unit of measurement for this module is household, but when we classify households as moderately food insecure, we're looking at households where the respondent has affirmed enough items for us to have reason to believe that there was some compromise in the quality of the dietary intakes of adults and or children in that household. So they've said the more things that people say yes to on these 18 questions the worse their household situation is. So, the moderate classification, people would have responded affirmatively to 2, 3, 4 or 5 questions across the adult and child scales that would've given us reason to believe that at minimum there were compromises in the quality of the intakes at some point in the year because of financial constraints.   [10:52] Brady: And then finally I guess that the severe category is evidence that someone actually forgave or gave up food.   Valerie: Yeah, yeah, yeah. The severe category is a very, very worrisome situation because those are people who have said yes to many of the questions on this module and the way the questions are organized there are several questions that are capturing quantitative compromises. So to give you an example, you know, people are asked, "Have you or other adults in your household ever skipped meals or cut the size of meals because you didn't have food or money for food? Have you ever gone hungry without eating? Have you ever lost weight in the past year because of a lack of food or money for food?" And then at its most extreme, "Have you gone whole days without eating?" And each time someone says yes to those questions, they're asked how often. And so not in a very detailed way on these modules but you know is it almost every month or some months or like was it a fairly rare event or was it a problem that was pervasive throughout the year? And similar questions are asked of the children in the household, although it's an adult who responds to those questions, but again asking, you know, "Have children in the household ever not eaten, or gone hungry without eating because the lack of food or money for food?" So by the time people are saying yes to those questions they're in very, very seriously compromised circumstances.   [12:19] Brady: And that severe category is about 2.6% of the population of the households, yeah?   Valerie: Yeah, it's been sitting fairly stably at that level for a few years and we have to hope it doesn't ever get any bigger.   Brady: Now I should say for the people listening to this podcast, Valerie and her co-authors, and you mentioned this earlier I think, have been working on reports on this issue for some time and we'll make a link to the reports that we're talking about and pulling data from so you can sit back and just enjoy and we'll make a link so you can get to the numbers. So if we can just kind of review it's 4.1 about in the marginal category then if you combine marginal and moderate together are about 10% and then you add another 2% in severe and you get this close to 13% figure that we've been using. Is that about right?   Valerie: That's right.   [13:22] Brady: So over time, what have you, in addition to kind of documenting the prevalence, what issues and characteristics are you finding are associated with food insecure households?   Valerie: Well we've done a lot of work to try to figure out whose got the problem and why they got it and so at a very kind of gross level we can say that food insecurity is more prevalent amongst households with low incomes, the lower the income the greater probability of food insecurity but it's not a one-to-one relationship so we can find households with fairly low incomes but still reporting food security and we can find households with what would seem like middle or higher incomes but reporting food insecurities, so that has caused us to take a lot longer look at what's going on. So the income is part of the story a big part of the story, it's actually the single strongest predictor household income, but on top of that what we realize is that homeownership is very, very significantly associated with this problem so on the Canadian Community Health Survey where the food insecurity is monitored, there's a very simple question about you know, do you own or rent the dwelling in which you live? And people who report that they are renting have a probability of food insecurity that is several times higher than those who are owning and when we do multivariate analysis where we've got income and homeownership in the models even after we to take into account income homeowners are at systematically lower risk and that associates with the fact that to be a homeowner is to be somebody with more wealth and even if you have a mortgage you've got equity so you're able to buffer changes in the household circumstances in a way that someone who is a renter isn't. So homeownership is another layer of evidence of vulnerability or protection. Another thing that turned out to be very interesting for us in addition to income and whether or not you're owning a home in which you live there are some very basic questions about the sources of household income and what we found is that households in which the main source of income is social assistance have an extremely high rate of food insecurity, I think nationally about two out of three households reliant on social assistance programs are food insecure, so that's at one end of the continuum. At the other end of the continuum we find people reliant on pensions or seniors' incomes and those people are at very low risk, much lower than the incomes of people who are in the workforce, which is… [Brady: What are your thoughts on that?] Well, part of our research program has been to really look very closely at those two ends of the spectrum and to speak first to the seniors, what we've got going on in Canada with seniors is that at the point that somebody turns 65 they without doing anything else except having that birthday are eligible for what is effectively a guaranteed annual income. At the point that someone turns 65 they will be eligible for old-age security and a guaranteed income supplement, they'll also have full drug coverage and they will enjoy discounts in many retail outlets if they live in the city like me in Toronto, they'll have a discount on public transit. There's many, many ways in which both the private and public sector support seniors and that's a beautiful thing, right? There's a whole string of initiatives that have emerged from determination to reduce or to try to eliminate in fact poverty amongst seniors and we're not there yet, but when we look at the effect of the guaranteed annual incomes of seniors in Canada, we can see that for someone who is a low income adult at the point that they turn 65 so a low income unattached adult at the point that they turn 65 the risk of food insecurity will drop in half. It's a tremendous statement on the power of the social protection program like our seniors' pensions. Contrast that to the story of people on social assistance of the other extreme end of this continuum where maybe two thirds and in some provinces it would be in excess of 80% of people receiving social assistance are food insecure. I should just make the clarification for people that are unfamiliar with these programs that in Canada, old-age pensions are managed at a federal level so that is a federal thing although there are provincial programs layered onto it, but social assistance programs are programs that fall under provincial or territorial jurisdiction so we can see significant variation between provinces and territories in terms of vulnerability related to social assistance, but with the sole exception in Newfoundland and Labrador. Everywhere else that you look in the country more than half of those receiving social assistance benefits are food insecure and many of them, and this is a very worrisome finding, many of them are severely food insecure, so this is a serious level of deprivation.   [18:34] Brady: You mentioned that you are able to look at comparisons across Canada at the provincial level. Have you been able to pick up any differences in provincial policies that have an effect?   Valerie: Yes. The most marked one was a study from a doctoral student of mine, Rachel Loopstra, did looking at Newfoundland and Labrador and what triggered it when we started producing these annual reports on statistics on food insecurity, we started graphing provincial and territorial prevalence estimates and we realized that Newfoundland and Labrador's rate of food insecurity had dropped markedly between 2007 and 2011 and that prompted us to do a whole lot more work. So what Rachel Loopstra was actually eventually able to figure out is that in 2006 that province introduced a very, very radical poverty reduction strategy and it was a strategy, it wasn't designed with any explicit goal to reduce food insecurity, not at all, but the goal was to reduce both the breadth and the depth of poverty in the province and so a part of the strategy was to improve the circumstances of people on social assistance there. So they did all kinds of things; they raised the benefit levels, they indexed into inflation, which is practically unheard of in this country, they did other things to reduce the liquid asset exemption, sorry to increase the liquid asset exemption, and the earnings exemptions and other things so that basically over a period of five years as that policy rolled out what we saw is the material circumstances of people on social assistance in Newfoundland and Labrador improving markedly. What happened to food insecurity over that period? The rates dropped in half, so when we look at the 2012 data, which is the most recent data we have from Newfoundland and Labrador where's when we look at other provinces can see people who report their main source of income as social assistance having rates of food insecurity of 70, 80, 65 whatever percent in Newfoundland we're sitting somewhere down around 40. So it shows that this problem is very, very sensitive to income-based interventions.   [20:52] Brady: Right. Does it suggest also that addressing food insecurity is similar if not exactly the same as addressing poverty, or are there distinctions that we should think about between the two? So would a poverty reduction policy be essentially similar to a policy to address food insecurity or are there important distinctions between those two approaches?   Valerie: Thank you. That is an excellent question. I think there are distinctions and it's partly about how poverty reduction strategies play out in this country. Often when a government, federal or provincial, announces a strategy to reduce poverty they start by defining poverty by some income threshold and then they introduce some measure to reduce the proportion of people or children or seniors whatever their target is to reduce the number that are below this income threshold, and depending on where that income threshold is set, I mean if you can imagine we can draw a line somewhere and wherever we draw the line really, there will be people very close to that line and they only maybe need five dollars to get over the line and so sometimes we've seen poverty reduction strategies that have very much focused on people close to whatever the line is. In Canada we don't actually have a firm policy-centered definition of poverty so it's not uncommon for provincial governments to start a poverty reduction strategy by defining poverty for themselves for example, you know going out on a road trip to say "what do people mean by poverty?" And so there's a lot of different ways in which that threshold would get set and then there would be measures to move people over it but because these often are policy interventions that are announced in play out in the context of political elections and things, the thresholds can be quite high and the interventions can be quite small and very much focused on the people at the threshold so the reason the Newfoundland and Labrador strategy had such a profound effect on food insecurity among social assistance recipients is because they weren't just focused on some arbitrary threshold, they were genuinely into tackling the depth of poverty as well. Contrast that for example to the poverty reduction strategy they rolled out in Ontario. They were focused on reducing the number of children living in poverty in Ontario but they didn't make any meaningful changes at all to the lives of people on social assistance. The centre point of their intervention was a child benefit that wasn't even distributed for many years to social assistance recipients and when it was it was restructured out of the benefits, so they experienced little if any material gain and people without children social assistance received nothing. So you know when we look at the experience of food insecurity among social assistance recipients in Ontario and they're a significant proportion of the food insecure, they don't move. So a poverty reduction strategy that tackles food insecurity has to get to the very depth of poverty where food insecurity is most extreme, where the probability of severe food insecurity is greatest. What I like about food insecurity and thinking about it as a policy outcome is I feel like it's kind of taking the clothes off these poverty reduction strategies and saying you know if you're going to introduce a poverty reduction strategy and it's going to be effective, it should reduce the number of households who are struggling to get the food they need, who are struggling to afford, you know, food, and if it doesn't do that then there's been some monkey business go on and you really haven't tackled people who are poor you might have played around with the proportion below some arbitrary income threshold that you've set for yourself but I think it would be easy to garner widespread consensus in this country that we would not want children for example living in households where parents were struggling to feed them. And a poverty reduction strategy that doesn't change that number isn't doing its job but you know I know Brady we have to talk with something else on this podcast [Brady: No, we can talk keep going.] but for me it's been a real learning to be able to start to look at food insecurity rates provincially in relation to provincial actions around poverty and we have this extraordinary success story of Newfoundland and Labrador, and there certainly are more provincial strategies that we need to examine in detail, but we have nothing else on the surface it looks like has been anywhere near that effective in reducing food insecurity.   [25:42] Brady: I want to follow up on that but I also want to raise an issue that I wanted to be sure and get in. I'd like to ask you about we talked about social assistance but I know that you have brought up in other discussions I've watched you give presentations you emphasize that it's important to recognize that the majority of the food insecure are actually working for wages and that's one thing I wouldn't mind you talking about. But then I don't want to lose the issue that we're on and have you seen other provinces learning lessons from what's gone on in Newfoundland or is there any learning going on that you've observed? So I guess maybe address that first point and then let's come back to this discussion that we're having about policies to address the problem of food insecurity.   Valerie: Yeah it is very interesting to look at the break down of food insecure households in Canada by main source of income and what we can see is that almost two-thirds, I think it's about 62% of households that are food insecure report their main source of income being employment and as I have been saying people on social assistance are at much higher risk. Still there are fewer people on social assistance overall and so even if two thirds of them are food insecure they end up comprising only I think it's something like 16% of the total pool of food insecure households in the country as opposed to the 62% or whatever that are people reliant on incomes from employment and that finding is an important one from a policy perspective as well because it challenges us to think about what we need to do to intervene to enable people in the workforce to make ends meet. There has been a more detailed examination of this relationship between work and food insecurity by one of our colleagues, Lynn McIntyre, who's at the University of Calgary and what she figured out is that to be in the workforce and food insecure it's more likely to be some household where there maybe is only one person in the workforce and they're trying feed multiple people with just one salary. There's also people working on part-time short-term precarious work arrangements so there could be more than one person in the household working but nobody with really secure well-paying long-term full-time employment. So as other people in other disciplines are talking about precarious work and the rise of precarious work and the concerns about that and I think our findings related to food insecurity are another dimension of that concern that to have so many people in the workforce were still unable to reliably and confidently feed themselves and their families is a very serious problem.   [28:38] Brady: Have the other provinces been learning from each other in terms of, with respect to the social systems issues that you raised earlier? I know we're kind of jumping back and forth but I wanted to make sure to come back to that.   Valerie: I think we're still in the early days you know it hasn't been that many years that we've been measuring food insecurity in Canada and the research that you and I are talking about that our group has done at least is very new and so you know I think it's gonna take time. I hope in time we will see more uptake. One thing that's interesting one province I can actually cite is Prince Edward Island a very small province but with a concerningly high rate of food insecurity and a very high rate among social assistance recipients. Soon after we started talking about the rates across provinces and then talking about this amazing reduction in food insecurity in Newfoundland and Labrador we found that it's a small place Prince Edward Island and I think there's a lot of really there's a real vibrant community in terms of advocacy for things related to poverty elimination there and before we knew it our work was being talked about in the legislature there and the province did make an increase in social assistance. Now it's nowhere near as much is it needs to be but I think it's encouraging right because it did show a province responding to concerns being voiced and then being substantiated with Statistics Canada data around problems of food insecurity among social assistance recipients. I don't think their increase is enough to really change the circumstances hugely for people on social assistance, but it has to have made them better.   [30:16] Brady: One of the issues that often comes up and in terms of solutions to this problem is food banks. What do we know about the relationship between food insecurity, use of food banks and the support are enabling people to move away from food insecurity? I know you've done some work in this area.   Valerie: It's interesting. Food banks have always been the public face of food insecurity in Canada and so I mean part of the reason that we started issuing the reports that we did that we've been doing with these annual statistics on food insecurity is to try to draw attention to this broader body of information that's available in Canada about this problem. But when we look at the relationship between food bank usage and food insecurity, just at a very cursory level, the numbers of Canadians I mentioned earlier 4 million over 4 million living in food insecure households in a year, each year Food Banks Canada, the national association of food banks, reports a hunger count that includes an estimate of the number of people who were helped by food banks over the month of March that year and those numbers, when we contrast them to the national food insecurity data, those numbers are less than a quarter of the number of people reporting you know who will be living in food insecure households as assessed through this measurement, but that's a contrast of an experience over a year with an experience over a month. Food Banks Canada says well there are people who come only once a month or whatever, if we look over the year their numbers are higher but still they're a far cry from the number of people who are food insecure. We have done a few other studies, I mean there have been a few earlier population surveys in Canada that included both questions about food insecurity and food bank usage and then maybe about 10 years ago we started doing a very detailed examination of food insecurity amongst a sample of 500 low-income families in Toronto. So we have some empirical work that has measured both food insecurity and food bank usage and those studies all confirm the impression that you get from contrasting the big food insecurity numbers from the Canadian Community Health Survey with the hunger counts from Food Banks Canada, and that is that for every person who goes to a food bank or is helped by a food bank there would be four or five others who are food insecure but not there. What's that about? Well, there are a whole lot of reasons why people don't go to food banks. Some of them relate to the structure of food banks, some of them relate to the way in which people understand their own struggles, but importantly that disconnects as we should absolutely not use food bank numbers as a proxy for rises or falls in the problem of food insecurity in our communities. The second layer though is those people who go to food banks, how are they doing? Because another way to look at this disconnect between the food bank numbers and the food insecurity numbers is to say well "gee whiz, you know all those people who are food insecure should be going to food banks because then they'd get some help, wouldn't they?" Well, when we've looked more closely at people who use food banks we consider two things: people who use food banks are absolutely food insecure and if anything they are more likely to be severely food insecure. So the research that we've done in Toronto absolutely says that food bank usage it's a last resort. People turn to public charities for assistance only when they can't figure out what else to do and they're really struggling, so absolutely those people are food insecure. But the other finding that we have from the work in Toronto, which is very worrisome, is that we can see no evidence that to use a food bank is to be rendered food secure. To go is to be is indicative of a desperate circumstance, but after you go you're very, very likely to still be food insecure. Why? Well because what's happened. When you've gone you've received a bag of food or a couple bags of food. The amount of food you get will be limited because these are volunteer organizations and they're effectively rationing the donations they are able to receive. So the amount of food will be limited, the frequency with which you can get food will also be limited and the fact that you know your struggles for food emerge out of a larger financial struggle in the household that is we're talking about it through the lens of food today, but anybody who's food insecure is also very likely to be struggling to pay other bills, they very, very likely are behind in their rent, certainly if they are severely food insecure it's quite, quite possible that they will be behind in their rent, they will be struggling if they have prescription medications, they probably haven't filled those prescriptions because they can't afford to, unless they happen to have a drug benefit program which most won't. So, you know, there's a lot going on in these households besides the fact that somebody's struggling to put food on the table and so food charity offers only a response to the food dimension and it's a limited response so it is important and I know this seems completely contrary to the idea that well gee if people are hungry the solution should be to give them food but the food charity systems that we have institutionalized in Canada provide very limited assistance and so while people I'm sure who use some are grateful for the assistance it's not enough to take somebody from one of these terrible situations and turn them into food secure.   [35:55] Brady: Well on that note let's talk about if you had your way what are the ideas that you would like to see brought forward? I'd also be interested in what your research around those ideas and in terms of addressing food insecurity. What kind of policies are you really hopeful that would I guess both address the problem in the short term but in the long term reduce the prevalence of food insecurity in Canada?   Valerie: I think the most hopeful thing is the discussion that seems to be heating up around the idea of a basic income. The starting point for our interest in that came from the work that Lynn McIntyre and Herb Emery did looking at the effect of seniors' pensions and saying gee that has a profound effect on vulnerability and it is effectively an income floor, but the only people in Canada who enjoy that kind of an income floor are people who are 65 and up because that's where we're intervening with a pension. But recently in the April budget in Ontario there was an announcement of a pilot a plan for a pilot study on a basic income and we've heard talk about this in Quebec as well and we've heard that you know the Liberal government is interested in this idea so I think it will be very interesting to see how it plays out. The fact that as incomes fall to a very low place the probability of food insecurity and severe food insecurity in particular rises so high, to me it says we need to intervene at that point and set a floor. The beauty of the floor over other kinds of policy interventions that we can imagine, like for example improvements to social assistance, the beauty of a basic income or an income floor is that it would reach not only people who are on social assistance but also people who are struggling to get by but in the workforce and unable to earn enough money, so it would help a lot of people. So I guess for me that's a promising direction and sometimes in conversations people say "yes, yes" but what else can we do because you know that's pie in the sky or something. We can talk about changes to the child tax benefit or some working income tax supplement or something else or social assistance for example. We can talk about changes to other benefits that might improve the circumstances of people who are struggling but ultimately all we're talking about is proxies or approximations, poor cousins to this idea of an income floor. So for me that's a really important direction going forward is to think about how do we funnel income support to people at the very bottom end of the income spectrum, recognizing that those people live in a variety of circumstances, there are a variety of household configurations, how do we reach them? And we need to reach them with income because every piece of evidence we've got suggests that at that end of the spectrum the most powerful intervention we can offer is a financial one, so that would be my starting point.   [39:03] Brady: I seem to recall that like in the United States that President Nixon brought up or proposed this idea at some point. Do we have any experience in Canada and in any of the provinces with this guaranteed income?   Valerie: We are home to probably one of the most important experiments that's ever happened around guaranteed annual income and that was an experiment called Mincome that happened in Manitoba back in the 70s and so I know I'm not an expert in this at all but it's a fascinating, fascinating experiment. So Dauphin, Manitoba and I believe some parts of Winnipeg but Dauphin as a community had the experience of a guaranteed annual income for a period of time and there's researchers from the University of Manitoba and the lead one I think being Evelyn Forget who has done a lot of analysis of what happened over that time. Unfortunately the experiment I think did never realize its full potential because at some point the government changed and the investments that had been made in monitoring and analysis or record-keeping around the experiment I think started to fall apart, but Evelyn Forget's work is amazing in showing that the positive benefits both from a health perspective but also more broad social benefits. One of the ones that comes to mind, I just recently happened to be somewhere where I heard her speak and one of the things that is just so, so interesting is that people stayed in school longer. Rather than having to leave school and go to work young people stayed in school longer. People make decisions differently when they knew that they didn't have a wolf at the door and there's a beautiful quote that she offers from one of the participants from the Mincome experiment in Dauphin and it's an older woman now and she talks about how you know it wasn't a lot but it was enough so that you could put cream in your coffee. So you know we've got some evidence. Also Evelyn has looked at hospitalization healthcare utilization in relationship to the Dauphin experiment and as you would expect there are indications that people's health improved and that's really, really important with respect to food insecurity because it's such a profound marker of poor health and of eroding health. So yeah I mean I think there's a lot that says a guaranteed annual income would be an effective response to a good chunk of this problem, the most extreme end of this problem and that said there are always you know the other side of that is people's concerns about will it form a disincentive to work and what will it do more broadly. And I think you know there's people who have done research in those areas and there are answers to those questions and if there are concerns it's very easy to implement these programs in such a way that there's an additional incentive for broader labor force participation. I think it's fair to say that the biggest criticism of the guaranteed annual income idea is this notion that it would be a disincentive to labor, but if I think back to our findings related to the high, high prevalence of working households, households in the workforce who are food insecure, these people already are working, they don't need an additional incentive but it's not enough for them to be able to put food on the table for themselves and their families. So you know I don't think we have to worry about a lack of incentive to work. Most of our food insecure are already in the workforce.   [42:35] Brady: Have you thought - I should say to listeners - for the most part in this discussion when we've been talking about data, we've been talking about data from a report that Valerie and her co-authors wrote from 2012 but I should note in the 2014 paper "Household Food Insecurity in Canada" on page 11 there's a really nice kind of graphic that traces out the relationship between food insecurity by household income and on that graph at less than $10,000 I guess in annual income you know there's a 50% prevalence, but then it falls gradually almost like a downward sloping line as you move higher and that's a nice graphic in the context of the conversation we're having, and I was wondering Valerie have you thought and you may not gone into this much detail yet, but have you thought about what that guaranteed income in terms of magnitude would look like?   Valerie: Well you know we're getting there. We've just started to try to figure out how we could model the effect of an income-based intervention and I think that's going to be a really important thing for us to do, right? To see just how far can we move this needle where can we get the biggest bang for our buck? I'm delighted that you have drawn attention to that graph, it's my favorite thing, it's our new innovation in the 2014 report and I just think it's so interesting. When we break open the relationship between food insecurity and income by these three levels of food insecurity, marginal, moderate and severe what we can see is that the moderate and severe are the things that are much, much more sharply happening at that bottom end of the income spectrum, so one of the things that we're trying to figure out is how to model the effect of an income floor and play around a little bit to see what do we need to do to get that severe in particular the severe and moderate categories down because those are the ones that look like they are most sensitive to income interventions at the bottom end and from a health perspective there's no question they're the most important so I think it's something that I hope will come forward in the future, but it feels to me like it's one of the frontiers for us as researchers in this field now is to figure out what would it look like to intervene and what does that intervention what form does it need to take to maximize the impact without just unnecessarily squandering money?   [45:06] Brady: Valerie, you've raised a number of important issues that students at the University of Guelph and at other universities are going to find very thought-provoking. But I wondered if you could step back and kind of as a way of ending this podcast and maybe speak directly to students about you know a lot of people are going to be inspired and want to address this issue. What would you suggest? What kind of steps might they take? What experience have you had that have really made a difference in your ability to be able to be in the position you are and address these questions? [laughter] Tough one at the end, huh?   Valerie: I'm glad you didn't start with this one we would've had nothing but dead air [laughing]. For me, the movement in Canada to finally measure this problem is extremely important and you know I could never get the quote right, but there's this saying that you know a problem doesn't exist until you measure it and so I think the measurement aspects have been really, really important and I think the longer I as a researcher have worked in this field the more I've learned about kind of separating the concept of food insecurity or the measurement construct from you know sort of broader notions of food that you know I mean look at this podcast. Most of what you and I have talked about here is income and income support programs like social assistance. We haven't talked hardly at all about food and food-based interventions or food needs. I guess, what would I say to people who find this interesting? I'd say figure out how you can do things in this area and I don't mean charity I mean I think that for a very, very long time the only opportunity any of us have had to participate if we are concerned about problems like hunger or food insecurity in our country has been through acts of food charity and that's fine, but to get beyond that into thinking about public policy I just think it's really important for young people to become engaged in public issues and social issues and to start to think about them in a political framework and to start to sort of talk about them that way. I mean there's a growing movement on campuses around food insecurity and student food insecurity and I am not sure that that's anywhere near as big a problem as the food insecurity experienced by people on social assistance for example, but you know I think that as people become more aware of these problems I think it's really, really important to get politicized and to start to see these things as they relate to public policy decisions because I feel like increasingly with our research what we're seeing is that insecurity is something that's preventable. You know if we had a societal consensus that we didn't want to have anybody in these circumstances we could do that and we wouldn't be doing it by making donations anywhere; we would be doing it by restructuring our policies in a way that protected people from these problems. So you know I think there's a lot here and I guess I would just invite listeners to think bigger in terms of problems of hunger and food insecurity in Canada, to think bigger and to think about them more from a policy perspective.   [48:30] Brady: Dr. Valerie Tarasuk thank you for sharing your ideas with us on FARE Talk today.   Valerie: Thank you very much for your interest in this the topic. We much appreciate the opportunity to do [music begins] a podcast with you, so thank you.   Brady: Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcast.

Students from the University of Guelph and I discuss issues regarding land-use regulation and affordable housing with Emily Hamilton. Emily is a policy research manager at the Mercatus Center at George Mason University. Our discussion draws from a recent paper that she, and her co-author wrote titled, "How Land-Use Regulation Undermines Affordable Housing." Transcript Brady Deaton: Welcome to FARE talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Junior of the Department of Food, Culture and Resource Economics at the University of Guelph. I will be your host. [music ends] Today is November 17 and we will be speaking to Emily Hamilton about her research on land regulation and its effect on affordable housing. Emily is a policy researcher at the Mercatus Center at George Mason University and she has written on this topic widely and we will actually be looking at a paper that she and her co-author Sanford Ikeda have written. A link to that article will be made available to you on the FARE Talk website. For those of you listening in, we will be talking because we are doing this podcast with Emily in a land economics course at the University of Guelph. Emily welcome to FARE Talk. [01:14 - 02:25] Emily Hamilton: Thank you very much for having me. Brady: Emily, I just want to begin, a lot of the listeners may not be familiar with the issues that we're going to talk about today and part of our challenge is to kind of work through them, but if you got in an elevator with someone you didn't know and you had let's say three floors and they said ÒWhat's your research about? What's this paper that you've written about?Ó What would you tell them in general? Emily: Sure. I'd say that a lot of well-intentioned regulations such as our minimum lot sizes and maximum density roles as well as newer smart growth regulations like urban growth boundaries or green belts all restrict the supply of housing over what we would see in a freer market, and the effects of this supply restriction of housing is felt most harshly by low income people and in our research we look at the regressive effects of these regulations, how they hurt low income people and how they reduce income mobility. [02:25 - 03:23] Brady: Alright, now sometimes I get in an elevator and I might be with a planner and if I've said something like that my guess is the pushback would be, ÒWell, but land-use planning is important, it stops conflicting land uses, it helps perhaps planning for urban infrastructure in those areas and it raises values because it makes places better to live in. What's you're kind of general, now you're going down the elevator and you've got two floors. Emily: Yeah, I would say that there are plenty of justifications for many of these types of regulations. People need places to park their cars, so planners require that landowners set aside areas for parking. Plenty of these regulations have benefits, but their costs are often not considered or not considered sufficiently, so in this environment we tend to see overregulation over what we'd see in an environment where planners consider the costs of these roles in addition to the benefits. [03:23 - 04:59] Brady: Alright I should say we are going to be talking about affordable housing, most of your examples take place, in the paper that you've written, most of the literature you're reviewing are examples that take place in the United States, in Canada we might define affordable housing as spending about 30% of your or 30% or less of your income on housing. Is there a similar definition apply in the United States or is it? Emily: Yes, that is a widely considered rule of thumb in the United States and when housing is required to be affordable for a certain income level, the 30% rule is what cities use to define affordable housing. Brady: And in terms of thinking about this differences among income groups, do you have a general sense of say what the of the poorest 20% pay in terms of housing versus say the richest 20% or? Emily: So typically in the US when city planners are looking at whether or not housing is affordable they look at what's called the Area Median Income and so that's the median income defined typically at the ZIP Code level so it varies very widely of across parts of the US and across cities, so in some places households earning over hundred thousand dollars per year would be eligible for affordable housing because their income level is low relative to others in their immediate neighbourhood. [04:59 - 06:05] Brady: I was looking at some of the data on this in Canada, just kind of preparing and I found, and I'll provide a link to this as well because seems quite high, but the Global News was reporting that, and I think I'll get this about right, that the poorest 20% in Canada pay more than 50% of their income on housing and of course there's a drastic difference for the reasons you mention in terms of the wealthiest 20% pay about 16% of their income on shelter, so the issue affordable housing and the effects that we're about to talk about really do matter perhaps differently to different groups. Emily: Definitely. Brady: What we're going to do now is I'm going to turn the questions for the remainder of this podcast over students and we're just going to try to walk through initially just understanding some of the specifics. One of things that I really enjoyed about the paper was all the specific examples of land regulation and zoning and so I'm going to turn it over to the students who will ask a question, there will be time for a follow-up and we'll just proceed like that. Emily: Great. [06:05 - 07:33] Student: Hi Emily. In your paper you mention exclusionary zoning. Could you give us a bit of an example or a background on what this is and its effect on housing affordability for low-income households? Emily: Sure. Exclusionary zoning is a term that people use to describe zoning rules that are implemented with the intent of limiting who can live in a neighbourhood. So for example rules that prevent any multifamily housing like apartment buildings being built within a neighbourhood could be considered exclusionary zoning if households can't afford to rent or purchase a whole house then they'll be excluded from a neighbourhood entirely. Other types of exclusionary zoning rules include minimum lot sizes and this was probably the first type of exclusionary zoning rule that was labeled as such and New Jersey townships have been some of the most studied areas for minimum lot sizes and some townships they are actually implemented minimum house sizes that were larger than the current average house size, so they're basically saying in the future only people who are on average wealthier than we are here are going to be able to move in, preventing low-income people from moving into the townships with those rules. [07:33 - 09:50] Student: Good morning Emily. I was interested in your discussion of inclusionary zoning. Could you briefly explain and describe what inclusionary zoning is and your findings regarding its capacity to address affordable housing challenges? Emily: Yeah. Inclusionary zoning is a policy that's in the US has been tried in many different types of municipalities and it varies how it's implemented, but in general developers are either incentivized to provide housing that's at a below market rate by either subsidies or changes in regulations that allow them to build more housing if they include inclusionary zoning in their project and what it does is it sets a price cap on the cost of housing, but only for some units within a development. So for example an apartment building of 100 apartments might be required to have 20% of those apartments affordable to people who are earning say 50% of the Area Median Income. And inclusionary zoning sounds like a great idea because it's making housing more affordable to people who make less money than many of their neighbours and it also can make neighbourhoods more diverse than what they would be in a completely free market, which many people argue benefits everyone to have a diverse neighbourhood, but the problem with inclusionary zoning is that it changes what type of housing is going to be built. So if 20% of the apartments in a new building have to be rented at a lower than market rate the other 80% of those apartments are going to tend to be very expensive luxury apartments so that the developer can subsidize the below-market apartments with those high rents on the other apartments. And another problem with inclusionary zoning is it typically provides very few units of affordable housing so inclusionary zoning alone is certainly not enough to address the affordability problem in many expensive cities. [09:50 - 12:23] Student: Hi Emily. You touched already a little bit on minimum lot size zoning. Is there any way that you can explain exactly what minimum lot size zoning is and how it affects housing prices and specifically housing affordability? Emily: Great question. So a minimum lot size rule might say that for example every house in a neighbourhood has to be built on at least a quarter acre of land, so that's setting of a floor on how much housing how much land must be dedicated to each house. So, if land is expensive it's going to directly make housing more expensive as compared to allowing houses to be built on say in eighth or a tenth of an acre of land. Student: Morning Emily. I found your discussion on the effects of parking requirements to be thought provoking. Could you give us a brief summary of your findings as well as the research pertaining to it? Emily: Sure. So in the US the vast majority of cities and municipalities require developers to build a certain amount of parking with their development whether that's housing, retail or commercial development, and the justification for this is that when automobiles first became common there really wasn't any accommodation for where people would leave them when they left their car, so big cities started seeing problems with double parking and people just leaving their car in the street when they went inside a store to run an errand, so obviously that was impeding movement and causing a lot of traffic problems. The problem is that many cities require parking to be built above what we would see in a free market and these requirements have big costs for developers that are then passed on to renters or home buyers. Donald Shoup is a professor at the University of California in Los Angeles and he has done an incredible amount of research on the effects of parking regulations and he found that within Los Angeles parking requirements can add over $100,000 to the cost of a condo in Los Angeles, so that's obviously a very substantial cost to home buyers or renters that could be lessened if apartment buildings or condo buildings were allowed to be built with less parking than what's currently required. [12:23 - 13:50] Student: Emily from what you've already said I'm kind of getting a sense of what you mean by possibly over regulating in some areas. One of the last places that we're interested in looking at which we're actually experiencing around the Greater Toronto Area is this idea of urban growth boundaries. Could you talk about the urban growth boundary around Portland, Oregon and what that effect is? Emily: Yeah. So the state of Oregon requires that all cities create urban growth boundaries and what these boundaries do is preserve land at the outskirts of cities as agricultural land that can't be developed for housing, and several studies have been done on the Portland area because that's the most famous and most binding urban growth boundary in the United States and they found that land outside the boundary sells for less than land inside the boundary, so that finding means that the boundary is making land inside the boundary that can be developed for housing more expensive than it otherwise would be, in turn driving up the cost of housing and I believe that Toronto's greenbelt works pretty similar to the Oregon urban boundary requirements. [13:50 - 15:50] Student: Hello. In your paper you cite a study in which the authors claim that a reduction in zoning regulations in three cities, New York, San Jose and San Francisco could increase GDP in the United States by 9.5%. Could you explain the relationship between zoning regulations, labor movement and economic growth? Emily: Sure um yeah. So this study that you mention is by economists Hsieh and Moretti and has been widely cited and a very influential study within urban economics and as you said what they do is they look at what would happen if the three most productive cities in the US, so San Jose, San Francisco and New York City reduce the burden of their land-use regulations down to the level of the median city in the United States, so they're not looking at what would happen if these cities got rid of zoning entirely, but just reduce the effect of their current zoning rules and allowed more housing to be built, and they find that if that happened in their alternative universe that many more people would be moving into these most productive cities to pursue jobs where they can be more productive and earn higher incomes and in turn this would result in a, as you said, 9.5% increase in US GDP and that's huge, that comes out to I believe about $1.5 trillion each year and it's important to note that not all of the benefits of that higher GDP would be going to the people who live in those productive cities, but it would be shared with all Americans and with people in other countries also because as people in those most productive cities are able to produce better products, new software and other types of new innovations everyone would benefit from those innovations not just the people who are able to get those higher income jobs in those cities. [15:50 - 17:56] Student: I'm Bridget and I was really interested in your point on historical designations. In your paper you mention that historical designations are correlated with the higher housing prices but also that it's difficult to determine if the designation causes the higher prices or if the houses in wealthier neighbourhoods are just more likely to be designated as historical and given this uncertainty I was wondering you would say that these regulations are a significant factor in restricting affordable housing? Emily: Great question. So what you mention is what's called an endogeneity problem, so economists have a hard time figuring out whether or not historical preservation causes higher housing prices or whether higher housing prices drop people who are likely to fight for historical designations for their properties. In many cases in say small cities in the US historical preservation probably has a very minimal effect on housing prices, but in some of the most expensive places it probably has a large effect. So within Manhattan I believe over a quarter of properties are designated as historically preserved properties, what's called landmarked in New York City so that's taking basically a quarter of the land off of the island and saying this is the amount of building supply that's going to be available forever it's never going to be able to increase with demand so in that case it's pretty clear that historical preservation does have an effect on house prices and some studies in New York City specifically have been able to find that result empirically, but in many other places where just a few buildings are preserved and perhaps those are the buildings that generally have the greatest historical significance it's probably having a very minor effect. [17:56 - 19:30] Student: Hi Emily. I actually have a very similar question with I guess just more of a broader scope. I was wondering about I mean you mentioned that there's problems inferring causality between the relationship between high levels of regulation and high house prices so I'm more interested just in general without pertinence to the historical preservation sites, how do you deal with this problem that it might be high housing prices and the residents of those houses that may cause high levels of regulation rather than the other way around like you argue? Emily: So there have been a couple of very clever research designs that have looked to address that question. One example is the economist Edward Glaeser looked at land sales in the Boston area and he found that he adjusted for land qualities to try to compare apples to apples among land that is already approved to have housing on it versus land in a very in the same neighbourhood that's the same size that doesn't have any approvals in place and he found very substantial price differences indicating that having those approvals in place causes land to be more valuable than land that doesn't have those approvals in place, so he's attempting to create a natural experiment there and that's one of the convincing studies on causality. [19:30 - 21:07] Student: Hello. In your opening pitch you mention that the benefits of zoning to the local community often considered without the costs to people either in that community or outside of it. Are there any situations though in which the net effect of zoning regulation can result in an improvement in well being for that community by the reducing congestion in which in situations in which someone's land-use might negatively impact their neighbour? Emily: That's certainly an argument that's made in favour of zoning and Houston is a famous example in the United States of a city that doesn't have any Euclidean style zoning which has roles that say only housing can be built in this neighbourhood and only industrial uses can be built in a separate area of the city and people argue that Houston suffers because there are cases where say you have a bar near a school or something on where they say that the world would be better off if these uses were further apart. I haven't looked specifically at cases where the benefits of zoning might outweigh the cost but I will say that Houston has been very impressive in its ability to increase its housing supply as demand for housing has increased there maintaining housing affordability and also it's become much denser so people are building more apartment buildings and smaller single-family homes to accommodate the large number of people because of the regulatory flexibility that they have there. [21:07 - 23:28] Brady: You mentioned Euclid zoning. Where does that term come from? Emily: It comes from the town of Euclid, Ohio and what Euclid, Ohio had done is they implemented rules that said this area of the city can only be used for single-family housing and a developer who owned land that was designated as single family housing had been planning to build I believe an apartment building on on that spot and so he sued the city and said that the rule that he couldn't put that land to what he saw as its highest value use was what's called a regulatory taking, so the city was taking away his property value by limiting what he could do on it. The case ended up going to the US Supreme Court and that's where the term Euclidean zoning comes from, from that Supreme Court case and the court held that under cities' police powers they are allowed to designate certain types of land as only permitting certain types of uses. Brady: I want to just take a pause for a minute and see if students have other questions about the particulars of zoning. We're to move on Emily and start to have a discussion about the policy issues that you raise in your paper but first let me just take a break and look around the room and see if there is anybody that would like to ask follow-up question in this category or Emily I don't know if you want to add anything about particular of zoning use that you think is important for listeners to think about that we haven't touched on yet. Emily: I think that the questions have already covered many of the most important rules that we discussed. I would just point out that these rules interact with each other, so looking at Portland's Oregon urban growth boundary for example it's not the case that developers can build anything they want inside the growth boundary, but rather there's this growth boundary and then there are also parking requirements and minimum lot sizes and other rules about how much housing can be built, so we can't look at just one rule in isolation but we have to think of them as interacting. [23:38 - 25:13] Brady: Alright with that I'm going to turn it over to the next student to ask a question. Student: Hi Emily. Your paper suggests a number of policies that communities might support to augment the supply of housing and thus lower prices. Could you explain one that you think is the most promising? Emily: Yeah, the one that I think is definitely the most interesting and perhaps the most promising is a policy idea developed by David Schleicher who is a law professor at Yale and he has an idea for what he calls Tax Increment Local Transfers or TILTs and his idea is that when a large development is built it is going to increase the city's property tax base. So if you go from a block of single-family homes to a block that's covered and huge apartment buildings the total amount of property value that cities are able to tax is going to increase substantially and the difference between that new value and the old value when it was just single-family homes is called a tax increment and Schleicher suggests that because that new denser development is going to impose costs on people who live near it because the new apartment residents will be causing much more traffic perhaps the single-family homeowners nearby just don't like looking at big apartment buildings that part of this increment could be shared with the property owners who live near the new development. So in a sense this would be like buying off the single-family homeowners' opposition to new development and it would also be compensating them for allowing denser development in their neighbourhood. [25:13 - 26:25] Brady: Is any location actually trying that right now? Has that been tried? Emily: No I don't believe it's been tried at all so at this point it's just a purely theoretical idea. Some cities do require developers to provide community benefits that act in some ways similarly, so for example if a developer is approved to build a new apartment building they may also have to put money toward a new park or swimming pool in the neighbourhood, but there's an important difference between TILTs and these community benefits because while both buy off opposition to the new development the community benefit acts as a tax on the development so it will result in fewer housing units being built because the developer has to pay for that extra benefit, whereas the TILT would be coming from the city tax revenue so it wouldn't tax development but it would benefit people who are opposed to new development. [26:25 - 28:36] Brady: It will be interesting to see that play out. All of these students can research the effects of the. Emily: Yeah. Brady: Next student. Student: Yeah so as we continue to consider alternatives to bring it back to this idea of the urban growth boundary around Portland, Oregon and then as you brought up the Greenbelt around Toronto, what are some alternatives to urban growth boundary zoning policies, still to protect prime agricultural farmland? Emily: Yeah well one thing that both the US and Canada have in common is that we have tons of open space in our country so that's a great benefit that both of our countries have and it might be worth considering whether a shortage of farmland is really a policy issue. I should caveat that I am much less familiar with Canada I don't know how far North within Canada is considered farmland, but within the US at least we really have plenty of farmland so preserving farmland around urban areas is not necessarily a policy goal that we need to be concerned about in the US, but at the same time policymakers who do want to preserve farmland near cities could look at the regulations they have in place that are preventing cities from becoming denser so if there is a high demand in a city for high-rise housing or simply smaller single-family homes that take up less space or have smaller yards allowing that type of denser development to be built would reduce pressure for cities to expand outward so that's one thing that Houston is really demonstrating is that over time it's becoming denser and it is certainly growing outwards also, but part of its population growth is being absorbed into a denser city. [28:36 - 29:56] Student: Maybe to follow up on that idea one of the benefits of being close to the city for farmers is the access to the market. Is there value in looking at more diffusive developments, so possibly instead of developing large metropolitan areas shifting some of that development into other cities? Emily: There certainly could be benefits to having farms close to cities, that's really not a topic that I've looked at in any depth at all, but I would say that policies that try to shift people from one city to another can have many consequences in terms of allowing people to live in the labor market where they can be most productive so jumping back to the Hsieh and Moretti study on productivity that we talked about a little earlier if you're preventing people from living in the highest productivity cities and instead requiring them to live in lower productivity cities that's going to have costs in terms of output and income mobility and economic growth over time. [29:56 - 31:04] Brady: I think that many would agree with your assessment of how much open space and how much farmland there is. I always use this idea that if you go to Pearson Airport and you fly west you're gonna be mostly looking down at a lot of open space but the majority of people and the disconnect I think between how much open space there is and perceptions of development the 80% of the people live in these urbanizing areas at the fringe of where development is taking place and so that's always there is this general tension we run into here at the University of Guelph between what the numbers look like in farmland let's say over the last 10 years and people's perception of that transformation zone. Emily: Right and access to open outdoor spaces is certainly a benefit to be considered of policies that do require some sort of open space, whether that's parks or agricultural land having that close to cities certainly has benefits as well as the costs that we've talked about. Brady: A couple of the questions, students might have just a follow-up or a general interest question, let me move to one student. [31:04 - 33:28] Student: Hi again Emily. Sorry so as we are talking about policies you had a policy recommendation for addressing historical designations, which was a quota on historical designations. I didn't really see a whole lot of detail, of course that's not the sole focus of your paper, but could you maybe explain like how you might set that quota or how you think it would work in practice? Emily: Sure, so that's another idea that came from Ed Glaeser and as far as how to set the quota that's certainly a question that would have to be debated and would have to vary depending on the size of the city and the historical importance of the city in question, but as we talked about earlier some cities like to take Manhattan as an example have just a huge number of buildings that are preserved and many of the preserved buildings are similar to other buildings that are preserved and they're perhaps not that historically important, so if we have a million townhomes that are preserved perhaps we could do with fewer of those townhomes being designated as landmarked, so what he suggests is say just to make up a number say that the number of landmark buildings is going to be capped at half of what it currently is and that cap would force both policymakers and historical architecture experts to work together to say which of these buildings that are preserved are really the most important. So Grand Central Station in New York City that's not going to be up for demolition that's very important architecturally and historically, so we definitely want to keep that one on the rolls, but maybe some of these apartment buildings from the 20s we have hundreds of them preserved so let's just preserve the best examples of that architectural style and allow the rest to be redeveloped to meet housing needs. So basically the landmark Just forces those trade-offs to be made rather than saying that as much can be preserved as could possibly have historical benefit. [33:28 - 34;56] Student: Just a follow-up on that question: how do you think defining that cap would go about? I'm hoping that it wouldn't just be an arbitrarily defined number such as half of the existing preservations right? So how would be a good way of actually defining that where to cap the amount of historical sites? Emily: I don't have a good answer for how to set that cap. British Columbia in Canada did a regulatory cap that might be an example to look at for people who are interested in historic landmarking caps and I believe what they did was they set a cap on the total number of rules that could be in place and wrote and set a one in one out policy that would be the same for a landmarking cap. So if a new building is landmarked then something that was landmark previously would have to go off the landmarked list, but determining the exact number of buildings that could be landmarked it's something that I think would just have to be determined politically and through political debate. Brady: I didn't know that and I Just want to say I'm learning a lot in this podcast. We're coming near to an end but that's a great point one that we will definitely be looking at in future Land Econ classes. Emily: Great. [34:56 - 36:31] Student: Hello again. You've mentioned how a lot of these policies came to be. I was just wondering if they reduce the benefits or net benefits for a community why do they have so much a staying power? Emily: These policies have a ton of support typically from community residents because it's often the current property owners who are benefiting from these rules. The economist William Fischel at Dartmouth calls this constituency that's in support of these rules home voters, so they're homeowners in a city who vote in the interest of preserving their home value. Now this is completely rational and it makes sense why homeowners tend to be very concerned about their home value since it's a huge part of their wealth typically, but because the only people who are voting on whose interests are represented in land use policy discussions already live in the community obviously where they're able to vote the people who don't live in that community aren't represented at all. So for example San Francisco land-use policy reflects the interests of current people who live there, but it takes into account none of the interests of all the college graduates all around the world who would want to move to San Francisco to pursue jobs in the tech industry if they were able to afford housing there. Brady: I think we have time for about two more questions. [36:31 - 38:22] Student: Hi. I imagine there is a great deal of uncertainty associated with the implementation and commitment to zoning in any community. Do you have any thoughts on the extent to which uncertainty surrounding zoning practices may influence housing supply and the associated prices? Emily: That's a great question. It's not something that I have looked into but there certainly is uncertainty when these roles are implemented in that people may not foresee their long-run effects, so for example parking requirements are often set based on standards that come out of an organization called the Texas Transportation Institute here in the US and they just come up with general suggestions for this is how many parking spots a house needs, this is how many parking spot each apartment needs within a development, or this is how many parking spots a fast food restaurant needs and cities then implement these rules and may end up with tones of excess parking so in plenty of areas in the US if you drive by a strip mall you'll just see a sea of parking that is never fully occupied. So when the rules were implemented planners probably thought you know we're just doing what's right and creating enough parking, but it's not until time passes that they are able to see the unintended consequences of their rules, so I would suggest that uncertainty should give planners reason to regulate perhaps less than they think they need to at first to see how that level of regulation plays out. Brady: And our last questioner. [38:22 - 39:58] Student: Hi Emily. I would be interested to know how you became interested in this relationship between zoning and housing prices and what inspired you to become a policy researcher in this area? Emily: Yeah, when I was in college I worked as an intern in the planning department of my hometown in Colorado and I just took that internship because it was available not because I had any underlying interest in urban planning, but through that internship I was exposed to the work of Jane Jacobs who's written some very famous books about cities and how land-use policy affects urban development and I became very, very interested in the topic and ultimately went to graduate school to study urban economics and want to just continue working in this area as much as I can. Brady: Emily Hamilton thank you for sharing your thoughts and doing the research that you're doing. We really appreciate it. Emily: Thanks you very much. It was a great discussion. [music fades in] Brady: Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcasts.

Dr. Daowei Zhang and Dr. Brady Deaton discuss his thoughts about the contemporary and historic trade dispute between Canada and the United States regarding softwood lumber: i.e., "The Softwood Lumber Wars." Transcript Brady Deaton Jr: Welcome to FARE Talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Junior of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I will be your host. [music ends] Canada and the United States have been engaged in a long and enduring trade conflict with respect softwood lumber. Today my guest Dr. Daowei Zhang of Auburn University will be discussing his book, "The Softwood Lumber War: Politics, Economics and the Long US-Canadian Trade Dispute". Dr. Zhang welcome to FARE Talk and what's currently going on? Daowei Zhang: Well there are litigations going on on this case. The Department of Commerce is supposedly to rule, make a preliminary ruling on April 24 for the countervailing side and early May on the anti-dumping side, so it's in litigation right now. Brady: Just for some of our listeners who might not know what is softwood lumber, what is it that we're talking about? Daowei: There is a scientific definition of softwood versus hardwood, but in laymen's language softwood is basically the species, lumber made from species like spruce, pine and firs and commercially hardwoods are made from oak, maple and beech, these types of species and the softwoods they have much stronger characteristics therefore can be used for construction where the hardwoods are mostly used for furniture and flooring and so on and so forth. [01:58 – 03:06] Brady: So the Canadian softwood that goes into the United States is it mostly used for housing or? Daowei: Correct, it's for housing. Brady: Which provinces in Canada are the big suppliers of softwood lumber to the United States? Daowei: The big supplier is BC and the second largest is Quebec and the third I think is either Quebec or Alberta and those four provinces roughly supplies the US with we're talking about 95 or 96 percent. BC takes the lion's share of the Canadian's, it's way over half of the Canadian softwood lumber supply to the US. Brady: Roughly how much money are we talking about on an annual basis in terms of the value of softwood lumber that moves across? Daowei: The Canadian dollar varies over the years, I mean on average we are talking about like six to eight billion Canadian dollars, five to seven billion sometimes depending on the exchange rate, US dollars annually. [03:06 – 04:15] Brady: And so that's a fair amount of money, that's a fair amount of importance to currency values but I suppose it's also important to particular groups with vested interests, so like homebuilders in the United States but also certain specific communities that rely heavily on forestry in Canada. What other key constituents really have vested interest in this issue? Daowei: Absolutely. It's very important. You mention a couple, the homebuilders in the US are the big players over in the US and also the US lumber producers, to some degree the US landowners the property landowners and their managers. On the Canadian side obviously you have the Canadian producers in the various provinces and the provincial government, on top of that you have the federal government responsible for international trade, so those are the players. Again on the US side you also have the US government as well. [04:15 – 07:15] Brady: In your book you point out that this you know what they call the softwood lumber war, which is a trade dispute between Canada and the United States, has been going on for well over 20 years. One of the very fascinating points that you raise in the beginning of your book, it's kind of a puzzle and I'll just read it to you for those listeners this is on page five of his book and Dr. Zhang says, "One of our first puzzles is that there's been increasingly free trade for most goods and services but not for softwood lumber." Why is that? Daowei: Well that's very true and if I could correct me that number one nowadays it's going on for more than 30, 35 years now. Brady: OK. Daowei: When I wrote this book it was more than 20 years. Brady: That's right. Daowei: But it's fascinating. If you look at the book, basically the US they admit for all of the imports, like 70 percent are duty free. For the duty for goods it's like four and five percent. If you do it with average of the tariff rate of all the goods and services that come to the United States it's about one, one-half percent. Lumber we're talking about sometimes 15, 20, even preliminary we got even 27 percent. So it's a puzzle, it's something so interesting that's my interest in this book – it rises. So, why is that? I mean, why is that? I mean we talk about, why free trade or freer trade for other goods and services, but not lumber? It's a long story. In my book I listed several factors, but if I could summarize quickly, basically I outline three factors for this longevity issues. One is economics. We talk about the endowment of softwood lumber resource in the two countries it's just too much different. If I could share with your audience the graph in my book, look at the softwood stocks in Canada and the US, basically that's referred to as Figure One. The US as a country as a whole has about 14 billion cubic feet of lumber stock, softwood timber stock. Canada as a country has 20 billion, so that's a big difference just between those two countries. If you use … we're talking about resource endowment, every Canadian has 667 cubic metres where in the United States it's only about 51 cubic metres per person. [07:15 – 9:42] Brady: For listeners out there, we will make these figures available and they're really compelling. That's interesting okay. Daowei: Yes. It's not only interesting, but it's not reported in most of the media, it's overlooked. I mean we in economics we think about the absolutely a comparative advantage of those two countries and it's just enormous. One story – I made the seminars 10 years ago in my school. The Department of Economics say well jeez the Canadians just look at this figure: the number one they do not … is their lumber produce and number two are they charging too much? And that's just, I mean, I was interviewed by the many radio stations and newspapers, publishers and they all pointed this out, they said "Jeez, we did not know this." Brady: Let's go over those points again if you don't mind. When economists talk about absolute advantage and talk about that's this idea that you can produce this softwood lumber at the lowest cost and the comparative advantage we bring in the idea of opportunity cost. Daowei: Correct. Brady: So in the in these cases what specifically is the difference in the opportunity? It's clear I think, if I'm following you, in terms of the graph Canada has the absolute advantage, it can produce softwood lumber the cheapest, but the story is a little different in terms of the comparative advantage. Can you just walk us through that a little bit more? Because it is fascinating. Daowei: Yes, well absolutely the amount, Canadians produce more and also in term of opportunity cost of producing lumbers the Canadians are are much more I mean compared look at the resource endowment. For example, the computer industry in the United States is leading the world, it's way more advanced. Canadians' computer industry relatively sized compared to the US does not have some kind of a comparable advantage, but in lumber, Canadian does, it's a huge difference in opportunity cost being produced in lumber, in softwood. [09:42 – 12:40] Brady: So Canada has both an absolute advantage in a comparative advantage in this? Daowei: Absolutely. Brady: OK. And so then how does that translate into your thoughts about whether or not, and I guess one of the big issues in this enduring softwood lumber wars you point out that's been more than 30 years ongoing is this issue of whether Canada subsidizes its softwood lumber. Daowei: Well, you are moving to the second factor now. If we think about economic factors, the second factor of the softwood lumber war is I call this institutional factors. In the United States you have a presidential systems, you have Congress and so they are subject to the influence of some of the special interest groups, and most importantly one institutional factor is that in this lumber dispute the consumer, which is mostly homebuilders and home dealers, those peoples under the US legal systems, they are not part of this dispute. Let me rephrase. They do not have legal standing in the legal fact. So legally, they are put at a much disadvantage compared to the producers the US lumber producers. So this is what I called the institutional factors, the second factor, in this long dispute. Brady: So Canada has a comparative and absolute advantage but there are key stakeholders with differing interests. This really comes out nice in your book, and I guess let's maybe go through them. That's fascinating. One of the stakeholders is the US consumer who presumably benefits from lower prices but they don't have legal standing in this debate, one of the other stakeholders is the US producer and they do have standing and they don't, I take it, they would prefer the less volume coming in from Canada. Is that right? Daowei: Correct. That's correct. And for example the US consumers they are not at the negotiation table. When Canada and the United States try to make a deal there were three deals over the years and there was no presence of the US consumers so anyways they were complaining but under the US legal system … they are not a part of it so that's the second factor I am talking about. [12:40 - 14:45] Brady: Well somebody out there might be in the United States or in Canada might be out there wondering well does Canada subsidize softwood lumber? How have you thought about that, the answer to that question? Daowei: Well, this is the heart of the dispute. I in my book alluded that there was no evidence, no credible evidence that I have found anywhere to say that Canadians are subsidized. It is true that in a couple of occasions that the US Department of Commerce found there was subsidy, but if you look at the WTOs if you look at the three NAFTA panels there's no evidence and also empirically from the academic side there is no such evidence that says there was an independent credible study shows that Canadians have subsidized their lumber producers. Brady: So if they don't subsidize what you think that Commerce is gonna come back and say in this recent I guess when I think they are sometime in April [Daowei: Correct.] are supposed to, what are your thoughts about that? Daowei: Well I said there were no subsidies found by international panel there were no subsidies found by any credible, scholarly work, but the Department of Commerce did find a couple of occasions there was subsidies, but they have their own criteria, they have their benchmarks. Depending on which benchmark they use I think they might find a subsidy. I suppose we'll find out in just a couple of weeks what happens. [14:45 – 16:47] Brady: One of the really fascinating discussion points of your book and I wouldn't mind you just talking about it in general is that you know we teach in our classes and we talk about certainly with our families the idea of free trade but what's clear is that trade is negotiated and there's tremendous rules and what was fascinating to me when reading your book was all the discussion about subsidies that come along with allowing free trade of defining what a subsidy is, what kind of actions can be taken against countries if the subsidy is argued to be in effect and the definition and the measure of what a subsidy is legally seem to be changing over time. What are your thoughts on that? Daowei: In this case, if I could basically summarize, in the eighties the US Department of Commerce had a different set of rules and in the 1990s, 1994 they changed it. Well not only this, within the same set of rules there are alternative benchmarks. They could choose one or two or three of those benchmarks. Depending on which benchmark is used and you can find some level of subsidies I suppose and one of the critical issues here is whether or not cross-country border comparison of stumpage is blocked, so it depends what type of benchmark you could find. There could be no subsidies, or small level subsidies or large level subsidies, so that's critical issues in this case. My thought is well in the future it depends on which type of benchmark the Department of Commerce use so it could change the result. [16:47 – 18:15] Brady: If you a crystal ball there what kind of a benchmark do you think the Commerce is going to use and what you think will happen? Daowei: I can only speak on behalf of the Department of Commerce [Brady: Sure.] but I know there are three benchmarks in this realm. So the definition of subsidies is some kind of adequate … they define … that whatever adequate is so-called … so their benchmarks are three benchmarks. One is market price from actual transactions from within country, in this case within Canada. The second is wood market price that would be available for purchase in the country of exportations, in this case it's cross border comparison. The third one is whether assessment whether or not the government price is consistent with market principle. This is a cost approach. I do not know which one they will use, but if I were Canadian I would definitely oppose them to use the cross-border pricing because cross-border pricing there is a problem with the exchange rate and different market conditions, different species compositions, so on and so forth. That is one of the most contentious issues in this dispute. [18:15 – 19:48] Brady: Let me ask you this question because it's kind of interesting. Wouldn't we expect there to be differences in prices across borders and that that's in fact what leads to exchange? Daowei: Correct. This is an interesting story. If there is no difference among countries in price, there will be no treat. Now you use the cross-border pricing you essentially turn the comparative advantage to some kind of comparative disadvantage. It's totally against the economic principles that we have learned. Brady: Alright, so politics are at play and probably the choice of these. What from your standpoint and you really are kind of one of the world's experts in this area if not the world's expert in this area. What would you what kind of comparison would you suggest? Daowei: I would suggest well at least use the in country. For example, you have private ownership in Canada and you have crown land and you could use property land somebody price to infer the crown land somebody price probably to adjust for the difference for example reforestation and so on and so forth. The other would be more legit to me than cross-border pricing, there's just too many problems with cross-border. Let me give you an example of these problems, within country and cross-borders. [19:48 – 21:29] Brady: OK before you do that let me just make one point for our listeners because you just raise the point that I realized I probably should have asked you about earlier, it's important. So Canada, a big distinction between Canada and the United States is that Canada much of the land is in provincial ownership whereas in the United States it's private, so when you say compare the stumpage the kind of the rental rate on provincial land with the rental rate on private land that's a better way of assessing the subsidy from your standpoint. Did I get that right? Daowei: Correct, correct. You correctly point out that in the United States most states 73% of land is owned by private landowners, whereas in Canada we're talking about something like 90% is owned by the public, but that aside let's just compare apples to apples in this case. In this case, private landowners in the United States in my state we have a … the same state the stumpage price could be 10, 15, 20 percent different; we are only talking about the same species. [Brady: Right.] So … talking about the same land ownership private land ownership the stumpage price is different. If you compare the stumpage price in the state of Alabama, compare with its neighbouring states, Florida, Georgia, Tennessee and Mississippi state same species the soft timbers they are going to be easily 5, 10, 15 percent different. So my point is that cross-border or cross-region comparison is riddled with problems. [21:29 – 23:40] Brady: Oh I see. So you would suggest a relatively focused comparison within regions between and to assess whether there was a subsidy in stumpage between the private and the public? Daowei: Correct. Brady: I want to move to a more abstract discussion that I thought was really fascinating and well developed in your book and that was the way you brought in public choice theory into this discussion of the softwood lumber war. Talk to me a little bit about public choice theory. Daowei: Public choice is basically a school of economics using economics to study politics and political process and common actions in this case is pre-deregulation. The public choice school started with assumption phase, OK all of the players, we're talking about politicians elected or the administrations … as well as the players like producers and consumers. Those people, every one of them, have a self interest and sometimes their self interest overrides the pubic interest so in this case and secondly some interest group, small well-organized interest group, when their loss is concentrated whereas the benefit of in this case the free trade is like a spread to many, many people. When that occurs you have a symmetry in the benefit and cost concentrations. In that case it will lead to some kind of lobbying more intensively to people who lost, in this case the US lumber producers. They could overcome the lobby of the consumer groups and find their voice in US Congress and Congress in turn apply pressure to the administration and therefore you could lead to some kind of result which is contrary to economic efficiency, contrary to free trade. [23:40 – 26:09] Brady: Right so consumers and producers on net could benefit from expanded trade with Canada but producers would be hurt and because they have relatively intense interest and I guess in this case, what you said US consumers don't even have standing, they can lobby government to take certain actions against traders. Is that right? Daowei: Correct, correct. Well actually free trade is better for the United States as a whole. There is a loser in free trade, which is the lumber producers and there is a benefactor in this case is the US consumers. Yes the lobby could be more intense to Congress from the producer side. And now I'm saying the US consumers do not have a legal standing, politically they can still lobby [Brady: Right.] but if their intensity of the lobby is subdued overshadowed by the lobby of the lumber producers, let's put it this way. They can be effective in the lobbying effort, but legally they do not have legal standing, so there is a difference on that. Brady: What's your thoughts? Canada is worried about this, why wouldn't they just adopt a system like the United States and just auction their land and be done with it? What you think stops that as a potential solution? Daowei: There are two things: Number one, it's not very good for the Canadian social and … objective. If we use the United States' systems number one the US Forest Service the public land the auction their timbers, stumpage. They lose billions of dollars. In Canada, you do not want to have somebody auction your timberland and lose a billion dollars. That I do not think the Canadian public will agree with if the Canadian public stumpage system loses billions of dollars over the years. [26:09 – 28:09] Brady: That's a great point. Why do they lose the money, why when they auction? Daowei: Well it's a long story in the US Forest Service but it's documented. They lose money because the cost of logging is just too high, there are litigations and so on and so forth so the transaction cost is too high for harvesting public forest or national forest in the United States, OK, and long story short they are losing money the US Forest Service in their timber sales they're losing money for years, for 10, 20 years now. Brady: So they auction off, but they don't get enough revenue to cover their, is that what you're saying? Daowei: Correct. And secondly to answer your question why Canada cannot do this kind of stuff, I realized this to a talk I did in Kelowna back in 1985. There was two key people in lumber negotiations back in 1995 and the coalition of the US lumber lobbyists the chairman by the name of Dick Bennett and I had an exchange with one of the leaders of the BC lumber industry by the name of Jake Kerr. So this is Jake Kerr asked Dick Bennett, he said, I quote: "I understand that you [which means the coalition] want to have a competitive timber sale system in Canada that is similar to the one used by US Forest Service. What will happen if the stumpage price fails after we implement such a timber sale system in British Columbia?" Dick Bennett replied, I quote, "We will sue you again if that happens." [28:09 – 30:06] Brady: So at the end of the day it may not really be about subsidy it's more about wanting to control the volume of timber that comes from Canada into the United States? Daowei: That's my understanding of this case. I have talked with many people in the coalition and US industry and Canadian industry and this seems to be the consensus, it's not about the pricing, it's about market share. Brady: One thing that I think is important to raise is that there's a lot of you know business going across borders and I think in one of our discussions you pointed out just how much of the forestry activities were actually in the United States were actually owned by Canadian companies. I don't know if you want to expand on that little bit but I think that's a fascinating point. Daowei: Yes that's something new; in fact it's one of the six puzzles that I point out in the book that basically you see the forest across the border in multiple cases a forest that does not recognize national borders. I mean you have the forest very similar in species and so on and so forth and the industries are somewhat integrated and yet we have this dispute. Anyway, you point out that basically what is happening in the last maybe 10 to 15 years was that increasing ownership over Canadian sawmill ownership in the United States in some state for example the state of South Carolina, the state of Georgia, the state of Alabama and the state of Arkansas those are big lumber producing states and the north Canadians are unique in the number of shares, we're talking about 35 to 50 percent of the capacities. [30:06 – 32:55] Brady: I think that's kind of an important point. In Canada for example we've had some people concerned about US ownership, or sorry not US but foreign ownership of Canadian farmland but I think oftentimes we don't sit back and reflect on just how integrated the ownership patterns are in other areas and that Canadians are surprised to learn how much Canadian ownership of US assets there are in the United States. Daowei: Well actually this is a fascinating point. I did a study back in the nineties. The US ownership of Canadian assets back in the seventies and eighties was higher than today. So the point is … basically that if the Canadians are really subsidized why don't the US producers go buy Canadian assets and just be a recipient of this quote end quote win for profit from the subsidies and empirically it's the other way around, and nobody can give me an answer to this question just yet. Brady: That's a very powerful point. I'm conscious of the time and I want to if the United States slaps a tariff for an export tax on walk me through really quickly the implications for both sides of the borders for producers and provinces in Canada and consumers and producers in the United States. Daowei: Well, if the tariff is imposed ultimately the lumber price will rise in the United States, and it depends on the magnitude of the tariff, and it will hurt the US consumers and it will benefit the US lumber producers and to some degrees landowners. The Canadians, if there is a quota or export tax the producer will be somewhat limited in their export activities. They are going to be hurt, and if they could tell their production and employment level of the sawmill sector in Canada will decline so the workers may suffer a little bit in Canada as well so that's I mean without knowing what's the magnitude and what exactly the deal will be I guess I can generally just summarize like that. [32:55 – 34:54] Brady: That way if you were given the opportunity to make a suggestion to policymakers and they would follow through, what would that be in dealing with this dispute? Daowei: If I had the opportunity I think I would be rational and reasonable in this case. I would appoint some kind of commission and negotiate for a deal for both countries. Back in 2003, I proposed a voluntary export tax of five percent and that deal was not very far from the settlement the software lumber agreement of 2006. The tax rate was about four to five percent and so anyway I think that kind of compromise somewhere in the middle will be a better deal. Brady: So the export tax that would be Canadian provinces placing it on the timber or the softwood lumber producers, is that right? So the money with the five percent that stays in Canada but it reduces the volume because it essentially raises the cost of production? Daowei: Right, correct and also as a goodwill maybe the Canadians should use a portion of the money to you know promote softwood lumber use in that case stimulate demand for lumber, so it will benefit both the Canadian lumber producers and the US lumber producers if the demand is increased. Brady: Dr. Zhang thank you for taking the time to discuss your book and your research with us on FARE Talk. I learned a lot and I wish you best of luck. Daowei: Thank you very much.