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.