Iowa Ag ReviewFall 2003, Vol. 9 No. 4

Geographical Indications, Property Rights,and Value-Added AgricultureBruce A. Babcockbabcock@iastate.edu515-294-6785

What do Vidalia onions, Wis-consin cheese, and Konacoffee have that feta

cheese, champagne, and cognac donot? The first three products havetrademark protection for their brandnames (in this case, through U.S.trademark law). The latter threehave no brand name protection, butthat could change. Protection wouldbecome available for the latter prod-ucts if E.U. proposals to increaseprotection for products identified asoriginating from a particular geo-graphic region—so-called Geographi-cal Indications (GIs)—are adopted.The European Union proposes to (1)establish a register of GIs that wouldgive protection to products acrossinternational boundaries; (2) extendthe protections that are enjoyed bywines and spirits to food products;and (3) allow E.U. member countriesto retrieve or “claw back” GIs cur-rently being used by other countries.The first 41 products with GIs thatthe European Union wants to protectare shown in the accompanying box.

The E.U. proposal is strongly op-posed by the United States, Austra-lia, Canada, and other major foodexporters. Furthermore, the UnitedStates and Australia believe that cur-rent E.U. domestic laws concerningGIs go too far. On October 2, the Dis-pute Settlement Body of the WorldTrade Organization agreed to lookinto European Community rules ontrademarks and GIs at the request ofthe United States and Australia.

The U.S. position seems to con-tradict the encouragement U.S. pro-

ducers are getting from the U.S. De-partment of Agriculture to moveaway from production of homoge-neous commodities toward produc-tion of value-added products thatcan increase returns. One feasibleway to differentiate a product andadd value to it is to brand it with theregion from which it originated.

Alaska fishermen are trying todo this by joining together to pro-duce Copper River Salmon andCastle Cape Reds. Wisconsin milkproducers have joined to create Wis-consin Real Cheese and WisconsinStyle Havarti. And many state de-partments of agriculture have cre-ated certification programs forproducts that originate in theirstates. Examples include A Taste ofIowa, Idaho Preferred, Fresh fromFlorida, Get Real Get Maine, andMaryland Seafood—It’s As Good as ItLooks. Given that producers areshowing increased interest in usingGIs to create branded products, whyhas the United States opposedpolicy changes that would seem tostrengthen their hand?

FINANCIAL INTERESTS IN GISThe objective of the 1992 E.U. lawgoverning protection of GIs is to“…add value to certain specific high-quality products from a demarcatedgeographical area. To promote, in arural development context, the di-versification of agricultural produc-tion” (see the full text at http://europa.eu.int/scadplus/leg/en/lvb/l21097.htm). Pascal Lamy, the E.U.’schief trade negotiator, is quoted in areport by the American Farm Bureauas saying “ I am convinced that thefuture of European agriculture liesnot in quantity of exports but qual-

Wines & spiritsBeaujolaisBordeauxBourgogneChablisChampagneChiantiCognacGrappa di Barolo, del

Piemonte, di Lombardia,del Trentino, del Friuli, delVeneto, dell’Alto Adige

GravesLiebfrau(en)milchMalagaMarsalaMadeiraMédocMoselleOuzoPortoRhinRiojaSaint-EmilionSauternesJerez, Xerez

Other productsAsiagoAzafrán de la ManchaComtéFetaFontinaGorgonzolaGrana PadanoJijona y Turrón de AlicanteManchegoMortadella BolognaMozzarella di Bufala CampanaParmigiano ReggianoPecorino RomanoProsciutto di ParmaProsciutto di San DanieleProsciutto ToscanoQueijo São JorgeReblochonRoquefort

The European Union’s Wish Listof Geographical Indicators

(prepared for the World Trade Organization

conference in Cancun)

2 CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT FALL 2003

Iowa Ag Review

ISSN 1080-2193http://www.card.iastate.edu

Becky OlsonPublication Design

Iowa Ag Review is a quarterly newsletter pub-lished by the Center for Agricultural and RuralDevelopment (CARD). This publication presentssummarized results that emphasize the implica-tions of ongoing agricultural policy analysis, analy-sis of the near-term agricultural situation, anddiscussion of agricultural policies currently underconsideration.

EditorBruce A. Babcock

CARD Director

Editorial StaffSandra Clarke

Managing EditorBetty Hempe

Editorial Consultant

Editorial CommitteeJohn BeghinTrade and AgriculturalPolicy Division HeadKeith HeffernanCARD Assistant DirectorRoxanne ClemensMATRIC Managing Director

Iowa State UniversityIowa State University does not discriminate on thebasis of race, color, age, religion, national origin,sexual orientation, sex, marital status, disability, orstatus as a U.S. Vietnam Era Veteran. Any personshaving inquiries concerning this may contact theDirector of Equal Opportunity and Diversity,1350 Beardshear Hall, 515-294-7612.

IN THIS ISSUEGeographical Indications,Property Rights, and Value-Added Agriculture ......................... 1

Meat Traceability in Japan ........... 4

Agricultural SituationSpotlight .......................................... 6

Agricultural Biotechnologyand Trade: The UnresolvedIssues ............................................... 8

Recent CARD Publications .......... 10

Contact Betty Hempe for a free subscription, publica-tion information, and address changes at: Iowa AgReview, CARD Publications, Iowa State University, 578Heady Hall, Ames, IA 50011-1070; Phone: 515-294-7519;Fax: 515-294-6336; E-mail: card-iaagrev@iastate.edu;Web site: www.card.iastate.edu

Would the demand for this Wiscon-sin cheese disappear if it could notbe called feta cheese?

POTENTIAL LOSSES FROM INCREASEDPROPERTY RIGHTS PROTECTIONCompanies outside the EuropeanUnion that have built their reputa-tion in part on products that origi-nally came from Europe could sufferunder the E.U. proposal if they wererequired to change the name of theirproducts and if demand for theproducts were to decrease. Kraft andother companies generate millionsof dollars annually from sales of in-expensive parmesan cheese, whichtakes its name from the world classParmigiano Reggiano. Many of uswere raised on Oscar Mayer bologna(also produced by Kraft), a versionof its namesake, Mortadella Bologna,a sausage originally produced onlyin Bologna in the sixteenth centurybut now produced in northern andcentral Italy.

People consume Oscar Meyerbologna, Kraft parmesan cheese, andKorbel California champagne for avariety of reasons. The amountspent on advertising to maintainthese brand names suggests that thecompanies believe that their prod-uct names are important. If nameswere changed because of adoptionof the E.U. proposal, then presum-ably sales of these products woulddecrease, with resulting financiallosses.

The reason the United States isagainst the 1992 E.U. law and againstthe current E.U. proposal is not diffi-cult to understand: existing U.S.companies are threatened. But mightthere be some offsetting benefits toconsumers or new companies fromincreasing protection for GIs?

POTENTIAL BENEFITS FROM INCREASEDPROPERTY RIGHTS PROTECTIONThe United States has been a forcefuland consistent international advo-cate for increased protection of in-tellectual property rights. The fightsagainst bootleg DVDs in China, pro-

ity, the quality of the Europeantrademark. That is why we arefighting to stop appropriation ofthe image of our products and im-prove protection.”

A quick glance at the list of GIsthat the European Union wants toprotect clearly shows why they seevalue in their proposal. Commonfoods, wines, and spirits that we con-sume would be given increased pro-tection. For example, KorbelCalifornia Champagne at about $12per bottle would become Korbel Cali-fornia Sparkling Wine. In order to en-joy Champagne, you would have tobuy a bottle of high-quality $40 winemade from grapes produced in theChampagne region of France. Underthe E.U. proposal, the demand forFrench champagne would be ex-pected to increase, thereby increas-ing the region’s wine profits at theexpense of producers of Californiasparkling wines.

Another item on the list is feta,which is a well-known Greek curdcheese with a tradition dating backthousands of years. In 2002, theEuropean Commission gave Greece aPDO (Protected Designation of Ori-gin) for feta, concluding that “feta” isa not a generic word for any kind oftangy, salty curd cheese cured in abrine solution. Rather, the Commis-sion ruled that cheese labeled as Fetacheese can only be produced in cer-tain areas of Greece from goat’s orsheep’s milk.

To Americans, feta cheese is astyle of cheese that is crumbly andsalty and is usually used in Greekdishes. Most U.S.-consumed cheesethat fits this description is made inWisconsin from cow’s milk. For ex-ample Mediterra Danish Feta is pro-duced in Wisconsin by Arla Foods ofNew Jersey and Denmark. Arla isnow forbidden from producing fetain Europe unless it does so in facili-ties in Greece. Should Wisconsinproducers be allowed to use theterm “feta” as a generic term to de-scribe their cheese? Increased pro-tection of GIs would suggest not.

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Iowa Ag Review

duction of unlicensed generic drugsin Africa, or the protection of therights of seed companies have beenled by the United States. Thisshould come as no surprise giventhat a large proportion of intellec-tual property is held by U.S. citizensand companies.

But protection of intellectualproperty also serves a greater soci-etal goal of rewarding creativity anddiscovery. Lack of protection for in-tellectual property would decreasemonetary incentives for people toengage in activities that lead to in-vention. Pharmaceutical companieswould invest less in discovering newdrugs. The recording industry wouldpay its artists less. And seed compa-nies would invest less in new seedtechnologies.

Suppose the United Statesjoined Europe’s efforts to increaseinternational protection for GIs inagricultural products. This policychange would immediately increasethe incentive to create and registernew products and brand namesbased on geographic origin. Re-gional foods could be marketed in-ternationally with less risk thattheir niche would be overwhelmedby domestic competition. That is,protection of the GI would increasethe incentive to create new brandsbecause future competition wouldbe limited.

There are numerous examplesof how increased protection has ledto increased profits for producersin Europe. Italian “Toscano” oil re-ceives a 20 percent premium overcommodity oil since the companyregistered its brand name in 1998.The market price for Bresse poultryin France is quadruple that of com-modity poultry meat. Milk used toproduce French Comte cheese sellsfor a 10 percent premium.

The key to maintaining theseprice premiums is control of qualityand quantity. And the only way thiscontrol can be (legally) attained isby giving the owners of a productproperty rights over its brand name.

DOES EUROPE HAVE A MONOPOLYON FINE FOODS?Most of the benefits of increasedprotection for GIs are expected toflow primarily to European produc-ers. After all, the wide variety offoods available across the many re-gions of Europe serves as the basisof much of Western cuisine. AndEurope’s food industry and farmerscertainly would reap a large propor-tion of the initial benefits of in-creased protection for GIs. After all,it has been the European Union’spolicy since at least passage of the1992 law to create a mechanism toreward its farmers for their invest-ments in value-added food items.Thus, European farmers and compa-nies are in a much better position tobenefit from increased protectionthan U.S. farmers and companies.

But Europe does not have a mo-nopoly on fine foods. For instance,high-quality, corn-fed beef slaugh-tered in plants throughout the U.S.Corn Belt is in high demand in Ja-pan. The demand for non-commod-ity U.S. cheeses identified withparticular regions is growing. Inter-national demand exists for productsmade from California citrus, nuts,and other fruit. Increased interna-tional protection for GIs could un-leash the creativity of U.S. farmersand food companies over the next 30years to meet new kinds of foodproducts demanded by consumersall over the world.

A TURNING POINT FOR U.S.AGRICULTURE?Rich-country policymakers are un-der increasing pressure to reducetaxpayer subsidies given to farmers.The current round of World TradeOrganization negotiations has stalledbecause poor countries banded to-gether with middle-income coun-tries, such as China and Brazil, toblock movement on an agreementuntil more progress is made on re-ducing U.S. and E.U. agricultural sub-sidies. Because farmer subsidiesoverwhelmingly focus on commodi-

ties, the current system of farm sup-port encourages farmers and re-searchers to continue to focus theirenergies on finding ever-cheaperways to produce more grain, oil-seeds, and fiber.

Europe is attempting to wean itsfarmers from subsidies in two ways.The first is to increase the propor-tion of payments that are decoupledfrom production levels, much likethe United States has done with itsdirect payments. The second ap-proach is to create incentives forfarmers to invest in higher-quality,value-added food products by be-stowing greater property rights overthe names of regional products. Theaim is to create a more diversified,profit-oriented agriculture. Again,there is evidence that this approachis working. The Italian food industryin Tuscany and Emilia-Romagna isbooming with new investments invalue-added food items protected byGIs. Growth in the availability ofnoncommodity meats, poultry, andproduce in France and Britain overthe last five year is extraordinary.Clearly, the strengthening of prop-erty rights through GIs has helpedproducers meet the demand forhigh-quality food items.

With luck, world prosperity willcontinue. If it does, then so too willthe demand for food items that makeup a diversified, high-quality diet.One way to ensure that growth indemand for high-quality foods willbenefit farmers is to give entrepre-neurial farmers greater control overthe quality and quantity of the fooditems they produce. Only then canthey guard against imitators, whowould overwhelm an otherwise prof-itable niche market. Increased pro-tection of GIs is just the type ofsupport needed by farmers whowant to move away from commodi-ties. If we want a more diverse andless subsidized agricultural sector,we might have something to learnfrom European agricultural policy. ◆

4 CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT FALL 2003

Iowa Ag Review

Meat Traceability in JapanRoxanne Clemensrclemens@iastate.edu515-294-8842

A series of food safety crises,the discovery of bovinespongiform encephalopathy

(BSE) in the domestic cattle herd,and a series of labeling scandals inJapan have shaken the trust of Japa-nese consumers in the safety of theirfood supply. The Japanese govern-ment has responded by implement-ing a series of new regulations andcreating the new Food Safety Com-mission. The food industry has re-sponded with assurance programsto reduce consumer anxiety overfood safety and wholesomeness.

Many of these new regulationsand assurance programs are basedat least in part on traceability sys-tems. So far, attempts to requiretraceability for imported meats havefailed. Some industry experts con-tend that traceability will never bemandatory for imported meats.However, most experts agree thattraceability will play an increasinglyimportant role in the Japanese live-stock and meat industries.

TRACEABILITYIn the livestock sector, traceabilitywas implemented to track animalmovement and identify cohorts inthe event of animal diseases orfood safety problems. In July 2002,the Law Relating to Special BSECountermeasures was enacted. Thelaw requires mandatory tracebackfor cattle from the feedlot to thepacking plant. In a system regu-lated by the Japanese government,each cow is identified with an eartag displaying an individual identifi-cation number. Producers mustsubmit data on each animal’s dateof birth, sex, and breed; name andaddress of owner, location of fatten-ing and date fattening commenced;and date of slaughter. These dataare entered into the “family regis-ter” of the domestic herd.

In June 2003, Japan passed legis-lation requiring traceability from thefarm through retail sale. Under thenew law, processors, distributors,and retailers will be required to pro-vide traceability information from theslaughterhouse to the retail outlet byDecember 1, 2004. The law will applyto beef muscle meats and will ex-clude offals, trimmings, ground beef,and processed products. Wholesalersand retailers can provide traceability

information by individual animal orby lot numbers. Penalties for non-compliance will range from warningsto fines and making violators’ namespublic. The government will provideassistance (low-interest loans andcredits) to help companies cover thecost of the computer and labelingtechnologies required to implementthe system.

Also in June 2003, Japan’s Minis-try of Agriculture, Forestry, and Fish-eries announced a new JapanAgricultural Standard (JAS) programto certify the traceability of importedbeef. To gain certification, exportersmust be able to provide all the sameinformation required under the LawRelating to Special BSE Countermea-sures just described, plus the namesof all feeds and pharmaceuticals usedin producing the animal. The JAS certi-fication is voluntary; domestic beef isalso eligible for certification if its pro-ducers supply feed and pharmaceuti-cal information. Beef certified under

the program is expected to appear onthe market in 2004, and a similar sys-tem is being considered for pork.

CONSUMER ASSURANCE PROGRAMSIn the retail sector, traceability hasemerged as a marketing tool to “makeconsumers feel good” about themeats they purchase. Japanese con-sumers have been critical of thegovernment’s role in handling theBSE crisis and other food-relatedproblems. Supermarkets have seizedthe opportunity to fill the gap in con-sumer confidence about thegovernment’s ability to protect thesafety and quality of the food supply.Traceability has been incorporatedinto assurance programs as a way tocreate trust, ease consumer anxiety,and assure consumers that “this” su-permarket chain can provide the saf-est food. In a culture where loss ofreputation is often of greater concernthan is litigation, supermarkets arestaking their reputations on beingable to provide safe food. To supplyto these supermarkets, producersmust stake their reputations as well.

Japanese consumers tend to be-lieve that if the person who pro-duced a food product is willing toput his or her face and name on theproduct, then that product may besafer than a comparable productwithout such information. Japaneseconsumers equate such informationwith “knowing” the producer. Retail-ers are responding to this belief in avariety of ways.

The Aeon Company has devel-oped one of the most comprehen-sive assurance systems for domesticWagyu beef. Under this system, cus-tomers can enter a 10-digit codeinto a computer located in the meatsales area to obtain informationabout the beef they are purchasing(see Figure 1). The consumer canobtain a production record certifi-cate that traces the meat back tothe birth of the animal from whichit was harvested, the BSE testingcertificate, and a photograph of the

Japanese consumers tend to

believe that if the person who

produced a food product is

willing to put his or her face and

name on the product, then that

product may be safer than a

comparable product without

such information.

FALL 2003 CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT 5

Iowa Ag Review

livestock producer(s). This informa-tion is also accessible from thecustomer’s home computer.

The Aeon system was wildly popu-lar at first, but few customers use thecomputer now that the novelty hasworn off. However, just having the sys-tem in place seems to make customersfeel more comfortable because the in-formation is available if they want it.The Aeon Company provides a similarcomputer system in its produce de-partment and plans to expand thesesystems to cover more products.

The Aeon Company also providesan assurance program for beef prod-ucts imported from its Tasmanian(Australia) ranches. A posted Certifi-cate of Assurance from the AustralianFeedlot Association tells customersthat the beef is produced under “man-agement systems audited under theNational Feedlot AccreditationScheme” to ensure that the beef is“free of hormone growth promotants,therapeutic antibiotics, bone meal, andany genetically modified feed materi-als.” Other point-of-sale informationtells the customer that the beef is fromBlack Angus cattle fed for more than200 days for greater tenderness andthat the consumer is assured of pur-chasing “a fully anxiety-free” product.

The assurance program at ItoYokado supermarkets includes a la-bel with a photograph of theproducer(s) on each package ofmeat. These labels appear on pack-ages of beef, pork, chicken, and fro-

zen fish produced underaquaculture.

These assurance sys-tems are not limited to theretail sector. One chain offamily-style restaurants pro-vides information about theorigin and production meth-ods of the domestic chicken,Chilean pork, U.S. beef, andAustralian beef on its menus.Meat processors report thatconsumers are increasinglyinterested in knowing moreabout the meat used in pro-cessed products.

PRODUCT DIFFERENTIATIONTo date, farm-to-fork traceability sys-tems have been implemented forhigh-value items such as domesticWagyu beef, for which consumers arealready paying premiums. Resultsfrom consumer focus groups indicatethat Japanese consumers will pay 20percent more for domestic foodswith specific safety assurances andproduction information. This re-sponse is generally supported byprice differences at retail outlets.

The question that must be an-swered is whether imported productscan achieve the same premiums,given that imported meats face con-sumer bias favoring domestic meats.Market experts believe that exporterswith fully documentable traceabilitysystems in place might do well in Ja-pan because no one has captured thismarket. However, Japanese industryparticipants generally agree that Japa-nese buyers and consumers are un-likely to pay higher prices, especiallyfor beef. Many importers believe thatthe key to obtaining premiums for im-ported meats will be in differentiatingproducts from those of competitors.

Providing meats for noncom-modity niche markets may improvethe competitiveness of importedmeats, especially in high-value mar-kets where quality and product at-tributes are key factors in purchasingdecisions. For example, pork fromU.S. animals produced without antibi-otics and with non-genetically modi-

fied (GM) rations is being sold at asubstantial premium to domesticproduct. Some Japanese importersexpressed interest in purchasingnoncommodity U.S. beef and pork,including antibiotic-free, non-hor-mone treated, produced without GMrations, and organic meat.

WHO WILL SUPPLY THE MEAT?Quality has long been the key factorin exporting meat to Japan, but aproduct that instills trust has be-come at least equally important. Un-fortunately, many consumerassurance programs blur the distinc-tion between assurances that food issafe and science-based systems thatenhance food safety. Japanese im-porters acknowledge the difficultyand cost of tracing meat cuts to indi-vidual animals and seem open toconsidering less extensive traceabil-ity systems. Importers also have ex-pressed a willingness to consideralternative systems using high pro-duction and manufacturing stan-dards scientifically linked to foodsafety. Documentation and the ex-porters’ willingness to stand behindthe product will be important to thesuccess of alternative systems.

Although beef has been the mainfocus since BSE, many restaurantsand retailers want consumer assur-ance programs for pork, and legisla-tion requiring traceability is beingconsidered for domestic pork. Japa-nese importers have begun initiativeswith North American, Australian, andNew Zealand beef suppliers and wantto develop initiatives for pork as well.The goal of many importers will be topurchase meat from suppliers whocan provide low-cost products withmarketable assurance programs,many of which will require some de-gree of traceability. In the short to me-dium term, the bulk of Japaneseimports will continue to be dominatedby commodity products, but demandfor higher-value, differentiated prod-ucts for the retail and hotel/restau-rant/institution sectors willincreasingly supplant demand forcommodity meats in Japan. ◆

The Aeon Company uses a 10-digit code onretail labels to trace packages of domesticWagyu beef back to the producer.

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Iowa Ag Review

Editor’s Note: Beginning with this issue, our Iowa’s Agricultural Situation reportwill move beyond a synthesis of past USDA reports. Each feature, now calledAgricultural Situation Spotlight, will provide in-depth analysis of an importanttopic in production agriculture.

Weak Spots in the Agricultural Safety Net

Agricultural Situation

Spotlight

Chad E. Hartchart@iastate.edu515-294-9911

Congress added new programsunder the 2002 farm bill to ex-pand the safety net for agri-

cultural producers. Countercyclicalpayments and marketing loan ben-efits compensate for low prices.Crop insurance and non-insuredcrop disaster assistance programsreduce risks from low yields. Directpayments provide income support.But the call for additional support tocover pricing and production emer-gencies has not subsided. Why?

While some of the calls for disas-ter assistance have centered on dev-astating crop losses (mainly fromdrought), others have called forcompensation for shallow losses(partial crop losses). Why mightfarmers request assistance to covershallow losses? An examination ofreturns under the new farm bill isrevealing.

NET RETURNS UNDER VARIOUSSCENARIOSOne way to examine the ability ofcurrent farm programs to deal with avariety of production and pricing sce-narios is to calculate the net returnsto an example farm over many differ-ent price and yield combinations.Consider, for example, an Iowa cornfarm that has been taken through5,000 price and yield simulations.Table 1 shows the assumed settingson the farm for the direct, counter-cyclical, and crop insurance pro-grams, along with assumptions onthe per acre costs on the farm andthe ability of the producer to use the

marketing loan program. The pro-ducer-paid insurance premium is theactual premium rate for a corn pro-ducer in Boone County, Iowa, with anactual production history (APH) yieldof 148 bushels/acre for Revenue As-surance (with the harvest price op-tion) of 65 percent coverage.

For each price and yield draw,we can calculate the net return peracre to the farm. Figure 1 shows therelationship between price and mar-ket receipts less variable costs. Thenatural hedge that Iowa corn farm-ers enjoy is nicely illustrated. Noticethat as the market price increases,the average return remains at about$150/acre. Higher yields tend to co-incide with lower prices and viceversa. Negative returns are possible.But the average return across theprices is roughly the same.

Figure 2 shows the relationshipbetween price and net returns afterthe inclusion of government pay-ments. This net return is equal tothe sum of market receipts, directpayments, countercyclical pay-

ments, net crop insurance payments,and marketing loan benefits lessvariable costs. What does Figure 2teach us about the effects of the gov-ernment payments?

GOVERNMENT PROGRAMS: GRAPHINGTHE EFFECTSFirst, government programs removethe possibility of not covering vari-able costs. In one sense, governmentpayments have largely taken the riskout of farming. Second, the market-ing loan and countercyclical pay-ment programs provide a great dealof support at low prices (lifting thepoints on the left side of the graph).Third, revenue insurance coverageprovides income support in cases oflow yields (lifting the points on theright side of the graph) and lowprices (providing additional lift onthe left side).

Fourth, the combination of pro-grams creates a “V”-shaped floor fornet returns. It is this floor (and par-ticularly the bottom of the V) thatillustrates the idea of a shallow loss.These points have prices between$2.00 and $2.60 per bushel andyields between 70 to 100 bushels peracre. At these points, market re-ceipts are somewhat below average,and all of the government programpayments are small or nonexistent.

The critical point for this farm isa price of $2.32 per bushel and ayield of 86 bushels per acre. Thiscombination results in the lowest

Variable(bushels/acre)

Direct payment yield 103Countercyclical payment yield 120APH yield 148

(dollars/bushel)National loan rate 1.98Direct payment rate 0.28Target price 2.60

(dollars/acre)Variable costs per acre 176.83Producer-paid insurance premium 3.96

TABLE 1. FARM AVERAGES AND GOVERNMENT PROGRAM SETTINGS

FALL 2003 CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT 7

Iowa Ag Review

FIGURE 3. BREAKDOWN OF NET RETURNS FOR AN 84 BUSHELPER ACRE YIELD

FIGURE 2. NET RETURNS

FIGURE 1. MARKET RECEIPTS LESS VARIABLE COSTS

net returns, as prices are fairly low but still high enoughto prevent any marketing loan and countercyclical pay-ments and yields are low but again high enough to pre-vent most crop insurance payments. Any movement ofprices and/or yields away from these points results inhigher net returns. The critical point juncture changeswith the type and coverage level of the crop insurance onthe farm. For revenue insurance products with harvestprice options, the critical point yield is equal to thefarm’s APH yield times the coverage level. For yield insur-ance products and farms with no crop insurance, thecritical point yield is zero. The critical point price leveldepends on the county loan rate for the farm.

Figure 3 shows how this pattern arises. Tracking thevarious components of net returns over a range of pricesfor a given yield (84 bushels per acre) shows the impactof each of the programs and the market. The dark grayarea represents the returns from market receipts lessvariable costs. It takes prices over $2.10 per bushel formarket receipts to cover variable costs. The light grayshows the direct payment. For this example, direct pay-ments provide roughly $25 per acre in support. The whitearea represents countercyclical payments. These pay-ments are maximized at prices below $1.98 per busheland are equal to zero at prices above $2.31 per bushel.The light blue represents the returns from the marketingloan program. Marketing loan program returns increasewith lower prices. The dark blue illustrates the returnsfrom crop insurance—in this case, Revenue Assurancewith the harvest price option. Given the set-up, a yield of84 bushels per acre is just low enough to trigger crop in-surance payments at any price. The harvest price optionallows crop insurance payments to increase at lowerprices. As Figure 3 shows, the combination of returns isthe lowest at prices around $2.32 per bushel.

SHALLOW LOSSES TAKE THE HARDEST HITSimilar patterns emerge when soybean markets are plot-ted. Prices near $5.35 per bushel result in the lowest re-turns. The season-average prices for Iowa corn andsoybeans in 2002 were $2.25 and $5.40 per bushel. So re-turns from government programs were low and thosefarmers who suffered shallow yield losses were the hard-est hit in returns. The situation for 2003 looks similar forcorn. Current new-crop December corn futures prices arein the $2.25–$2.30 range. Thus, those farmers who suffershallow yield losses again this year due to the dry condi-tions throughout the summer could face a second year oflimited returns, in which any other combination of pricesand yields would have left them better off. ◆

Iowa commodity prices located on page 11

8 CENTER FOR AGRICULTURAL AND RURAL DEVELOPMENT FALL 2003

Iowa Ag Review

GianCarlo Moschinimoschini@iastate.edu515-294-5761

To observers contemplatingthe failure of the Cancun min-isterial meeting of the World

Trade Organization (WTO) in Sep-tember 2003, the United States andthe European Union appeared tostand on the same side of the dis-agreement that stalled efforts to ad-vance the Doha Round of multi-lateral trade liberalization. Poorcountries wanted real reduction inthe widespread agricultural subsi-dies that depress world prices incommodities that are critical to de-velopment. The United States andthe European Union, on the otherhand, insisted on a more compre-hensive approach to liberalization,including pushing the WTO intonew areas (such as rationalizationof inefficient and corrupt customprocedures). Neither side couldagree with the other. But, whereasat Cancun rich countries found acommon stance vis-à-vis the de-mands of developing countries, theUnited States and the EuropeanUnion remain on a collision coursewhen it comes to agricultural tradebecause of the enduring and grow-ing problems associated with theregulation of genetically modified(GM) products.

THE MAKINGS OF A TRADE DISPUTEThe advent of biotechnology in agri-culture has, to date, displayed a per-plexing, dual nature. On the onehand, we have witnessed a remark-ably speedy adoption of some ex-tremely innovative products, suchas herbicide-resistant soybeans andcotton, and insect-resistant corn andcotton. In the United States, for ex-ample, the share of transgenic cropsin the latest harvest amounts to 81percent for soybeans, 73 percent forcotton, and 40 percent for corn. Onthe other hand, although GM crops

Agricultural Biotechnology and Trade: The Unresolved Issues

currently account for 145 millionacres worldwide, large-scale adop-tion essentially has been limited tothree countries: the United States,Argentina, and Canada. Adoption inother countries has been preventedby encroaching regulation that di-rectly affects the diffusion of bio-technology products at variousmarket stages.

The E.U. experience is emblem-atic in this setting. The earlierregulation of these new crops wassimilar to that of the United States,and 14 products were approvedprior to 1998. But public opposi-tion and consumer concerns drovethe European Union to institute ade facto moratorium on new ap-provals pending an extensive re-examination of the regulatoryframework for GM products. Nonew GM varieties have been ap-proved since October 1998, andsome E.U. countries (such as Aus-tria, Luxembourg, and Italy) havetaken steps to unilaterally ban,within their own national borders,products already approved in theEuropean Union. Meanwhile, tradeof affected commodities has shownearly signs of problems to come.Access to the E.U. soybean marketwas not immediately threatened,because Roundup Ready soybeans(practically the only transgenicbean variety being grown) had

gained an earlier E.U. approval. ButU.S. shipments of corn to the Euro-pean Union have essentially endedbecause of the difficulty in ensur-ing the required purity. (There area few GM varieties of corn that aregrown in the United States that arenot yet approved in the EuropeanUnion.) This untenable situationhas led to two recent, and distinct,developments of interest: the filingby the United States of a WTO com-plaint against the European Unionin May 2003, and the completion bythe European Union, in July 2003,of a new, complex, and far-reachingregulatory framework for GM prod-ucts, centered on the requirementsof labeling and traceability.

THE WTO CHALLENGEIn the WTO action, the United States(supported by Canada and Argen-tina) explicitly singled out the E.U.failure to approve new GM varietiesin the last five years, claiming thatthis moratorium amounted to aWTO-illegal barrier to trade. TheUnited States emphasized that theEuropean Union’s persistent resis-tance to move forward on GM prod-ucts could not be justified by riskconsiderations. (For example, theEuropean Union’s own scientific as-sessment has ruled out health riskfor the products considered thusfar.) Technically, the action initiatedwas a “request for consultation,”the first step in a WTO challenge.Not surprisingly, consultation hasnot led to a resolution of the issue,and in August 2003 the UnitedStates escalated the confrontationby moving to the next step, the re-quest for a WTO panel to adjudicatethe dispute. The panel’s ruling isexpected within the next 12months, but considering that an ap-peal of the ruling is possible, andthat countries have a reasonableperiod of time to comply with thefinal ruling, no resolution is ex-pected for some time. In fact, it is

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possible that this particular WTOaction might be rendered moot byrecent developments on the E.U.regulation of GM products.

THE NEW E.U. REGULATION OFGM PRODUCTS: LABELING ANDTRACEABILITYIn July 2003, after years of gestationin the elaborate E.U. institutionalstructure, a comprehensive frame-work for GM products was finallyadopted in the form of two new E.U.regulations (one regulating GM foodand feed, the other dealing withtraceability and labeling of GM or-ganisms). Whereas some GM label-ing requirements already existed inthe European Union, the new rulesare considerably stricter. All foodsproduced from GM ingredients mustnow be labeled, regardless ofwhether or not the final productscontain DNA or proteins of GM ori-gin. Such labels will have to state:“This product contains geneticallymodified organisms,” or “This prod-uct has been produced from geneti-cally modified [name of organism].”Furthermore, the new rules intro-duce (for the first time) labeling re-quirements for GM feed (forexample, soybean meal and corngluten feed produced from GM vari-eties will have to be labeled assuch). To avoid carrying a GM label,a high level of purity is required:the tolerance level for the presenceof “authorized” GM products is setat 0.9 percent. Some leeway is intro-duced for the accidental presenceof other GM material, in the form ofa 0.5 percent threshold level for GMevents that are not yet approved bythe European Union but for whichthe E.U. scientific assessment hasbeen favorable (otherwise, the im-plicit requirement of zero toleranceapplies). This mandatory labeling issupplemented by traceability re-quirements, meant to facilitatemonitoring of unintended environ-mental effects and to help enforceaccurate labeling. Operators at allmarketing stages using or handlingGM products are required to trans-

mit information about the GM na-ture of the product and to retainthese records for five years, so thata system is in place to identify whosupplies GM products to whom,from “farm to fork.”

The E.U. regulation also outlinesa new, more centralized authoriza-tion procedure to govern future ap-provals of GM crops and products.The procedure features a scientificrisk assessment prior to approval,carried out by the European FoodSafety Authority. Authorizations areenvisioned for a limited (but renew-able) period of 10 years. CurrentE.U.-approved GM products remaineligible, but the limited 10-year ap-proval period applies to them aswell (retroactively, starting with thedate of their first marketing). GMproducts that could be used as bothfood and feed should be approvedfor both or neither. The previoussimplified procedure for approvingGM products for marketing based onthe notion of “substantial equiva-lence” is to be abandoned. Thesenew regulations are expected tocome into force sometime in 2004.

CONSUMERS AND PRODUCERS WILLSHARE IN THE COSTS OF REGULATIONOn the positive side, the new E.U.regulations on GM products have thepotential to unlock the five-yearmoratorium on new approvals, a keystep toward normalizing the stanceof GM products in the European

Union. Restarting approvals of GMproducts in the European Union mayalso render the outlook for the cur-rent WTO action against the Euro-pean Union somewhat moot, giventhe focus of that challenge on themoratorium. But the new andstricter requirements of labeling andtraceability are bound to have anumber of serious market effects.Operators in the food industry areconcerned that the new require-ments will prove costly and ulti-mately unworkable. Labeling andtraceability are likely to add consid-erable administrative and bureau-cratic burden to transactionsinvolving agricultural products andfood, the end result of which is pre-dicted to be more costly food to E.U.consumers, and lower prices for pro-ducers in exporting countries. Per-haps the biggest unknown is howE.U. consumers will react to food la-beled as containing GM products. If,as some fear, E.U. consumers were toavoid buying food and feed labeledas GM, a substantial rebalancing ofthe supply lines of the E.U. food in-dustry may result, with possibledeep repercussions on world mar-kets. In such a scenario, the UnitedStates may stand to lose a sizeableportion of its current $6 billion inagricultural and food exports to theEuropean Union.

Whether or not E.U. consumerswill choose to avoid GM food re-mains to be seen, however. Whereaspolls and studies have documentedthat a majority of E.U. consumersoppose GM food, it is not known justhow much they are willing to pay forGM-free food. And pay they must,because avoiding the GM label willbe costly. Some have naively as-sumed that, by requiring GM label-ing, the burden of marketsegregation could be shifted ontothe suppliers of the new GM prod-ucts. This is not so, however. It isthe suppliers of the traditional, GM-free food (the perceived “superior”good) that will have to undertakethe costly segregation activitiesrequired to avoid commingling of

Whereas polls and studies

have documented that a

majority of E.U. consumers

oppose GM food, it is not

known just how much they

are willing to pay for GM-

free food. And pay they

must, because avoiding the

GM label will be costly.

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GM and non-GM products at vari-ous production, marketing, pro-cessing, and distribution points.This will require moving away fromthe traditional (efficient andcheap) commodity-based tradingsystem and moving toward a moreexpensive handling process char-acterized by identity preservation.The E.U. threshold level of 0.9 per-cent may indeed prove ratherstrict and difficult to achieve. U.S.operators are particularly con-cerned about the impact that thenew rules will have on productsthat have, to date, been somewhatprotected from the controversialE.U. stance on GM products. Asnoted earlier, soybeans had notbeen directly affected by the E.U.moratorium. But the new rules willnow require GM labels for foodcontaining soybean products, evenfor refined soybean oil, which hadnot been subject to such labels.The new E.U. regulation will also

apply to feed products, such assoybean meal and corn gluten feed,which constitute an important por-tion of U.S. agricultural exports tothe European Union.

WHAT’S NEXT?The United States and the EuropeanUnion remain as divided as ever onthe issue of GM products. The Euro-pean Union views its new regulatoryframework as addressing legitimatepublic concerns about the environ-mental and health effects of GMproducts. It claims that the new pro-cess will be transparent, non-dis-criminatory, and will help buildpublic confidence in this new tech-nology. The United States, on theother hand, perceives the new label-ing and traceability requirements tobe burdensome, impractical, and ul-timately constituting an unwar-ranted restraint on trade.

The root of the disagreement isdeeper, as the United States sees no

scientific basis for singling out GMproducts for special regulation. In-deed, it is quite clear that the newE.U. regulation is sending a mixedmessage to consumers. On the onehand, approved GM products sup-posedly have been found to be safeby the mandatory pre-approval riskassessment. On the other hand, man-datory GM labeling sends the “warn-ing signal” to consumers that, afterall, there may be something wrong(however undefined) with GM prod-ucts. This continuing E.U. ambiva-lence about GM products reinforcesthe largely held view in the UnitedStates that the new E.U. labeling andtraceability regulations contain unac-ceptable protectionist attributes thatare inconsistent with the WTO agree-ment on technical barriers to trade.This may set the stage for a new,deeper WTO challenge to the E.U.policies on GM products. ◆

Recent CARD PublicationsMATRIC BRIEFING PAPERSClemens, Roxanne. Meat Traceability and

Consumer Assurance in Japan. September2003. 03-MBP 5.

MATRIC RESEARCH PAPERLence, Sergio H., and Sanjeef Agarwal.

Assessing the Feasibility of Processing andMarketing Niche Soy Oil. August 2003.(Revised). 03-MRP 6.

WORKING PAPERSHerriges, Joseph A., Silvia Secchi, and Bruce

A. Babcock. Living with Hogs in Iowa: TheImpact of Livestock Facilities on RuralResidential Property Values. August 2003.03-WP 342.

Tokgoz, Simla. R&D Spillovers in Agriculture:Results from a Trade Model. September2003. 03-WP 344

van der Mensbrugghe, Dominique, John C.Beghin, and Don Mitchell. Modeling TariffRate Quotas in a Global Context: The Caseof Sugar Markets in OECD Countries.September 2003. 03-WP 343.

Zhao, Jinhua, Catherine L. Kling, and LyubovA. Kurkalova. Alternative Green PaymentPolicies under Heterogeneity WhenMultiple Benefits Matter. August 2003.03-WP 341.

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2003 2002 Avg 98-02

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