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After Five Years Of Losses, Tesco Calls A Stop To Fresh & Easy Growth Plans

The announcement from Britain was simple: Tesco Halts New Fresh & Easy Stores In The US, and to paraphrase another famous Brit with an American connection: “This is not the end. It is not even the beginning of the end, but it is, perhaps, the end of the beginning”:

The move by chief executive Philip Clarke, which means Fresh & Easy will end the year with 200 stores rather than the 230 initially planned, is intended to allow Tesco to focus on making the existing stores profitable and restricting further investment into the US.

“We are clear that Fresh & Easy needs to demonstrate it can be a positive return for shareholders,” Mr Clarke said. “This is a clear message to the market. I hope they like what we have chosen to do.”

Fresh & Easy was launched by Tesco in 2007. Mr Clarke wants the business to make a profit by 2014, but losses in the last six months remained £74m despite the number of profitable stores increasing from 30 to 55.

Mr Clarke announced the slowdown in store openings as Tesco, Britain’s biggest retailer, reported its first fall in profits since 1994 due to a drop in sales in the UK, the cost of a £1bn turnaround plan to halt that decline, and pressure on its international businesses.

Tesco said pre-tax profits fell 11.6pc to £1.7bn in the half-year to August 25, with the supermarket group’s UK and international businesses suffering a fall in like-for-like sales.

The notion that 55 stores are “profitable” is an odd one. It seems to mean that the stores make a profit if you don’t include a lot of costs that have to be covered by the stores — say procurement and central overhead.

In any case, the most important phrase in the Tesco announcement was this:”… new capital investment will be tightly constrained.”

This, which means no store openings and minimal renovations, will make Fresh & Easy’s positioning progressively more difficult.

First, we have been writing about Tesco’s Journey to America as Fresh & Easy for a long time. The first store opened November 2007. This means that what Tesco should be announcing is significant capital investments to avoid the five-year-old stores becoming dated. This is just the age when the shine is off the new stores, the natural same-store sales increases that accrue the first three-to-five years are exhausted, and new investment is required to compete with shiny new competitors.

A hesitation to invest will make it difficult to succeed.

Second, the decision to cease new store openings makes Fresh & Easy a sitting duck. A chain aggressively opening new stores is a moving target and is difficult to hit. But Safeway, Kroger, Wal-Mart etc., none of which needs another well-heeled domestic competitor, can do a lot to make Tesco’s life miserable in the US. They can position new store openings to do maximum damage; they can use loyalty data to give coupons and mailings to specific customers who might shop at Fresh & Easy; they can lower prices at those stores in direct competition with Fresh & Easy units… many other things. All are easier to do with a target standing still.

Third, a fundamental problem is that the overhead is wildly disproportionate to the volume. This problem can only be solved by adding many more stores and investing heavily to maximize sales of existing units. The decision not to expand, but also not to close the giant distribution center and send everyone back to the UK, etc., almost guarantees continued losses.

Presumably, the theory is that by cutting costs and focusing on getting the concept right, the US division can show London that the stores can operate profitably, and thus London will authorize the investment needed to max out the distribution center, etc.

One suspects, however, that many other companies are now taking actions to make sure that particular call to London never gets made.

Cornell Professor Miguel Gómez To Speak At New York Produce Show And Conference On Fruit & Vegetable Dispute Resolution Corporation

When Kansas and Colorado have a quarrel over the water in the Arkansas River, they don't call out the National Guard in each state and declare war over it. They bring a suit in the Supreme Court of the United States and abide by the decision.  There isn't a reason in the world why we can't do that internationally.
         —   Harry Truman, 1945

Harry Truman was right on a lot of things. Unfortunately Harry Truman was wrong on this. There are lots of reasons that different countries and the traders in different countries are unable or unwilling to submit their disputes to some kind of binding judgment— notably a lack of faith in any particular institution and a lack of ability to enforce judgments.

With all the rage being about things ‘local,’ we might as well think about global trade as something that begins close to home— specifically with the North American Free Trade Agreement — NAFTA — and thus trade between Canada, the US and Mexico.

The vision of a unified market sometimes runs into resistance from specific players who win or lose based on various trade rules. That is what the current dispute between Florida and Mexican tomato industries represents.

Sometimes, though, we fall short of the vision because we lack the institutions to facilitate trade. Within the US, we have a reasonably clear set of rules, relatively inexpensive procedures for resolving disputes, acceptably respected experts, such as inspectors, to make factual statements and the ability to deny licenses and enforce judgments. Much of this process is established via USDA inspectors and the rules of the Perishable Agricultural Commodities Act or PACA.

The lack of such institutions for international trade reduces the volume of trade because it increases transaction costs. If you feel when you sell to a particular country that you will have difficulty getting paid and that it will be difficult or impossible to enforce your rights via the existing legal structure, then you will either refuse to trade or demand large profits to compensate for these difficulties. This reduces the volume of trade and means that society does not get the benefits inherent to trade.

So those who seek to minimize transactions costs do God’s work.

The challenges are formidable. First, you need an agreed-upon set of rules — when can things be rejected, what is the penalty for delivering product that does not meet contract terms, etc. Second, you need an agreed-upon referee of the facts — akin to a USDA inspector, but this must be someone acceptable to all sides of the transaction. Third, you need a referee mechanism, such as a court or PACA-complaint process. Fourth, you need a way to enforce any decisions made, such as the ability to rescind a license with that having the real effect of putting someone out of business. Finally, you have to do all this at an acceptably low cost — so that these resolution techniques are  actually viable options for traders.

It is not easy. But a concerted effort has been made. The Fruit & Vegetable Dispute Resolution Corporation is specifically designed to address these issues among NAFTA countries. Some progress has been made, but much needs to be done.

An important focus at The New York Produce Show and Conference is to reach out to the great centers of learning of the region and help those institutions fulfill their missions to disseminate knowledge. Cornell University is a Charter Member of the event’s University Exchange Program, by which we pay to bring students and faculty to New York to interact with the industry so we can learn from each other.

When we learned that Miguel Gómez had done important research in this area, we quickly invited him to do a presentation at the Global Trade Symposium, an event co-located with The New York Produce Show and Conference. Thrilled that he accepted, we quickly asked Pundit Investigatorand Special Projects Editor Mira Slott to find out more:

Miguel Gómez
Ruth and William Morgan Assistant Professor
Dyson School of Applied Economics and Management
Cornell University
Ithaca, New York

Q: It is exciting that you are coming back to share your latest research at the upcoming New York Produce Show and Conference. You captivated attendees at the inaugural show, brandishing a new hypothesis of ‘local’ based on performance of local and mainstream supply chains; and then again in 2011, broaching development of an East Coast broccoli industry. This year, in addition to moderating a panel on December 5th, you will be presenting at the Second Annual Global Trade Symposium. The Symposium program last year won stellar reviews. What will your talk encompass this year?

A: Recently, I completed an analysis for the USDA Agriculture Marketing Service (AMS), working with Bob Keeney, who just stepped down as AMS Deputy Administrator, about the origins and evolution of the Fruit & Vegetable Dispute Resolution Corporation (FVDRC). I will discuss the findings and the challenges ahead to develop a truly NAFTA-wide transparent and efficient dispute resolution mechanism. Following my presentation, I will moderate a panel discussion, which will include Bob Keeney and several other participants addressing both how to minimize risk while trading within NAFTA today and the way dispute resolution within NAFTA should evolve in the years to come.

Q: What sparked the study?

A: The FVDRC is a private entity. Its mission is to harmonize trade standards to avoid or resolve disputes in a timely and cost effective manner. The Agriculture Marketing Service of USDA commissioned this study to me through a Cornell cooperative agreement. The objective was to document the origins and evolution of the Dispute Resolution Corp. (DRC) from 1996 when discussions started for its creation until 2011.

[Editor’s note: you can read the full final report here.]

Q: Why?

A: This is important because private resolution is unique. In most of the world, with most products, disputes must be resolved via expensive litigation — the idea behind the DRC was to reduce transaction risks by reducing the cost, increasing the expertise and certainly dispute resolution. DRC’s history hasn’t been documented before. We wanted to explore actions that transpired and lessons to be learned for government and industry.

Everything started when NAFTA was signed in 1994, which has had tremendous implications for trade between Canada, the U.S. and Mexico. One of the most profound changes relates to agriculture and, in particular, the fruit and vegetable trade, a segment where trading really picked up after NAFTA.

Q: Have you tracked trade movement and annual growth rates in imports and exports between countries to provide greater perspective on this transformation?

A: Yes. We are able to assess trade export value for each country by charting numbers provided by USDA’s Foreign Agriculture Service; exports from U.S. to Mexico and Canada, exports from Canada to the U.S. and Mexico and exports from Mexico to Canada and the U.S. The numbers are incredible — in some instances growing by five times since 1994. Trade in general, both imports and exports, has been wonderful because the fruit and vegetable markets in North America are becoming fully integrated in terms of prices and flows of product. This transformation has featured a rapid increase in trade, but also a lot of trans-border investments in fresh and processed fruit and vegetable capacity.

Q: What is the downside? Have government infrastructures and import/export systems been able to keep pace with this growth?

A: As trade increases, we are negotiating more, and problems intensify because we are trading products that are perishable. The quality of a tomato shipped in Mexico may be very different to the quality of the same tomato when it arrives to the Montréal terminal market in Canada. Quality can deteriorate during transit. So as trade increased, it also increased potential for commercial disputes on product quality, payment, timely reimbursement, delivery, maybe a breech of contract, and other related issues.

Without a system to thwart commercial disputes, the increased trade stimulated by NAFTA could be reversed, defeating all the progress that has been made. Companies will start avoiding exports if they are worried about not getting paid. It creates mistrust. There is a need to have a mechanism to resolve disputes in a transparent and effective way.

Q: Haven’t there been significant differences within and between countries for facilitating resolutions and seeking legal recourse? For example, in the U.S., doesn’t PACA already create mechanisms for companies to address trading problems?

A: If we go back to 1996 and 1997, when fruit and vegetable trade started to pick up in these regions, each country had very different systems to resolve disputes. In the U.S., we have PACA, which has been very successful in resolving disputes in the United States for many, many years.

Then there was the Canadian Board of Arbitration, the regulatory system in Canada that proved to be very ineffective in resolving payment issues. In Mexico, there was basically an absence of a formal system, no dispute settlement mechanism. Problems were either not resolved or handled between the companies. Mexico didn’t have an inspection capacity either. It didn’t have any structure for an inspection service; it was basically non-existent.

Q: It sounds like the stage was set for a cross-border mechanism to alleviate trading problems. Did the impetus for FVDRC stem from issues emanating within Canada and Mexico?

A: The concern was that U.S. exporters to Mexico wouldn’t get protection as they did with PACA, and U.S. companies weren’t protected selling to Canadian buyers. The Canadian regulatory system was a mess. Both buyers and sellers weren’t protected. It went both ways. In the U.S. now, sellers are protected by PACA if there is a dispute.

If you are a Mexican exporter selling to a U.S. company, the Mexican exporter is protected through PACA and so is a Canadian exporter. It’s always been like that.

So you have variant systems in the three countries, and it becomes obvious to anticipate more trade disputes. The produce industry in the three countries, as well as their governments, began to envision a unified system that would avoid or resolve disputes. That is how the Fruit and Vegetable Dispute Resolution Corporation was formed.

Q: Wouldn’t the internal systematic and structural issues within Canada and Mexico create major obstacles? Could you discuss the evolutionary process?

A: I want to emphasize the key role of the produce industry, particularly in the U.S. and Canada, in creation of the FVDRC. Canada was desperately in need of reforming its system. Leaders saw they had a rotten system. This FVDRC would not only help them with trade issues but also help with their domestic issues. For the U.S, there was general agreement PACA had been successful for years, so why reinvent the wheel? There was consensus to extend the PACA model. The U.S. needed protection when exporting to Canada and Mexico.

Q: You point to Canada and the U.S. pushing the initiative. What was Mexico’s position at this time?

A: For Mexico it was different. The motivation for the Mexican produce industry was not that clear. Most exports were to the U.S., and companies were already protected by PACA. At that time, there was very little direct export from Mexico to Canada. Product was sold first to the U.S. and then resold to Canada. In Mexico, there was no inspection system, no resolution structure. Within Mexico, companies resolved disputes internally. There wasn’t motivation for involvement. This is still an issue today.

It’s voluntary to become a member of the DRC, and Mexico still has very few members. If you want to be protected you pay an annual fee. The fee is around $600, which is very reasonable when you compare the potential consequences of not being protected during a dispute. [Editor’s note: See membership composition here.]

Q: Wouldn’t that interest change as Mexican companies increase trade with Canada?

A: There is more trade today and more direct exports and direct relationships with retailers in Canada now, but in Mexico, the business culture is different. Companies are not used to using formal mediation to solve disputes. It’s an issue of business culture and lack of infrastructure inspection services. The businesses don’t have the inspection system set up. It’s more complicated because they have to change their infrastructure.

Q: Are there actions being taken to do that?

A: In DRC’s creation, the U.S. and Canadian produce industries and governments focused on mechanisms that eliminated trade irritants and disputes. The business model was based on the PACA system and moved ahead with two main purposes. It was expected to solve domestic disputes within Canada, and second to encourage institutional development and infrastructure for dispute resolution in Mexico.

Q: Transforming a country’s infrastructure and cultural mores seems quite a costly and challenging endeavor. What specific measures, financial investments and resources have been allotted to implement a meaningful change?

A: There were concerted efforts. USDA agencies went to Mexico to show how PACA worked and provide technical assistance from 1996 through 1999. The U.S. and Canadian governments, as well as the produce industry, did a lot to try to develop that infrastructure and improve inspection systems. The U.S. and Canadian governments both provided financial support and personnel. Many U.S. companies got involved in training. Yet, problems still remain.

Q: Do you see those efforts as futile? Where do we go from here? When you make your presentation at the New York Produce Show and Conference, will you be able to leave attendees with some proactive steps to move the process forward?

A: I’ll summarize some of the achievements and failures, and look to the developments and future. After documenting the origins, I did a complete report on the accomplishments and hurdles that need to be overcome.

Q: I imagine the solutions must consider many players within the entire supply chain… How does that work?

A: The DRC has been developed in a multifaceted way. It involves many players including growers, wholesalers, transport companies, and retailers. DRC is valuable to certain, but not all, produce sectors. Some are very happy and some are not. The happiest of all are Canadians.

Q: Why?

A: Because Canadians have realized the most salient success with DRC. It is better for the produce trade within Canada. DRC also resolved domestic programs in Canada. In Canada, you are required to have a license like PACA through the Canadian Food Inspection Agency or through a DRC membership. Most Canadian companies chose DRC because it provides a cost effective and timely resolution of commercial disputes. They have a nice system very similar to what PACA does here.

Canadian firms embraced DRC because it resembled the PACA system. In addition, the Canadian government took an aggressive stand in working very closely with all members of the supply chain from the smallest fruit and vegetable growers to the largest companies to keep DRC strong. It realized the necessity of catering to members to provide value.

All the groups within the supply chain have access to the same services with parallel protections of PACA.

Q: Who’s not happy?

A: The ones that are not very happy are those very interested in exporting to Mexico. The Mexican government still doesn’t require a license. DRC membership is not mandatory in Mexico, and therefore exporters to Mexico are not protected. Even though the USDA and Canada spent a lot of money trying to build infrastructure, it has not paid off.

There are a small number of Mexican firms that are DRC members. In 2011, the DRC had over 1,300 members, and from Mexico there were only 23. U.S. membership accounts for about 360, while Canada makes up the large majority with approximately 1,000 members. It’s their sweet spot.

If a U.S. firm is selling in the U.S., it doesn’t need DRC. I’m sure those 360 members are very engaged with Canada. The problem with Mexico is there is no enforcement. If you’re a Mexican wholesaler importing apples, you don’t have to be part of a licensing system.

Q: Is there real opportunity to actually grow the export market to Mexico?

A: Yes, definitely for products like stone fruit, apples and oranges. If Mexico has an infrastructure for inspection and companies embrace it, there’s a good market to export to Mexico. U.S. exports to Mexico have increased. If you look at the top U.S. produce exports to Mexico, apples are Number One and have multiplied by four times, tomatoes have increased from essentially $0 in 2005 to $50 million in 2009, and pears have more then doubled.

The whole market is underutilized. Most U.S. exporters don’t want to export because they view it as too risky. This is a hurdle. It’s good to have a dispute resolution system that is formal and will boost members. But also the Mexican government has to invest in the infrastructure.

One of the big failures in Mexico was how the government handled membership incentives. In 2004, the Mexican government decided to subsidize the membership, paying for the Mexican firms to join the DRC.

Q: Wouldn’t that jumpstart enthusiasm?

A: But it’s unsustainable. They subsidized companies initially, but the incentive was superficial without addressing the underlying issues. In 2004, Mexican membership picked up to 211, and then dropped dramatically when it wasn’t subsided anymore.

DRC needs to figure out how to provide value to Mexican firms and for government to invest in the necessary systems.

DRC has been very successful with Mexican companies exporting to Canada. They definitely embrace the DRC. They are trying to communicate the benefits to the Mexican sector. The Canadian government was very receptive to its companies’ needs. They quickly realized it was good for commercial relations not to have to go to court. When you have this collective support, it is easier to go to the Mexican government and encourage infrastructure investment.

Q: Your presentation will be a part of our Global Trade Symposium. How do trade disputes between U.S. produce industry sectors and Mexico impact development of initiatives like the DRC?

A: I think things are changing in Mexico, but it doesn’t help when you have these Florida tomato trade disputes. The Florida dispute is terrible. It damages the trust in the industry. If you have any trade irritant, it just hurts future initiatives and overall relationships.

Formal trade dispute mechanisms can boost trade and help the industry. The story in Canada has shown success, and the U.S. system works, but we are still missing the opportunity of a regional harmonized system.

The problem is a policy issue. There are many in Mexico who believe this is a very important system to have. But there is a political case that needs to be made for infrastructure and training, an inspection process at shipping points to check the grades and quality standards...

Q: When was your study completed and what feedback have you received?

A: It’s been about six months, and feedback has been positive. I’ve been invited to talk about these issues in Mexico and the U.S. It is important for the industry to have a cost effective strategy. In the long run, we want to be efficient. With DRC, most of the disputes are related to quality of product and related payments.

Q: How successful has the DRC been in alleviating trade problems? Do you have statistics?

A: The DRC success rate is impressive. It involves formal and informal mediation. Eighty-five percent of disputes are resolved before moving to the arbitration stage of the process. [Editor’s note: you can read more about the resolution process here.]

In discussing the challenges, we need to remember to put out the positive messages. By 2010, DRC resolved over 1,300 disputes. The value is about $35 million. Think of these 1,300 disputes going to court or not being resolved.

Q: Do you have any additional thoughts to share with our readers in anticipation of your presentation?

A: It is important to share the benefits of belonging to one system collectively in the produce industry. You must look beyond what is good for your own business to what the industry needs to optimize commercial trade. 

Reducing transaction costs and making this work is crucial to expanding trade. Following the presentation by Professor Gómez, we are putting together a terrific respondent panel, to help the trade move this process to the next level and to help today’s traders navigate the perilous waters that exist today. We will be announcing members of that panel soon.

Come hear the panel and Professor Gómez in person by registering here for The Global Trade Symposium and The New York Produce Show and Conference.

Spouse/Companion program registrations are available here.

You can get travel discounts here… and discounted hotel rooms here.

We still have a few opportunities to exhibit and sponsor events available. If you would like more information, please let us know here.

With the event taking place December 4-6, 2012, New York is a magical place this time of year, with the tree up in Rockefeller Center, the Rockettes kicking their heels at Radio City Music Hall and the shop windows on Fifth Avenue prepped for Christmas.

And The New York Produce Show and Conference is a terrific venue for learning, trading, networking and communicating. Come enjoy a Fresh Celebration! in the capitol of the world.

State Financing Of Refinery Versus Food Production Is No Simple Decision

Alan Siger over at Consumers Produce Co. in Pittsburgh, Pennsylvania, sent over an opinion piece in a local newspaper, the Pittsburgh Post-Gazette, titled, “Food for all our neighbors: We should invest as much in Western Pennsylvania agriculture as we do in a ‘cracker’ plant”:

"We take care of our own" goes the popular Bruce Springsteen song that gets played at political rallies everywhere, regardless of political party. But here in Western Pennsylvania, this is simply not true -- at least when it comes to making sure that our neighbors don't go hungry during these hard economic times.

A front-page headline in the Post-Gazette Sept. 15 read "Rural Food Banks Struggle to Meet Need." The article reported that food pantries all over Western Pennsylvania — but particularly in our rural communities — cannot provide enough nutritional food for struggling families. Does anyone find this more than ironic?

Our region is a cornucopia of agriculture. We have well over 14,000 operating farms and more than 1.2 million acres under cultivation. We have good and stable sources of water, even during droughts. We have an extended northern growing season due to relatively mild early winters. We produce a wide variety of fruits, vegetables, poultry, beef and pork. We have a rich history in food production and processing — we are, after all, the home of H.J. Heinz, one of the largest food companies in the world.

Yet we seem incapable of addressing the most fundamental need of our community — indeed, of any community — and this is to see that everyone is well fed.

We are so rich agriculturally that we are considered a national treasure. From Lake Erie to West Virginia, ours is one of the finest growing regions in America. Due to our water resources, climate stability and strong farming culture, the U.S. Department of Homeland Security considers our "food shed" a strategic asset, not unlike how we now view the natural gas resources in the Marcellus and Utica shale deposits.

However, as recently as 2010, the USDA estimated that Western Pennsylvania farmers and producers devoted nearly 99 percent of their capacity to commodities like corn and soybeans — the overwhelming share of which are exported from our region and into the agri-industrial system for conversion to ethanol, processed food and non-food additives.

This was not always the case. Our region boasted some of the largest orchards, for example, being the home of Johnny Appleseed. Dairies dotted the landscape. Our farms earned a well-deserved reputation for variety and quality. Over the last 50 years, this has changed.

Urban sprawl has overtaken many farms, to be sure, but even more have been lost because it is so difficult for farm families to run financially sustainable operations — especially if they produce goods for local markets. In recent years, we have seen a decline in dairies due to low prices for milk and dairy products, for instance. Our farms, the people they employ and the businesses that support them are all at risk.

Also at risk is our community's ability to directly meet the nutritional needs of our neighbors — even though we know from recent university studies and research that our region has plenty of capacity to produce food for all of our residents. If we provide the financial and market infrastructure, there might never be another story about an empty food pantry in Western Pennsylvania.

This is a problem with a solution. All it requires is the shared commitment of the public and private sectors and a bipartisan effort to do what is in the best interests of the citizens of our commonwealth.

I would modestly propose that the state invest as much in food-system development in Western Pennsylvania as it is offering in subsidies to Shell Oil for the gas cracking plant in Aliquippa. No more, no less: some $1.7 billion over the next five years.

In exchange, the region would start a local-food initiative to direct subsidies and tax benefits to farmers and producers who agree to shift at least 10 percent of their capacity away from commodity agriculture for industrial reprocessing and into the production of vegetables, fruits, beef, poultry, pork and dairy. This five-year, 10-percent commitment would fill a regional anti-hunger and nutrition resource pool managed by the Greater Pittsburgh Food Bank and our regional pantry network.

Beyond providing fresh, in-season produce and protein, this state investment also would be used to create regional food aggregation and processing centers so that we could capture more locally grown food and make shelf-stable, value-added food products. From tomato sauces to apple sauces to ready-to-eat meals full of nutrition, we could reinvent a regional processing and production industry that has been all but eliminated with agri-industrialization.

Much of what is needed is already under development here and around the nation in the creation of food hubs. Hubs are, by the USDA's definition, centers for value-added processing which are intended to leverage the economic benefits of local farming. In much the way that Shell wants to leverage the presence of natural gas and byproducts in Western Pennsylvania, we should leverage the presence of fertile land and a farming culture through our commitment to grow and buy local.

Our leading food-based corporations also should increase the share of locally produced food products they buy by a minimum of 10 percent. This purchasing commitment would help drive the development of more and higher-volume processing centers in the region. Local growers and producers would have the value chain they need to move fresh products into our marketplace on a year-round basis. Our end markets would create demand and the market would become efficient and robust over time.

Our region is blessed with dedicated organizations that focus on local foods and food-system development. Let's give them the resources and support they need to build intelligent networks, market-based strategies and the infrastructure we need to grow our oldest industry — agriculture. We are subsidizing and investing in our energy sector, why not do the same for the most basic sector of all — food?

The recent regional planning effort called the Power of 32 hardly mentioned food and farming as part Western Pennsylvania's economy, evidence of how blind we have become to the importance and significance of this incredible resource and opportunity.

Leadership is key. We need our entire food-producing and consuming industry and our public officials to commit to building a sustainable local food system that ensures no Western Pennsylvanian is ever left without access to nutritional, high-quality food.

The author of the piece is Joseph Bute, the president of Hollymead Capital, a Gibsonia, Pennsylvania-based company that supports the creation of sustainable enterprises in low- and moderate-income communities. He makes an interesting argument, but we don’t think the solution is as obvious to us as it is to him.

First, he explains that the government is giving subsidies of $1.7 billion over the next five years to Shell to have a ‘cracker’ refinery built and suggests that the same amount be spent on developing and diversifying the local agricultural and food production community.

It is a little unclear as to whether he is saying that there would be a better return on investment for the community in investing in local food than investing in bringing the refinery there, so the government should not do the refinery and, instead, do the food or if he is just arguing the government should spend twice as much money and do both.

In either case, the argument is weak. These are major financial investments, and to suggest them one really has to show a return. He never quantifies the return on an investment in the food and ag industry — how many jobs created, how much tax revenue paid, etc. — in any way that could justify an expenditure. He certainly doesn’t take on the burden of demonstrating that this investment in food would pay off more than an investment in a refinery.

He also has some of his facts wrong. He talks about the state making a $1.7 billion dollar subsidy over five years. In reality, the proposal — and it is just that, a proposal that has not been passed — is to provide an incentive of $67 million each year, or $1.7 billion over 25 years, not five years. That reduces the present value calculation very substantially.

Besides, the word he uses — “subsidies” in referring to the Shell Oil project — is somewhat questionable. Although the details of the proposal haven’t been published, typically these incentives offered by states and localities involve tax credits. So if a new refinery is not built, then, obviously, the tax that will be paid on the profits of the non-existent refinery is zero.

In contrast, the owner of a new refinery might pay $100 million a year in taxes. If Pennsylvania woos the refinery from, say, Ohio, and the price is a tax credit of $67 million a year, that scenario would produce an increase in taxes paid to Pennsylvania of $33 million a year. So to call giving up some money you might not have had anyway a “subsidy” isn’t really fully explanatory. And it is not at all clear that Mr. Bute is proposing a similar credit on the marginal increase in taxes that a newly robust local food industry would pay.

Now we don’t think states and localities should even be permitted to give out these types of incentives — to oil plants or food companies. It encourages politicians to allow the business climate to deteriorate in general – high taxes, regulatory obstinacy, etc. — then to play the hero by offering incentives to individual companies.

We would be much better off if politicians knew that if they didn’t create an environment in which business would naturally be attracted to a state or locality, they would have to explain to the citizenry why plant after plant went to neighboring state. Besides, the whole process is unfair to competitors who don’t get deals, and it is corrupting as it gives politicians too much leverage against particular industries and individual companies.

Still, if we are going to allow states to incentivize certain industries, certainly Mr. Bute doesn’t provide any particularly compelling analysis as to why the local food industry would be a profitable place to invest state funds.

Second, Mr. Bute seems to conflate local food production with alleviating local poverty. These are really issues that are not particularly related. If a local population needs help, increasing local wealth is what increases the ability of the community to help them out. Whether the community makes jet fuel or cabbage is not really key — after all, if those farms are going to be profitable, they have to sell their products for a good return, not donate them to the poor. In other words, the reason food banks don’t have enough food to distribute in rural areas is not a shortage of food — there are plenty of places to buy food. The problem is a shortage of money. 

Mr. Bute doesn’t explain how taxing the local community $1.7 billion and then putting the $1.7 billion back into the community through this program would actually increase wealth. If it does not — and it seems unlikely to do so – the program might well make poverty worse.

Third, diversifying agriculture away from corn and soybeans sounds pretty good, but then again, neither Mr. Bute nor the Pundit has to do the work. We’ve mentioned other efforts to consciously move farmers to different crops — as in this piece we wrote when Dole was opening a new fresh-cut facility in Bessemer City, North Carolina, and was collaborating with the state department of agriculture to persuade local farmers to switch from tobacco to vegetables.

Turns out these efforts are most difficult. Different products present different degrees of difficulty, and different farmers have different levels of expertise. It is also a business that operates on a different scale. In fact, one reason we never had a President Dukakis was because during an Iowa caucus debate he suggested that Iowa farmers could benefit by diversifying from corn and growing things such as Belgian Endive. Of course, if even 1% of Iowa’s farmland was shifted to Belgian Endive, the one absolutely certain thing is that Belgian Endive would sell for less than corn and Mr. Bute, not being an expert on the various products he thinks should be produced, has simply no idea of the impact on prices of such dramatic increases in production.


In the end, Mr. Bute’s approach is questionable. First, what makes him think that politicians will be good at selecting certain industries — picking winners and losers — to invest in? Politicians have no special expertise in this area and, if anything, they are likely to make decisions on a political basis — nee Solyndra. Second, a focus on feeding the poor may distract from the key question: Why are all these people poor to begin with, and what can we do about that? Third, it is important to keep a focus that expenditures have costs as well as benefits, and those who propose expenditures thus have to argue not only that their proposals will do good, but whether they will do more good than the money would do elsewhere or if left with the people who made the money to begin with.

In fact, there is substantial evidence that Pennsylvania ought to look to improve general economic conditions by adopting pro-growth policies. Stephen Moore has been kind enough to comment on some of our work as we mentioned here. Recently, he collaborated on a piece for The Wall Street Journal: Laffer and Moore: A 50-State Tax Lesson for the President

In our new report, "Rich States, Poor States," prepared for the American Legislative Exchange Council, we compare the economic performance of states with no income tax to that of states with high rates. It's like comparing Hong Kong with Greece or King Kong with fleas.

Every year for the past 40, the states without income taxes had faster output growth (measured on a decadal basis) than the states with the highest income taxes. In 1980, for example, there were 10 zero-income-tax states. Over the decade leading up to 1980, those states grew 32.3 percentage points faster than the 10 states with the highest tax rates. Job growth was also much higher in the zero-tax states. The states with the nine highest income tax rates had no net job growth at all, and seven of those nine managed to lose jobs.

Then there's the question of in-migration from state to state — or how people vote with their feet. As common sense would dictate, people try to move from anti-growth states and cities to more welcoming climates. There are relevant factors other than tax policy, of course (as in North Dakota today, where the oil boom has brought about the lowest unemployment rate in the nation), but in general the most popular destination states don't have income taxes. That's as true recently as it was 40 years ago.

Over the past decade, states without an income tax have seen 58% higher population growth than the national average, and more than double the growth of states with the highest income tax rates. Such interstate migration left Texas with four new congressional seats this year and spanked New York and Ohio with a loss of two seats each.

The transfer of economic power and political influence from high-tax states toward low-tax, right-to-work ones is one of America's most momentous demographic changes in decades. Liberal utopias are losing the race for capital. The rich, the middle-class, the ambitious and others are leaving workers' paradises such as Hartford, Buffalo and Providence for Jacksonville, San Antonio and Knoxville.

Sustaining America depends not only on making sure people are fed, but also on making sure people are free. Focusing on changing policy to insure more food for food banks detracts from the important work of making sure there are fewer people needing food banks.

Instead of finding new ways to spend money, maybe Pennsylvania should become a Right to Work state and eliminate its state income tax. Then come the 2020 Census, we might be reading about some additional congressional districts being allocated for the Keystone state.

We would love to have an expansion of diversified food production in western Pennsylvania and other areas — but it shouldn’t come by taxing the people of the region to the tune of $1.7 billion.

Many thanks to Alan Siger and Consumers Produce Co. for leading us to think over such issues.

What Do Bicycle Helmets And Organic Produce Have In Common?

A New York Times piece, To Encourage Biking, Cities Lose the Helmets, explains how a focus on the dangers of cycling can lead to negative outcomes, even though helmets really do protect against injuries:

Then I did something extraordinary, something I’ve not done in a quarter-century of regular bike riding in the United States: I rode off without a helmet.

I rode all day at a modest clip, on both sides of the Seine, in the Latin Quarter, past the Louvre and along the Champs-Élysées, feeling exhilarated, not fearful. And I had tons of bareheaded bicycling company amid the Parisian traffic. One common denominator of successful bike programs around the world — from Paris to Barcelona to Guangzhou — is that almost no one wears a helmet, and there is no pressure to do so.

In the United States, the notion that bike helmets promote health and safety by preventing head injuries is taken as pretty near God’s truth. Un-helmeted cyclists are regarded as irresponsible, like people who smoke. Cities are aggressive in helmet promotion.

But many European health experts have taken a very different view: Yes, there are studies that show that if you fall off a bicycle at a certain speed and hit your head, a helmet can reduce your risk of serious head injury. But such falls off bikes are rare — exceedingly so in mature urban cycling systems.

On the other hand, many researchers say, if you force or pressure people to wear helmets, you discourage them from riding bicycles. That means more obesity, heart disease and diabetes. And — Catch-22 — a result is fewer ordinary cyclists on the road, which makes it harder to develop a safe bicycling network. The safest biking cities are places like Amsterdam and Copenhagen, where middle-aged commuters are mainstay riders and the fraction of adults in helmets is minuscule.

“Pushing helmets really kills cycling and bike-sharing in particular because it promotes a sense of danger that just isn’t justified — in fact, cycling has many health benefits,” says Piet de Jong, a professor in the department of applied finance and actuarial studies at Macquarie University in Sydney. He studied the issue with mathematical modeling, and concludes that the benefits may outweigh the risks by 20 to 1.

He adds: “Statistically, if we wear helmets for cycling, maybe we should wear helmets when we climb ladders or get into a bath, because there are lots more injuries during those activities.” The European Cyclists’ Federation says that bicyclists in its domain have the same risk of serious injury as pedestrians per mile traveled.

Yet the United States National Highway Traffic Safety Administration recommends that “all cyclists wear helmets, no matter where they ride,” said Dr. Jeffrey Michael, an agency official.

The point, of course, is that focusing on a particular benefit of an action — say wearing a helmet when bicycling — really doesn’t make any sense. You have to look at the total picture. In this case that is weighing the benefit of a helmet against the likelihood that one will cycle less. Writ large, this is a public policy question regarding laws requiring helmets of bicycle riders.

The same questions apply to the produce industry. Take an issue such as organics. Even if organics are in some sense healthier, is the benefit sufficient to outweigh a lower consumption due to the higher prices of organic. Then, note the argument against bicycle helmets: it is that the very act of making people wear “armor” dissuades from use. Surely it is not a stretch to look at the “Dirty Dozen” list from the Environmental Working Group and say that it doesn’t so much encourage people to buy organic as to discourage them from purchasing produce.

Equally, all those proposals to get individuals to scrub and sanitize produce for food safety reasons seems more likely to dissuade from consumption than to get lots of produce scrubbing done.

And, on a public policy level, one has to question if this insistent beat of pathogen recalls is really keeping people safe or just harming them by encouraging a switch to less healthful foods. 

Pundit's Mailbag — Florida Versus Mexican Tomatoes: Protectionism Isn’t The Answer

We have run several pieces regarding the dispute between the Florida tomato growers and the Mexican producers:

After 16 Years Of Compliance, Florida-Mexican Tomato ‘Suspension’ Agreement Gets Challenged By Florida Growers Claiming Dumping Is Occurring: Is This Just Rent-Seeking?

The Florida Tomato Growers Are In The Right Legally, But More Than Tomato Production May Be At Stake In This Battle

In general, we satisfied nobody. The Mexicans didn’t like that we favored lifting the suspension agreement, and the Floridians weren’t crazy that we questioned the logic of anti-dumping laws as they related to perishables. A US greenhouse grower sent this note along:

You failed to mention protecting farmers in the US from those outside the US that would benefit from having these farmers not in business, and then grabbing larger share at the expense of the US ag business.

Free trade also means fair trade… look at sugar, tobacco, wheat, all the policies we use to protect our ag interests for national security and the sake of the economy.

A strong US-based ag business helps the economy by creating jobs and strengthening our ability to not be reliant on outside interests. Free and fair trade is a great concept as long as we apply these metrics equally.

When you look at the recent pricing, although temporarily good for consumers, if there are less farms in the market, eventually the pricing will rise due to lack of supply and in the long run consumers will not benefit.

We bow to no one in our support for US farmers. We count more than a few as very close friends.

Yet we have to confess that we are quite uncertain what advocating “fair trade” actually means. Certainly, we could understand that if one government was subsidizing its industry that the US might not want to stand by idly and lose that capacity. Our point, though, was that the anti-dumping laws do not require anyone to show that foreign producers are being subsidized.

Once one gets beyond the issue of government subsidies, then the question becomes what type of conditions would make trade “unfair”? Different areas have different advantages in producing different things. Some have ample labor, cheap water, low taxes, few regulatory requirements; others have intellectual capital or geographic proximity or critical mass. This is why we have trade so we can all get richer by buying products more economically.

Much of our attention should be paid to alleviating these issues. Have we done all we can to make sure water is available, labor, etc., in this country? If, however, we choose to not allow immigrant labor in, that doesn’t make it unfair for some other country to have lower wages.

There is no question that domestic-production agriculture generates jobs, etc., and to the extent our industries are competitive and thus get business as a result of voluntary transactions, this is undeniably good for the country. But if we have to block competitors to raise prices, then there is a cost —the cost being all the money consumers spend on a protected product that they would have spent elsewhere. This means that for the win on the protected industry, there is a loss in jobs elsewhere in the economy.

Protectionism does make the country more independent, but it is not clear that independence on tomatoes is an important matter. There is no question that we have taken steps to protect domestic producers of sugar and other industries, but it is not clear that these steps are wise or help our economy or our country.

It also is a bottom-line fact that countries don’t simply let us do whatever we feel like. It is highly predictable that a tariff on tomatoes into the US will wind up being countered by a tariff on, say, apples going into Mexico. It is not clear this will be a win for US production agriculture.

In the long run, industries that get protected tend to atrophy. Take a look at the total market irrelevance of the highly protected French cinema. Andrew Grove of Intel once wrote a book titled Only the Paranoid Survive. He might have pointed out the problem with protectionism is it makes an industry less paranoid. Why stay on the cutting edge of consumer preference, why invest in the latest and greatest technologies, why strive down the difficult road of being world-class if you are being protected from competition? Most don’t do this because it is fun; they do it because the whole world is racing to make them obsolete and they want desperately to survive.

We want to help farmers in Florida. We want them to have incredible varieties, access to labor, competitive taxes and regulatory burdens. We want them to win because they are progressive growers and brilliant marketers. We want them to win because they run a great race. Anything that makes it easier to postpone bringing this to fruition is not likely to help in the long run.

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