Quality versus Quantity: Idle Resource and Scale Effects

Introduction The pattern of agrifood trade between North America and Europe can be described generally as an exchange of commodities for products (dell'Aquila, Sarker, and Meilke, 1999). A commodity is a good with homogeneous characteristics, such as "Hard Red Winter Wheat" or "Number 2 Yellow Corn." A product has distinctive characteristics which vary across processors and/or the geographic source of the raw inputs or the location of processing, such as "Roquefort" or "Cognac." North American farmers and food processors, serving domestic customers who enjoy homogenous quantity, benefit from increasing returns to scale, specialize in, and export homogeneous commodities. European farmers and processors, serving domestic customers who value quality, specialize in and export differentiated products. Agricultural trade issues are the basis for serious disputes between the US and Europe. Both regions seek to protect/expand rural incomes and employment. An increasingly popular policy toward this end in both Europe and the United States is “origin labeling”: IGP, AOC, DOC, state grown, etc. (Sylvander, et al 2000; Kilkenny and Schluter, 2001). Consider, for example, Appelation d’Origine Contrôllée (AOC), introduced in France in 1935 (Renou, 2000). The AOC label implies more than horizontal product differentiation, it testifies that the item has been produced from local raw inputs in a place-specific mode, and that its high quality characteristics are the result of substantial long term collective and individual investments. When a commodity is labeled as having specific characteristics it becomes a product. The price it commands in the marketplace as a product is expected to be higher than its price as a commodity. The higher value added by quality processing and labeling is captured by the owner of the label and the owners of the relatively fixed factor of production: the land from which the specific inputs are harvested. Thus it is presumed that origin labeling of food will earn rural citizens a larger share of national income.