Iowa Economy

Article of the Day

The Future of Agriculture – Economist


The seafood counter historically is the only place in the grocery store where we have been hunting and gathering, and that is rapidly changing to a farmed environment. And with the interest in local and domestic production, sustainability, and carbon footprint, the emphasis is now on producing more seafood here in the U.S.
~ Joe Hankins –  Director, Freshwater Institute

Six Reasons Salmon Production in Iowa is Interesting

I am part of a startup business, Inland Sea, that in September publicized for the first time an intention to build a recirculating aquaculture system facility to produce salmon in Iowa, specifically a site in Harlan.  With a two-acre footprint, this large-scale, bio-secure and efficient facility will result in weekly harvest of approximately 100,000 pounds of salmon, 5.3 million pounds annually.

ras-tank-renderingRendering of Salmon Production Tank ~150 feet in Diameter

We believe indoor fish production is the emerging frontier of aquaculture and the most promising systems to emerge for indoor, efficient production are recirculating aquaculture systems (RAS), and it’s been interesting for the last month to get a deeper sense of other people’s thinking on the topic.  As we’ve conducted a series of public meetings about the Inland Sea-Harlan project, a sense of people’s interest in the project has emerged based on the questions they ask.

A common question to the Inland Sea team, however, is why we became interested in this opportunity.  The top six include the following.

  1. The technology model has been proven elsewhere – Multiple RAS salmon production facilities are currently operational in Europe. These European RASs have demonstrated capability as environmentally sustainable and scalable, with the ability to guarantee both the safety and the quality of the fish produced.
  2. Competitive unit economics – The economics of aquaculture starts with feed conversion. One advantage fish have over land animals is feed conversion. Fish need fewer calories, because they’re cold-blooded and due to living in a buoyant environment, they don’t fight gravity as much. It takes roughly a pound of feed to produce a pound of farmed fish; it takes almost two pounds of feed to produce a pound of chicken, about three for a pound of pork, and about seven for a pound of beef. The salmon produced in a model facility in Denmark has demonstrated a feed conversion ratio of approximately 1.10.
  3. Salmon consumption has upside potential – U.S. salmon demand grew rapidly in the 1990s, and has been relatively flat since because of higher prices and constrained supplies. Salmon passed tuna as the second highest consumed seafood in the U.S. in 2013, coming in at 2.7 pounds per capita compared to 3.6 pounds for shrimp and 2.3 pounds for tuna. In addition, salmon is the only seafood consumed primarily as a premium product rather than frozen or canned.  A one pound uptick per capital in U.S. salmon consumption would require about 60 Harlan facilities worth of production to fill.
  4. The next model of salmon production – Due to biological constraints, seawater temperature requirements and other natural constraints, seaside farmed salmon is primarily produced in Norway, Chile, UK, North America, Faroe Islands, Ireland, and New Zealand/ Tasmania. Seaside salmon aquaculture production has reached a level where biological boundaries are being pushed. The Chilean industry, for example, has had significant struggles with disease, sea lice, and algal blooms in recent years. In addition, seaside salmon aquaculture production can occur only in a few areas globally because of water temperature and there is little upside production potential remaining. Future production growth of any significance will need to come from RAS systems.
  5. A fantastic food – A good aim for a food business is to make a fantastic product, and salmon from RAS production fits the bill with great texture, taste and nutrition profile.  And, of course, fresher is better.  Salmon has been termed by nutritionists as a superfood for its health impact. It is one of the best sources of omega-3 fatty acids, particularly EPA and DHA, which are nature’s heart medicines.
  6. Iowa and aquaculture are a fit – The major input for salmon, like any animal protein, is feed. Iowa is one of the lowest cost feed ingredient locations in the world. Another major input for RAS salmon is electricity, and Iowa has one of the lowest kWh prices in the nation. Finally, the salmon you eat in the Midwest travels approximately 4,000 miles from Norway or approximately 5,500 miles from Chile. We anticipate that salmon production in Iowa will have an out-of-the gate transportation cost advantage of approximately $0.50 to $1.00, aside from a freshness advantage.

We know other agricultural entrepreneurs working on aquaculture projects, driven by similar reasons to ours at Inland Sea.  But what other opportunities may be driven by one or more reasons similar to the above?  What opportunities are there for other proteins?  How might technologies deployed in RAS systems (sensors, water treatment, precision feeding, biological controls) be deployed for agricultural production beyond fish?  What opportunities for entrepreneur may emerge as new industries emerge in new areas?

Value Added Agriculture and the Terroir of Innovation

The annual produce of the land and labour of any nation can be increased in its value by no other means, but by increasing either the number of its productive labourers, or the productive powers of those labourers who had before been employed.
~ Adam Smith, The Wealth of Nations, Book II, Chapter III.

The Des Moines Register published an article that the value of Iowa’s crops and livestock sales would reach something close to $30 billion this year, triple the value of ten years ago.

A big part of this change is driven by dramatically higher commodity prices.  Most or all of this year’s corn crop will be sold for more than $5 per bushel, for example, whereas the average price received by farmers in 2000 was $1.90 per bushel.

There also has been an increase in the productive capacity of grains and livestock in the last ten years.  Yields, of course, fluctuate from year to year, but they trend upward.  Average yield for corn in Iowa in 2000 was 145 bushels/acre and is projected to be 167 in 2011, for example.  In 2009, a better growing year, corn yields averaged 182 bushels/acre.

Productivity can increase in other ways to increase the value of crops and livestock.  It’s the application of innovation that sparks my entrepreneurial interest in particular.  An example is La Quercia, a company in Norwalk that sold its first aged, prosciutto-style ham in 2005.  Now it sells tens of thousands of them, along with other associated pork products, throughout the U.S.

I was visiting the Santa Clara Valley wine region in California two years ago, when I met a local gentleman who asked where I was from.  I told him I was from Iowa.  He smiled.   “Iowa,” he said.  “There’s  a company there that makes the best prosciutto.”

“La Quercia,” I replied.  “A guy I used to work with started the company.  I like it too.”

I can’t say I’ve had anyone from either coast say anything much more pleasant about where I live.  Iowa, the land of great prosciutto!

La Quercia is run by Herb and Kathy Eckhouse.  I met Herb in the 1990s when we both worked for Pioneer Hi-Bred International, the global seed company.  The Eckhouses had lived for three years in the 1980s in the Italian city of Parma before moving back to Des Moines.  They had picked up a taste for all things Italian and Herb started to experiment with aging hams.

La Quercia has moved well beyond experimentation.  The company’s headquarters is a 50,000 square foot facility.  A big part of that space is occupied by state-of-the-art refrigeration units.  These units are set up to mimic the seasons in terms of temperature, humidity and air movement, and replicate the ancient process of curing hams.

La Quercia’s hams are sweet and on the low end of saltiness for cured meats, with a delicacy that is touted by chefs, food critics, and food publications.  In 2007, as sales of La Quercia products really accelerated, Bon Appetit magazine, a premier food publication, awarded the company its Food Artisan of the Year award.  Feature articles on the company have appeared in the New York Times, the LA Times, Cooks Illustrated, Serious Eats, Chicago Magazine, Saveur, the Chicago Tribune, Edible Communities, and The Art of Eating.

La Quercia’s artisan pork is produced using dry curing based on traditional Italian methods. This is a millennia-old method that involves salting and drying to preserve meat and then aging to develop flavor internally.  No nitrates, nitrites or their vegetable-derived substitutes are used in curing.  A maximum of three ingredients are used, pork, sea salt and spices, depending upon the product.

With the exception of a small quantity of pork that comes from pigs fed acorns (for a nutty meat flavor), most of the pork purchased by the company is fed a fairly standard ration of corn and soybean meal.  The Eckhouses have explained to me that they want their products to reflect Iowa’s terroir, and that includes corn and soybeans.

Their focus on a high-quality, high-end product adds value that makes other pork and ham products pale in comparison.  The company’s Prosciutto Americano will sell at retail for around $40 per pound.  Other, higher-end prosciutto made from organic and acorn-fed pigs may retail for more than $200 per pound.

Iowa’s agricultural landscape will continue to be represented by those engaged in creation of products on the lower end of the cost scale.  However, La Quercia is an example of how to apply innovation to a specialty market segment and in the process create new value for corn, soybeans, and pork produced in Iowa.

America is a land of taxation that was founded to avoid taxation.
– Laurence J. Peter

In the previous post I wrote about a survey that found that Iowa State University alumni entrepreneurs disproportionately started their companies in places other than Iowa.  While there are a number of reason for this, it seems likely that the business climate in Iowa, or lack thereof, must play some role.

But how do we measure business climate?  How do we gauge how friendly or unfriendly the environment in one state is for starting and operating a business versus another?  One method is to look at taxes.

My colleague Peter Orazem and former graduate student Joe McPhail have worked on a very interesting means of sizing up the business climates of states, and are in the process of updating their data.

This paper analyzes tax policies across states, with particular emphasis on marginal tax rates, or the tax rate that applies to the last dollar of the tax base (taxable income or spending).  Marginal tax rate is a term often applied to the change in one’s tax obligation as income rises.

The paper finds that there are persistent differences in distortionary tax policies across states which have caused persistent differences in capital investment across states.  There is evidence that there are low levels of labor productivity in states with the most distortionary policies compared to states with more favorable tax policies.  Iowa’s taxation ranks most negative among the 48 states, dead last,  in the analysis for its impact on labor productivity, and thus its impact on income, employment, and investment.

Taxes on property, corporate profits and consumption are the most damaging to labor productivity. Jointly administered income and capital gains taxes have smaller but still significant effects. Corporate taxes are particularly inefficient because they generate relatively little tax revenue per unit of lost productivity.

The overall effect of marginal tax rates on output per worker are substantial, reducing state labor productivity an average of 19.4%. They are responsible for substantial differences in the level of labor productivity across states: from a minimum negative impact of 11.8% in Nevada to a maximum of 27.6% in Iowa. States that rely more heavily on distortionary tax levies discourage capital investment, leading to lower levels of labor productivity and wages.

There are large and persistent differences in state tax policies as state taxes simply don’t change much over time.   The authors show that in theory, taxes on capital income, capital ownership, and sales will all lower labor productivity by distorting prices and returns to investment.  As implemented by the states, property taxes are responsible for 35% of the lost labor productivity while corporate taxes and sales and excise taxes are each responsible for 25% of the adverse effect. Income taxes and capital gains taxes have smaller negative effects, but as they are imposed together, their joint effects are also statistically significant and economically relevant.

The joint effects of tax policies are substantial, lowering labor productivity by an average of nearly 20% over the period 1977-2004. Tax policies have become more damaging to labor productivity over time, from -13.7% in 1977 to -24.5% in 2004.

Driving the negative effect is the reliance on rising marginal tax rates, apparently because of their greater distortionary effects on prices and returns compared to flatter tax rate structures. Tax policies can lead to substantial differences in equilibrium labor productivities across states, creating a gap of nearly 16 percentage points in output per worker between the least distortionary tax mix (Nevada: -11.8%) and the most distortionary (Iowa: -27.6%). Even though taxes differ in their relative efficiencies in generating revenue, with corporate taxes being the most costly and sales taxes the least costly in lost labor productivity per proportional increase in revenue, it is the highest marginal tax rate and not the type of tax that proves the most important for lost state labor productivity.

From an Iowa perspective, there are several observations:

  • While Iowa taxes don’t appear uncompetitive versus other states looking at individual rates, the net effect of their impact is significant because of their marginal effect, or impact on the last dollar of taxable income or consumption.  In effect, Iowa has the nation’s highest marginal impact on success (income, investment) which negatively affects wages, investment, and employment.
  • The impact of Iowa’s many tax credits and exemptions is to increase marginal tax rates.  A simplified tax regime with a broader tax base decreases this marginal impact and distortionary incentives to realize income, invest capital, and create jobs in other states.
  • State tax policy is relatively stable over the course of time.  One implication is that significant changes in state tax policies are apparently difficult to make.  The other is that if a state like Iowa can improve its competitive tax impact relative to other states, the improvement will likely persist over time.

Taxes are necessary to fund government services, but the structure of those taxes makes a significant difference in terms of the climate for investment and production.  Taxes matter.

Our real objective is not just jobs but productive jobs–jobs that will mean more goods and services to consume.
— Milton Friedman (Free to Choose: A Personal Statement)

In the previous post, I cited the results of a survey of 1982 to 2006 graduates of Iowa State University.  The 15.8 percent of Iowa State University graduates between 1982 and 2006 who had created at least one for-profit business, resulted in the creation of 222,569 jobs.  These companies had 2007 revenues of approximately $64 billion.  For an indication of magnitude, note that Iowa gross domestic product was $135.7 billion in 2008.

An interesting result of the survey was that 84 percent of these over 200,000 jobs were created outside the state of Iowa.  Only 35,242 of the jobs created at firms started by ISU alumni entrepreneurs were created in the state of Iowa, 15.8 percent of the total.  A higher proportion of total companies founded by alumni were located in Iowa (35 percent), but those businesses located outside Iowa had more jobs created per enterprise.  Large metropolitan areas both in the Midwest (Minneapolis, Chicago, and St. Louis, Kansas City) and outside the Midwest (Phoenix, Los Angeles, Dallas, Seattle, San Francisco) recorded multiple alumni starting businesses.

If ISU alumni entrepreneurs had started their firms in Iowa and all the jobs created at those firms were also in the state, then theoretically Iowa’s economy would be about 40 percent bigger than it is today.  Can you imagine an Iowa with that many more firms, jobs, and people?

So what’s going on?  Undergraduate enrollment at Iowa State is comprised historically of greater than 70 percent Iowa residents.  It seems reasonable to expect some propensity for an entrepreneur to locate their business in their state of residency and undergraduate attendance.  However, that expectation isn’t met by the data from the survey.

It’s not that I believe that ISU alumni have a particular requirement to start their firms in Iowa, even if they grew up in the state.  We just need to trade some of our native entrepreneurs for those from other states.  I immigrated all the way from Nebraska and have started two companies in Iowa, but apparently this is rare behavior.

Part of the story is the overall environment for entrepreneurs in Iowa.  Iowa’s report card for entrepreneurship is not stellar, with the state consistently ranking between fortieth and fiftieth in most measures of entrepreneurial activity such as venture capital investment, manufacturing investment, employment growth, and new business creation.  This fact makes the entrepreneurial activity of Iowa State University alumni appear all the more impressive.  It may also explain the disproportionate amount of entrepreneurial activity of alumni outside the state of Iowa.

There were some important indicators from the survey on firm location.  The top response for business location in the survey was ‘where I lived’ (82 percent ranking it as very important) indicating that alumni had already moved away from Iowa to pursue their careers when they started their entrepreneurial ventures.  Rather than move back to their native state of Iowa, they located their business where they lived currently and had built their post-undergraduate career and lives.  The first business start for alumni was on average ten years after graduation.

The founding of entrepreneurial ventures by ISU alumni, over 70 percent of whom are Iowa natives, outside the state of Iowa likely signifies problems in the business climate in the state.  A more dynamic business climate would lead to a higher proportion of undergraduates pursuing careers in their native state because of more numerous and better quality job opportunities.  This, in and of itself, would increase the likelihood of alumni ventures being started in Iowa.

The consequences of what is commonly referred to as ‘brain drain’ are profound from an entrepreneurial as well as an economic perspective.  Policies that have focused on keeping students in state to attend college miss the point that if they do not find a commensurate way to make a living in the state upon graduating they will leave (Artz, Georgeanne M. and Li Yu, 2009).

A more dynamic entrepreneurial ecosystem in the state would encourage more alumni to either start their ventures in Iowa sooner after graduation or to move back from another state after having pursued employment with another company for a time.  It would also attract more entrepreneurs who are non-Iowa natives.

The ISU alumni survey reveals the economic impact of alumni entrepreneurs and the positive role that higher education plays in spurring entrepreneurship.  Entrepreneurs tend to have higher incomes, their ventures create jobs for others, and they are more active in their local communities.   This activity does not occur in a vacuum, however, and the business and entrepreneurial climate in the state plays an important role in the form and location of alumni’s entrepreneurial ventures.

Research- and technology-intensive universities like Iowa State can have a dramatic impact on the economy via the entrepreneurial activities of its alumni.  The economic activity this entrepreneurship can spur is part of a larger entrepreneurial ecosystem, however, that necessarily requires a vibrant economic environment to fully extend its potential impact.

In the next post, I’ll dive deeper into issues regarding Iowa’s business climate, as well as that of other states.

Artz, Georgeanne M. and Li Yu.  How ya gonna keep ‘em down on the farm: Which Land Grant graduates live in rural areas? Working Paper No. 09016. Iowa State University Economics Department. July 2009.