Economics of
AgBiotechnology
Presentation to
NDSU Extension Meeting
Sept 21, 2005
By William W. Wilson
GREENLAND
UNITED STATES
(Alaska)
CANADA
UNITED STATES
MEXICO
Topics
Overview and Motivation
Major economic issues
Cost reductions
Consumer acceptance
Segregation, IP and traceability
Distribution of benefits and costs
Challenges to agbiotechnology in future
.
Studies on GM Wheat
Issues in Development and Adoption of GM Wheats, AgBioForum 6(3) 1-12;
Costs and Risks of Testing and Segregating GM Wheat, Rev of Ag. Econ
Adoption Strategics for GM Hard Wheats,
Contracting Strategies for GM Hard Wheats
Costs and Risks of Testing and Segregating GM Hard Wheats in Canada
Welfare Distribution of Introducing RRW in US and Canada
Costs and Risks of Conforming to EU Traceability Requirements in NA Hard
Wheats,
Games and Strategies in Introducing GM Hard Wheats in NA
Technology Price Impacts of GM Technology in Hard Wheat (RRW and FRW)
Licensing and Stacking Games and Strategies in GM Hard Wheats
Background on
AgBiotechnology
Adoption and
Development
Harvested Acres for North Dakota,
by Crop
Soybean Planted Area (000 A) 1995
Soybean Planted Area (000 A) 2004
Soybean Production 2004
GM Soybean Adoption in ND, SD and
MN; 2000-2004.
ND Soybean Varieties
Revenue (in millions of $)
Revenue from oilseed production in
North Dakota, 1995-2003
700
600
500
Soybean
400
Canola
300
Flax
200
Sunflower
100
0
1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Flows of A Biotech Research and
Development Benefits and Costs
Over Time
Gross Annual
Benefits
($ per year)
Research
Benefits
5
Research
Costs
Annual Costs
(-$ per year)
Research and
development lag
Source: Alston et al. 2000.
10
15
20
Adoption
Process
25
30
Commercial View of Trait Development
Time for Development: 8-10 years
Cost: $80-100 million (incl. 20-40$ million in costs to
conform to regulatory system)
Risks
Technical feasilility--proof of concept
Regulatory Approval--US and ROW
Commercial acceptance--price discounts
ƒUS and ROW
ƒConsumers vs. buyers
Competitor traits and technologies
Patent protection--for a period
Ag Biotech Product Development
(75%)
(Probability of
Success)
(25%)
Gene optimization
(5%)
Crop transformation
High throughput
Bio-evaluation
screening
Greenhouse and field
Model crop testing
trials
Year 0
1
2
Discovery
Gene/trait
identification
Trait integration
Field testing
Agronomic evaluation
(50%)
Regulatory data
Trait development generation
Bio-evaluation
Field trials
Pre-regulatory data
Large scale transformation
3
4
5
Phase I
Phase II
Proof of
concept
(90%)
Regulatory
submission
Seed bulk-up
Early
development
6
7
8
Phase III
Advanced
development
9
10
Phase IV
Regulatory
submission
Seeds and Traits being Field Tested
by Agbiotech Firms
Company
Dow
DuPont
Syngenta
Monsanto
Product
Quality
corn
Herbicide
tolerant
corn, cotton
Insect
resistant
corn,
cotton
Agronomic
properties
corn
Fungal
resistant
Virus
resistant
corn,
soybean
corn
corn, cotton
rice, corn,
sugarbeet
corn,
cotton
corn
wheat,
corn,
potato,
barley
beet,
watermelon,
tomato
corn,
potato,
soybean
alfalfa,
soybean,
cotton,
rapeseed,
beet, wheat,
rice, potato
corn,
cotton,
soybean
corn,
soybean
Number of field test permits filed by
private agbiotech firms, 1987-2004
Seminis
Scotts
Dow
DuPont
Monsanto
Bayer
Syngenta
0
1000
2000
3000
4000
Number of Field Test Permits
5000
6000
Number of field test permits filed by
public institutions, 1987-2004
NDSU
U of Wisconsin
U of Neb./Lincoln
U of Minnesota
U of Idaho
Purdue
Montana St.
Iowa State
ARS
0
50
100
150
200
Number of Field Test Permits
250
300
Applications for Field Trials in North
Dakota, by Crop, 1990-2004
50
Wheat
Sunflower
Soybean
Safflower
Rapeseed
Potato
Cotton
Corn
Beet
Barley
Alfalfa
40
30
20
10
0
1990
1992
1994
1996
1998
2000
2002
2004
1991
1993
1995
1997
1999
2001
2003
Future New Traits (prospective)




GM row crops: soybeans, canola and corn
 Input traits:

Further refined input traits

Output traits refined by feeding efficiency and ethanol
 Output traits:

Oil content, etc.

Food use of oils

BioDiesel (potential)
Wheat
 Fusarium Resistance (Syngenta)
 Drought Resistance (various state universities)
 RR…door open to be revisited
 Product quality: various forms
Other small grains—negligible
Bio-Pharmaceuticals
Myths about AgBiotechnology
Productivity gains/cost savings--typically
understated!
 Consumer acceptance
ƒ selected claims
ƒ GMA; other crops; and survey realities
ƒ segments in each market will persist
Segregation technology and costs
Economic Issue 1: Reduced cost of
production and/or output trait

Some agbiotech traits can



Reduce the cost of production due to the
technology
Reduce the cost of competing inputs
Reduce the cost of producing an output trait
RRW: Elements of Cost Savings
Sources of Cost Savings for RRW:
Implied in Model Assumptions
$/ac
Value of Yield (11-16%)
Adopter Cost Savings
Tech fee
Dockage rem. costs
Total
13.62 $/ac
9.70
-6.00
0.33
18 $/ac
48 c/b
18 $/mt
Potential Decreases in Crop
Technology Costs
Prices for competing chemicals: Soybeans post intro of RR
 reduced 40-50%
 glyphosate reduced 22% by 1998.
Proposed ND GM traits (Wilson and Huso--NDSU)
ƒ Prices of competing products to RR:
decrease 35%
ƒ Prices of competing products to Fus Res: decrease 37%
Retail Price of Pursuit in North
Dakota, 1995-2002
Prospective Adoption Rates
for GM Wheats in ND
Allowing RRW, GM FRW, Stacked, and
Conventional varieties:
Equilibrium adoption in US HRS areas:
ƒ
ƒ
ƒ
ƒ
GM FRW
RRW
Stacked
Conventional
34%
20%
31%
15%
Economic Issue 2: Consumer Acceptance

Who benefits:


Producer benefits--cost reduction and/or increased yield
Consumer benefits of producer traits

ƒ
increased supply, reduced price, and/or new trait
Consumer benefits of output traits
What Do End-Users Want?
Difficulties in Defining Desired Characteristics
Who is the buyer? Consumers, bakers, millers....
Divergent interests (i.e., multitudes of products) leading to
fundamentally different market segments (i.e. of desired
characteristics)
Seeking information about characteristics that may not be
currently available (e.g., storability, nutritional attributes)
Buyer acceptance--discussion
 Claims of buyer aversion should be challenged
ƒ US Domestic market is by far the dominant market:
 70% of grocery products are GM; and
 bread has GM ingredients already
ƒ Buyers are naturally averse prior to trait gaining regulatory approval
ƒ Buyers are not likley fully informed about the functional differences
ƒ Buyers typically express aversion in surveys;
ƒ in practice accept the products (results of major survey of literature).
Be cautious of surveys!
ƒ Experimental Auction results:
ƒ Suggest 7% of market is averse to products containing GM
Buyers Approach is Evolving
Many countries do not have regulatory process
with scientific integrety
Some will naturally adopt that of US, and, require
certification (Philipines, China, Mexico)-Certificate of Free Trade
Application in the case of GM wheat—see below
Distribution of North American Market
Segments
Consumer Acceptance: Summary

Evolving


e.g., China
Segments:

In nearly all mature markets, one should expect market
segments to emerge with respect to GM acceptance



Due to demand, incomes, market maturity, regulations, etc.
Natural process of market maturity
Segregation:

Buyers in most cases have found, or are finding ways to
make purchases of non-GM even though GM may be the
predominant crop



Numerous examples in US on corn and soybeans
Brazil routinely serves both market segments
etc
Economic Issue 3: Segregation, IP
and Traceability

Spectrum of Procurement
Strategies
Spot
Market
Testing &
Segregation
grades
protein
F.N.
T.W.
Origins
By
Location
PreShipping
Contract
Production
Targeting
Varieties Prod.
Practices
PreProcessing
Acres
Identity
Preservation
Traceability
Proc. certif.
Vertical
Integration
Assets
Prod.
Practices
Quality
Req't.
Grain
IP/Segregation are not synonomous
IP
Desired processes are declared
ƒ Audits conducted using varying mechanisms
ƒ Paper trail (sometimes)
ƒ Identity if preserved
ƒ Tests may/may not be component of system
Segregation
ƒ Grain is segregated based on varying forms of information:
tests
variety declaration
hunches!
ƒ Maintained throughout system in response to incentives
ƒ Tests assure integrity of segregations
GM Averse buyers very likely want tests/segregations and traceability, not
IP
ƒ
Results from Segregation Studies
Specialization will reduce
risks/costs
Likely specialization with respect to
ƒ geography
ƒ handlers
ƒ farmers
Mitigation of risks and costs: All of these would mitigate
broader risks to system
Recent Survey of Upper Midwest Elevators

IP and GM Marketing





Certification


89% handle GM grains
18% handle IP
57% use mechanisms of proof
19% ask for variety declaration
22% HAACP and 19% ISO certified
Segregation


Percent of grain segregated: 36%
Average cost=7c/b


Greater for small elevators than large
Cost of modification for enhanced segregation:

$200,000 or 8c/b
Traceability: European
Requirements

April 2004:


End of the moratorium (in force since 1999).
EU allows grain from countries using GM seed
under restrictive conditions:



Labeling of product containing more than 0.9% of approved
GM material.
Maintaining high level of traceability
January 2005:

Traceability is obligatory for all food and
ingredients.
Traceability

Defined in 1987 (NF EN ISO 8402) as

the ‘Ability to retrace history, use or location of an entity by the
means of recorded identification’.

Ability to trace GMOs and products produced from GMOs at all
stages of their placing on the market through the production and
distribution chains’ (EU Parliament, 2003)
Requirements for Non-GM Grains



On-Farm: Isolation between GM and Non-GM fields, Buffer stocks, Cleaning,
Storage adapted, Auditing, Certification, Testing, Traceability,…

One step back and one step forward: system to identify to whom and from
whom products are made available.

Transmission of specified information concerning the identity of a product to the
next agent: certification record, test records,…

5 years period of recordkeeping.
Labeling:

“this product contains genetically modified organisms” if exceeds the 0.9%
threshold.
Costs and Risks Management Strategy
Conforming EU Requirements




Research supported: NDSWC and SBARE
Prospective costs and risks for wheat from ND to
conform to EU traceability requirements
Research report: available
Costs include

On-farm:




isolation, certified seed etc.
Lower yielding (efficient) varieties vs. GM technology
Off-farm: testing, segregation, traceability certification
Risk premiums
Base Case Results: Elements of
Costs (related to GM Wheat)
60
Quality Loss
Costs (c/Non-GM bu)
50
5
1
2
Traceability Cost
40
21
30
Testing Cost
20
10
Risk Premium
21
On-Farm Cost
0
Base Case
Conclusion

Risks can be managed,

Buyer Risk: 0.01%
Seller Risk: 1.73%

Risk Premium/Non-GM bu = 21 c/bu



Total cost about
50c/bu,
Dominant costs are risk premium and onfarm practices.
Economic Issue 4: Distribution of
Benefits and Costs of AgBiotechnology

RRW Case Study: Background




Weed pressures in HRS
Field trials in HRS and CWRS areas
Opposition began from numerous fronts
Welfare analysis

How are benefits of a new technology
distributed?



Consumers—lower prices
Producers—lower costs
Regulations/GM aversion distort results
Changes in Welfare by Scenario
Change in Producer Welfare:by
Scenario
Change in Consumer/Import
Welfare:by Scenario
Intuition to Results II:
Intro of RRW
Producers benefit
+$197 Mill
After considering all other costs/benfits explicitly modeled
Consumers benefit (in total) +$163 million
reduced prices/increased supply
Consumers of non-GM segments: Reduced welfare due to
higher cost technology (forgo yield increases and on-farm cost savings)
ƒ require segregation costs
ƒ non GM must compete with RRW, other crops and markets with no
segregation costs
ƒ Longer-term: may have to compete against products not requiring nonGM
ƒ
Summary and Future Challenges


Major changes occurring in agriculture as a result of the
introduction of agbiotechnology into crops
 Increased profitability
 Changing cropping patterns
Major economic issues
 Production costs: Decline as result of new technology
 Consumer acceptance: Evolving; but, highly fragmented
 Segregation/IP/Tracebility: Systems are evolving and US
handlers are penetrating these segmented markets fairly
efficiently
 Distribution of benefits: GM traits result in consumer and
producer benefits; but, reduced benefits to those not
adopting/accepting of the technology
Future Challenges




Escalation of GM traits
 More specialized and focused on specific segments and industries
 Identifying desired traits: Major challenge for future

Smaller segments

Consumers preferences likely reflect different desired
characteristics; hence making targeting of traits more difficult
GM traits provide N. America an advantage—first mover advantage
 Due to the legal system to facilitate intellectual property rights, vs. that
in many other countries
Small Grains
 Small acres base relative to corn and oilseeds
 Consumer acceptance more fragmented
 Challenge to encourage agbiotech investment and/or risk continued
loss of area planted: small grains becoming increasing more of
specialty crop
GM Research and Investment
 Cost, risk and time required for trait development
 Requires increase in partnering across system for effective
commercialization