Economics of AgBiotechnology Presentation to NDSU Extension Meeting Sept 21, 2005 By William W....
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Transcript of Economics of AgBiotechnology Presentation to NDSU Extension Meeting Sept 21, 2005 By William W....
Economics of Economics of AgBiotechnologyAgBiotechnologyPresentation toPresentation to
NDSU Extension MeetingNDSU Extension Meeting
Sept 21, 2005 Sept 21, 2005 By William W. WilsonBy William W. Wilson
GREENLAND
CANADA
UNITED STATES
UNITED STATES(Alaska)
MEXICO
TopicsTopics
Overview and Motivation Major economic issues
Cost reductionsConsumer acceptanceSegregation, IP and traceabilityDistribution 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 WheatsCosts 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 NATechnology Price Impacts of GM Technology in Hard Wheat (RRW and FRW)
Licensing and Stacking Games and Strategies in GM Hard Wheats
Background on Background on AgBiotechnology AgBiotechnology Adoption and Adoption and DevelopmentDevelopment
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 from oilseed production in North Dakota, 1995-2003
0
100
200
300
400
500
600
700
1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Rev
enu
e (i
n m
illi
on
s o
f $)
Soybean
Canola
Flax
Sunflower
5 10 15 20 25 30
ResearchBenefits
ResearchCosts
AdoptionProcess
Research anddevelopment lag
Annual Costs(-$ per year)
Gross AnnualBenefits($ per year)
Source: Alston et al. 2000.
Flows of A Biotech Research and Flows of A Biotech Research and Development Benefits and Costs Development Benefits and Costs Over TimeOver Time
Commercial View of Trait DevelopmentCommercial View of Trait Development
Time for Development: 8-10 yearsCost: $80-100 million (incl. 20-40$ million in costs to
conform to regulatory system)Risks
Technical feasilility--proof of conceptRegulatory Approval--US and ROWCommercial acceptance--price discounts
ƒUS and ROWƒConsumers vs. buyers
Competitor traits and technologiesPatent protection--for a period
Ag Biotech Product Development Ag Biotech Product Development
Year 0 1 2 3 4 5 6 7 8 9 10 Discovery
Gene/trait identification
Phase IProof of concept
Phase IIEarly
development
Phase IIIAdvanced
development
Phase IVRegulatory submission
High throughput screening
Model crop testing
Gene optimizationCrop transformationBio-evaluationGreenhouse and field trials
Trait developmentBio-evaluationField trialsPre-regulatory dataLarge scale transformation
Trait integrationField testingAgronomic evaluationRegulatory data generation
Regulatory submissionSeed bulk-up
(5%)
(25%)
(50%)
(75%)
(90%)
(Probability of Success)
Seeds and Traits being Field Tested by Agbiotech Firms
Company
Product Quality
Herbicide tolerant
Insect resistant
Agronomic properties
Fungal resistant
Virus resistant
Dow corn corn, cotton corn, cotton
corn
DuPont corn, soybean
corn, cotton
Syngenta corn rice, corn, sugarbeet
corn, cotton
corn wheat, corn,
potato, barley
beet, watermelon,
tomato
Monsanto 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
0 1000 2000 3000 4000 5000 6000
Syngenta
Bayer
Monsanto
DuPont
Dow
Scotts
Seminis
Number of Field Test Permits
Number of field test permits filed by public institutions, 1987-2004
0 50 100 150 200 250 300
ARS
Iowa State
Montana St.
Purdue
U of Idaho
U of Minnesota
U of Neb./Lincoln
U of Wisconsin
NDSU
Number of Field Test Permits
Applications for Field Trials in North Dakota, by Crop, 1990-2004
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20040
10
20
30
40
50
Wheat Sunflower Soybean Safflower Rapeseed Potato Cotton Corn Beet Barley Alfalfa
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 AgBiotechnologyMyths about AgBiotechnology
Productivity gains/cost savings--typically understated!
Consumer acceptanceƒ selected claimsƒ GMA; other crops; and survey realitiesƒ 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 RRW: Elements of Cost Savings
$/ac
Value of Yield (11-16%) 13.62 $/acAdopter Cost Savings 9.70Tech fee -6.00Dockage rem. costs 0.33 Total 18 $/ac
48 c/b18 $/mt
Sources of Cost Savings for RRW: Implied in Model Assumptions
Potential Decreases in Crop Potential Decreases in Crop Technology CostsTechnology 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 Retail Price of Pursuit in North Dakota, 1995-2002Dakota, 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 GM FRW 34%ƒ RRW 20%ƒ Stacked 31%ƒ Conventional 15%
Economic Issue 2: Consumer Acceptance
Who benefits: Producer benefits--cost reduction and/or increased yield Consumer benefits of producer traits
increased supply, reduced price, and/or new traitƒ Consumer benefits of output traits
What Do End-Users Want? What Do End-Users Want?
Difficulties in Defining Desired CharacteristicsWho 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--discussionBuyer 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; andbread has GM ingredients already
ƒ Buyers are naturally averse prior to trait gaining regulatory approvalƒ 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 EvolvingBuyers 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 Spectrum of Procurement StrategiesStrategies
Spot Market
gradesproteinF.N.T.W.
VerticalIntegrationTesting &
SegregationTargeting Contract
Production
IdentityPreservation
TraceabilityProc. certif.
ByLocation
Pre-Shipping
Pre-Processing
Origins Varieties Prod.Practices
Acres Prod. Practices
QualityReq't.
Assets Grain
IP/Segregation are not synonomousIP/Segregation are not synonomous
IPƒ Desired processes are declaredƒ Audits conducted using varying mechanismsƒ Paper trail (sometimes)ƒ Identity if preservedƒ Tests may/may not be component of system
Segregationƒ Grain is segregated based on varying forms of information:
testsvariety declarationhunches!
ƒ Maintained throughout system in response to incentivesƒ Tests assure integrity of segregations
GM Averse buyers very likely want tests/segregations and traceability, not IP
Results from Segregation Studies
Specialization will reduce Specialization will reduce risks/costsrisks/costs
Likely specialization with respect toƒ geographyƒ handlersƒ 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 89% handle GM grains 18% handle IP 57% use mechanisms of proof 19% ask for variety declaration
Certification 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)
21
1
21
25
0
10
20
30
40
50
60
Base Case
Co
sts
(c/N
on
-GM
bu
)
Quality Loss
Traceability Cost
Testing Cost
Risk Premium
On-Farm Cost
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 on-
farm 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 ScenarioChanges in Welfare by Scenario
Change in Producer Welfare:by Change in Producer Welfare:by ScenarioScenario
Change in Consumer/Import Change in Consumer/Import Welfare:by ScenarioWelfare:by Scenario
Intuition to Results II: Intuition to Results II: Intro of RRWIntro of RRW
Producers benefit +$197 MillAfter considering all other costs/benfits explicitly modeled
Consumers benefit (in total) +$163 millionreduced prices/increased supply
Consumers of non-GM segments: Reduced welfare due toƒ higher cost technology (forgo yield increases and on-farm cost savings)ƒ require segregation costsƒ 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 non-GM
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 ChallengesFuture 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