Economic Issues and Trends with Transgenic Crop Production

Transcription

1 Economic Issues and Trends with Transgenic Crop Production General Overview Joe Parcell, Assistant Professor & Extension Economist On a recent trip to Vancouver, British Columbia, my wife and I were visiting with an off-work bartender before we set down to eat dinner. He had asked us about our career occupation and I happened to mention I had an interest in biotechnology. He proceeded to go off on me about how I could promote (which I don t necessarily do) the production of frankenfood crops. He expressed to me that he had read all the articles on the development of agrobiotechnology, and he strongly indicated that he would not consume GM foods because he wasn t sure of the consequences. I can appreciate the argument, though I have strong priors in that the researchers of the world would not collectively lead us down a bad path. Now, let me tell you about the gentleman. He had just finished golfing. He was considerably overweight, smoking a cigar and drank 4 to 5 mixed drinks while we sat visiting with him. Do you see a contradiction in his story? This gentleman hit on the exact issue that took the international community, and to a lesser extent the U.S. community, by storm last year. He was unsure of the consequences or consuming biotechnology produced products; however, he knew exactly the consequences of being overweight, smoking, and consuming large amounts of alcohol. It is the unknown that drives fear. Everyone has different fears, primarily because different unknowns affect each person differently. Culture, however, can impact the way a group of people fear. I may not be an expert in this subject, but I do know people. One might say the debate over agrobiotechnology has dropped off considerably during the previous year. For one, most large grain handlers have indicated they will not suggest that producers segregate the crop this year because there is not sufficient non-gmo product demand relative to supply, i.e., the cost of segregation is greater than the premium. The USDA estimates the cost of segregation to most producers at around $0.50/bushel (Ballenger, Bohman and Gehlhar), and Maltsbarger and Kalaitzandonakes have suggested the segregation cost to the local elevator is greater than producer s segregation costs. It is quickly apparent that a large premium, effectively from the consumer, is required to cover the segregation costs throughout the marketing chain. Coverage in the media may have been a driving force in the public s perception of agrobiotechnology. Figure 1 is used to graphically represent the ratio of positive to negative agbiotech press coverage by four different popular press outlets in the U.S. and Europe. Note, this figure is only through Of even greater concern to agricultural producers this past year has been the announcement by many large firms regarding non-use announcements of GMO ingredients in the production of their food products. These announcements have occurred domestically and internationally. One issue often overlooked in these announcements is that much of the grain/oilseed used in food production, by these processors, is already under contract production. Thus, much of the company s demand is captive, and the contract often already specifies the quality of the crop to be delivered. However, in reality not all companies guarantee that all products are GMO free (see figure 2). 1

2 I am writing this paper to collectively address issues of interest to persons in the global agricultural industry. The next few sections highlight some the trends in agrobiotechnology and overview of the current situation is given. Figure 1. Ratio of Positive/Negative Agbiotech Coverage (source: Kalaitzandonakes & Marks ) Wall Street Journal Washington Post Daily Telegraph USA Today Rate of Adoption The rate of adoption of transgenic crops in the US has been great. Figure 3 is used to show the percentage of corn, soybean, and cotton acres planted in each year since introduction relative to hybrid corn adoption. As is obvious from this figure, the rate of transgenic crop adoption has been much greater; however, many would agree that the introduction of hybrid corn was the single most significant event in the evolution of production agriculture. The overwhelming adoption of transgenic crops likely had a role in surprising consumers because consumers did not have time to understand agrobiotechnology. The percentage of acreage planted to transgenic crops declined slightly in This occurred for three reasons: 1) some producers were concerned about a market for their GMO grain in fall 2000; 2) some producers perceived there would be a premium for non-gmo crops; and 3) for the case of Bt corn, producers began realizing that unless there is a high probability of corn bore infestation, Bt corn production is not as profitable as conventional corn production. 2

3 Figure 2. Example of reply to question regarding GMO non-use announcement by a firm. 3

4 Tables 1, and 2 highlight trends in global transgenic crop adoption. Acreage has increased over time. Acreage increases may be stagnate this year; however, the percentage of acres planted to transgenic crops will likely to continue to increase in the future. Why? The increase will come as producers realize the excess profits made by cutting input cost and/or receiving a premium for commodities with enhanced quality traits, e.g., high iron rice. Figure 3. Rate of Adoption of Biotech Crops relative to Hybrid Corn (source: USDA and Kalaitzandonakes) (% of planted acres) (Year after adoption) Biotech Corn Biotech Soybean Biotech Cotton Hybrid Corn Table 1. Areas Planted in Transgenic Crops Global Acres (millions) US Acres (millions) % in US % % 4

5 Table 3. Global Area of Transgenic Crops (million acres) Ratio of Crop 1997 % 1998 % Increase (acres) 1998 to 1997 Herbicide Tolerance Insect Resistance Her. Tol & < Ins. Res. Quality < < Traits Total Source: James, C Global review of commercialized transgenic crops: ISAAA Briefs No. 8. ISAAA, Ithaca, NY Difference Production Costs The table (Table 3) below provides one example of the potential for transgenic crops to enhance profitability. For this example, herbicide costs are reduced considerably so that on a per acre basis the total variable cost difference is $15. Thus, in the short-run there may be an economic benefit. It should be understood that in the long-run there will be zero economic return, on average, to producers of transgenic crops. Thus, early adopters will incur the profits. Why? There is an economic identity that states marginal cost will equal marginal revenue at the optimal production point. That is, the increase in cost of producing transgenic crops, e.g., seed cost, will exactly equal the cost savings of production, e.g., reduced herbicide costs. There will be evolutions of the profit enhancement from producing transgenic crops. A decrease in input costs initially will cause some producers to expand their operation, e.g., now they can spread their management over more acres. Producers will bid up land values or rental rates to get the land. The bid rate will go as high as where the cost of production about equals the per unit value of production. Also, transgenic crop production may lead to enhanced production, i.e., no more corn production lost due to corn bore infestation or soybean production lost due to weed infestation. This may effectively drive down the market price, again causing price to be near the cost of production. As a wrap up, does producing transgenic crops pay? It shouldn t take an economist to figure out that when a majority of producers adopt a technology (see figure 3) that it pays. And, if an economist tells you differently remind him/her that economists performed an economic analysis on the cost difference between mechanical harvesting and picking by hand upon introduction of the corn picker the economist concluded the corn picker was not economically feasible and everyone would continue harvesting by hand! 5

6 Table 3. University of Illinois estimated cost difference between producing regular and STS soybeans Inputs Regular Soybeans STS Soybeans Soil Fertility $22 $22 Seed $19 $19 Pesticide/herbicide $35 $20 Drying $3 $3 Mchy, rep., fuel, & hire $26 $26 Storage $7 $7 Operating interest $5 $5 Total variable cost $117 $102 Input Costs The introduction of transgenic crops, particularly Roundup Ready crops, has caused considerable debate in the United States over technology fees associated with purchasing seed. In an economic sense the technology fee associated with purchasing seed will exactly equal the input cost savings. That is, a technology fee of $18/bag should equal, on average, the herbicide, machinery, labor, and management cost savings for the number of acres a bag of seed would plant. There are two economic concepts that will help here. The law of demand states that as demand for a product increases the price of that good will decrease. And, as the price of a substitute, e.g., glyphosate and 2,4-D are herbicide substitutes, good decreases the demand for a good will decrease, i.e., producers will change from using one good to using another less expensive good. The introduction for glyphosate has increased rapidly with the introduction of Roundup Ready crops. Thus, not only will the price of glyphosate decline as demand increases, but the price of substitutes will decrease. Figure 4 is used to graphically represent the annual index of prices for glyphosate, 2,4-D, and Atrazine between 1991 and Over the past few years the price of glyphosate has decreased around 25% (some of this price decrease is due to glyphosate going off patent). However, the price of substitutes have also slightly declined. One could conclude that the introduction of transgenic crops has not only saved producers of transgenic crops money but also producers of non-transgenic crops have seen a slight chemical input cost drop. 6

7 Figure 4. Index of Price paid by Farmer s for Glyphosate, 2,4-D, and Atrazine, (source: USDA) (Index, 1999=100) Glyphosate 2,4-D Atrazine Potential Supply and Demand Figures 5, 6, and 7 were computed based on expected 2000 production, 1999 ending stocks, and the percentage of acres planted to transgenic cops in 1999 and This information was used to provide an estimate of the potential supply of transgenic and non-transgenic corn and soybean for The corn with contamination figure was derived assuming a 10% contamination level. The requirement of a 20% buffer in a corn field should significantly reduce the impact of contamination for fall Table 4 was created for discussion of the potential demand for non-transgenic crops. Most corn and soybean meal is used as an input into feed. The issue of feeding livestock transgenic crops has not been a wide spread concern. Table 4 was created using data for the 1999/2000 crop year and imputed percentage of soybean meal and oil market to exporting markets. The three locations listed as importers of U.S. grain/oilseed commodities are areas of the world where concerns have arisen regarding the use of transgenic crops in food production. Though the percentage of total U.S. exports to these locations is large for separate categories, the overall percentage of U.S. crop supply needed to meet demand from these markets is fairly small. The other category of interest is the percentage of crop used for domestic food use. Corn for food use is 17% of supply. The percentage of soybean oil for food use was not broken out; however, it can be assumed that a large percentage of domestic soybean oil is used as an ingredient in food production or food preparation. 7

8 Figure 5. Breakdown of 2000 U.S. corn supply from transgenic and non-transgenic crop Corn 3.38 mil bushel GM crop 9.38 mi bushel Non-GM crop Figure 6. Breakdown of 2000 U.S. Soybean supply from transgenic and non-transgenic crop 1.5 mi bushel Soybean 1.7 mil bushel GM crop Non-GM crop 8

9 Figure 7. Breakdown of 2000 U.S. corn supply from transgenic and non-transgenic crop with a 10% contamination level Corn with Contamination 3.72 mil bushel GM crop 9.04 mi bushel Non-GM crop Table 4. Breakdown of 1999/2000 Corn and Soybean Supply and Use. % of U.S. Crop to Export Market Corn Soybean Soybean Meal Soybean Oil Total Supply 11.2 bil. bushel 3.3 bil. bushel 37.7 (000) ton 19.4 mil. lbs. Seed & Feed use 50% 6% Food use 17% Domestic use 80% 84% Crush 52% Exports 17% 33% 19% 6% (% of total exports) Japan 30% 16%* 4%* S. Korea 13% 52% (Asia)* 33% (Asia)* European Union < 0.1% 32%* 7%* Ending Stocks 14% 9% 1% 10% Percentages Extracted from Martin and may not represent actual percentages for the 1999/2000 crop year. 9

10 Elevator Survey During the Spring of 2000 an elevator survey was conducted by Pioneer Hi-bred International, Inc. Some of the results of this survey are reported in Figures 8, 9, and 10. Figures 8 and 9 are used to graphically present the percentage of elevators, by state, stating they plan to offer a premium for non-transgenic corn and soybean in fall The highest percentage of elevators that indicated they would be paying premiums in fall 2000 were located in Illinois. This is not surprising given that Illinois has many terminal elevators situated on rivers that can load barges for shipment of grain/oilseeds to the gulf and then to export markets. That is, some locations are better situated to deliver non-transgenic grain to export markets. Figure 10 indicates the percentage of elevators responding to the question of the percentage of grain/oilseed commodities marketed to the export markets. One can easily see that Illinois elevators are a larger player in the export market. Thus, given the percentage of elevators in states further from export terminal elevators, it can be assumed that locations not low in transportation costs to the export markets will not see a premium for non-transgenic crop. That is, the primary use of grain/oilseed in most of the non-export terminal markets is for feed use. Figure 8. Are you planning to pay a premium for non-biotech corn during fall 2000? (source: Pioneer Hi-bred International, Inc. Elevator Survey) 100% (percentage (%) yes) 80% 60% 40% 20% 0% Iowa Illinois Indiana Minnesota Nebraska Other States U.S. 10

11 Figure 9. Are you planning to pay a premium for non-biotech soybeans during fall 2000? (source: Pioneer Hi-bred International, Inc. Elevator Survey) 100% (percentage (%) yes) 80% 60% 40% 20% 0% Iowa Illinois Indiana Minnesota Nebraska Other States U.S. Figure 10. Percentage of crop to Export Market for Illinois and Nebraska (source: Pioneer Hibred International, Inc. Elevator Survey) 10.0% 8.0% Illinois - 74% ship none Nebraska - 85% ship none (percentage) 6.0% 4.0% 2.0% 0.0% 1-10% 11-20% 21-30% 31-40% 41-50% 51-60% 61-70% (Percent to Export Market) 71-80% 81-90% % 11

12 Premiums for non-gmo crop Beginning in May 2000 the Tokyo Grain Exchange (TGE) began trading a non-gmo soybean (of U.S. origin) futures contract in addition to the Exchange s existing conventional soybean (of U.S. origin) futures contract. The primary contract specification difference (other than non- GMO versus other soybeans) is that the conventional contract size is 30,000 kilograms and the non-gmo contract size is 10,000 kilograms. Figure 11 below is the computed non-gmo soybean premium for the December 2000, February 2001, April 2001, and June 2001 TGE soybean contracts. Note, these contract months differ from the soybean contracts traded at the CBOT. Data used to compute the premium differential were downloaded from the Tokyo Grain Exchange web site and daily exchange rates were downloaded from the St. Louis Federal Reserve web site. What does the Premium Represent? Figure 11 indicates the difference processors in Japan would be willing to pay for non-gmo soybeans shipped from the United States. In an efficient market the premium offered should exactly equal the costs of obtaining the premium. Thus, this premium reflects the value of planting and segregating non-gmo soybeans at the farm level, segregating at the elevator, and segregating during shipment to Japan. An individual producer would only receive a portion of the premium because the producer is only one component in the marketing chain, and there are costs of segregating at each level each wants a piece of pie (premium). Figure 11. Price Difference between U.S. Non-GMO and Conventional Soybean Quotes off Tokyo Grain Exchange, by contract month ( to ) 12

13 References Ballenger, N., M. Bohman and M. Gehlhar, "Biotechnology: Implications for US corn and Soybean Trade, Agricultural Outlook, April 2000, pp Frerichs, R.L., E.D. Nafziger, B.E. Swanson, S. Eckhoff, and D.L. Lattz. Specialty Corn and Soybean Facts Sheets. Department of Agricultural and Consumer Economics, College of Agricultural, Consumer, and Enviornmental Sciences, University of Illinois, AE-1728, August, Kalaitzandonakes, N. A Farm Level Perspective on Agrobiotechnology: How Much Value And For Whom? AgBioForum 2(Spring 1999): Maltsbarger, R., and N. Kalaitzandonakes. Studies Reveal Hidden Costs in IP Supply Chain. Feedstuffs 72(August 28):Special Report on Cover. Martin, M. Agricultural Biotechnology. Power Point Presentation downloaded via the Internet at: Department of Agricultural Economics, Purdue University, April, Tokyo Grain Exchange. Internet download of conventional and non-gmo soybean price quotes, August, United States Department of Agriculture (USDA). Feed Outlook. August, Oilseed Outlook. August, Agricultural Prices. Various years. 13