A BRIEF OVERVIEW OF CROP RESEARCH FUNDING MODELS

Transcription

1 A BRIEF OVERVIEW OF CROP RESEARCH FUNDING MODELS by Richard Gray and Katarzyna Bolek University of Saskatchewan Department of Bioresource Policy, Business and Economics 51 Campus Drive Saskatoon, SK S7N 5A8 Funding for this research provided by Please comments to 1

2 Executive summary The funding of global crop research has changed a great deal in the past 30 years. While the public sector has historically played a dominant role, many new institutions with greater private sector involvement have evolved in specific crops and jurisdictions. In crops such as corn, soy and canola the investment by the private companies has been substantial. In some jurisdictions, industry levies have an important source of new research funding. Given the high economic returns to crop research, finding new models to increase investment is a major challenge, especially for those crops, which remain primarily dependent on public funding. As Canada considers the future of crop research funding, some of these newer models of crop research funding merit consideration. The purpose of this report is to describe a spectrum of existing crop research models, to give the reader an appreciation of the range of the possible options. In a subsequent report, these models will be subjected to assessment criteria for comparison and their desirability for funding crop research in Canada. As part of the context to describe the important features of innovation systems, the paper begins with a discussion of issues that underlie the development of crop research systems. These issues include, underinvestment, asymmetric information, economies of scale, anticommons, freedom to operate, and market power. Six models of crop research funding are described in this report. 1) Australian (GRDC) Crop Research, 2) Saskatchewan Pulse Research Levy, 4) France s End Point Royalty Research, 5) U.K. s wheat research, 5) Canadian Canola Research, 6) US Wheat Research Funding. Each of these crop research funding systems differ. The Australian crop research funding system, which includes the GRDC and end point royalties, is an interesting model that has several advantages including an adequate level of funding, a system wide perspective with producer involvement in priority setting. The French wheat research funding system is still driven to a large extent by INRA, a public research institution, which proactively partners with private and public institutions. The end point royalty system for bread wheat is interesting because it is uniform across varieties and set by negotiation with industry. The government of the UK in no longer directly involved in cereal variety research but instead support both public basic research and private research through a research levy and matching research contributions. The Saskatchewan Pulse Growers are a Canadian example of successful producer funding and control of research. Expanding this system of crop research funding would be difficult within the legislative and political environment in Canada. ii

3 The Canadian Canola sector, initially built on public research has been very successful in attracting private investment, in part due to patents and hybrids, which allow the private sector to capture value from their research. Both market power and research fragmentation are challenges facing the industry at this point. The US research system is still dominated by a federal system of land grant colleges. Like Canada, this system is addressing a broader set of issues with finite funding. Crop research in Canada is generally underfunded and fragmented in its approach. Within the existing models reviewed in this paper there are many desirable features that can be used to create an improved crop research funding system in Canada. There are ways to create a vibrant and sustainable crop research sector that will Canadian producers affordable access to superior technologies over the long run. The challenge will be to recognize the imperative of increasing research investment, objectively examine the options, and to summon the courage and conviction to change our funding system. iii

4 TABLE 1: SUMMARY OF CROP RESEARCH FUNDING SYSTEMS Funding System Funding Sources Corporate role Producer Role Public Role Australia - Wheat Saskatchewan Pulse Development Board - 1% grain levy with.5% Gov t match - End Point Royalties - 1% nonrefundable pulse levy - ad hoc public support/tax credits Breeding in partnership with GRDC in seed companies Limited involvement (BASF Clearfield and some European Pea Varieties) Producer reps on panels that control the GRDC SPD Board is elected by producers and manages research and IP Matching funding for GRDC/ science funding/ significant State investment Provision of research infrastructure, research tax credits, other matching France Cereals UK Cereal Canadian Canola US Cereals.5 Euro/t EPR and 69 Euro/t seed levy 5 Euro/t EPR and 69 Euro/t seed levy Corporate sector sells Hybrid and patent protected seeds Public sector funding for germplasm enhancement and disease resistance US government funding some state level funding and some state level research Limagrain, a producer cooperative undertakes most of the breeding Limagrain a French producer cooperative dominates cereal research Private sector ownership of varieties- Large involvement in variety commercialization UPOV 91 compliant limited private investment Producers have some say in allocation of general research funds and ownership and control of Limagrain Very limited No role in genetics/ some role in agronomics and utilization Very little producer involvement in research some involvement in market development INRA does trait development a Public /private venture in genomics some matching of industry investment in research Very limited presence- the Government is involved negotiating royalty rates AAFC provides germplasm for private breeders Variety testing USDA is the dominant source of germplasm Source: Compiled by the author from various sources (please see the text) iv

5 Table of Contents Executive summary... ii Crop Research Funding Models Introduction The Objectives Issues in crop research funding Underinvestment in crop research Asymmetric information Economies of Scale Anti- commons and freedom to operate Market Power Summary of Issues Australian End Point Royalty and GRDC Research Levy GRDC (Grain Research and Development Corporation) End point Royalties (EPRs) Research Coordination Summary Saskatchewan Pulse Growers History Research funding Intellectual property Management Summary Crop research Funding in France The Public Sector - INRA The Crop Royalty System Summary The United Kingdom Cereal Levy Scheme The Public Sector The Private Sector Commercialization of new varieties Summary The Canadian Canola Innovation System Canola Research Funding Commercialization of new varieities Summary The United States Royalties Private research Summary References...26 v

6 Crop Research Funding Models 1.0 Introduction Agricultural innovation continues to be one greatest achievements of mankind. Innovation has allowed the sector to produce an increasing amount of output using fewer inputs. Increases in labour productivity has freed up the majority of the population to leave the sector and produce other goods and services, while increases in land productivity has allowed agriculture to feed a growing population on a finite land base. Healthy crop innovation systems are vitally important for the future well being of mankind. Growing population, growing income, and climate change issues create the imperative for an effective global crop innovation system that can keep up with the burgeoning demand for food, fibre and fuel. From a national perspective an effective crop innovation system will determine the ability of the domestic agricultural industry to compete within the global marketplace. For individual crops, those crops with more effective innovation systems will grow at the expense of those crops with less effective systems. For individual farmers the access to new varieties and technologies is a key to sustained economic viability. Broadly speaking innovation is the use of new processes or the production of new products. The innovation system is the whole set of policies and institutions affect the rate of innovation, including private and public research institutions, education and knowledge dissemination, regulations, taxation, industrial organization, international institutions. As a key to economic growth, governments around the world are striving to improve their national innovation system. Research funding is a key aspect of the crop innovation system. As the source of new knowledge, technologies, and germplasm, research is an essential for innovation. Given the public nature of some forms of knowledge, the inherent economies of scale in research, and the sequential nature genetic improvement, many different types of models have developed to support crop innovation. The ways in which the crop sector is organized to fund crop research has implications for the level of research, the innovation system as whole, and by implication, the future of agricultural and food sector. There is growing body of evidence that indicates the rate of productivity growth in Canadian and US agriculture has been slowing since 1990, which coincides with real reductions in crop research expenditures. At the same time there are there are some crops and some countries that have adopted models of research funding that have been successful in generating resources for crop research. Despite the imperative of having an effective crop innovation system, there is a growing concern the crop research funding in Canada is inadequate and a recognition that new funding models should be explored. The public sector, having a long history of involvement in crop research, has decreased it real expenditures in crop research as the mandate to address environmental, food and other issues has expanded. While corporate investment has dramatically increased in canola, soybeans and corn, the industry has 1

7 become increasingly concentrated and there is growing concern that the relatively small Canadian acreage of these crops will be inadequate to sustain private research investment. While there has some been success in levy based funding, particularly in Saskatchewan Pulse Crops, in general, the levy rates tend to very low providing a limited amount of funding. Given these concerns the interest in exploring other models of research funding has increased. 1.1 The Objectives The objectives of this report are to: 1) to describe economic issues in crop research. This will involve a non-technical description of the key issues analyzed in the economic literature as they apply to crop research funding. 2) To provide brief overview and comparison of several successful crop research funding models that exist in Canada and the rest of the world. 3) To identify some the best features of these crop research funding systems, which could provide options for crop research funding system in Canada. 2.0 Issues in crop research funding 2.1 Underinvestment in crop research Decades of studies showing consistent high rates of return to crop research clearly illustrate that the public sector has generally underinvested in crop research. Reviewing over 1158 post war rate of return studies, Alston and others (1998) found that this is a global phenomenon and not restricted to Canada. This situation has not improved recently, as public research institutions have broadened their research mandate while reducing real expenditures. 1 Stewart and others (2009) recently published a study showing a slowdown in crop productivity growth in Western Canada, which is consistent with several other studies showing a global slowdown in productivity growth. The documented high rates of return to investments in research, and the slowdown in productivity growth also suggest that the private sector and producer groups have been unsuccessful in fully addressing the underinvestment in research. The reason for limited public investment despite evidence of high returns is not entirely clear, but is likely due to a combination of factors. These factors include: 1) the long time horizon of research returns relative to election cycles; 2) the very high return to other public investment of discretionary funds; 3) the lobby activity of private firms and producer organizations that have more urgent demands; 4) A view that crop research is a private good should therefore funded by the industry and 5) a view that public research crowds out private investment. The underinvestment by private research firms can be largely attributed to the inability to fully capture the value of their research activity. In the absence of intellectual property 1 The international exception may be China which has made massive public investments in biotechnology 2

8 rights, most research discoveries can easily be copied or duplicated. In crop research this would include non-hybrid new crop varieties that can be reproduced and replanted by farmers. Research also spills over to other firms and other countries. In the presence of research spillovers, that are very prevalent in crop research, firms will under invest in research because they are unable to capture the full value of their activities. While hybrids and strong intellectual property rights can increase research incentives, they do not eliminate all forms research spillovers and they can create competitive and anticommons issues (discussed below) that can interfere with innovation. Producer controlled levies or check-offs can also be used to fund research. The standard reason given for the underinvestment through this mechanism is the refundable nature of most check-offs. If the levy rates are significant there is an incentive for farmers to free ride on the contributions of their neighbors. 2 In some cases where existing research is dominated by the private sector, producer groups could have trouble gaining enough access to existing intellectual property to have freedom to operate Asymmetric information Innovation, by definition, involves new products and new processes. The owner of the new product or technology has some incentive to over promote its value, while potential users have an incentive to be cautious in adoption until the qualities of the new product or technology are well known. The lack of independent information about new product quality can make it more difficult to sell a better product and the lack adoption can slow the innovation process. To address information issues, either the public sector or industry organizations, often assume the role of a regulator and product tester. Product standards and regulation often serves to protect the industry and consumers from reduced quality. Variety trails and extension activities are often used to speed and refine the adoption process. 2.3 Economies of Scale Research has tremendous potential for economies of scale, largely because once a discovery is made it can be replicated at very little cost. Firms that have large market share have more resources quantity to spread their research costs over. Organizations that are large in scope are able to use some of their process related intellectual property for multiple lines of research. In addition, a greater proportion of research spillovers can fall within the boundaries of large organizations. As result of these factors large research institutions have lower costs of production, creating a cost structure for what economists refer to as a natural monopoly. 2 This problem is solved in the GRDC and with Sask. Pulse Development Board, which have compulsory non-refundable levies. Both have 1% of gross sale levies, much higher than most refundable levy plans. 3 Perhaps the best example for the Canadian is canola. The two major methods to incorporate new genes into a plant are protected by patents. 3

9 For public institutions, economies of scale are usually created by the gains from national and international collaborations, which was the very idea of the creation the United Nations CGIAR global research institutions. When intellectual property is protected and a private sector exists, these economies of scale create very strong incentives for industry mergers and consolidation. In the case of hybrid corn, Pioneer Hybrid had the dominant market share in United States as early as the late 1960 s. After patents allowed biotech firms protect transformation processes, and transgenic traits, a period of biotech firm proliferation was subsequently followed by multiple mergers and acquisitions. Currently, two or three firms dominate new variety development and sale in most biotech crops. 2.4 Anti-commons and freedom to operate The problem of the anti-commons results in the under-use of a resource. When a large number of individuals own complementary assets and act independently an anticommons problem can exist. (Parisi et al.) In crop research the classic example is Golden Rice. This new type of high vitamin A rice, was a developed using more than 40 different patented processes and germplasm. While having desirable properties, this rice has failed to be commercialized because it was too difficult to get so many independent owners reach and agreement on the value of each component. (Dalmer et al., 2003) The potential anti-commons issues are especially acute in crop research relative to many other forms of research, because crop innovation is sequential, meaning that new varieties are bred from the best of existing varieties. Thus new varieties embody the intellectual property from parent varieties. As such, in two or three generations a single variety can involve a great number of pieces of IP that were embodied in the parent varieties. In general, firms spend resources to obtain the freedom to operate in order to avoid anti-commons problems: 1) they develop their own research platforms, which is a duplication of effort; 2) they merge with or acquire the firms with the complementary assets; and more recently 3) they have reached cross licensing agreements with competing firms. In many cases key pieces of IP are held strategically to prevent their competitors from using the innovation. In the public sector research institutions also have to expend resources in order to have the freedom to operate. In many cases, this has led the public institutions to create their own research platforms, and to protect their intellectual property so they can have something to bargain with when they need access to private IP. The overall result has been a fragmentation and duplication research effort, and an increase in research secrecy, which can impede innovation. 2.5 Market Power Market concentration can lead to market power and, in turn, the over pricing of new technology can impede adoption and reduce the gains from research. Private shareholder firms have an incentive to maximize the return to shareholders. A patent, or hybrid protection of crop variety, gives a firm the exclusive right to market their product, and they will price their product to maximize returns. This ability to capture the returns from an innovation is a strong motivator for research expenditure. 4

10 In an ideal world, these research firms would face competition from many other firms, and new firms would enter the industry if it was profitable. These competitive forces would increase the focus on innovation and reduce the prices paid for new varieties. However, given the economies of scale and the freedom to operate issues, there are very few research firms producing competitive plant varieties with little or no threat of new competition. (see Howard, 2009). The result is firms with significant market power and ability to price far above the average cost of research Without sufficient competition, high prices of new varieties transfers rents from farmers to the seed industry and impedes adoption. For example, more Canola would be grown in marginal areas if the costs of the hybrid seed were lower. This impediment to innovation creates a loss to economy, relative to the situation where the same varieties are available at competitive prices. 2.6 Summary of Issues Crop research in Canada suffers from chronic underfunding, duplication of effort, and fragmentation of results. Recent declines in productivity growth of the crop sector in Western Canada suggest a crop innovation system that worsening over time. The public sector, faced with growing demand for tax dollars and a growing breadth of issues in the agricultural sector, are under-investing in crop research as evidenced by consistently high rates of return. With the exception of the Saskatchewan Pulse Growers, crop producers have been unable address the funding gap through substantive non-refundable levies. The For the crops where intellectual property right have been strengthened through biotech patents and hybrid seed, the private sector has made significant research investment and has had success. With the success in private investment, has come growing concern about the duplication of research effort, the fragmentation of research results, the competiveness of the sector, and the ability to fund unprotected research essential for the sector. In the remainder of this short paper, we will examine interesting aspects of the crop innovation system, in other crop and other jurisdictions. In doing so we will try to identify which features of these systems are able to address some of the issues outlined above. This will is the development of options for future crop research funding in Canada. 5

11 3.0 Australian End Point Royalty and GRDC Research Levy The Australian crop innovation system has undergone a significant transformation that began twenty years ago with the establishment of levy funded Research Development Corporations and the introduction of the ability to charge end point royalties. As result of these changes, the funding of agricultural research has grown over time and has greater producer and industry input than most other crop innovation systems. Agricultural R&D is funded from a number of sources and takes place in a number of Institutions. As shown in Figure 1, in 2006/07 there about a 1.66 billion Australian dollars of broadly defined rural and agriculturally related R&D spending, funded by State Governments, the Commonwealth (federal) governments, and the business sector primarily made up of Research Development Corporations (RDCs). Despite some the decreases in government funding shown in Figure 2, funding for research has increased largely due to the increases in funding coming through the RDCs. While end point seed royalty rates have been low in the past, they are now increasing in price and generating revenue for private research. Core, 2009 page 8. 6

12 Source: Source: Cutler, T. A Review of the National Innovation System, August 2008, p. viii as shown in Core P GRDC (Grain Research and Development Corporation) In 1989 the Australian crop research funding system underwent a significant transformation with the introduction of the levy funded Grain Research and Development Corporation (GRDC) and the introduction of end point royalties (EPR). Prior to the GRDC crop funding had a long history of predominantly public research at both the state and federal level, dating back more than a century. The GRDC established a large pool of levy based industry controlled funding while the EPR has attracted private firms to invest in research. As shown in Figure 3, RDCs as a whole have become the largest single funding source for agricultural research. When the government matching contributions to RDCs are included funding levels, have been over $500 million dollars in recent years. These unique features of the merit some description as options for additional research funding in Canada. 7

13 The GRDC was established in 1989 as part of a broader rural innovation initiative that established more than a dozen research development corporations in several sectors of the economy. The funding authority for GRDC is granted through the Primary Industry and Energy Research and Development Act (PIERD Act 1989). The GRDC is funded by a mandatory non-refundable research levy of 0.99 % of the farm value of 25 crops that is matched by the Australian Government up to a maximum of 0.5%. When a grower sells grain to a buying agent or processor, the research levy is deducted by the buyer and the buyer is liable to GRDC for that amount. GRDC levy is also collected from farmer to farmer sales. The list of crops span temperate and tropical cereals, oilseeds and pulses. The GRDC manages it financial reserves to minimize its exposure to risk from such factors. The government matching of industry levies, serves a number of important functions. The first and foremost, is that it recognizes that knowledge generated from research inevitably spills over to benefit other industries. Second it recognizes that differences exist among producers in terms of assets, abilities, ages, enterprise etc, which means they not receive equal benefits from invested levy dollars. Third, it ensures that governments will not back away from funding research as industry increases their research investment. With more than $100 million in annual revenue the GRDC is the major funder of applied R&D in the grain sector, which includes work in public institutions and farmer led research groups. The GRDC is also a primary investor along with universities and provincial governments in the two major Australian wheat variety development companies. It is involved in almost all aspects of grain R&D, either through funding, variety testing, strategy development or commercial partnerships. In 2008 the according to their annual report, the GRDC spent $56.3 M on cross-commodity research, $9.8M on 8

14 coarse grains, $7.4M on grain legumes, $3.6M on oilseeds, and $12.0M on wheat. In total expenditures were $89.1M in The GRDC has also encouraged regulatory reform and taken other measures to accelerate the rate of innovation According to GRDC the development time for new wheat variety has been reduced by about 4 years and it takes now approximately 8 years to develop new wheat variety. While reduction in development time is in-part due to more intensive research and multiplication efforts, it is primarily due to a registration process that now allows varieties to be licensed prior to extensive side by side variety tests. The GRDC argues the acceleration of the commercialization process more than offsets the additional risk to producers. The growers can get access to new varieties at a very early stage in the process. They do not have to wait for 3 years of crop testing. Those who adopt early take on risk, as a variety is unproved. The GRDC research is increasingly focusing on germplasm development, which is then made generally available to seed companies to incorporate into seed varieties in return for future royalties. Wheat is the only cereal crop where the GRDC no longer does variety development and has been completely commercialized. The private breeding companies are also breeding durum and triticale, but with significant GRDC support. For other crops the GRDC commercializes new varieties by tendering with partners under agreements that encourage rapid adoption among growers. Public breeding programs in barley have been consolidated with one program remaining in each of the 3 major regions. GRDC also finances breeding institutions that release varieties in their own right. For example the GRDC entered into a joint venture with the State of Western Australia to create a seed commercialization company. There is a growing recognition in Australia that the private seed industry will become concentrated to take advantages of economies of scale, as has occurred in many other countries. A result of concentration will be potential for market power to develop in the seed industry, directly in the pipeline between industry funded GRDC investments in germplasm research and producers wishing to grow new varieties. One can speculate that this recognition has kept the GRDC in the business of variety development and seed sales. 3.1End point Royalties (EPRs) Australia is compliant with UPOV 91 and has set up a system that allows plant breeders to charge an end point royalty (EPR) on delivered grain and royalty on the sale of seed. The Plant Breeders Rights Act 1994 (PBR) grants legal rights to owners of new plant varieties to charge EPRs. Grain marketers are required by PBR legislation to collect the EPR prior to marketing, usually on the basis of variety declarations. The EPR is over and above the GRDC levy and above any levy charged on the sale of seed. The EPRs and seed royalties give private industry the incentive to develop, multiply and market new seed varieties. The EPR rate is determined between breeding program and the successful seed company and varies by seed company, by species and even by variety. 9

15 Section 17 of 1994 PBR Act explicitly allows for farm saved seed, but strictly prohibits the sale of seed or product without permission of the variety owner. Thus EPR s are enforceable on all product sales, whereas the ability to capture value from seed sales is limited by the ability of producers to save and propagate their own seed. Despite the introduction of EPRs fifteen years ago there has been fairly limited multinational private investment in crop research, and varieties with public origins tend to still dominate the seed supply. Most seed companies are small and medium size enterprises have some government and or GRDC ownership. The notable exception are the recent acquisitions and partnerships initiated by LimaGrain, a large French based multinational seed company. While these provisions have generated some private investment in variety development producers are worried about paying too much for access to new technology, especially as the currently available public varieties are no longer competitive. Growers recognize that it is in the best interest of the breeders to have low EPR and seed cost to get as much seed/tonnage of a new variety out into the industry to generate wider variety adoption and larger market share. Growers also have strong worries and question how much of the EPR money goes back into the breeding program. The money is absorbed by administration costs and very little is received by the breeding program. 3.3 Research Coordination While the RDC s are the largest single source of agricultural funding in Australia, they only account for 1/3 of total research funding. Several federal agencies, and state governments fund different aspects of agricultural research. As a large pool of resources organized the national level the RDCs have been successful in providing a funding and research coordinating mechanism commodity crops. There is also are some concerns that RDC funding mechanisms and commercial priorities have made important long term basic research more difficult to do. Currently, there is also a significant duplication of research effort at the State level. Recently, the State governments have been meeting to try to rationalize research at the State level to reduce the duplication of effort. 3.4 Summary There are several attractive features of crop research funding in Australia. The introduction of the RDCs has increased the amount of agricultural research, while committing government expenditures and establishing a national coordinating mechanism. The establishment of EPRs along with direct investments by the GRDC and State Governments has attracted investment and established a private seed industry that is doing some variety development. Given the imperative of increasing crop research funding in Canada, these funding mechanism warrant careful consideration. There are also some apparent weaknesses in the Australian system. As the GRDC withdraws from variety development, the existing public varieties get old and the seed 10

16 industry become more concentrated, there is concern about the future competitiveness of the seed sector with implications for seed pricing and research investment. There is concern that the GRDC model draws research closer to the market at the expense of important long term cross cutting research, that is required to build the platforms for future research. If Canada were to adopt research policies similar to Australia it would be important to understand these developments and concerns, and where possible, address them. 11

17 4.0 Saskatchewan Pulse Growers 4.1 History The Saskatchewan Pulse Development Board also known as Saskatchewan Pulse Growers (SPG) provides an excellent Canadian example how growers can become actively involved in crop breeding and drive the development of an industry. The SPG is funded through a check-off of one per cent of the value of the gross sale of all pulse crops. A check-off is deducted at the first point of sale or distribution when a Saskatchewan producer sells pulse crops. Unlike, other commodities, (which in Saskatchewan are all established as Commissions) the Board s levy is non-refundable. In 2003, after twenty years of success, growers voted for an increase in the levy rate from.5 to 1 percent. This levy rate is similar to the Australian GRDC and far higher than the rates that exist for other Canadian crops. SPG represents over 18,000 pulse crop producers in Saskatchewan and is directed by a Board of seven elected pulse farmers, each elected for a three-year term. The Pulse Crop Development Plan Regulations, originally written in 1984 and subsequently amended through Board Orders, outlines the mandate of the organization and legal ability to collect the check-off. Under the Provincial Natural Products Marketing Act (the Agri-food Act), pulse buyers must register with SPG annually, collect the check-off from all purchases and make monthly payment to SPG with complete producer information. The Saskatchewan Agri-Food Council, an independent body appointed by the Minister of Agriculture and Food, supervises the activities of all organizations established under the Agri-Food Act. 4.2 Research funding The revenue base of the SPG has grown with the industry. Between 1985 and 2004, $25 million was been collected. Revenue from check offs from the annual report for the year 2007/2008 was CAD $9,7M. Governments do not provide matching funds to the pulse industry but do offer research tax credits and have been active in providing research infrastructure and other support for pulse research. SPG has noted the decline of Saskatchewan government funding in recent years. Saskatchewan Pulse Growers uses the check-off to fund research projects, extension and communications activities, the variety release program and general operations of the organization. It has been used for a number of activities of direct benefit to seed growers. These include support of the University of Saskatchewan s Crop Development Centre s (CDC) pulse breeding program, royalty-free seed to Select-status seed growers, agronomic research, Pulse Days, Pulse Production Manual and efforts to increase demand through domestic and international market development programs. SPG also invested with provincial and federal governments in new facilities at CDC. 4.3 Intellectual property Management The CDC is the exclusive recipient of funding for breeding through the SPG check-off. All developed varieties are technically owned by the CDC however, the SPG receives 12

18 exclusive rights to distribution of CDC new varieties in exchange for its financial contribution. SPG in turn provides industry access to new pulse varieties through several different release programs, each designed to maximize grower returns from their investments. New varieties for larger established markets are distributed under the general release program, which offers seed to all select-status seed growers in Saskatchewan and Alberta on a royalty free basis. This wide distribution ensures competition in seed propagation and distribution. Under the Niche Variety Release Program, a single firm is given exclusive access to a new class of pulses for a decade, in return for royalties paid to SPG, This gives the private firm the time and incentive to develop these markets. A private firm is also given the rights to foreign distribution of new varieties (after a period of time) in return for royalties thereby giving the firm the incentive to market and protect these varieties where it is possible to do so. In an agreement with BASF, the firm is given access to recent varieties to incorporate the Clearfield herbicide tolerant trait. To ensure fair pricing of the Clearfield varieties, SPG releases of the same variety without the herbicide tolerant trait at least a year prior to the Clearfield variety. Finally the SPG, has offered financial compensation for some private firms that agree to release independently developed varieties that must compete with the royalty free CDC varieties. 4.4 Summary The SPG breeding program has been a remarkable success. The program has developed an industry providing benefits for growers and the industry as whole. Over the first 25 years, economic studies estimate that producers have earned an internal rate of return of 20% per year and producers have received a 20 to 1 one return on their check-off investments. This industry has also helped to diversify the income base of growers, while extending crop rotations, and improving soil organic matter and sequestering carbon from the atmosphere. The SPG is an example of levy funded, producer controlled variety development system. While the corporate research sector is involved in research, the SPG retains control over the germplasm and varieties that have funded. The ability of SPG to work with governments, the corporate sector, and have their grower support a 1% levy is a result of very well thought out and effective innovation system. It should be noted that this experience of successful grower driven research, is not easy to repeat in the current institutional framework. As mentioned the SPG is unique in its nonrefundable nature. In Saskatchewan legislation the SPG is the only example of a Development Board, whereas all other commodities are established as Development Commissions that must operate with refundable levies. Changing the numerous provincial refundable grower based levy s to non-refundable levies is unlikely to happen without some major legislative changes. As long as these other crops remain voluntary it would be difficult to sustain the higher levy rates required to significant research investment. 13

19 5.0 Crop research Funding in France France also has an interesting and complex crop innovation system. The publicly funded National Institute for Agricultural Research (INRA), is at the center of the innovation system, and has proactively engaged the private sector and other research institutions. Two funding mechanisms, an end point royalty and a seed royalty system, support private variety development. LimaGrain, a large producer cooperative, is the dominant seed company in France. 5.1 The Public Sector - INRA The National Institute for Agricultural Research (INRA), founded in 1946, is public research institution under the joint authority of the Ministry of Higher Education and Research and the Ministry of Food, Agriculture and Fisheries. With a 2008 budget of nearly $1.2 billion dollars, and over 1800 scientists, it is the second most published agricultural research institution in the world. INRA actively partners with Universities and other public research institutions, and in directly involved in the education of 1800 Ph.D. students. INRA had over 200 research contracts with private companies, and participates in over two dozen research clusters. (INRA, 2009). As the central player in the French agricultural research system, INRA plays a very important role in networking and coordinating agricultural research. Recently, INRA has been put in charge of the delivery of research funds designed to build industry partnerships. Since, 1993 INRA has been bringing industry leaders together to participate in foresight activities. They have also been catalyst in the commercialization of research. They boast new 47 companies have been created from INRA research discoveries. INRA is involved in the full spectrum of crop research from basic science to variety development. INRA currently heads up an international project to map the bread wheat genome. In 2008, 52 new plant variety licences were granted in 2008 by Agri- Obtentions, which is INRA s subsidiary in charge of the commercial development of new plant varieties. (INRA 2009). It should be pointed out that INRA does not focus on wheat cultivar release, but if introgression of a new trait results in a wheat genotype suitable for release as a cultivar, then the cultivar is commercialized through Agri Obtentions. (DePauw, 2008). Wheat breeding is carried on mainly by private sector. However, LimaGrain, which plays the dominate role, is farmer-member cooperative, giving producers some voice, control and significant ownership of wheat breeding. 5.2 The Crop Royalty System France is a member of UPOV (Union for the Protection of New Varieties of Plants) and is acquiescent with UPOV Most grain varieties are protected by a licensing management system called SICASOV (Société coopérative d'intérêt collectif agricole des sélectionneurs obtenteurs de variétés végétales), which collects seed royalties and licenses authorized users of the plant patents. The current royalty system used to fund 14

20 wheat research in France first came into operation in 2002, following a long period of discussion between farmers, breeders and the government. The royalties are collected in two parts. First, all wheat sales subjected to an end point royalty paid at the first point of sale. Second, farmers are subject to private royalty paid on purchased commercial seed, and a royalty on farm saved seed of 68.8 Euros per tonne (about 110 Canadian Dollars per tonne). The end point royalty was established in July The levy is a uniform 0.5 Euros per metric tonne (CAD 0.8/t) of wheat delivered by the farmers to an end-user. The levy is collected by the grain handling companies at the time of delivery and is sent to Groupement National Interprofessionnel des Semences et des plants (GNIS). GNIS then pays SICASOV, which is a property rights management system. SICASOV allocates royalties according to breeders market share, reserving 15% of the total collected for projects of common interest as agreed in the negotiations with farmers. SICASOV members are plant breeders and rights owners (both public and private). There is a chair and a board of directors, none of whom appear to be representing farmers in general. A levy was also established to deal with the issue of farm-saved seed for planting. Instituted by Law of 28 July 2001, the levy applies to the harvested wheat product and is collected at first point of sale. Farmers declare which varieties and tonnage that derived from farm-saved seed. The funds are submitted to GNIS. The funds are distributed 80% to the cultivar owner and 20% is returned to support wheat research administered by FSOV (Fond de Soutien aux Obtentions Varietales, under the authority of GNIS) which is about EUR 14 m per annum. Approximately 85% of end point royalties and 80% saved seed royalties are returned to the variety owners based on their market share. The end point royalty system is solely focused on distributing royalties to plant breeders in the interests of fulfilling UPOV obligations, and does not profess to be a vehicle for farmer investment in research. Recommendation of cultivars for producers is done by Arvalis Institut du Vegetal (National technical centre for major crops) and also experimented by technicians of the departmental and regional agriculture organizations. Candidate cultivars are assessed for official registration by GEVES (Groupe d Etude et de Controle des Varietes et des Semences) under the authority of the CTPS (Comite Technique Permanent de la Selection). CTPS is part of the French Ministry of Agriculture and Fisheries. 5.3 Summary The French crop research system still has a very large public presence in the development of new crop traits, and relies on the private sector for breeding and commercialization of new varieties. Notably, Agri Obtentions, a commercialization vehicle for INRA, and LimaGrain, a producer owned cooperative, play the dominant roles in the private sector. France also has general levy on all wheat sales which is returned to variety owners, and special levy that is paid at the time of grain delivery for farmers cannot prove they purchased commercial seed. Interestingly, these levy rates are uniform across varieties, 15

21 which reduces collection costs and eliminates any producer incentive to mis-declare varieties. The royalty rates are also negotiated between industry and government. There appears to be very little room for producer input into the management crop research system, other than through LimaGrain, which is producer cooperative in the seed industry. 16

22 6.0 The United Kingdom Cereal Levy Scheme Despite a long history of successful public research in the United Kingdom, the government employees and government labs are no longer involved in wheat research. However, DEFRA (Department of Environment Food and Rural Affairs) does continue to financially support a limited amount of public research at Universities, and supports applied research through matching funds. Modest levies are collected to support genetic research and variety testing. Royalties for purchased seed and for farm saved seed support a foreign owned private research industry. The public sector no longer does wheat breeding and focuses on basic research and broader social and environmental objectives. A levy to fund R&D activities of the Home Grown Cereals Authority is assessed at the time grain is purchased by a registered buyer. In addition to funding R&D, the levy also funds market information for farmers and promotion of United Kingdom exports. The production information that is generated is shared and does not appear to be owned by the Home Grown Cereal Authority. The levy is imposed under the HGCA Cereals Levy Scheme (1987) and rates are established by Order of Parliament. Approximately CAD 11.3 million of levy funds is invested annually in production research. HGCA publishes Recommended Lists (13% of levy income devoted to assessment for the Lists) but does not own rights to any varieties. Levies are mandatory, includes fines and other liability issues if the levy is not collected / paid. In 2008 a new organization, Agriculture and Horticulture Development Board (AHDB) has been established to improve the efficiency, competitiveness, and sustainability of various agriculture and horticulture sectors within the United Kingdom. AHDB administer levies on meat and livestock (cattle, sheep and pigs) in England; horticulture, milk and potatoes in Great Britain; cereals and oilseeds in the United Kingdom. In April 2008 the Home Grown Cereal Authority became part of the 'Agriculture and Horticulture Development Board '. There is a levy on farmer-saved seed and tax supported funds for R&D lobbied successfully by the British Society of Plant Breeders (BSPB). The BSPB is the representative body for the United Kingdom plant breeding industry, formally the Plant Royalty Bureau. The organization was formed in 1966 after the United Kingdom Plant Varieties & Seeds Act 1964 established a legal framework for collecting seed royalties on protected varieties. It serves as an agency for royalty collection and lobbying. Farmers pay royalties on farm saved seed at approximately 50% the royalty due on bought seed, which varies by variety. The farm-saved seed levy goes back to breeders and is part of their income stream, (about $68CAD) per tonne or 5.42 (about CAD $10.80 per hectare or about CAD 4.37 per acre) for wheat. There is concerted effort by breeders aligned with farmer associations (like NFU) to counter potential non-payment of the seed levy on farm-saved seed. The right of plant breeders to charge a royalty on farm-saved seed became EU law in 1994 and in 1998 was 17

23 passed into United Kingdom law. This legislation instructs that royalty payments on farm-saved seed must be sensibly lower than on certified seed. The British Society of Plant Breeders collects farm-saved seed payments, either through declaration or seed processors (cleaners). The campaign to have farmers voluntarily declare their farm saved seed has been quite successful and collection rates have remained high in the UK. 6.1 The Public Sector Universities and public institutions conduct basic research with core funding from government. DEFRA (Department of Environment Food and Rural Affairs) funds Genetic Improvement Networks for wheat, oilseeds, pulses and bioproducts. These net works focus on upstream research and trait development. The United Kingdom government has moved away from employing staff to conduct near market research. Applied research and variety development takes place in the private sector and is supported by matching funds by Government and cash leverages matching funds called LINK projects. DEFRA supports these near market research via matching funds that can be as high as $4 government to $1 industry, however usually it is 1:1. Government is funding research to support its strategic areas such as environment, water, climate change, food security, and food safety. 6.2 The Private Sector United Kingdom is a member of UPOV and is compliant with UPOV In United Kingdom all wheat breeding is performed by the private sector. In mid 1980 s Plant Breeding Institute (PBI), Cambridge had about 80% wheat variety market share. In 1987 PBI wheat was privatized and first owned by Unilever who sold to Monsanto who sold to RAGT, a French Cooperative, which was subsequently acquired by Limagrain. It was an extreme example of government withdrawal from research. Today, there are 52 breeding institutions registered with British Society of Plant Breeders; only three are public facilities and these are at universities. 6.3 Commercialization of new varieties No seed of the major agricultural and vegetable species may be marketed in the United Kingdom unless the variety is on a United Kingdom National List or the EC Common Catalogue. On proof of the variety s distinctiveness, uniformity and stability (DUS), the variety will be considered by experts to ascertain whether all requirements for Plant Breeders' Rights have been met. If the variety meets the criteria, a proposal to grant rights in the variety is published in the Seed Gazette. Plant Breeders' Rights entitle the holder to prevent for 25 years anyone producing, marketing or importing the protected variety without authority. The levy funded Home Grown Cereal Authority plays a critical role in testing these varieties. 6.4 Summary Despite significant wheat industry the UK appears to do very lit tle wheat research. The decision for the public sector to get out of the business an to provide limited support for private sector though a small research levy has not resulted in a influx of private research. 18