Agribusiness & Applied Economics Report No. 566 June 2005
Welfare Implications of Introducing Biotech Traits in a Market with Segments and Segregation Costs: The Case for Roundup Ready® Wheat
William W. Wilson, Eric A. DeVuyst, Won W. Koo,
Richard D. Taylor, and Bruce L. Dahl
Department of Agribusiness and Applied Economics Agricultural Experiment Station North Dakota State University Fargo, ND 58105-5636 Acknowledgments
Constructive comments were received on previous versions of this report from Drs. George Flaskerud, Dragan Miljkovic, and Cheryl Wachenheim.
Funding for this research was provided by the Center of Excellence in AgBiotechnology and the Center for Agricultural Policy and Trade Studies at North Dakota State University, Fargo.
We would be happy to provide a single copy of this publication free of charge. You can address your inquiry to: Carol Jensen, Department of Agribusiness and Applied Economics, North Dakota State University, P.O. Box 5636, Fargo, ND, 58105-5636, Ph. 701-231-7441, Fax 701-231-7400, e-mail [email protected]. This publication also is available electronically at: http://agecon.lib.umn.edu/.
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Copyright © 2005 by William W. Wilson. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. Table of Contents
Page
List of Tables...... iii List of Figures ...... iv Abstract ...... v Highlights...... vi
1. Introduction and Overview ...... 1 2. Studies on Welfare Distributions and GM Crops ...... 3 2.1. Welfare Studies on GM Crops ...... 2 2.2. Welfare Studies on GM Wheat ...... 7
3. Issues in GM (RRW) Wheat Impacting the Distribution of Welfare ...... 11 3.1. Market Segments on GM Acceptance in Wheat: ...... 11 Overview of the Issue ...... 11 Previous Studies...... 11 Importer Acceptance and Aversion to GM Wheats ...... 14 Approach Used in the Analytical Model...... 16 3.2. Segregation Costs ...... 20 Market Mechanisms, Testing, and Tolerances ...... 20 Approach Used in the Analytical Model...... 26 3.3. Dockage Removal Costs ...... 27 Approach Used in the Analytical Model...... 30 3.4. Yield Increases ...... 30 Assumption in the Empirical Model ...... 31 3.5. Adopter Cost Savings (Change in Costs and Limits on GM Adopted Acres) ...32 3.6. Non-Adopter Cost Savings ...... 33 3.7. Supply Function Shifts in HRS Producing Regions ...... 35
4. Welfare Model ...... 39 4.1. Model ...... 39 4.2. Assumptions/Treatment of Specific Features ...... 39
5. Results...... 45 5.1. Base Case Definitions and Alternative Models ...... 45 5.2. Base Case and Market Assumption Scenarios ...... 45 5.3. Sensitivities ...... 52
6. Summary and Implications ...... 54 6.1. Overview ...... 54 6.2. Major Findings ...... 55 6.3. Implications ...... 57 6.4. Limitations ...... 59
References...... 61 Table of Contents (Cont.)
Page
Appendix A: Supply and Demand for Protein in Hard Wheats ...... 70 A.1. Import Demand for HRS and CWRS...... 70 A.2. Supply for HRS and CWRS ...... 71 A.3. Supply/demand for Competitors to These Classes ...... 75 A.4. World Production and Exports of Higher-protein HRS Wheats ...... 77 A.5. Summary ...... 78
Appendix B: Comparison of Studies on Import Country GM Aversion ...... 80 Appendix C: Mathematical Specification of the Analytical Model...... 85 Appendix D: Approach and Assumptions in Wisner’s Analysis: Market Risks of RR Wheat Introduction ...... 89
ii List of Tables
No. Page
2.1. Economic Surplus Generation and Distribution: Argentine Soybeans ...... 4 2.2. USDA Baseline Elasticities ...... 5 2.3. Estimated Welfare Effects for Selected Biotech Crops ...... 6 2.4. Comparison of Model Assumptions Used in Biotech Welfare Analysis ...... 6 2.5. Impact of Biotech Crops by State ...... 7 2.6. Assumptions and Impacts of R Wheat on Welfare ...... 10 3.1. Concerns About Food Safety ...... 12 3.2. Market Segments for RR Wheat By Acceptance ...... 17 3.3. Segregation Costs ...... 25 3.3.1. Costs of Dockage Removal Prior to Export/Shipping ...... 30 3.4.1. Yield Impacts of RRW: RRW vs. Leading Competitive Treatment ...... 31 3.5.1. Sources of Cost/Values Due to RRW (Averages) ...... 33 3.6.1. Estimated Average Costs for ND Herbicide: Before and After RR Wheat Adoption ...36 4.2.1. Import Demand Parameters ...... 40 4.2.2. Functional Characteristics for North American Hard Wheats (5-yr. Avg.) ...... 41 4.2.3. Supply Parameters and Assumptions ...... 42 4.2.4. Grower Benefits at Calibrated Base Case Values at Different Tolerances ...... 43 4.2.5. Grower Benefits of RRW Adoption by State/Province ...... 43 5.1. Comparison of Welfare, Changes in Welfare, Prices, and Market Shares under Selected Scenarios ...... 46 5.2. Equilibrium Market Share, by Scenario ...... 50 5.3. Comparison of Weighted Average Prices for Segregated Market Acceptance with Base Case...... 52 5.4. Sensitivity Results ...... 53
iii List of Figures
No. Page
3.1 U.S. Domestic Use and Exports by Segregation ...... 18
3.2 U.S. Average Exports by Segregation ...... 18
3.3 Canadian Domestic Use and Exports, by Segregation ...... 19
3.4 Canadian Exports by Segregation ...... 19
3.5 North American Exports by Segregation ...... 20
3.6 Distribution of North American Market Segments...... 20
3.2.1. Costs of Segregation for Prior Studies and Model Assumptions ...... 27
3.3.1 Average Dockage Levels in U.S. HRS Imports by Country ...... 28
3.3.2. Cleaning Costs and Initial/Ending Dockage Content: U.S...... 29
3.3.3. Cleaning Costs and Initial/Ending Dockage Content: Canada ...... 29
3.6.1. Cost/A (Medium Rate) for ND Soybean Chemicals 1996-2003 ...... 35
3.7.1. North Dakota Planted Acreage, 1971-2003 ...... 37
3.7.2. Saskatchewan Planted Acreage, 1971-2002 ...... 37
3.7.3. Estimated Supply Functions, by State/Province ...... 38
5.1. Changes in Welfare by Scenario ...... 47
5.2. Change in Producer Welfare by Scenario ...... 47
5.3. Change in Consumer/Import Welfare by Scenario ...... 48
5.4. Change in Consumer Welfare by Scenario ...... 48
5.5. Changes in Prices ...... 51
5.6. Supply of Wheat by Region, Segmented Market Acc. vs. Base Calibrated ...... 51
5.7. Sensitivity: Changes in Prices ...... 54
iv Abstract
Roundup Ready® Wheat (RRW) was one of the first genetically modified (GM) traits for the wheat sector and was under review by regulatory agencies in the United States and Canada when Monsanto withdrew it from further consideration. There are a multitude of issues associated with the ex ante evaluation of this decision. These include market acceptance and segregation, as well as the varying sources of cost savings and productivity gains. In this article, we develop a spatial partial equilibrium model of the higher-protein hard wheat market and assess the changes in the distribution of welfare associated with release and adoption of RRW. It incorporates segments for GM aversion in each market and segregation costs for each segment. Major conclusions indicate that in the most likely scenario, producer welfare increases by $301 million and consumer welfare increases by $252 million. Producers of hard red spring (HRS) wheat in the United States and Canada win, while hard red winter (HRW) wheat growers lose.
Key Words: genetically modified grains, welfare analysis, wheat
v Highlights
An important challenge confronting the hard wheat market in North America is development and commercialization of genetically modified (GM) wheats. There are a number of GM traits at varying stages of development including Roundup Ready®, fusarium resistant, drought resistant, and varying types of quality improvement. This study addresses issues about Roundup Ready® wheat (RRW). Even though it has been withdrawn from regulatory approval, there are numerous lessons and issues that were uncovered regarding GM wheat which are highlighted. RRW would have been the first GM trait for the wheat sector and was under review by the regulatory agencies in the United States and Canada. There are a multitude of issues associated with the ex ante evaluation of GM traits in wheat. These include market acceptance, segregation, as well as the varying sources of cost savings and productivity gains. All these are compounded by U.S.-Canada competition in domestic and international markets and their approach to adoption.
In this study, we develop a comprehensive welfare model of the higher-protein hard wheat market and assess the changes in the distribution of welfare associated with release and adaption of RRW. It is a partial spatial equilibrium model and incorporates segments for GM aversion in each market and segregation costs for each segment. The domestic and international markets consist of segments with respect to GM aversion. Suppliers are allowed to adopt or not adopt depending on location and financial incentives to do so, and handlers are allowed to segregate GM from non-GM at different tolerance levels at different costs. Finally, the model determines equilibrium adoption rates, prices, and price differentials among segments, as well as trade flows. Sources of productivity gains and cost savings, some of which vary geographically, are included. The equilibrium is compounded by the spatial distribution of production and demands and domestic and international competition.
Some of the important facts that have an impact on the results include:
» Supply and Demand for High Protein Hard Wheat: High protein hard wheat is used to blend with and improve lesser quality wheat or in the manufacturing of highly specialized food and bakery products. Exportable supplies of high protein hard wheat are largely from the United States and Canada with limited supplies available in Australia, Argentina, and France. Customers with strong aversion to biotech wheat would confront procurement challenges in substituting for the volume of high protein hard wheat currently supplied by either (or certainly both) the United States or Canada.
» Supply Function Shifts: In each of the major hard wheat producing states and provinces in North America, there have been significant shifts in the supply functions during the 1990s. In all cases, these were leftward shifts with the exception of Montana. These are likely due to the combined impacts of the changes in U.S. farm legislation and the concurrent introduction of competing crops, which in most cases have been GM.
» Productivity Gains: RRW has a yield advantage ranging from 11-14% compared to conventional varieties and competing treatments. This is comparable to the initial gains
vi associated with biotech corn and is the first major technology breakthrough for hard red spring (HRS) wheat since the introduction of semi-dwarf wheats in the early 1970s.*
» Cost Savings: Costs savings associated with adoption related to labor and management savings and other non-pecuniary costs range from $8.30 to $11.57/acre across regions. These are in addition to gains related to yield and reduction in dockage removal costs. In addition to these, non-adopter cost savings due to reduced competing chemical costs are in the area of $2.28/ac.
» Market Acceptance: Each market consists of segments with respect to GM aversion. We considered 4 potential segments in each country. Taken together, these imply that about 10% of the North American domestic market would require some form of segregation, and about 43% of the offshore market would require segregation.
The welfare model was solved and used to identify changes in welfare, the distribution of welfare changes, prices and differentials, and equilibrium adoption rates associated with the introduction of RRW. Major conclusions indicate:
» In the most likely scenario which we define as segmented market acceptance, producer welfare increases by $301 million, and consumer welfare increases by $252 million. These are comparable to the expost estimates of GM traits on other grains.
» Producers of HRS wheat and Canadian Western Red Spring (CWRS) wheat gain, and Hard Red Winter (HRW) wheat growers lose welfare. The reason for this is due to the technology being available to spring wheat growers and not HRW wheat growers. Further, (as noted below), there is an overall price decline which is less than the cost savings to HRS wheat growers, that adversely impacts HRW wheat.
» Consumers in countries and segments allowing GM gain in welfare, and those with restrictions, notably the European Union (EU) and Japan, have reduced welfare. Reasons for this are that their purchases are of a higher cost wheat that would not incur the technology savings, due to their segregation requirements and due to minor changes in origins. All other countries enjoy increases in consumer welfare.
» If there was full market acceptance (i.e., as if there was no GM aversion or market segments in any of the countries), total welfare increases to $787 million, and in this case there is a greater increase in consumer welfare.
» Any form of restricted introduction results in a lesser gain in welfare. Release in the United States only (or, only in Canada), results in a much lesser increase in producer welfare and negligible increase in consumer welfare. The United States would serve the domestic market, which is largely non-averse, and many of the smaller international
* Technically, breeders introduced semi-dwarfs into their breeding programs prior to the 1970s. Norman Borlaug is credited with identifying the semi-dwarf wheat 'Norin' in Japan in 1961 and starting what is called the "green revolution." These semi-dwarf materials were in the hands of CIMMYT in the 1960s which found their way to breeders programs in the spring wheat region.
vii markets. Canada would serve most non-GM market segments, albeit at a higher cost in order to increase supplies and conduct segregation.
If Japan were to shift all its purchases from the United States to Canada, there would be a substantial reduction in welfare gains. In this case, Japan is served by Canada at a higher cost, in part due to increase supplies and in part due to segregation costs. The United States serves the domestic market and most of the rest of the world market, in some cases at a higher cost. The combined impacts of these are for a large reduction in both producer and consumer welfare.
In the segmented market acceptance scenario:
» Adoption is greatest in the United States and North American supplies increase by 4%.
» Export market shares are largely unchanged.
» Price levels decline in all likely scenarios associated with introduction of this technology. Results indicate prices decline in the area of $5 to $10/mt. This is as expected and is due in part to the cost reduction of RRW of adopters. The change in prices varies across scenarios and by wheat class. However, for those markets averse to GM content, prices increase in the area of $9 to $12/mt.
» Price differentials emerge in each market and market segment approximately equal to the differentials in costs of production and marketing. These are the differentials likely to confront competitors within each country.
Numerous sensitivities were conducted including those related to technology fees, yield changes, and demand assumptions and implications are drawn for public organizations and private firms.
viii Welfare Implications of Introducing Biotech Traits in a Market with Segments and Segregation Costs: The Case for Roundup Ready® Wheat
William W. Wilson, Eric A. DeVuyst, Won W. Koo, Richard D. Taylor, and Bruce L. Dahl*
1. Introduction and Overview
There are several initiatives for the development of Genetically Modified (GM) wheats. In North America, these have been primarily on the Roundup Ready® trait, though there is extensive research elsewhere on a wide range of GM traits in wheat (e.g., fusarium resistance by Syngenta, drought resistence by DuPont, among others). Virtually all developments in North America are currently on Hard Red Spring (HRS) wheats though there is some effort on drought resistance in hard red winter (HRW) wheat. Experimental trials have been planted in South Dakota, North Dakota, and Minnesota, as well as in selected Canadian prairie provinces.
This study addresses issues about Roundup Ready® wheat (RRW) and even though it has been withdrawn from regulatory approval, there are numerous lessons and issues that were uncovered regarding GM wheat which are highlighted. RRW would have been the first GM trait for the wheat sector and was under review by the regulatory agencies in the United States and Canada. There are a multitude of issues associated with the ex ante evaluation of GM traits in wheat. These include market acceptance, segregation, as well as the varying sources of cost savings and productivity gains. All these are compounded by U.S.-Canada competition in domestic and international markets and their approach to adoption.
Even though RRW has been withdrawn from regulatory approval in Canada (Monsanto 2004; Sosland Publishing 2004), other GM wheat traits are under development. Policymakers will have to confront issues related to those traits as/if these move closer to commercialization decisions. Monsantos’ decision to “deferring all further efforts to introduce Roundup Ready® wheat” (Monsanto 2004) and to “withdraw regulatory submissions outside the United States” (Sosland Publishing 2004) is particularly important. This decision was made for a multitude of reasons, but were influenced by apparent resistance by grower groups and others on the inability to segregate GM from non-GM wheat which was the maintained assumption of several aggregate level analyses (Furtan, Gray, and Holzman 2005; Furtan, Burden, Scott 2003; Wisner 2003).
Development of GM wheats has lagged other grains and oilseeds for varying reasons. Most important is likely the more complex genetics. Other contributing factors include: 1) wheat is a smaller volume crop within North America; 2) exports are of greater relative importance; 3) import country regulations vary much more for wheat and are less well defined;
* Wilson is Professor, DeVuyst is Associate Professor, and Dahl is Research Scientist, in the Department of Agribusiness and Applied Economics, and Koo is Director and Professor and Taylor is Research Scientist in the Center for Agricultural Policy and Trade Studies, all at North Dakota State University, Fargo. and 4) competition amongst exporting countries is likely more intense and compounded by radically different marketing systems regarding quality and trade practices, etc.
If a trait is approved in the United States and/or Canada, there would be no limits on the adoption of these traits, except for the extent that individual companies may impose a limit or tolerance. If the traits are approved in Japan, wheats can be imported, but subject to labeling laws. Since this trait is not (yet) approved in the European Union (EU), it would imply a nil tolerance. The new EU policy (Commission of the European Communities 2003a,b) would allow approved traits, but would require product labeling and traceability (using a yet to be specified system) if the level of adventitious presence exceeds 0.9%. Developments in these countries are pending and will impact the evolution.
RRW 1 is an example of 1st stage benefits. The 2nd and 3rd stage effects will not be accessible until 2007 and beyond.2 In the case of wheat, 2nd stage effects include enhanced protein quality, novel starch types (functionality), enhanced nutritional content, reduced allergens, and improved freshness and shelf-life for baked products. These observations were echoed by Biane indicating that consumer benefits in the case of wheat include extending shelf life, improved nutrition, and reduced allergens. Pressures for adopting GM wheat, specifically RRW, come from a combination of yield increase, cost reduction, reduced dockage, increased profitability of competing crops (being recipients of GM technology), and the prospect of 2nd and 3rd stage benefits associated with GM wheats.3
A recent study evaluated the composition of RRW (Obert et al. 2004) to its non- transgenic parent and to conventional wheats. That study indicated that MON71800 was substantially equivalent to its non-transgenic parent and commercial wheat varieties and that MON71800 is as safe and nutritious as commercial wheat varieties. In closing, they indicated:
Considering the principle of substantial equivalence as articulated by the World Health Organization, the Organization for Economic Cooperation and Development, and the United Nations Food and Agriculture Organization, these data, along with the safety of the CP4 EPSPS protein and the safe history of use of wheat as a common source of animal feed and human food, demonstrate that glyphosate tolerant wheat MON71800 is as safe and nutritious as conventional varieties of wheat currently on the market.
This is a significant finding that is the first refereed evidence about the substantial equivalence of RRW. Many of the existing studies we refer to below proceeded without this set of facts.
1 Monsanto decided to defer further commercialization of RRW for several reasons (Kilman 2004). On July 29, the United States Food and Drug Administration informed Monsanto that RRW “is as safe as conventional wheat for all food and feed uses.”
2 Bloomer (2001) originally suggested that 1st stage benefits should be commercially available by 2005. However, Monsanto has indicated these would not be released until certain milestones have been achieved. Syngenta suggested a date of availability for their fusarium resistant wheat for 2007, but it is unclear about the firmness of this date.
3 Much of this background material is described in greater detail in Wilson, Janzen, and Dahl (2003).
2 The problem in wheat is compounded by the fact that most of the effort is focused, at least initially, on HRS which is the primary wheat class grown in northern tier states and Canada. Thus, Canada’s position and adoption will have a critical impact of the post-adoption competition. Most important is that the mechanisms to facilitate adoption of GM wheats in Canada differ from those in the United States (e.g., variety approval process, variety kernel distinguishability, contract calls, the ability to add/create subclasses of wheat with specific characteristics).
The purpose of this study is to analyze the distribution of welfare changes associated with adoption of this trait. Though Monsanto has announced their deferral of commercialization of RRW, the results are still pertinent as to the factors that impact the market and distribution of welfare. As well, the methodology provides a way to evaluate welfare distribution for other GM traits and those in the hard wheat market in particular. The first section below describes previous studies that analyze welfare distributions of GM crops in general and of HRS in particular. Section 3 provides a detailed discussion of the major issues impacting welfare distributions associated with RRW in HRS. The analytical model is described in Section 4 and results are presented in Section 5. Finally, Section 6 provides a summary and discusses policy implications. The appendices contain background data, a description of the market for wheat protein, and other assessments.
2. Studies on Welfare Distributions and GM Crops
Introduction of biotechnology traits into GM crops and oilseeds have been subject to a number of studies. One strain of these focuses on the distribution of welfare gains amongst producers, consumers, and technology providers. This section summarizes some of these studies. The first section focuses on recent studies on grains, oilseeds, and cotton. The section that follows provides detail to the few studies that have addressed welfare implications of GM wheat.
2.1. Welfare Studies on GM Crops
Since the introduction of GM technology, a number of studies have analyzed the distribution of welfare gains attributable to these technologies. Generally, these use fairly aggregated models, make assumptions to facilitate calculations, and usually analyze impacts of traits that have already been introduced. Introduction of a trait, in this case an output trait, has the impact of increasing productivity and production, shifts the supply function, reduces prices, and increases demand by consumers. Then the analysis proceeds to evaluate the distribution of these gains amongst producers, consumers, and technology providers. Examples of some of these are summarized below.
Falck-Zepeda, Traxler, and Nelson (2002) modeled Bacillus Thuringiensis (Bt) cotton in 1996 with no technology spillovers assuming linear demand and supply and parallel shifts from adoption of the new technology. Two sectors were included, the United States and the Rest of the World (ROW). Differences in production costs were derived from surveys. Yield differences were converted into equivalent cost savings. Simulation was used to capture distributions for elasticity of demand, supply, and exports in the United States, and supply elasticity for the ROW. They found that the benefits were distributed as: 59% increase in
3 producer surplus for U.S. farmers; 9% increase in consumer surplus for U.S. consumers; 21% increase in producer surplus from technology fees to Monsanto; 5% increase to Delta and Pineland; and 6% increase for the ROW.
Qaim and Traxler (2005) examined farm level and aggregate welfare effects of Roundup Ready® (RR) soybeans in Argentina (Table 2.1). Their analysis utilized a partial equilibrium model with international technology spillover. The model assumes linear supply response for a three-region model (United States, Argentina, and ROW). Farm level differences were elicited by surveying Argentine growers (late 2001). Respondents were asked to respond for the last three years (as most had stopped growing non-RR soybeans within the last two years). Data were analyzed to determine differences between RR and non-RR budgets and if farm size influenced effects.
They found seed costs were higher with RR in Argentina. Chemical costs were higher for non-RR soybeans as two to three chemicals were utilized vs. glyphosate for RR and the fact that glyphosate was cheaper than alternatives. Operating costs for own machinery and custom operations were lower with RR technology (faster harvest time). They estimated cost savings at $21/HA. No yield advantage was found. Prices for alternative herbicides dropped 32% on average from 1996-2001.4 Bias was found where small farms accrue larger cost savings than large farms (higher pesticide savings than larger farms and lower average price markup for RR seeds due to lower use of certified seed).
Table 2.1. Economic Surplus Generation and Distribution: Argentine Soybeans Change in Change in Producer Consumer Technology Surplus Surplus Revenue Total Surplus ------$mil------Argentina 303 4 28 335 United States 145 149 393 687 ROW -291 498 0 207 Total 158 652 421 1, 230 Source: Qaim and Traxler (2005).
Several studies have analyzed the impact of GM technology in the U.S. soybean complex. Moschini, Lapan, and Sobolevsky (2000) derived increases in U.S. producer surplus ranging from $135 million to $396 million from the adoption of GM soybeans. Consumer surplus in the United States increased from $9 to $25 million. Total world surplus increased ranging from $804 million to $2.2 billion.
4 This is close to the 38% to 40% price declines found elsewhere–see Section 3.6 of this report.
4 The U.S. Department of Agriculture (USDA) compared welfare benefits of adopting Bt cotton, herbicide tolerant (HT) cotton, and HT soybeans in 1997 (Price et al. 2003). Their welfare model assumed linear supply and demand functions and a parallel shift in supply due to biotech innovation for Bt cotton and HT cotton and HT soybeans for 1997. Several sources were used to quantify farm level impacts of biotechnology including the Agricultural Resource Management Survey (ARMS) and the Enhanced Market Data (EMD) (used for Bt cotton model only). Econometric models were developed to estimate effects of yields and pest control costs. Elasticities used in their analysis and results are summarized (Table 2.2) for base cases with linear demand and supply functions.5 Results illustrate that welfare benefits of these biotech traits are $213 million, $232 million, and $308 million, for Bt cotton, HT cotton and HT soybeans, respectively (Table 2.3), and the distribution of these gains among producers, consumers, and technology companies varies.6
There are a number of important contrasts of these studies and approaches to the issues and challenges confronting welfare impacts of GM wheat traits. These include market segments and segregation costs, international competition, spatial dimensions of trade, and impacts of adoption, and each was conducted post-introduction of the trait. A critical item was that all these studies were of approved GM traits. These contrast with the analysis of the proposed GM wheat which has to rely on perceived benefits.
Table 2.2. USDA Baseline Elasticities 1997 Bt and Herbicide 1997 Herbicide Tolerant Tolerant Cotton Soybeans U.S. Supply Elasticity 0.47 0.28 U.S. Demand Elasticity -0.50 -0.50 Net Export Demand Elasticity -0.97 -1.21 ROW Supply Elasticity 0.15 0.30 ROW Demand Elasticity -0.15 -0.25 Source: Price et al. (2003).
These studies are summarized in Table 2.4 with respect to their assumption.
5 Price et al. (2003) also notes two other studies with non-linear supply and demand functions and non- parallel shifts in supply.
6 Sensitivity was conducted to evaluate the impacts of non-linear demand and supply functions.
5 Table 2.3. Estimated Welfare Effects for Selected Biotech Crops Herbicide Tolerant Herbicide Tolerant Bt Cotton Cotton Soybeans $mil percent $mil percent $mil percent U.S. Farmers 61 29% 10 4% 62 20% U.S. Consumers 30 14% 132 57% 16 5% Monsanto 62 29% 11 5% 86 28% Delta & Pine Land/ Seed Companies 13 6% 4 2% 124 40% ROW Producers -135 -733 -35 ROW Consumers 181 809 55 Net ROW 46 22% 76 33% 20 6% World Benefit 213 232 308 Price et al. (2003).
Table 2.4. Comparison of Model Assumptions Used in Biotech Welfare Analysis
Moschini, Falck-Zepeda Qaim and Lapan, and Price et al. Price et al. et al. (2002) Traxler Sobolevsky (2003) (2003) (2005) (2000) Base Case Sensitivity
Crop Bt Cotton RR Soybeans RR Soybeans Bt Cotton, Bt Cotton, RR Cotton, RR Cotton, RR Soybeans RR Soybeans
Year 1996 1996-2001 1999 1997 1997
Supply and Demand Linear Linear Linear Linear Non-linear Functions
Technology Shift Parallel Parallel Parallel Parallel Non-parallel
Efficiency of 0 100 100 50 Technology Transfer
Number of Sectors 2 3 3 2 2 (U.S., ROW) (U.S., Arg., (U.S., S. Am., (U.S., ROW) (U.S., ROW) ROW) ROW)
6 2.2. Welfare Studies on GM Wheat
There are numerous issues important in GM wheat that were not problematic in other studies of GM traits. Most important is that the trait(s) are not yet approved, there will be market segments with respect to GM aversion, segregation costs are important, and there is intense intercountry competition.
Aggregate Impacts of GM Grains on the Upper-Midwest (NCFAP). A comprehensive study quantified the farm income, food production, and reductions in pesticide use that may result from wider use of agricultural biotechnology in the United States (Gianessi et al. 2002). The study was based on 40 case studies of 27 crops across 47 states. The report is limited to cases for which successful transformation has occurred and for which there are at least preliminary results on performance for pest management. It compares observed and potential impacts of biotech crops versus conventionally bred crops, including only biotech cultivars to be used in pest management.
The study included two different case studies on wheat: viral resistant and herbicide tolerant varieties. The study on HT wheat was conducted in the four states that account for 92% of U.S. spring wheat acreage -- Montana, Minnesota, North Dakota, and South Dakota. In the case study on HT wheat, it is estimated that 33% of spring wheat in the above four states is not treated with herbicides to control Canada thistle, a key weed problem, because cost outweighs benefits, resulting in an average yield loss of 4 bu/ac. It is estimated that glyphosate tolerant wheat would control all major weeds in wheat and enable growers to increase their income by $12 per acre. The potential economic gains in North Dakota rank second only to California. The total economic impact of biotech crops in the four states is summarized in Table 2.5.
Table 2.5. Impact of Biotech Crops by State Added Income Pesticide Reduction State ($mil)* (lbs active ingredients) Minnesota 156 5,145,888 Montana 21 37,000 North Dakota 185 86,732 South Dakota 74 291,444
* Combines value of increased production and lower production costs if all biotech varieties studied are adopted.
Two recent studies used real options to analyze the optimal timing of the release of RRW in Canada. Though these are not comprehensive welfare analysis, they do capture the key sources of uncertainties associated with the irreversible decision of releasing a trait. Results from Furtan, Gray, and Holzman (2005) were based on the inability to segregate RRW from conventional wheat and concluded that releasing RRW would be akin to the market for lemons. Carter, Berwald, and Lyons (2004a) allowed for segregation at reasonable costs and refined other assumptions and found that it would be optimal in virtually all cases to release RRW.
7 Several notable studies have addressed potential welfare issues in the case of GM wheat using conventional techniques focusing on market equilibrium. Each is summarized below and their approaches are compared at the end of this section.
Australian Studies. A report by the Productivity Commission concluded that the benefits of genetically engineered non-wheat crops and oilseeds outweigh the costs (Stone, Matysek, and Dolling 2002 ). This study is based on the premise that the United States and Canada would expand their use of GM technology and that Australia would not. They found that in the long term, production and exports would be adversely affected because the country would lose market share to the United States and Canada if it did not expand its use of GM technology.
Foster, Berry, and Hogan (2003) (as part of a broader study addressing numerous issues related to GM grain development in Australia) addressed trade and welfare impacts of GM crops using AGLINK (a model used by OECD, a multicommodity, multicoutnry econometric model of world agriculture). Simulations were conducted and evaluated through 2010. Wheat was included, but not allowed as a GM grain. Adoption rates and technology fees were assumed at 2001 levels. Segregation costs are included at a rate of 10% of FOB values for identity preserved (IP) and any other costs, which translate to about $15/mt for wheat, or 40 c/bu. Finally, the supply of other grains and oilseeds was allowed for GM adoption and productivity growth.
The results indicated that grain prices fall by about 2.4%. Wheat prices, though not treated as a GM, fall also, in response to increased competition from course grains and oilseeds. Wheat trade declines slightly. The main beneficiaries are primarily consumers in the form of reduced prices. Also, those countries and crops adopting gain, while those not adopting lose.
Furtan, Gray, and Holzman (2005) analyzed the distribution of welfare from the release of RRW in Canada. Ten export markets were identified that Canada risks losing due to the introduction of GM wheat. If Canada were to register GM wheat, the markets that demand GM- free wheat would turn to other exporters where GM wheat is not registered, such as Australia, the EU, and the United States. Canada would then sell its wheat into those markets that are indifferent to GM wheat, such as China. This study is based on the premise that Canada would be the first country to register GM wheat and the other wheat producing countries would not produce GM wheat. They conclude that while GM wheat will make production cheaper, those agronomic benefits are more than offset by the costs of segregation of GM wheat, the impact of lost export markets, and lower wheat prices. Results indicate that while GM wheat will make production cheaper, those agronomic benefits are more than outweighed by the costs of segregation of GM wheat, the impact of lost export markets, and lower wheat prices.
DeVuyst et al. (2001) developed a model to investigate international trade of wheat following GM wheat introduction. This study used a partial equilibrium framework to determine equilibrium trade, prices, and supplies and demands in major countries. Demand is for all hard wheats, inclusive of HRS, HRW, and CWRS. Technology fees were assumed at nil. Import bans on GM varied and segregation costs were not considered.
8 In most scenarios considered, U.S. producers gain considerably due to GM wheat introductions, assuming a 4.8% costs savings for GM versus non-GM wheat. Only in the most widespread adoption scenario do U.S. producers suffer from GM wheat introductions. Their results indicate that the United States may have a first-mover advantage even when importers of U.S. wheat do not accept GM wheat.
A follow-up study by these same researchers (Taylor et al. 2003) refined their simulations. The same fundamental modeling approach was used, with some important differences. Notable amongst these were their approach to the demand for wheat protein which was aggregated into protein equivalent. Results were reported for 10 potential scenarios. The free trade simulation indicated welfare gains of up to $356 million and price differentials of about $4/mt.
In a more aggregate analysis, Carter, Berwald, and Loyns (2004b) analyzed the prospective changes in welfare and prices with the introduction of GM wheats under three scenarios. One was widespread global release of GM wheat and other more restricted cases. The analysis used a partial equilibrium model with some countries aggregated together, and allowed for differentiation and segregation costs. Importantly, and different from our analysis, it allowed for introduction of GM wheat in other countries, besides the United States and Canada, and determined adoption rates exogenously. The results showed a regulatory bias in Canada against new varieties and caused Monsanto to not release its trait.
Finally, Wisner (2003) addressed numerous issues related to the development of GM wheat.7 Assumptions of this study were that wheat could not be segregated, there would be extreme and ubiquitous aversion to GM wheat by consumers around the world, and segregation and other costs would be large and imposed on all transactions. Yield increases and cost of production decreases were not allowed. Finally, it was assumed that there were adequate supplies of high protein from elsewhere around the world to replace U.S. and Canada origin high protein wheats if they adopted GM varieties.
No analytical model was provided. An implicit assumption was that production of excess supplies of RR HRS wheat was disposed in the U.S. feed grain market, at feed market values.
Summary: Existing studies on RRW used credible models (for the most part) to explore the prospective distribution of welfare as a result of introducing RRW. However, these were conducted prior to the availability of recent data on salient features of RRW and had to make assumptions to facilitate exploration of prospective welfare gains.
Crucial assumptions used in some of these studies and results are summarized in Table 2.6. There are radical differences in the underlying assumptions, particularly with respect to segregation and costs of segregation, amongst others. These are no doubt the reasons for the sharp differences in results. In addition, a number of notable features of RRW that were not
7 Appendix D provides a detailed critique of the major themes promoted in this study.
9 considered in any of these studies. These include the existence of market segments with respect to GM content, the possibility and costs of segregation, dockage removal costs, cost savings for adopters and non-adopters, structural shifts in supply functions of HRS as a result, partly, of competing GM crops. These features are discussed in detail in Section 3.
Table 2.6. Assumptions and Impacts of RR Wheat on Welfare
Furtan, Gray, Taylor, DeVuyst, and Holzman Wisner DeVuyst et al. and Koo Item/Study (2002) (2003) (2001) (2003)
Framework Commodity No model Spatial partial Spatial market equilibrium equilibrium equilibrium
Elasticities of Supply/Demand Based on 1994 No reference Estimated Estimated analysis
Acceptance of RR Wheat CWB estimates Not allowed Allowed U.S. wheat (import) estimates
Cost/Return Change as a Result of RRW
Yield Increase 0 to 5% None 0 and 10%
Production Cost -4.8% -2$/ac
Technology Fee Endgogenized: $4/ac $5.89 to 6.83/ac
Segregation Not allowed Not allowed Allowed Allowed
Segregation Cost Assumed infinity Not possible $2.23/mt
Spatial Competition not allowed Not specified Allowed Allowed
Major Result for Comparable Scenarios with Adoption in both the United States and Canada
Price Effects $/mt -$28 &-30/mt -$2.76
Price Differentials Non-GM Not allowed $0.55 to 4.15/mt vs. GM
Total Welfare Gain mill $ 25.89 NA +312 U.S. -18 to +350$ +461 World million
10 3. Issues in GM (RRW) Wheat Impacting the Distribution of Welfare
There are several issues that are critical in analyzing the prospective market impacts and distribution of welfare gains with the introduction of RRW. Some of these were alluded to above. In this section, we describe these in detail. The major issues are identified and in each case we describe the issue, provide background data, information and studies, and then describe how we deal with it in the analytical model (which is described in Section 4).
3.1. Market Segments on GM Acceptance in Wheat
Overview of the Issue: Substantial uncertainty and debate exist regarding consumer acceptance of GM products. This topic is confounded by how consumer acceptance is being defined (e.g., attitudes, behaviors) and what products are considered in what circumstances (e.g., information, labeling).
Biotechnology is not as important for the vast majority of U.S. consumers according to a national survey by the Grocery Manufacturers of America (GMA 2000). The GMA concludes that U.S. consumers have confidence in the regulatory structure provided by government agencies like the U.S. Food and Drug Administration (FDA) and the U.S. Environmental Protection Agency (EPA). American consumers also are much more trusting of scientists (Hoban 2001). This confidence and trust are significant factors in the general acceptance or level of concern related to GM foods in the United States. International differences do exist as noted below and are due in part to differences in regulatory regimes.
Previous Studies: In the United States at least, GM crops and oilseeds are more thoroughly tested before the government approves them for human consumption than traditional crops. Phillips [Biotechnology Industry Organization (BIO)] notes that “Biotech crops are among the most tested products in the world and have been used in our food products for the last six or seven years and there have been no reported illnesses as a result of eating any of these food products (Soya & Oilseed Industry News 2001). Differences in concerns about food safety across countries are summarized in Table 3.1. Concern over the food safety of GM ingredients/products appears to be fading and the issue of labeling, along with the right to know and right to choose, are issues currently on the forefront. With only 2% of respondents expressing a concern about the safety of GM foods, consumers in the United States are generally accepting of biotechnology, in large part perhaps because they are generally unaware of the rapid developments in agricultural biotechnology.
11 Table 3.1. Concerns About Food Safety United What, if anything, are you concerned about when Kingdom Australia United States it comes to food safety? (2) (3) (1) (------percent of respondents ------) Food Poisoning 63 72 Mad Cow Disease 61 Growth Hormones 47 Pesticide Use 46 68 10 Human Tampering of Foods 65 Packaging 27 Food Handling 23 Contamination or Diseases 16 Genetically Modified Foods 43 58 2 (1) Study by the British Food Standards Agency, January 2001 (AAP News 2001b). (2) Study by Quantum Market Research, late 2000 (AAP News 2001b). (3) Survey for the International Food Information Council, January 2002.
Consumer Attitudes. The Grocery Manufacturers of America estimate that 60% to 70% of processed food in the American market contains products of genetic engineering, e.g., sweeteners, such as high fructose corn syrup, and oils derived from corn, soybeans, and Canola (Reuters 2001). A national survey sponsored by the Grocery Manufacturers of America (October 2000), shows consumers in the United States are increasingly aware of agricultural technology but they have not changed their food consumption behavior. The survey found that only 10% of consumers worry a great deal that the foods they eat might not be safe. Almost two-thirds had little or no concern.8 Hoban, a nationally recognized expert on public opinions about biotechnology, concluded: “Biotechnology is simply not an issue for the vast majority of U.S. consumers.” (Grocery Manufacturers of America 2000).
Hostility toward GM in French public opinion does not reflect the actions of individuals’ consumption (Stokes 2001). Two-thirds of the French consumers would not be against GM foods if they were labeled (as reported in Stokes 2001). A recent study [Biotechnology Australia (BA)] found for the first time there were more Australians prepared to eat GM foods than those who were not. As people were learning more about GM foods, they were overcoming their initial fears (AAP News 2001a).
The marked differences in consumer preferences across countries have given rise to uncertainties that are reflected in differences in regulatory requirements and in consumer responses to acceptance/rejection of GM foods. Most polls continue to show that Americans generally do not have strong opinions about GM food, but opposition is strong in Europe and increasing in Japan.
8 The survey was designed and analyzed by Thomas Hoban, Professor of Sociology and Food Science, North Carolina State University.
12 Blaine, Kamaldeen, and Powell (2002) summarized numerous surveys on perceptions of biotechnology. Consumers do not reject Genetic Engineering (GE) but objections focus on specific applications of the technology. Consumer support is linked to perceptions of direct consumer benefits. International surveys suggest that Americans have greater support for biotechnology than Canadians and Europeans. In contrast to other risks, concerns for biotechnology are relatively low compared to other food safety issues. Americans have a higher degree of trust in regulatory authorities than Europeans. And, Japanese and European consumers prefer international regulatory agencies and have less trust in national regulatory agencies than Americans or Canadians. When a connection is made between labeling and increased food costs, consumers were generally not willing to pay more for labels (citing Angus Reid Group Inc. 2000). Finally, surveys were found to be generally poor predictors of actual consumer behavior as consumers often say one thing and do another.
Consumer Attitudes on GM Wheat. The American Bakers Association (ABA) sponsored a survey that studied consumer’ preferences of biotech wheat and grain-based foods. The purpose of the survey was to establish a benchmark of U.S. consumer attitudes on GM wheat (WorldGrain.com 2002).9 Three major attitudinal segments were identified from the survey results. These included:
» Loyalists (50%) - Loyal bakery product consumers who say they would keep buying bakery products if they contained GM wheat.
» Potential Switchers (40%) - Consumers who are voicing concern by saying they would switch to non-GM, or buy fewer baked goods if GM wheat was in a product.
» Market Exit (5%) - Consumers who already have or will stop buying wheat-based baked goods.
Following are among the principal findings from the survey: » Consumers are early in the judgement process: Only one in two Americans are familiar with GM food issues in general and just 16% are familiar with GM wheat.
» Acceptance of GM wheat is at the same level as GM corn, tomatoes, and oil, which are already in production, but overall at this early stage, a plurality still say the risks of GM wheat outweigh the benefits.
» The number of ‘potential switchers’ saying they would switch from GM wheat bakery products is identical to GM corn products. In reality, few consumers have switched from GM corn. A wholesale switch from GM wheat is not likely to happen without a trigger event that would draw more attention to the issue, or easy access to an alternative market to ‘exit’ to (e.g., organic or non-GM wheat alternative).
» Acceptance of GM wheat is likely to depend on the extent to which it is differentiated from other more ‘contentious’ GM technologies, particularly animal applications.
9 Directed by Dr. Tom Hoban, North Carolina State University.
13 The higher acceptance by those more familiar with the issue and increasing societal familiarity with genetic sciences suggests that acceptance of GM wheat will increase.
Several studies have addressed consumers’ willingness to buy and pay (for information) in GM wheat.10 One recent study specifically focused on products produced with wheat (VanWechel 2002) indicated that about 7% of the buyers would potentially not buy (i.e., interpreted as a nil bid) products containing GM ingredients. There were numerous demographic and informational bias factors impacting how much buyers would pay for products produced with non-GM ingredients. Buyers would be willing to pay an average premium of 7% more for cookies with non-GM ingredients and 11% more for muffins with non-GM ingredients.
Importer Acceptance and Aversion to GM Wheats. Although GM wheat is not yet available, there is concern about the potential impact it may have on exports. Several of the organizations involved in international wheat marketing have been trying to assess the acceptance of GM wheat to their customers.11 It should be noted that each of these was conducted prior to evidence being available that RRW is substantially equivalent to its non- transgenic parent and to conventional wheat varieties (Obert et al. 2004).
U.S. Wheat Associates: Early in the evolution of discussions about RR wheat, U.S. Wheat Associates published a list of countries that would potentially be averse to the purchase of GM wheats and later conducted a survey of buyers to assess their aversion to GM wheats (Forsythe 2002). This was a survey of customers in key strategic markets to determine their willingness to accept GM wheat (Gillam 2002). Some of the points from that survey are noted below:
» Representatives for Chinese, Korean, and Japanese wheat buyers surveyed said they would not buy or use RRW. Eighty-two percent of buyers from Taiwan and 78% of buyers from South Asia said they would reject the wheat.
» If the country had regulatory approval of the trait, each country with the exception of Japan, indicated they would accept some GM wheat with a tolerance. One country expressed that regardless of government approval, “contracts will stipulate no adventitious presence of GM wheat."
» The majority of the responses indicated there was a future for biotechnology in wheat if there is some consumer benefit that can be marketed.
Canadian Studies: “At risk” countries were identified by Kuntz (2001), citing a Canadian Wheat Board (CWB) source. The 10 countries identified as “at risk” have publicly stated their concerns regarding GM wheat and have indicated the possible termination of imports from the CWRS wheat sector.
10 There have been numerous studies on this topic that have not been specific to wheat products. These include Lusk, Fox, and McIlvain (1999), Lusk et al. (2001a,b), Huffman et al. (2000a,b), and Rousu et al. (2000).
11 These surveys are summarized in Appendix A.
14 USDA FAS Survey: The USDA-FAS (2004a) recently released unpublished results of a survey of its attachés around the world. Some of the findings from that study indicated:
» There had been 12 (out of 99) inquiries about biotech wheat from government officials and 24 by importers and processors; and the issue has been raised in official meetings in 11 countries.
» 17 countries indicated they would not buy biotech wheat; 18 indicated they would insist on IP of non-biotech wheat; and 5 indicated they would not continue to buy other classes of wheat from the United States.
» The responses seemed to be most encouraged about biotech wheat due to it having a marginally lower price.
» 23 countries had concerns about consumer acceptance. Many of the countries had concerns about the “lack of host country approval” and concerns that consumers would not accept the product.
» The focus of concern in some countries was: EU–environmental release, status of regulatory procedure in the United States; France–questioning public acceptance; Japan–food safety and consumer acceptance; South Korea–status of development and approval in the United States; United Kingdom–industry concerns; and the Philippines–ensure compliance with existing regulations governing risk assessment of GM varieties.
Discussion: There are several important points in interpretation of the data about foreign buyer acceptance. First, reviews of survey results (noted in Section 3.1) noted the tendency for consumers to indicate one thing in surveys, but their actual purchase behavior differs. In the case of GM wheats, it is fully expected that buyers would be naturally averse to a trait prior to it gaining regulatory approval, and they may not be fully informed about the functional similarities (substitutable equivalence) and food safety. Second, the regulatory process in many countries is evolving and/or may not have the scientific sophistication of that in the United States. As a result, many countries may adopt the position that if a trait is approved in the exporting country, it would allow its importation (concurrent with a “certificate of free trade”).
Finally, some of the countries that are claimed to be averse to GM content in wheat, are in fact large importers of GM soybeans and corn, at least from the United States. These data indicate that amongst the countries being averse to GM wheat: Japan and Korea are large importers of U.S. corn and soybeans, as are the Philippines, Spain, and Italy. It is not possible to detect whether these countries’ imports are GM or not. However, it is illustrative that these countries have apparently established protocols to facilitate imports of grains and oilseeds from regions in which there is known production of GM grains and oilseeds.12
12 The Japan Starch and Sweeteners Industry Association (JSSIA) used identify preservation to separate GM corn. However, the JSSIA recently informed “Japanese soft drink manufacturers, beer producers and other food companies that, because of costs and logistical considerations, it will no longer supply identify preserved, non- biotech corn to its customers.” (NewsEdge Corporation 2003). This apparently has been in response to the educational efforts of the U.S. Grains Council (2002).
15 A non-aversion assumption of the U.S. domestic market is debatable. Important considerations in this assumption are that: 1) 70% of grocery products sold in the United States contain GM ingredients; 2) results of most surveys (summarized above) suggest that U.S. consumers are more tolerant of products produced with GM ingredients; and 3) in the case of bread, numerous ingredients are from GM grains and/or oilseeds. Further, the U.S. market is dominated by non-branded product consumption of wheat products (i.e., food service, private label, industrial foods) for which aversion would be non-apparent. More likely, there will be vigorous segment competition amongst products produced with organic, non-GM, and GM ingredients.
Approach Used in the Analytical Model. In the analytical model, we derived market size estimates in each country with respect to likely GM aversion. Countries were categorized by market segments that would require different levels of segregation. Segments were defined as No GM Restriction, <5%, <0.9%, and GM Free (interpreted as nil GM). In addition, EU countries would be subject to yet to be determined traceability requirements. The methodology for deriving these market segment shares was based on the following:
» Regulatory approval is gained in each of the major consuming countries/regions including that in the United States, Canada, Japan, and the EU.
» Regulatory approval would be sought in other importing countries that have formal biosafety review processes.
» In the absence of a formal biosafety review/import approval process in a given country, trade will be facilitated with negotiated agreements such as "certificates of free trade,” which exist in various forms.
» Each country is expected to have a market segment evolve which would be promoted as "GM Free." This is thought to be relatively minor given the composition of other GM ingredients. We allocated a 2-5% segment for GM Free in all countries.
» Several countries may develop a small market for less than 0.9% to facilitate trade for global products. Typically this was assigned at 8%-10% of the market.
» Known regulatory thresholds were included, e.g., EU 0.9%, Japan 5%, Chile 2%, Korea 3%, etc.
In comparison to other studies that suggest GM aversion in wheat, the notable difference is that we allow for different market segments in each country. Competitive pressures will evolve in most cases amongst segments such that each country will have multiple product segments. Finally, buyers are allowed to buy from any of the four categories, subject to their assumed segment composition. However, tighter thresholds will accrue greater costs (see Section 3.2). This is in contrast to most of the other studies which suggest complete aversion and/or added segregation costs for the total countries’ market.
The distribution of these shares for each of U.S. and Canadian exports are shown in Table 3.2 and Figures 3.1 through 3.6.
16 Table 3.2. Market Segments for RR Wheat by Acceptance
Percent of Import Market by Likely Tolerance
No GM Comments Country/Region Restriction < 5% < 0.9% GM Free
Bangladesh 98 2
Chile 90 8 2 2% toleramce
China 18 80 2
Colombia 90 8 2
D Republic 90 8 2
Ecuador 90 8 2
Egypt 98 2
European Union 95 5 0.9% tolerance and traceability
Guatemala 90 8 2
Indonesia 90 8 2
Iran 98 2
Iraq 98 2
Israel 95 5 1% tolerance
Japan 95 5 5% tolerance
Jordan 90 8 2
S Korea 95 5 3% tolerance
Malaysia 98 2
Mexico 90 8 2
Nigeria 90 8 2
Peru 90 8 2
Philippines 90 8 2
S Lanka 98 2
Taiwan 49 49 2 5% tolerance
Thailand 95 5 5% tolerance
U.A.E. 90 8 2
United States 90 8 2
Venezuela 90 8 2
Canada 87 10 3
Brazil 95 5 1 % tolerance
Rest of World 90 8 2
17 9.0 8.0 7.0 6.0
>5% GM 5.0 <5% <.9% 4.0 GM Free 3.0 2.0 1.0
HRS Usage (Dom + Exports) (MMT) 0.0 Italy Haiti Malta Israel Spain Benin China Egypt Belize Japan Ghana Gabon Bolivia Mexico Taiwan Nigeria Iceland Cyprus Guyana Norway Vietnam Panama Belgium Jamaica Ecuador Thailand Malaysia Lebanon Suriname Barbados Honduras Indonesia Nicaragua Venezuela Singapore Guatemala Costa Rica Philippines El Salvador Netherlands South Africa South South Korea South Mozambique Saint Vincent United Kingdom Netherlands Antilles Dominican Republic Trinidad and Tobago United Arab Emirates Arab United US (Domestic + Can Imp) Figure 3.1. U.S. Domestic Use and Exports by Segregation.
1.5
1.0
>5% GM <5% <.9% GM Free 0.5
HRS Usage (Dom + Exports) (MMT) 0.0 Italy Haiti Malta Israel Spain Benin China Egypt Belize Japan Ghana Gabon Bolivia Mexico Nigeria Taiwan Cyprus Iceland Guyana Norway Panama Vietnam Belgium Jamaica Ecuador Thailand Lebanon Malaysia Barbados Suriname Honduras Indonesia Nicaragua Venezuela Singapore Guatemala Costa Rica Philippines El Salvador Netherlands Netherlands South Africa South South Korea South Mozambique Saint Vincent United Kingdom Dominican Republic Netherlands Antilles Trinidad and Tobago Trinidad United Arab Emirates Figure 3.2. U.S. Average Exports by Segregation.
18 8.0 7.0
6.0 5.0 No Concern >1 & <5% 4.0 <.9% GM Free 3.0
2.0 1.0
CWRS Usage (Dom + Exports) (MMT) 0.0 US Iran Italy Haiti Peru Chile Brazil Spain Egypt Japan Sudan Kenya Ghana Turkey Jordan Bolivia Poland Nigeria Mexico Cyprus Greece Taiwan Norway Vietnam Belgium Ecuador Thailand Malaysia Morocco Tanzania Colombia Indonesia Venezuela Caribbean Singapore Zimbabwe Cameroon Guatemala Philippines Hong Kong Ivory Coast Bangladesh South Africa South Korea Mozambique New Zealand United Kingdom Canada (Domestic) Dominican Republic Figure 3.3. Canadian Domestic Use and Exports by Segregation.
1.4
1.2
1.0
0.8 No Concern >1 & <5% <.9% 0.6 GM Free
0.4
0.2
CWRS Usage (Dom + Exports) (MMT) 0.0 US Iran Italy Haiti Peru Chile Brazil Spain Egypt Japan Sudan Kenya Ghana Turkey Jordan Bolivia Poland Cyprus Mexico Nigeria Greece Taiwan Norway Vietnam Belgium Ecuador Thailand Malaysia Morocco Tanzania Colombia Indonesia Venezuela Caribbean Singapore Zimbabwe Cameroon Guatemala Philippines Hong Kong Ivory Coast Bangladesh South Africa South Korea Mozambique New Zealand United Kingdom Dominican Republic Figure 3.4. Canadian Exports by Segregation.
19 3.0
2.5
2.0
No Concern >1 & <5% 1.5 <.9% GM Free 1.0
0.5 NAM HRS+CWRS Usage (MMT) 0.0 Iran Italy Haiti Peru Chile Malta Israel Benin Brazil Spain Egypt China Japan Belize Kenya Ghana Sudan Gabon Poland Turkey Jordan Bolivia Cyprus Iceland Greece Mexico Nigeria Taiwan Guyana Norway Panama Vietnam Jamaica Belgium Thailand Ecuador Lebanon Malaysia Morocco Tanzania Suriname Barbados Colombia Honduras Indonesia Nicaragua Zimbabwe Singapore Cameroon Caribbean Venezuela Guatemala Costa Rica Costa Hong Kong Philippines Ivory Coast Ivory El Salvador Bangladesh South Africa Netherlands South Korea New Zealand New Mozambique Saint Vincent United Kingdom Netherlands Antilles Dominican Republic Trinidad and Tobago United Arab Emirates Arab United Figure 3.5. North American Exports by Segregation.
10000% 56% 90% 9000%
8000%
7000%
6000% >5% GM <5% 5000% <.9% GM Free 4000% 24%
3000%
2000% 17% NAM HRS + CWRS Exports 01-02 1000% 8% 0% 3% 2% Export Domestic Figure 3.6. Distribution of North American Market Segments.
20 The approach used in this analysis recognizes that market segments will emerge in each market with respect to GM aversion. While recognizing that market acceptance is somewhat speculative there are two important related observations.
Resale Prices into the EU and Japan: Both Japan and the EU have import price regimes that will be challenged by the introduction of biotech wheat. These countries administer a pricing mechanism such that the resale price of imported wheat to processors differs from the import price. For imports to the EU, a variable import levy regime operates resulting in a wedge between imported prices and EU prices. The reference price for imported wheat is the price of HRS, without reference to particular specifications for individual purchases. Thus, if a buyer specifies a tighter specification resulting in a greater price, it does not impact the import levy and that marginal cost is accrued by the buyer. It is not clear how or if this will be adjusted with the prospective introduction of GM wheat and the likely sharp difference between current reference prices and specifications to conform to EU traceability and labeling requirements. Further, if a particular buyer has a tighter specification than contained in the reference price and/or than other buyers in the EU, it is not clear how the import levy will be adjusted.
In Japan, the Ministry of Agriculture (MAFF) determines a government purchase and resale price to govern wheat resale prices into the domestic market. The resale prices to millers are greater than the world market prices, and they use these proceeds to support domestic agricultural programs. These are based on the average FOB price of imported wheat (usually determined in December, using a simple average of the FOB price for different classes from different sources over the preceding 6-7 months), exchange rates, and handing and shipping costs. Actual purchase prices can and do vary with respect to timing of individual purchases and specifications. The difference between import and domestic resale prices is used to subsidize domestic production. It is unclear how this mechanism would be impacted with the introduction of RRW. Most important is whether and how the import reference price makes a distinction for a GM specification relative to the average price and, particularly, if purchases are made at tighter limits than the regulatory tolerance.
These have two interesting implications. If prices decline as a result of the introduction of GM wheat, the mechanisms and resale prices in some countries are such that consumers would not realize the impact. This is a crucial distinction between these countries and many of the other countries. The other is that there will no doubt be price differentials between biotech and non-biotech wheat in all markets, approximately equal to the difference in production and marketing costs. As such, it is not apparent as to how these countries will, if at all, adjust their reference price for international purchases. However this is reconciled, it can have an impact on purchase regimes and on inter-firm competition.
21 3.2. Segregation Costs
One of the challenges to the commercialization of GM grains is creating institutional and contractual mechanisms to facilitate a dual marketing system. This section provides a summary of previous studies on IP, a description of testing technologies, and summarizes results from a recent study on testing and segregation costs and risks for GM wheats.13
Market Mechanisms, Testing, and Tolerances. There is a spectrum of alternative procurement strategies that can be adopted with the introduction of GM crops. Ultimately, it is buyers that will determine the elements of their procurement strategy. These can range from spot transactions simply on grade and non-grade factors, to full integration into grain production and/or handling. Intermediate solutions contain varying forms of testing, contracting, and IP.
Identity Preservation, Traceability, and Segregation: Definition of what constitutes an IP system vary. Dye (2000) defined it as a “traceable chain of custody that begins with the farmer's choice of seed and continues through the shipping and handling system.” Wilcke (1999) refers to IP as separate storage, handling, and documentation of separation. Sonka, Schroeder, and Cunningham (2000) define it as a coordinated transportation and identification system to transfer product and information that makes products more valuable; and Buckwell, Brookes, and Bradley (1998) and Lin, Chambers, and Harwood (2000) refer to it as a 'closed loop' channel that facilitates the production and delivery of an assured quality by allowing traceability of a commodity from the germ plasm or breeding stock to the processed product on a retail shelf. 14
However, there is a distinct difference between testing and segregation as a strategy, in contrast to IP and traceability. Segregation is the isolation of like products with particular attributes. Unlike IP, the identity of the grain is not preserved. Segregation is common in many grains, particularly in HRS and CWRS and is evolving in response to the dichotomy in international market acceptance of GM crops. Segregation has been a long-standing practice in other differentiated grains including wheat (which is segregated by numerous traits including protein, test weight, grade factors, falling numbers, vomitoxin, dockage, and more recently in selected functional traits), and malting barley (segregated by grade factors, germination, variety, vomitoxin, etc.).
Tolerances are a component of country and commercial strategies. Technically, a tolerance is defined as the allowable variability from a standard. In the context of the grain trade, a tolerance for Non-GM is normally referred to as the maximum allowable GM content to still be considered Non-GM. Ultimately, it would be the buyer that would specify the tolerance and testing methodology as part of their purchase contract. If the tolerance is violated, the
13 This section was largely adopted from Wilson and Dahl 2001, and forthcoming 2005, and Wilson, Janzen, and Dahl 2003.
14 Several firms have initiated IP programs where sales/segregation are by specific variety/location. The Minnesota Crop Improvement Association (MCIA) operates IP programs for 99.5% Non-GMO soybean grain and seed, 99.0% Non-GMO corn grain and seed, and an IP grain handler’s facility program. The Canadian Soybean Export Association initiated a standard that outlines identity preservation procedures for food grade soybean exports (Strayer 2002). Other examples of IP systems include: CWB-Warburtons, Pro-Mar Select Wheat of Idaho, AWWPA, etc.
22 shipment would be either rejected or, in some cases, some type of labeling would be required. In the United States, this will come from the Food and Drug Administration (FDA) guidelines. In the European Union, tolerances have been adopted for labeling as GMO (Commission of the European Communities 2003a,b). These include tolerances of 0.9% for adventitious presence of approved GMOs, 0.5% for unapproved GMOs which have been assessed by the EU Scientific Committees as not posing any danger to the environment and health, and 0% tolerance for “unknown” GMOs. For Japan, a 5% tolerance is required if the trait is approved. Beyond these will be commercial tolerances for individual marketing and processing companies that will ultimately govern the relations between buyers and sellers.
Varying concepts of traceability have been used in countries within the EU for several years, primarily as an informational process and to govern inter-firm transactions. In September 2003, the EU formally adopted traceability requirements on GMO Food and Feed products (Ferriere 2003; Bertheau 2003) to govern both intra-EU trade as well as imports. The proposal requires development of a traceability system to transmit and retain five years of information on GMOs or GM products (both food and feed). Details for the systems are being developed with a target date of April 2004. Issues related to traceability requirements include costs and limitations on trade and marketing, risks for buyers and sellers, and determination of seller strategies to conform to these requirements (Commission of the European Communities 2003a, b).
Traceability is a form of procurement requirement (if invoked due to a regulation) or a strategy that individual firms may use as part of the purchasing program. In either case, these have important implications for integration, contracts, costs, and risks for buyers and sellers (Golan et al. 2004). Traceability will indeed have major implications for the world grain trade. To support this, the AC21 (the USDA Advisory Committee on Biotechnology and 21st Century Agriculture) identified “traceability” as an immediate issue with long-term implications. Imposition of traceability will confront the grain trading industry with new risks. Further, the traceability requirements may require a change in contracting practices (which for the United States has traditionally been based on “certificate final” from the USDA-Federal Grain Inspection Service and otherwise “as is” for marketers of grains.
Economics of Testing: There are two basic tests that could be used for analyzing for the presence of RRW, commonly referred to as strip tests and PCR tests. The PCR test is based on DNA technology and is more commonly used in international contracts. Tests would be applied at different points in the marketing system and, depending on the size of the unit, would convert to about 0.20c to 3.6 c/bu.
The grain marketing industry will have to develop testing strategies, encompassing the cumulative activities including sampling, physical testing, and reporting of results. Tests increase the cost of handling GM and Non-GM grains. Costs escalate as the number of tests and locations within the marketing system at which they are applied increase. Increased testing reduces the potential for delivery of lots of undesirable quality to buyers.
Testing is complicated by the inherent risks of adventitious commingling that may occur at different locations and functions in the marketing system. Given that testing has a cost and is subject to error and can be conducted at several places within the marketing system, it is an
23 economic problem involving costs and risks. Risks are defined as buyers receiving a product that should be rejected and sellers having a product rejected that should have been accepted. There is a tradeoff between risks and costs. Tighter tolerances result in increased costs and decreased risks.15
Wilson and Dahl (2002, forthcoming 2005) developed a model to analyze the potential costs and risks associated with a marketing system based on testing and segregation. The model derives additional system costs at each stage of the marketing chain, tracks segregation flows throughout the system, and derives statistical properties on the proportion of lots with GM exceeding specifications within end-use flows. This system could be envisioned as being adopted with several different scopes. It could reflect an elevator that seeks to segregate within their own facilities, or it could be elevators specialized in handling GM versus Non-GM. Or, it could be a vertically integrated firm with some elevators specializing in GM versus Non-GM handling. Each type of adoption has occurred in the marketing of other GM grains.
The base case was defined to reflect the most likely system and protocols. The results identify the optimal testing strategies of a GM/Non-GM system versus the existing Non-GM system. The optimal strategy would be to test every fifth railcar at the country elevator when loading and to test every ship sublot when loading at the export elevator. This testing strategy results in average rejection rates at the importer of 1.75%. An average of .02% of importer flows had GM content greater than tolerances which represents the buyers’ risk of accepting quality that does not meet tolerances. The cost of the system was 2.4 c/bu when measured across all bushels and 3.4 c/bu when attributed solely to non-GM bushels. These include additional costs of testing and rejection and a risk premium to the shipper due to the added risk of handling non-GM in a dual marketing system. The model was used to analyze varying other scenarios that are important in GM wheat.
A second study (Wilson, Jabs, and Dahl 2003) allowed for determination of the choice of appropriate tolerance for tests at locations and also included a quality loss function to incorporate economic costs due to deviations from quality specifications for GM content in Non- GM flows. Costs of segregation were higher for the Wilson, Jabs, and Dahl (2003) study than for the Wilson and Dahl (2001) study due largely to the incorporation of quality loss costs and due to different calculation of adventitious commingling (Table 3.3).
Testing and segregation strategies and costs depend on numerous factors. One of these is the rate of adoption of GM in a region. If adoption is low, testing and other associated costs would be less than if adoption rates are larger. Using the Wilson, Jabs, and Dahl (2003) model above, they illustrated that costs increase by $5/mt with increases in adoption rates from 10% to 25% (assuming the model including Taguchi effects).
15 The North American Millers Association (NAMA) has embraced testing of inbound grain, and opposes testing on intermediate or finished products ...... and that government mandated testing programs need not be adopted. Further, NAMA has conducted their own analysis in the case of Starlink corn. Results from that indicated that the domestic industry quickly adopted contract terms and tests to control the adventitious presence of Starlink. They indicated that the samples testing positive for Starlink averaged 1.2% from October 2000 to June 2001. By fall 2001, this declined to “as close to zero as you can get” (Sjerven 2001).
24 Table 3.3. Segregation Costs Wilson, Jabs, and Dahl 2003 Limit on GM Wilson and Dahl Incl Taguchi effects Excl Taguchi effects ------$/mt------
<5% 0.53 2.65 0.83
<4% 3.86 1.01 <3% 2.46 0.97 <2% 4.85 1.50
<0.9% 1.23 5.81 2.37 *Source: Wilson and Dahl (2005), and Wilson, Jabs, and Dahl (2003) and assumes 20% GM adoption.
These studies identified several important implications. A system based on testing and segregation can very efficiently assure buyers of GM content at a low cost. While nil tolerance cannot be achieved through a system based on testing, the GM content can reasonably be assured at the 1% level. The cost of a system based on optimal testing and segregation inclusive of a risk premium is much less than most systems that have been proposed on IP and other means to control GM content. Many factors will affect the elements of an optimal testing system, costs, and risks. Most important amongst these include price discounts/costs for being out of contract and GM declaration at delivery. Strict interpretation of the risk premium would indicate that this is the premium required for grain handlers to be indifferent between a dual system of Non-GM and GM or the existing Non-GM system. In order for Non-GM to gain a premium, sellers will have to provide proof that it is in fact Non-GM, buyers must be willing to pay this cost and, eventually through competition, price differentials will emerge to approximately reflect these costs.
There have been few studies on the costs and feasibility of segregating GM grains in Canada. This is despite the fact that there has been a growth in the number of segregaions marketed in Canadian grain handling and that marketing of GM and non-GM soybeans are facilitated by the Canadian Grain Commission.16, 17 One study analyzed the costs of different segregation strategies in Canada (Gosnel 2001). Different scenarios included marketing GM through a separate terminal, multiple designated terminals, and segregation within terminals. The results varied substantially depending on scenarios and assumptions. Costs varied widely
16 Specifically, soybeans are being tested for food grade markets. Since GM content is not a quality parameter in Canadian soybeans, these tests are not mandatory. Instead, these are performed as requested by buyers and traders. In some cases ELISA tests are used. Strip tests are also used on behalf of buyers to assist in segregation of GM vs Non-GM soybeans.
17 In addition, several studies have been conducted on the costs of testing for variety content (Furtan, Burden, and Scott 2003; Oleson 2003).
25 depending on costs included. The lowest cost was for segregation within and was in the area of $1.87 to $2.95/mt.
Identity Preservation and Traceability Costs: As noted above, there is a wide range of cost estimates of prospective IP systems. There are numerous reasons including the definition of IP and requirements, methods, amongst others. There are estimates of markets requiring nil (0) GM content. Lin, Chambers, and Harwood (2000) estimated such a system at 22 c/bu for corn and 54 c/bu soybeans. Components of these costs include premiums for the underlying commodity and other costs associated with IP marketing. One study of Canadian IP costs (Smyth and Phillips 2002) included on-farm costs, freight costs, and other implicit costs. Taken together these estimates range from $33 to 41 c/mt, which translates to 59 to 64 US c/bu.
The EU purpose (European Union 2004) of establishing traceability requirements for GM products is a “strategy to re-establish consumer confidence in the EU beef sector following the environmental and health effects of GMOs and to enable choice to those consumers who want to avoid GMO consumption” (p. 9). Traceability is thought to be a compulsory IP system and that “it is necessary to ensure traceability at all stages of the placing on the market of GMOs.”
Though traceability requirements and protocols are going to be of importance in the future, there are no such estimates of the likely costs of these requirements.18 They should be comparable to the above costs of testing and segregation, in addition to costs associated with on- farm buffer requirements and storage, auditing, paper trails, and prospective liability.
Approach Used in the Analytical Model. In the analytical model, we allow GM averse importers to buy non-GM at higher costs associated with the required tolerances for each segment. We ascribe a cost of segregation for each of the four segregations. Those used in the base case are shown in Figure 3.2.1, along with those from other studies (referenced above). The costs of testing and segregation escalate as the tolerance increases. Those for nil GM and requiring traceability are somewhat elusive and were approximated from the results in Lin, Chambers, and Hardwood (2000). Few studies have estimated traceability costs which are truly elusive. For these reasons, we simply assumed they equal the nil GM costs, as an approximation. However, these are comparable to another study by Wilson, Henry, and Dahl (2005a,b) who extended the Wilson and Dahl model to include traceability that would conform to EU requirements.
This approach differs sharply from those of other studies' assumptions of several aggregate level analyses (Furtan, Gray, and Holzman 2002; Furtan, Burden, and Scott 2003; Wisner 2003). This is despite that segregation of other characteristics is routine in these small grains.
18 Preliminarily, the additional costs for traceability would likely include: on-farm costs related to seed contamination, volunteers and cross-pollination, mechanical mixing, record keeping, and price risks. Off-farm costs would include those for testing and separate storage and handling (Dale as reported by the European Union 2004). Estimates of these have been made for corn and soybeans and reported by the EU, but not for wheat.
26 25 Wilson and Dahl Model Assumption Wilson, Jabs and Dahl 20
15
10
Segregation Costs ($/MT) 5
0 No Tol <4% <2% Traceability <5% <3% <.9% 0% Tolerance Figure 3.2.1. Costs of Segregation for Prior Studies and Model Assumptions.
3.3. Dockage Removal Costs 19
One of the important problems in the wheat marketing system over the past decade is that of dockage content. Dockage includes weed seeds and due to weed infestation is a major problem in marketing HRS wheat. In the United States, dockage is a non-grade determining factor and ends up being a contract term. Normally, growers are discounted or their weight is adjusted for dockage content upon delivery. Importers vary with respect to the specifications (Figure 3.3.1). Some treat all dockage as a deductible, others apply a discount, others do both, and still others may not have any limit at all. Over time, this has resulted in dockage generally being cleaned at the country elevator prior to export and, in some cases, again at the export elevator to meet more refined specifications.
The system differs in Canada. All growers are deducted a cleaning fee upon delivery, irrespective if the wheat is cleaned or not, and irrespective of their dockage content. Traditionally, shippers cleaned wheat using high-capacity cleaners at the export elevator. In recent years, with the growth in larger high-capacity interior elevators and the increase in shipping costs and feeding on the prairies, there has been a shift in cleaning to the prairie elevators for at least a portion of the shipments.
19 Discussions contained in this section are taken from earlier discussions reported in Johnson and Wilson (1993, 1995), Prairie Horizons, Ltd. and JRG Consulting Group (1998), and Wilson, Johnson, and Dahl (2000). Cost estimates are derived from the models reported in Wilson and Dahl (2001).
27 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 Avg Dockage (98/99-02/03) 0.00 EU Iraq UAE Peru Chile ROW Israel China Egypt Japan Jordan Taiwan Mexico Nigeria Ecuador Thailand Malaysia Sri Lanka Colombia Indonesia Nicaragua Venezuela Korea Rep Guatemala Philippines Bangladesh Dominican Rep Figure 3.3.1. Average Dockage Levels in U.S. HRS Imports by Country
Dockage removal costs were estimated using an economic engineering model of cleaning costs. The model utilized functional relationships between initial dockage levels, cleaning capacity, working capacity, grain loss, and annual hours of operation to calculate average costs of cleaning. Results are summarized in Figures 3.3.2 and 3.3.3 for the U.S. and Canadian elevators, respectively. As illustrated, with reduced levels of dockage, the cost of removing dockage to a prescribed level is shown. These values are approximately corroborated in the recent survey of growers about the value of RRW (Kalaitzandonakes, Suntornpithug, and Phillips 2004). Growers reported that the value to them of reduced dockage content would be about $1.58/ac, which translates (at 36.8 bu/a) to about 4.2 c/bu.
RRW has the impact of reducing weed infestation. Since a significant component of dockage content is weed seeds, the incidence of dockage will be impacted by the introduction of RRW. The composition of dockage is prospectively highly variable with respect to year, climatic, agronomic, and harvesting practices. The dockage level is affected by input intensity (application of herbicides in particular) which affects weeds. In addition, dockage levels are impacted by harvesting practices (combine settings by farmers) and numerous other factors.
28 0.1 Ending 0.09 Dockage 0.08 1 0.07 0.7 0.4 0.06 0.1
Cleaning Cost $/bu 0.05
0.04
0.03 0123456 Initial Dockage Figure 3.3.2. Cleaning Costs and Initial/Ending Dockage Content: U.S.
0.035 Ending 0.03 Dockage
0.025 1 0.7 0.4 0.02 0.1 Cleaning Cost $/bu 0.015
0.01 0123456 Initial Dockage Figure 3.3.3. Cleaning Costs and Initial/Ending Dockage Content: Canada.
29 There is little common knowledge of the composition of dockage. To put perspective on this issue, we conducted a survey of knowledgeable individuals in the grain trade. These included elevator managers, managers of quality control labs in the HRS and durum region, and market development associations. Each was asked the opinion of the composition of inbound dockage. Results were clear and revealing. The largest component of dockage is “weed seed” and the average across respondents indicated about 62% (ranging from 30% in durum to 75% and 80%). The other components are individually small including dirt/dust, wheat parts, chaff, buckwheat, wild oats, and S&B. However, each of these individually is less than 10% of the total. These results should be qualified. This would be the maximum reduction in dockage, assuming 100% weed control which is not likely. These data are corroborated from field trials of RRW versus competing technologies (Pilacinski et al. 2003).
Approach Used in the Analytical Model. We approximated the cost savings associated in terms of reduced inbound dockage. The base values used are summarized in Table 3.3.1. The implicit assumption is that RRW, though it has reduced dockage, still requires cleaning. Consequently, the cost savings are not as great as if the cleaning function could be eliminated.
Table 3.3.1. Costs of Dockage Removal Prior to Export/Shipping Cost of Cleaning Cost of Cleaning Avg. Dockage w/o RRW RRW Change Region % c/bu c/bu c/bu North Dakota 2.31 6.5 5.1 -1.4 Other HRS 1.64 5.9 4.9 -1.0 Kansas 0.71 5.2 5.2 0.0 Canada 2.00 2.0 1.5 -0.5 Source: Derived from models reported in Wilson and Dahl (2001) for the United States; Prairie Horizons, Ltd. and JRG Consulting Group (1998) for Canada. Costs of Cleaning in U.S. = 0.0473*e(0.135*X) where X is initial dockage level and e is natural logarithm.
3.4. Yield Increases
There have only been a few published studies on the extent that RRW increases yield relative to competing technologies. Few of the other welfare studies have used yield changes.
Results of several of these studies illustrate the extent that yields increase with RRW (Table 3.4.1). Monsanto indicated yield increases in the 11% to 14% range. The most recent study (Kidnie et al. 2003) indicated yield increased in the range of 9% to 16% compared to competing treatments, varying by weed type and location. Blackshaw and Harker (2002) showed slightly less. These no doubt vary with respect to weed infestation, crop rotations, and region. In the Monsanto U.S. data set, weed pressure was light to moderate and yield increases averaged 5%. In the Monsanto Canada data, pressure was moderate to heavy and yield increases
30 were around 9% to 10%. The AAFC (Blackshaw and Harker 2002) trial had moderate pressure and yield increases were about 10%. One trial from NDSU had very high pressure and yield was up 40%.
Assumption in the Empirical Model. The range of estimates of yield increases ranges from 5% to 15% and 8% to 17%. In the empirical model, we used 10% increase as representative of these published studies.
Table 3.4.1. Yield Impacts of RRW: RRW vs. Leading Competitive Treatment Study N Yield b/ac Yield % Range % Comments Kidnie et al., 2003 9.7% to Most recent public 16.5% for study based on 3rd perenniels; party field trials from and 8.9% to 2000-2002 14.1% for annuals State Universities 23 +2.77 +5.36 1.85-7.84 Light to moderate (1) annual weed infestations, 7 of 23 trials done at state universities Monsanto field 20 +3.10 +8.87 3.03-15 Moderate to heavy scientists: Canada annual weed (2) infestations Monsanto field 9 +2.72 +9.70 7.99-11.42 Perennial weeds like scientists: U.S. (3) Canada thistle NDSU (4) 1 +11.0 +40.74 Moderate to very heavy annual weeds and Canada thistle (NDSU) Agriculture and 3 +6.36 +9.54 5.05-16.67 Annual and perennial Agrifood Canada (5) weeds
Notes, by study: (1) 23 side-by-side field trials from 1999-2002 in ND, SD, ID, WA, and MT. 30% of trials done by scientists at state universities; (2) 20 side-by-side field trials from 2000-2002 across MB, SK, and AB; (3) 9 side- by-side field trials from 2001-2002 across MB, SK, and AB; (4) 1 side-by-side trial by Drs. Howatt, Roach, and Davidson-Harrington and NDSU (2000 North Dakota Weed Control Research Wheat Research Projects, Department of Plant Sciences, North Dakota State University, Fargo, ND, 58105; (5) 3 side-by-side trials by Drs. Blackshaw and Harker, Agriculture and Agrifood Canada in 2000 and 2001. Blackshaw and Harker (2002) "Selective Weed Control with Glyphosate in Glyphosate-Resistant Wheat (Triticum aestivum)." Weed Technology 16:885-892.
31 3.5. Adopter Cost Savings (Change in Costs and Limits on GM Adopted Acres)
One of the sources of cost savings is due to the combination of a number of on-farm cost savings. Previous studies of GM wheat have not allowed such cost savings. Other studies have found substantial cost savings to growers of other crops.20 As example, for Bt corn, the estimate of the value to growers was $23/ac in addition to $15/ac in management advantages. Sources of these savings are in part due to convenience and savings in handling and labor, safety, equipment, and reduced yield risk.
In a companion study, surveys were conducted of HRS growers in the United States and CWRS growers in Canada (Kalaitzandonakes, Suntornpithug, and Phillips 2004). A summary of those results are contained in Table 3.5.1.21 Some of the results of interest and importance are highlighted. The maximum adoption rate varies both geographically and internationally. GM adoption in Canada is far less in Canada than in contiguous states. Further, the expected adoption rate would be greater in Idaho and Washington, even though these are smaller HRS producing states. The prospective cost savings and benefits of RRW also vary somewhat geographically. The value of RRW is reportedly greater in Idaho and Washington (although there were only a few responses from those states). Valuations are otherwise similar across states with the exception of Minnesota (likely due to those growers already benefitting from RR in other crops). Amongst individual factors, those of greatest importance were typically the value of yield increase and reduced dockage content. Amongst individual cost factors those of greatest importance were typically those related to labor, reduced tillage costs, management, and peace of mind.
These are the average of the responses of likely adopters, by region. The results suggest on-farm cost savings (excluding the value of yield increase and reduced dockage) in the area of $8 to $10/ac for the major producing states in the United States and $9 to $10/ac in Canada for those growers likely to adopt RRW. These contrast from other studies. Monsanto has indicated an increase in net income in the area of about $15 to $20/ac. Taylor, DeVuyst, and Koo (2003) assumed $2/ac. Holzman (2001) indicated $3 to $14/ac for conventional tillage and $-2to $-7/ac for zero-tillage. These were included in our welfare analysis as a source of cost savings for adopters of RRW. Neither Furtan, Gray, and Holzman (2002) nor Wisner (2003) allowed for on- farm cost savings.
20 See Alston et al. 2002 as summarized in Runge and Ryan, 2003.
21 Actual survey results were used in these calculations. The maximum adoption rates is reported for year 3 after commercialization and at a stated technology fee of $6/acre. The reported value is the average percentage of acres amongst those that indicated they would adopt. The reported costs are the averages by states amongst those indicating they would adopt. The individual factors reported here are adjusted as a proportion of the total reported cost savings (since growers tend to over state the value of individual factors relative to the total value). Finally, the value used in the welfare model (described later) is the total excluding the value of yield increase and reduced dockage which are dealt with separately in that model.
32 Table 3.5.1. Sources of Cost/Values Due to RRW (Averages)
Factor U.S. Adoptersa Canadian Adoptersa
ID MN MT ND SD WA AB SK MB
Max % to RRW Year 3 83 30 49 53 47 60 32 28 20
Direct and Indirect Sources of Cost and Convenience
Labor 1.58 0.56 1.46 1.63 1.30 3.90 1.26 2.59 1.29
Management 0.82 0.96 1.13 1.10 1.25 0.85 0.89 0.76 0.98
Peace of Mind 2.07 1.26 1.13 1.27 1.82 3.11 1.44 2.16 1.19
Reduced Dockage 0.54 0.70 0.68 0.43 0.88 0.52 0.27 0.58 0.95
Yield Increase 1.93 4.40 1.68 1.92 2.52 2.04 1.69 2.27 2.04
No Rotation Restrictions 0.91 0.33 1.27 0.79 1.42 0.72 0.99 0.66 1.12
Improved Fallow 4.22 0.41 1.75 1.11 2.26 5.13 0.63 0.00 2.18
Reduced Tillage 1.81 1.73 1.42 1.62 1.66 2.34 1.33 2.31 1.14
Human Safety 0.07 0.19 0.70 0.38 0.77 0.70 0.91 0.47 0.40
Environmental Safety 0.31 0.26 0.58 0.40 0.73 0.84 1.35 1.45 0.63
Total Reported Cost Savings 14.24 10.80 11.80 10.64 14.60 20.15 10.75 13.25 11.93
Total Adopter Savings in Modelb 11.79 5.70 9.44 8.30 11.21 17.59 8.79 10.40 8.93 Source: Kalaitzandonakes, 2004. a Defined as those growers whose response about adoption of RRW were: definitely would; probably would; might or might not, i.e., excluding those indicating probably would not and definitely would not. b The total excluded impacts of yield and dockage because they were evaluated directly within the partial equilibrium model.
3.6. Non-Adopter Cost Savings
A source of cost savings attributable to the introduction of a new technology is what is referred to as non-adopter cost savings. When a biotechnology trait is introduced, its introduction has the impact of lowering prices of competing technology inputs. This has been observed in other sectors and should impact the wheat sector.
One study (Gianessi and Carpenter 2000, as reported in Lemarie and Marette 2003) found that prices of two leading soybean herbicides decreased 40% between 1995 and 1997, following introduction of RR soybeans in 1996 (p. 288). Lamarie and Marette (2003) developed and applied a theoretical model that estimated effects of biotech adoption on chemical prices for non-adopters. Their results indicated declines in alternative herbicide costs of 38% to 58% (cases 5-6 as reported on pp. 298-300). The extent of price reduction for non-adopters depends
33 on the structure of competition for sales of the herbicide tolerant chemical. With competition for sales of the herbicide chemical in adoption to the HT seed company, price declines for alternative herbicide costs were larger (58% decrease). Finally, the post-RR introduction of soybeans had the impact of reducing prices for alternative herbicides by 32% (Qaim and Traxler 2005).
To illustrate this impact, we collected prices for selected competing herbicides used on soybeans over the period 1996-2003 (Zollinger 2003) (Figure 3.6.1). Results illustrate and confirm the suggestion made that post introduction of a GM trait has the impact of reducing costs of competing technologies.
We derived the impacts of prospective reductions in competing technology costs for HRS growers that would be non-adopters22 using conventional and typical chemical applications. Chemical practices of growers in North Dakota for wheat in 2000 were obtained from Glogoza et al. (2002) which indicated chemicals utilized and percent of acres applied for North Dakota. Prices for chemicals for 2003 were obtained from Zollinger (2003). Prices for 2003 were applied to chemicals utilized in 2000 weighted by percent of acres applied to derive a weighted average chemical cost for North Dakota wheat growers. To arrive at a cost for non-adopters, prices for grass herbicides (excluding Roundup®) were decreased by 40% from 2003 prices to reflect increased competition from Roundup® after introduction of RR wheat. This rate of decrease is similar to what was found for alternative chemicals for soybeans after introduction of RR soybeans. This decrease for grass herbicide costs resulted in a lowering of average chemical costs for non-adopters of 2.28/a (8.53/a to 6.25/a) (Table 3.6.1). These results are very comparable to a recent study by Huso and Wilson (2005) that developed an equilibrium model of competing inputs to determine the impact of introducing a GM trait, in this case RRW, on incumbent technologies.
22 Similar information does not exist in Canada. Some information exists on costs for 2003 for Saskatchewan and Manitoba. However, we do not have data on herbicide use. The only comparable information we have for Canada is the cost category results from a survey by Monsanto which gives percent of users with costs for herbicides within a range. Cost data were similar to the United States for chemicals for which we were able to match to North Dakota counterparts. After exchange rate conversion, Canada costs were only slightly higher (North Dakota was 0.95% of Saskatchewan costs for selected chemicals).
34 18
16
14 Poast
12 Pursuit Roundup 10 Prowl
$/A (Medium Rate) 8
6
4 1996 1997 1998 1999 2000 2001 2002 2003 Source: NDSU Weed Control Guide (Various Issues) Figure 3.6.1. Cost/A (Medium Rate) for ND Soybean Chemicals, 1996-2003.
3.7. Supply Function Shifts in HRS Producing Regions
Major changes have impacted production choices since the mid-1990s. These include the introduction of GM row crops in traditional small grains production regions, notably soybeans, corn, and canola. In addition are changes in farm policies in the United States and transportation policies in Canada. Taken together these have had an important impact on the supply of HRS wheat in traditional producing regions.
Trends in acres planted to these crops are shown in Figures 3.7.1 and 3.7.2. To evaluate these impacts, supply functions which are used in the welfare model were respecified to account for this structural change in supply relations. These are the supply functions used in the welfare model and reported in Taylor, DeVuyst, and Koo (2003). To evaluate shifts in supply, binary variables were introduced for the period following 1996. These illustrate the structural shifts that occurred after the mid-1990s (Figure 3.7.3). In all states the shift is significant and, in all except Montana, the shift resulted in a reduced planted area for a given price level. For example, these results illustrate that in North Dakota, to induce the same level of acres planted following 1996, prices have to increase by 25 to 50 c/bu. Necessary price increases are even greater in Minnesota, South Dakota, and Canada.
These shifts are due to the cumulative impacts of several important factors that occurred during the mid-1990s. One of these is the introduction of competing crops in each region. Those of importance in North Dakota, South Dakota, and Minnesota are no doubt soybeans and corn. In Canada, these would be impacted by canola, as well as potentially for specialty crops. In addition, there have been changes in farm policies in the United States which allow for
35 greater planting flexibility and for changes in the shipping costs regime in Canada (which was applied similarly across all grains and oilseeds).
It is not possible in this framework to credibly determine the extent of the shift resulting from each of these effects. However, the results are important and persist. Irrespective, the impact on supply is important, is persistent, and impacts the longer-term relative prices of producing HRS in these regions versus competing crops.
Table 3.6.1. Estimated Average Costs for ND Herbicide: Before and After RR Wheat Adoption Percent of Cost 2003 Weighted Weighted Target Acres Low Cost Cost Weed Applied Recom. Prior to RR After RR Herbicide Type 2000 Rate Wheat Wheat* % $/a --weighted cost $/a-- 2, 4D BL 47.0 0.81 0.38 0.38 Bromoxynil BL 0.9 4.63 0.04 0.04 Bromoxynil+MCPA BL 12.4 5.50 0.68 0.68 Clodinafop GR 0.6 12.00 0.07 0.03 Clopyralid BL 0.2 15.00 0.03 0.03 Clopyralid + 2, 4D BL 2.2 9.25 0.20 0.20 Clopyralid + MCPA BL 0.4 9.41 0.04 0.04 Dicamba BL 20.7 10.25 2.12 2.12 Difenzoquat GR 0.3 10.00 0.03 0.01 Fenoxaprop + 2,4D + MCPA GR 1.8 6.31 0.11 0.05 Fenoxaprop + MCPA GR 1.9 5.50 0.10 0.04 Fenoxaprop + MCPA + Thifensulfuron + Tribenuron GR 4.1 17.00 0.70 0.28 Fenoxaprop-P + Safener GR 23.9 7.01 1.68 0.67 Fenoxaprop-P-ethyl+MCPA+ GR 0.2 0.00 0.00 Isooctylester+Thifensulfuron Fluroxypyr BL 2.2 5.31 0.12 0.12 Fluroxypyr + 2,4D ester BL 0.3 7.65 0.02 0.02 Glyphosate FS 4.2 8.75 0.37 0.37 Imazametabenz GR 1.8 10.63 0.19 0.08 MCPA BL 16.7 1.03 0.17 0.17 Metsulfuron BL 0.8 2.20 0.02 0.02 Metsulfuron + Chlorsulfuron BL 0.2 2.70 0.01 0.01 Picloram BL 0.2 10.65 0.02 0.02 Quizalofop-P GR 0.1 8.15 0.01 0.00 Sethoxydim GR 0.1 8.15 0.01 0.00 Thifensulfuron BL 2.4 3.30 0.08 0.08 Thifensulfuron + Tribenuron BL 2.8 3.60 0.10 0.10 Tralkoxydim GR 2.4 12.25 0.29 0.12 Triallate GR 1.0 10.80 0.11 0.04 Triallate + Trifluralin GR 1.3 11.30 0.15 0.06 Trasulfuron BL 0.6 2.10 0.01 0.01 Tribenuron BL 11.9 2.92 0.35 0.35 Trifluralin GR 3.8 8.50 0.32 0.13 Total/Average 169.4 8.53 6.27 Source: Derived from data contained in Glogoza et al. (2002) and Zollinger (2003). *After adoption price assumes a 40% decrease in costs for grass herbicides. GR, BL, and FS refer to Grass, Broadleaf, and Full Spectrum, respectively.
36 15000
10000 000 Acres 5000
0 3 5 7 9 3 5 9 5 7 9 3 7 7 001 1971 19 197 197 19 1981 198 198 1987 198 1991 1993 199 199 199 2 200 Wheat Barley Corn+Soybean+Canola Sunflower Figure 3.7.1. North Dakota Planted Acreage, 1971-2003.
20
15
10 Million Acres 5
0 3 9 3 7 993 1971 197 1975 1977 197 1981 198 1985 198 1989 1991 1 1995 1997 1999 2001 2003 Spr Wht Barley Oats Canola + Flax + Sunflower Durum Figure 3.7.2. Saskatchewan Planted Acreage, 1971-2002.
37 North Dakota Minnesota 7 7
6 6
5 5 Prior 96 Prior 96 Post 96 Post 96 4 4 Price ($/bu) Price Price ($/bu) Price
3 3
2 2 6000 6500 7000 7500 8000 8500 1500 2000 2500 3000 3500 Planted Acres (000) Planted Acres (000)
South Dakota Montana 7 7
6 6
5 Prior 96 5 Prior 96 Post 96 4 Post 96
Price ($/bu) Price 4 Price ($/bu) Price 3 3 2 1600 1800 2000 2200 2400 2 1700 1900 2100 2300 2000 2500 3000 3500 4000 4500 Planted Acres (000) Planted Acres (000)
Kansas Manitoba 7 8
7 6 6 5 Prior 96 Before 94 5 Post 96 After 94 4 Price ($/bu) Price Price $C/bu Price 4 3 3
2 2 9000 11000 13000 15000 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2 10000 12000 14000 16000 Million HA Planted Acres (000) Saskatchewan Alberta 8 8
7 7
6 6 Before 94 Before 94 5 5 After 94 After 94 Price $C/bu Price 4 $C/bu Price 4
3 3
2 2 44.555.566.577.5 2.2 2.25 2.3 2.35 2.4 2.45 2.5 2.55 2.6 Million HA Million HA Figure 3.7.3. Estimated Supply Functions, by State/Province.
38 4. Welfare Model
4.1 Model 23
A model of wheat trade in higher-protein hard wheat was developed to measure changes in welfare and the distribution of welfare. It is a spatial partial equilibrium model and incorporates market segments for GM aversion and segregation costs for each segment. This is distinguished from other studies that use non-spatial models, amongst others. Other features that distinguish it from previous studies measuring welfare changes due to GM technology are that market segments with respect to GM aversion are allowed, segregation is allowed at a cost which varies by segment, adopter and non-adopter cost savings and dockage removal costs savings. The model simultaneously determines imports by class and GM, production and plantings by GM and non-GM, flows and equilibrium prices and price diffenetials, and equilibrium adoption rates. This differs sharply from other models. In addition to these, we use more refined data from refereed publications on yield increases.
4.2. Assumptions/Treatment of Specific Features
The specific treatment of some of the numerous functions in the model are described below.
Demand Functions, Market Segments, and GM Aversion: Demand functions for higher- protein hard wheats were estimated for each country and substitution was explicitly modeled. A weighted average of the quantity of protein (14% for HRS and CWRS, and 12% for HRW and above) was derived and used as the dependent variable for each country. This is the overall demand for hard wheat protein and captures the impact of price changes on consumption. The logic of this is that there is an overall demand function for higher-protein hard wheat and changes in price levels result in a movement along the demand curve. In this specification, buyers can buy HRS or CWRS, or can buy HRW 12%. If they shift to the latter, the quantity demanded has to increase to account for the lower quantity of protein reflected in the HRW purchases.
Demand parameters and elasticities for each country are shown in Table 4.2.1. As noted, these vary across countries and are highly inelastic. This simply refers that changes in prices will not result in a substantial increase in quantity demanded. These are comparable to the wheat import demand elasticities used in some of the macro trade policy models (USDA-FAS 2004b). The overall elasticity across these markets is -0.24.
23 The complete mathematical specification of the model is contained in Appendix C.
39 Table 4.2.1. Import Demand Parameters
Constant Parameter Elasticity Bangladesh 37.22 -0.000004 -0.020 Canada 0.00 0.000000 0.000 Chile 35.55 -0.000046 -0.300 China 53.33 -0.000005 -0.016 Colombia 162.30 -0.000215 -0.300 DRep 35.74 -0.000048 -0.300 Ecuador 56.97 -0.000076 -0.300 Egypt 284.19 -0.000002 -0.001 EU 281.10 -0.000019 -0.012 Guatamala 64.05 -0.000086 -0.300 Indonesia 97.87 -0.000053 -0.110 Iran 264.13 -0.000027 -0.020 Iraq 39.83 -0.000004 -0.020 Israel 88.45 -0.000009 -0.020 Japan 492.11 -0.000016 -0.006 Jordan 35.90 -0.000004 -0.020 Korea 161.63 -0.000308 -0.492 Malaysia 49.74 -0.000028 -0.110 Mexico 365.60 -0.000505 -0.300 Nicaragua 6.66 -0.000009 -0.300 Nigeria 266.69 -0.000640 -0.710 Peru 116.23 -0.000155 -0.300 Philippines 216.92 -0.000122 -0.110 SLanka 27.59 -0.000003 -0.020 Taiwan 121.00 -0.000014 -0.021 Thailand 57.60 -0.000032 -0.110 UAE 21.47 -0.000002 -0.020 US 209.44 -0.000457 -0.500 Venz 139.85 -0.000184 -0.291 ROW 1045.00 -0.000118 -0.020
Perfect substituitability is assumed between HRS wheat and CWRS wheat.24 Substitutability between HRS and HRW differs. We assume that importers buy the lowest cost wheat to meet their quality requirements for the products they produce and/or for the processing technology they use. There are functional differences between HRS and HRW that would suggest there is limited substitution between these wheats. As examples, some of the relevant functional characteristics between HRS and HRW wheat are illustrated in Table 4.2.2. As illustrated, both CWRS and HRS wheat have superior values to HRW Ord for most quality characteristics.
24 Ideally this would be estimated but, due to the unobservability of CWRS export prices and qualities, it is not possible to use empirically estimated demand parameters for these different wheats.
40
Table 4.2.2. Functional Characteristics for North American Hard Wheats (5-yr. avg.) Characteristic CWRS HRS HRW Ord Wheat Protein 14.3 14.5 12.1 Absorption 66.0 64.8 58.4 Stability 9.5 19.4 11.9 Gluten 35.6 35.8 28.7 Peak Time 5.6 11.6 5.2 Source: Canada Grain Commission; Department of Cereal Chemistry, North Dakota State University; Kansas Department of Agriculture.
We allow for HRS and CWRS wheat to substitute perfectly, but allow limited substitutability of HRW 12 for reduced imports of HRS or CWRS wheat. If HRW wheat is substituted for HRS or CWRS wheat, the quantity is adjusted to account for its lower protein quantity. Further, the substitutability is subject to a maximum of 10% which was derived by observing actual shifts among classes. This is conceptually equivalent to a linear approximation of an isoquant subject to substitution limits. With changes in relative prices and/or aversion (see below), there is a shift in equilibrium import shares.
GM Aversion: For each country, we define shares of demand in each of the four segments with respect to GM aversion as presented in Section 3.1. Buyers in each segment have requirements for GM content and different segregation costs are required to serve that segment. Thus, if buyers are averse to GM hard wheats, they are allowed to specify alternative tolerances and still buy HRS or CWRS at the added costs of segregation. The alternative would be to shift a portion of their demand to HRW. However, given inherent quality differentials between these in terms of functional characteristics, the extent of this substitutability is limited. To capture this, we assume in our base case a maximum substitutability of HRW for HRS/CWRS wheat of 10%. For non-averse segments, the lower cost of GM results in a shift in relative prices and increases demand for that type.
This treatment differs sharply from other studies. Furtan, Gray, and Holzman (2005) and as implied by Wisner (2003), allow substitutability of wheats (without respect to quality) from other sources even though they differ substantially from these functional characteristics and does not allow for segregation. This is despite that there are only minimal quantities of higher-protein hard wheat available on the world market (see Appendix A). Implicitly, the approach in these studies is that buyers would produce different products than current.
Supply Functions, Adoptions Rates, Yields and Yield Changes. The supply functions used in the model were from Koo and Taylor (2004) and with adjustments for the period after 1996 to reflect the changing relative profitability of wheat relative to competing RR crops (see Section 3.7).
41 The base case yield was the average from the USDA’s National Agricultural Statistics Service (USDA-NASS 2002) for the period 2000-2002 for each state and province. With the introduction of RRW, there are two potential changes for adopters. One is the yield change which was assumed at 10%, which is midrange of recent published studies (see Section 3.4). Then, for each state or province, we imposed a maximum adoption rate for RRW using steady state results (Kalaitzandonakes, Suntornpithug, and Phillips 2004). These reflect that for varying reasons, and irrespective of the profitability adoption, there may be some resistance and reluctance and potential technical reasons related to rotations and agronomics that would preclude complete adoption. The supply parameters and elasticities are shown in Table 4.2.3.
Table 4.2.3. Supply Parameters and Assumptions Yield Yield RRW Maximum State/Province Elasticity (Average MT) (MT) Adoption (%) North Dakota .263 2.00 2.20 83 Montana .302 1.62 1.79 47 Other .251 2.20 2.42 30 Alberta .179 2.40 2.66 34 Saskatchewan .204 2.00 2.20 43 Manitoba .282 2.40 2.64 22
Changes in On-Farm Costs: Adopter, Non-Adopters, and Tech Fees. Base case costs for each region were from results shown above. Costs were adjusted by region for adapters and non-adopters of RRW. Cost advantages for adopters (value to farmers) were from Kalaitzandonakes, Suntornpithug, and Phillips (2004) and as summarized in Section 3.5. Technology fees were $6/ac and sensitivities were made for values from $4 to $8/ac (as suggested by Monsanto). For non-adopters a cost savings of $2.28/ac was allowed to reflect the reduced costs of chemicals post-introduction of a competing technology.
The impact of these on the typical farm across regions is summarized in Table 4.2.4 and 4.2.5. The first shows the changes in relative costs from the base case, and summarized in terms of the change in returns per acre for North Dakota, with comparisons to returns from a non-GM wheat. Results suggest that when considering the cost advantages in production and marketing, RRW would generate a greater return per acre of about $16/ac (39 c/bu). The cost disadvantage of the non-GM increases under greater segregation costs resulting from tighter tolerances. As example, for those conforming to <0.9% tolerance, their costs would increase by about $4/acre, and their returns would be about 49 c/bu less than GM producers.
The results in Table 4.2.5 make comparisons across the regions used in the welfare model. Results indicate the returns to adopting RRW are fairly attractive in most cases, largely depending on yield and the value of adopter cost savings. These results suggest the greatest
42 advantage would be in Montana, followed by other HRS states, and then Manitoba and Saskatchewan.
For perspectives on these assumptions, none of the other studies allow for either adopter or non-adopter costs savings. Furtan, Gray, and Holzman (2002) solved for the profit maximizing technology use fee. They found optimal tech fees of $6.43/acre if Canada adopts, $5.89/acre if the United States adopts, and $5.85/acre in the United States and $6.14/acre in Canada if both adopt.
Table 4.2.4 Grower Benefits at Calibrated Base Case Values at Different Tolerances
GM Tolerance 0/Traceability < 0.9% < 5 > 5% Base Wheat Price $/bu 2.88 2.88 2.88 2.88 Base Yield bu/ac 40 40 40 44 $/ac $/ac $/ac $/ac Value of Yield $/ac 0 0 0 11.54 Adopter Cost Savings $/ac 0 0 0 9.70 Non-adopter Cost Savings $/ac 2.28 2.28 2.28 0 Technology Fee $/ac 0 0 0 -6.00 Dockage Removal Costs $/bu 0.0 0.0 0.0 0.36 Segregation Costs $/bu -21.77 -6.32 -2.88 0 Total $/ac -19.49 -4.04 -0.60 15.60 c/bu -49 -10 -2 39 $/mt -18 -4 -1 14 Diff: GM vs. NGM $/mt -32.2 -18.0 -14.9 0.0 c/bu -88 -49 -41 0.00
Table 4.2.5 Grower Benefits of RRW Adoption by State/Province
ND Mont Other Albta Sas Man Base Yield b/a 32 26 35 34 31 33 Base Price $/b 3.55 3.62 3.54 3.51 3.72 3.30 Value of Yield Increase $/ac 11.36 9.41 12.39 11.93 11.53 10.89 Adopter Cost Savings 8.30 9.44 11.57 8.79 8.93 10.40 Tech Fee -6.00 -6.00 -6.00 -6.00 -6.00 -6.00 Dockage Removal Costs 0.29 0.23 0.31 0.30 0.28 0.30
Total $/ac 13.95 13.08 18.28 15.03 14.74 15.59
43 Changes in Marketing Costs. Introduction of RRW would have two impacts on marketing costs. Segregation costs would escalate for those segments requiring reduced GM tolerance. Separate costs were used for each of the four segments. Those used in the base case (as summarized in Section 3.2) were: No tolerance 0, < 5% at 2.65$/mt, < 0.9 at $5.81/mt, nil at 20,25 and Traceability at 20$/mt and, assumed the same, for Canada.
The assumption is that for the market segments at 5% and 0.9% maximum, the market can meet those requirements through the use of testing, segregation, and contractual mechanisms with growers. While it is technically not possible to achieve a 0% tolerance using conventional testing and segregation strategies, IP-type mechanisms could apply. Likewise, the traceability requirements that would apply, largely to EU importers, would be added costs. However, these systems are yet to be defined so it is not possible to model these costs. Nevertheless, there are segments in most markets that will demand nil tolerance, and EU buyers will require traceability. We used estimates of IP from Lin, Chambers, and Harwood (2000) for wheat but these are similar to those derived by Henry (2005) for wheat shipments from the United States.
The second change in marketing costs would be due to reduced cost of dockage removal. The cost of removing dockage was included as a cost in model. While RRW would result in reduced dockage (due to reduced weed infestation), the reduction would not be sufficient to eliminate the need to clean wheat someplace in the marketing system. These are based on expected reduced incoming dockage levels as a result of RRW. However, it is expected that these will still exceed levels required by most markets, so cleaning will still be required.
Cost estimates were derived for a non-RRW case and for RRW based on Wilson and Dahl (2001) and Prairie Horizons, Ltd. and JRG Consulting Group (1998) and extrapolating using the figure in Wilson and Dahl (2001). These are reported in Table 3.3.1. The cost reduction for RRW translates to 1.4 c/bu, 1 c/bu, and .5 c/bu U.S. for North Dakota, other HRS regions, and Canada, respectively, see Section 3.3.
Shipping Costs and Tariffs. Shipping costs from each origin to each market were included. Interior rail costs were from the public waybill sample in the United States and from the CN Rail tariffs for Canada. Ocean shipping costs were from Richard Lawrie Associates (2003). Finally, an import tariff of 14.2% was added for imports of wheat from Canada to the United States.
25 Few studies have estimated the costs of traceability requirements, hence, we approximate their value at equivalent to nil-GM. The additional costs would be audit trails, cleanout affidavits, Non-GMO signed seed letters, etc. Each certification agency is different. Since then, Henry (2005) and Wilson and Dahl (2005) did estimate these costs directly building on other models and their results are comparable to that used here.
44 5. Results
5.1. Base Case Definitions and Alternative Models
The base case is defined as an equilibrium without the introduction of RRW. These were derived and calibrated based on the partial equilibrium without introduction of the technology and associated costs and savings.
We define another model, Segmented Market Acceptance, which conforms to the set of assumptions defined in the previous section and is interpreted as one of the likely scenarios. This specification allows for market segments, planting of RRW, and accrual of costs due to segregation and cost savings due to the technology, as well as non-adopted cost savings. Changes in welfare, the distribution of welfare, and equilibrium prices, adoption rates, and trade flows by segregation are derived relative to the base case.
In addition to the set of market assumptions defining Segmented Market Acceptance, we also model scenarios inclusive of full market acceptance, restricted release in the United States or in Canada, one in which Japan rejects all hard wheat purchases from the United States, and a scenario in which producer adoption was limited based on indications in a producer survey. Each of these are compared to the base case without RRW. We also conduct a set of sensitivities on segregation costs, and the maximum substituitability of HRW for HRS. These are compared to the set of results from the Segmented Market Acceptance scenario.
5.2. Base Case and Market Assumption Scenarios
Comparison of changes in welfare and prices are shown in Table 5.1 and Figures 5.1 to 5.3. In each of these cases, the change is derived with respect to the base case.
Major Changes by Scenario: The results illustrate that in all cases there is an improvement in welfare, as expected. However, the change and the distribution differs amongst scenarios. In the Segmented Market Acceptance scenario, both producer and consumer welfare increase by $301 and $252 million, respectively, and the total change in welfare is $553 million (Figure 5.1). If there was full market acceptance (i.e., as if there were no market segments in any of the countries), total welfare increases to $787, and in this case there is a greater increase in consumer welfare. Producer welfare for spring wheat growers increases in all cases and those for HRW decrease (Figure 5.2). The reason for this is due to the technology being available to spring wheat growers and not HRW growers. Further (as noted below), there is an overall price decline which is less than the cost savings to HRS growers, that adversely impacts HRW.
Due in part to the reduced prices and increased supplies, there is an increase in consumer welfare in all countries except the EU and Japan (Figure 5.3). In these countries, except for the Full Acceptance scenario, there are reductions in consumer welfare. The reason for this is that their purchases are of a higher cost wheat that has not incurred the technology savings, due to their segregation requirements, and due to minor changes in origins. All other countries enjoy increases in consumer welfare (Figure 5.4).
45 Changes in Prices ($/mt) GM Premium Prices, and Market Shares under Selected Scenarios 773 347.930 109.17 105.47 92.83 86.21 80.66 Welfare Measures (billion $) Prices ($/mt) Changes in Welfare (million $) Changes in Welfare (million 12.116 335.640 347.757 107.76 90.90 98.50 7 GM Adoption Limited 12.156 335. 123 Base-No RRW4 Acceptance Full 5 Market Base Segmented 6 U.S. Release Only Canada Release Only Rejection by Japan of U.S. 12.289 11.988 12.324 335.787 335.535 12.116 12.190 348.076 335.986 347.522 335.640 335.628 348.310 347.757 347.816 110.87 106.09 110.51 119.19 123.48 96.49 90.10 93.78 107.76 97.25 90.90 89.53 94.69 98.50 82.48 96.06 76.98 234 Acceptance Full 5 Market Base Segmented 6 U.S. Release Only7 Canada Release Only Rejection by Japan of U.S. GM Adoption 301 Limited 337 129 202 252 129 169 451 106 553 106 93 238 787 234 234 294 407 -0.36 13.10 -1.70 17.39 -6.39 1.67 -0.62 1.67 -2.71 -5.59 -3.66 -5.59 -6.96 22.97 24.50 24.81 27.42 Scenario PW CW TW U.S. HRS C-HRS HRW U.S.-GM Can-GM Scenario PW CW TW U.S. HRS C-HRS HRW U.S. Can Table 5.1. Comparison of Welfare, Changes in
46 900 800 700 600 Producer 500 Consumer 400 Total 300 200 100
Change in Welfare ($ Millions) 0
. U pt ly ly nce e n n ll O O A ption ta e e n o p s s a e t Acc a k lea le e e R R a Full Acc ted M S d ion - Jap n U a t an jec gme C Limited GM Ad e Re S
Figure 5.1. Changes in Welfare by Scenario.
400
300
200 HRS 100 HRW CWRS 0
-100 Change in Welfare ($ Millions)
-200
t ly M ept Mk G c On S egm U n No US it on S a m Full Ac Canada Only Jap Li
Figure 5.2. Change in Producer Welfare by Scenario.
47 250
200
150 EU 100 Japan US 50 ROW Canada 0
-50 Change in Welfare ($ Millions)
-100 y US Onl o N da ll Accept US Only a Segm Mkt n imit on GM Fu a apan C J L
Figure 5.3. Change in Consumer/Import Welfare by Scenario.
200 EU 150 Indonesia Japan 100 Korea Mexico 50 Philippines Taiwan 0 Thailand US -50 ROW Change in Welfare ($ Millions) Canada -100 y Mkt US GM ccept Onl o A S N on ll egm U it S im Fu anada Only apan C J L
Figure 5.4. Change in Consumer Welfare by Scenario.
48 Any form of restricted release results in substantially less change in welfare. One scenario would be for selected release in U.S. production regions only (or only in Canada). In such a selected release, there is a much lesser increase in producer welfare and negligible increase in consumer welfare. There are numerous reasons for these that result in the new equilibrium. Release in the United States only results in the United States serving the domestic market, which is largely non-averse, and many of the smaller international markets. Canada would serve the non-GM market segments, albeit at a higher cost in order to increase supplies and conduct segregation.
Another set of scenarios was applied with respect to Japan as an importer. One was that Japan would shift all its imports to non-North American origins. It was not possible to simulate this because there is not adequate supplies elsewhere, at least assuming current technology to allow such a big importer to shift its supplies. The other was that Japan would shift all of its hard wheat purchases from the United States to Canada. These results indicate a substantial reduction in welfare gains from any of the previous scenarios. In this case, Japan is served by Canada at a higher cost, in part to increase supplies and in part due to segregation costs. The United States serves the domestic market and most of the rest of the world market, in some cases at a higher cost. The combined impacts of these are for a large reduction in both producer and consumer welfare.
The last scenario restricted the adoption of RRW by producers. In the Segmented Market Base and all others, the model determined equilibrium rates of adoption. However, producers indicated in a survey (Table 3.5.1.) that their rate of adoption would in fact be much less. To evaluate these producer intentions, we ran the model subject to maximum adoption rates by region. Results show that both producer and consumer welfare, at $169 and $238 million respectively, would be much less than the Segmented Market Base Scenario. The reason for this is simply that with these adoption intentions producers would be under-adopting and therefore incapable of capturing the benefits of the technology.
Market shares for each of the hard wheat suppliers are shown in Table 5.2. These are comparable to the base period. Under either the full acceptance or the segmented market base case scenarios, market shares for both U.S. and Canadian HRS increase, and U.S. HRW declines. This is as would be expected in that if the former suppliers have a cost reducing technology and the latter does not, they enhance the competitiveness in some markets relative to HRW. Market shares under the various restricted scenarios change as would be expected. It is notable that there are not radical changes in the market shares with the introduction of the RRW technology, as well as across some of the more likely scenarios. There are some fundamental reasons for this and are a result of the maintained assumptions in our model. Most important is that buyers’ demands are reflected in market segments and each supplier is allowed to produce and market to penetrate each segment through segregation. Once the efficient distribution of flows are determined, producers are assumed to make production and adoption decisions to match these market demands. These results differ from those of other studies. For example, Wisner (2003) assumes segregation is not possible and, thus, purchases are shifted off-shore; and Furtan, Gray, and Holzman (2002) also assume segregation is not possible and Canadian customers would shift their purchases to Australia, the EU, and the United States. In contrast, we allow for segments to emerge in each importing country, the composition of these will vary
49 across countries and allow for segregation at a cost. This is the fundamental reason why the results shown in Table 5.2 do not result in radical changes in market shares.
Table 5.2. Equilibrium Market Share, by Scenario Market Shares Scenario U.S. HRS C-HRS HRW ------percent ------1 Base-No RRW 24.77 31.72 43.51 2 Full Acceptance 25.48 32.37 42.16 3 Segmented Market Base 25.52 32.22 42.26 4 U.S. Release Only 25.70 31.73 42.58 5 Canada Release Only 24.64 32.45 42.92 6 Rejection by Japan of U.S. 25.70 31.73 42.58 7 Limited GM Adoption 25.28 31.92 42.79
Equilibrium prices were derived for each country, segment, and wheat class for each of these scenarios (Figure 5.5). The weighted average (i.e., across markets and segments) of these price changes is derived and reported in Table 5.1 for each scenario. Results indicate that as a result of this technology, prices decline in the area of $5 to $7/mt for U.S. HRW and HRS, respectively. This is as expected and is due in part to the average cost reduction of RRW of adopters in the area of $14/mt (Table 4.2.4). Thus, even though prices decline, the cost cumulation of cost savings and value of yield gain exceeds the price decline for the HRS producers. In contrast, the price decline for HRW is not offset by cost savings. The equilibrium prices for Canadian HRS increase by about $13/mt and for Canadian GM HRS the equilibrium prices decline. Taken together, the price differential implied between Canadian non-GM and GM is about $24/mt, approximately reflecting the cumulation of cost diffenetials. The change in prices varies across scenarios and by wheat class as expected.
Specific Changes in the Segmented Market Acceptance Scenario: We expect that longer term, the market would most likely reflect what we refer to as the Segmented Market Acceptance scenario. Thus, we report greater details with respect to this scenario versus the base case.
The adoption rates and changes in supplies under this scenario are shown in Figure 5.6. Results suggest a greater adoption in the United States than Canada, slightly. There are a multitude of reasons for this including yield differentials, implied adopter cost savings, and their location with respect to the different market segments. Given the size of the U.S. non-GM averse segment, as well as the greater yields in ND and Other U.S., there would be a greater adoption in these regions. The supplies of HRS wheat increase by about 5% in the United States, and 2% in Canada, and the supply of HRW wheat declines to 98% of the calibrated base case. The latter is due to the reduced price in HRW wheat.
Trade flows are impacted by this technology. Relative to the base case, Canada serves a greater portion of the Japanese market and the United States serves the EU market. These are largely driven by the relative cost of shipping to these respective markets from these two countries.
50 20
15
10 US HRS 5 CWRS HRW 0
-5 Change in Prices ($/MT) -10
e y c pt. n e ta c p c e Onl option e A s d c t a c le A Mk ll d Re GM A u te a d F n US Release Only d te e a i an jection - Japan All U C e Lim R Segm
Figure 5.5. Changes in Prices.
30000 108%
25000 106%
20000 104% Segmented Mkt
Calibration 15000 102% Percent of Actual Supply (TMT) 10000 100%
5000 98%
0 96% ALB MAN ND HRW BC SAS MT Other US Figure 5.6. Supply of Wheat by Region, Segmented Market Acceptance vs. Base Calibrated.
51 Finally, equilibrium price differentials were derived by segment in each market and selected differentials (and levels) are shown in Table 5.3. These are interpreted as the price differentials that would be implied to the different buyers with the introduction of RRW. In the model, these are derived for all countries and segments to be illustrative, but show them for a selection of representative countries. To derive these, the model was solved for both the base case and segmented market acceptance scenario. Marginal prices were derived for each segment in each country and used to derive consumer prices. The volumes for each segment were used to derive weights and from these, a weighted average price was derived for each importing country. This was compared to the import price in the base case.
Table 5.3. Comparison of Weighted Average Prices for Segregated Market Acceptance with Base Case U.S. U.S. EU Japan Philippines HRS HRW Taiwan Indonesia Canada Non-GM < .9% 185.63 < 5% 189.55 186.82 > 5% 160.80 165.61 166.88 185.01 134.34 HRW 170.14 167.49 149.18 141.95 165.81 168.66
Sum of Weighted 185.63 189.55 160.80 165.61 141.95 169.87 185.01 134.34 Costs
Base Case 177.40 180.97 172.15 173.06 148.33 178.24 196.37 145.70
Difference 8.23 8.58 -11.35 -7.45 -6.38 -8.37 -11.36 -11.36
Of importance here is the price differential confronting the buyers in the different segments. The results indicate that price differentials are approximately reflective of the differences in production and marketing costs required by the segment. Consequently, the prices and price differentials would vary across countries depending on all these factors. In Japan and the EU which would require non-GM and associated costs, their prices increase by about $8/mt each. In contrast, the weighted average price in all other countries declines reflecting much larger differences due to their greater acceptance of the GM trait. For example in Taiwan, prices would decline by $8.37/mt and the segment requiring tight tolerances will have to compete with other segments at approximately a $20/mt cost disadvantage.
5.3. Sensitivities
A number of sensitivities were conducted and compared to the results of the Segmented Market Acceptance scenario. These are summarized in Table 5.4.
An important area of cost and inter-country competition will be those related to segregation. This study differs from others in that it allows segregation and costs vary depending on the tolerance requirements. We corroborated them with handlers in each country,
52 but we acknowledge that the values used are estimates, albeit defendable. Most important is that these will likely vary and can be impacted dramatically by strategies adopted by individual grain exporting companies, as well as by the institutional mechanisms (e.g., testing costs and protocols, certification, etc.) in each exporting country. For this reason, we conducted some sensitivities to evaluate these prospective impacts.
One sensitivity about segregation costs was conducted. Segregation costs were increased by 150% of the base case values. This is thought to reflect that some non-GM and/or traceability requirements may be more onerous than in our base case. The results (Table 5.4) illustrate a number of interesting points. First, greater segregation costs in the non-GM and traceability markets result in reduced welfare gains and are largely absorbed by consumers. The reasons for this are that in a spatial market with multiple segments, buyers imposing onerous requirements ultimately have to compete for supplies, have to induce suppliers to adopt higher cost alternatives all relative to buyers in many other markets and segments. This contrasts with conventional thoughts on numerous fronts. For example, the EU evaluated the distribution of these costs along the supply chain (p. 19) and concluded “...that IP costs would be passed back to primary producers and processors of GM crops. The producers of conventional crops would not be affected and the additional IP costs at the farm level would reduce the profitability of GM crops.”
Table 5.4. Sensitivity Results Changes in Welfare (millions) from “Segmented Market Acceptance” Sensitivity Analysis Producer Consumer Total Winter Percent = 0 -11 2 -9 Winter Percent = 20 -2 8 6 Segregation Fee 150% -6 -17 -23 Price Changes $/mt U.S. HRS C-HRS HRW Winter Percent = 0 1.17 -0.62 Winter Percent = 20 0.43 0.38 Segregation Fee 150% -0.10 -0.08
53 We made one important a priori assumption in our model which we have been unable to refute. Substitutability was allowed between HRS, CWRS, and HRW wheat. The latter was allowed a maximum of 10% based on the technical limits and requirements reflected in the functional characteristics of these two classes. To evaluate the impact of this assumption we ran the model with 0% and 20% substitutability (Table 5.4 and Figure 5.7). Results indicated there was negligible impact. Implicitly here is that in our base case of 10%, there is some substitution, but it is minimal. Relaxing this did not impact the results. This implies that generally, GM- averse buyers shifted to segregated HRS wheat as opposed to HRW wheat. The reason for this is the relative costs of incurring segregation versus that of greater wheat costs of buying HRW wheat with less functional traits.
1.5
1
0.5 US HRS CWRS 0 HRW
Change in Prices ($/MT) -0.5
-1
0 % 0 5 %=2 1 r e te e F Winter %=0 Win eg S
Figure 5.7. Sensitivity: Changes in Prices.
6. Summary and Implications 6.1 Overview An important challenge confronting the hard wheat market in North America is the release and adoption of RRW. This is the first trait for the wheat sector and is currently being reviewed by regulatory agencies in the United States and Canada. There are a multitude of issues associated with the ex ante evaluation of this decision. These include market acceptance and segregation, as well as the varying sources of cost savings and productivity gains. All these are compounded by U.S.-Canada competition in domestic and international markets and their approach to adoption.
54 In this study, we develop a comprehensive welfare model of the higher-protein hard wheat market and assess the changes in the distribution of welfare associated with release and adaption of RRW. It is a spatial partial equilibrium model and incorporates segments for GM aversion in each market and segregation costs for each segment. The domestic market and each importing country consist of segments with respect to GM aversion. Suppliers are allowed to adopt or not adopt depending on location and financial incentives to do so, and handlers are allowed to segregate GM from non-GM at different tolerance levels at different costs. Other sources of productivity gains and cost savings, some of which vary geographically, are included. The equilibrium is compounded by the spatial distribution of production and demands and domestic and international competition. The model determines equilibrium trade flows, adoption rates, prices and price differentials.
The report makes three general contributions. One is that it comprehensively addresses a very important problem in the world wheat market and extends previous literature in this area. Second, it expands on other welfare studies of GM traits by accounting for market segments and segregation costs which vary by tolerance. The methodological contribution is important. In order to determine equilibrium prices, most other studies make assumptions on adoption and trade flows and disallow segments and segregation. Our model differs in that it determines equilibrium values for adoption rates, prices, and differentials, as well as trade flows. Finally, it builds on previous studies that have analyzed welfare distribution due to RRW. The previous studies were non-spatial models which made a priori assumptions with respect to the ability to segregate GM from non-GM and otherwise understated productivity gains and cost savings.
6.2. Major Findings
Some of the important facts that have an impact on the results include:
» Supply Function Shifts: In each of the major hard wheat producing states and provinces in North America, there have been significant shifts in the supply functions during the 1990s. These are likely due to the combined impacts of the changes in U.S. farm legislation and the concurrent introduction of competing crops, which in most cases have been GM.
» Productivity Gains: RRW has a yield advantage ranging from 5% to 15% compared to conventional varieties and competing treatments. This is comparable to the initial gains associated with biotech corn and is the first major technology breakthrough for HRS since the introduction of semi-dwarf wheats in the early 1970's.
» Cost Savings: Costs savings associated with adoption range related to labor and management savings and other non-pecuniary costs range from $8.30 to $11.57/acre across regions. These are in addition to gains related to yield and reduction in dockage removal costs. In addition to these, non-adopter cost savings related to competing chemical costs are in the area of $2.28/ac.
» Market Acceptance: Each market consists of segments with respect to GM aversion. We considered four potential segments in each country. Taken together, these imply that
55 about 10% of the North American domestic market would require some form of segregation, and about 43% of the offshore market would require segregation.
The welfare model was solved and used to identify changes in welfare, the distribution of welfare changes, prices and differentials, and equilibrium adoption rates associated with the introduction of RRW. Major conclusions indicate:
» In the most likely scenario which we define as Segmented Market Acceptance, producer welfare increases by $301 million and consumer welfare increases by $252 million. These are comparable to the expost estimates of GM traits on other grains.
» Producers of HRS and CWRS wheat gain, and HRW wheat growers lose welfare. The reason for this is due to the technology being available to spring wheat growers and not HRW wheat growers. Further, as noted below, there is an overall price decline which is less than the cost savings to HRS wheat growers, that adversely impacts HRW wheat.
» Consumers in countries and segments allowing GM gain in welfare and those with restrictions, notably the EU and Japan, have reduced welfare. Reasons for this are that their purchases are of a higher cost wheat that has not incurred the technology savings, due to their segregation requirements, and due to minor changes in originations. All other countries enjoy increases in consumer welfare.
» If there were full market acceptance (i.e., as if there were no market segments in any of the countries), total welfare increases to $787 million and, in this case, there is a greater increase in consumer welfare.
» Any form of restricted introduction results in a substantial lesser gain in welfare. Release in the United States only (or only in Canada) results in a much lesser increase in producer welfare and negligible increase in consumer welfare. Release in the United States only results in the United States serving the domestic market which is largely non-averse and many of the smaller international markets. Canada would serve the non-GM market segments, albeit at a higher cost, in order to increase supplies and conduct segregation.
If Japan were to shift all its purchases from the Untied States to Canada, there would be a substantial reduction in welfare gains. In this case, Japan is served by Canada at a higher cost, in part to increase supplies and in part due to segregation costs. The United States serves the domestic market and most of the rest of the world market, in some cases at a higher cost. The combined impacts of these are for a large reduction in both producer and consumer welfare.
In the Segmented Market Acceptance scenario:
» Adoption is greatest in Montana and North Dakota, and North American supplies increase by about 4%.
» Export market shares are largely unchanged.
56 » Price levels decline in all likely scenarios associated with introduction of this technology. Results indicate prices decline in the area of $7mt. This is as expected and is due in part to the average cost reduction of RRW of adopters in the area of $14/mt. The change in prices varies across scenarios and by wheat class as expected.
» Price differentials emerge in each market and market segment approximately equal to the differentials in costs of production and marketing. These are differentials likely to confront competitors within each country.
Numerous sensitivities were conducted including those related to technology fees, yield changes, and demand assumptions.
6.3. Implications
There are many implications of these results including those for public and private policies and inter-country implications.
The welfare gains of RRW are comparable to the estimated expost welfare gains on like traits introduced in soybeans and cotton in magnitude. Due to the increased productivity and market segments, prices decline. The distribution of welfare gains are neither universal nor symmetric. Producers in regions with greater adoption have a greater gain in welfare than others. Producers of HRS and CWRS wheat benefit, but HRW wheat producers lose. The reason for this is that the latter do not benefit from the technology but suffer from the price decline. There are also differential impacts across consuming countries. Those with large segments which are GM tolerant benefit the most. However, those that restrict GM imports, notably the EU and Japan, suffer due in part to the higher costs of production and segregation and to a minor extent the geographic shift in procurement.
Besides the differential impacts among producers and consumers, there are two areas that may be influenced by public policy. One is to improve, however possible, acceptance of GM wheat. In these results, the non-GM market segments comprised about 10% of the domestic market and 44% of the export market. Welfare improvement of full versus segmented market acceptance is about $234 million. This is sizable and results in improvements for all sectors. If other traits are commercialized, its impact would become even more important. While we recognize efforts are underway to improve and facilitate acceptance, there is certainly room for greater concentration of initiatives toward this end.
The second relates to segregation costs. We allow for reasonable costs of segregation in determining our equilibrium results. However, a number of requisites are necessary to achieve these, including the availability of low-cost repeatable tests, certification, and mechanisms to facilitate variety declaration. Each of these can be influenced by the public sector. Looking beyond the equilibriums presented here, an important area of intercountry competition will be the countries’ ability to perform these functions at lower costs than their rivals. Again, the ability to do so can be influenced by policies and initiatives.
Three sets of private sector implications are discussed. Growers will be confronted with another production choice that has implications for farm management. These will also affect
57 marketing decisions and will be impacted by price differentials, contracting mechanisms and obligations, and the prospective need to maintain segregations and assure improved variety purity. Handling firms and exporters will compete in this bifurcated market based on segregation costs and risks. Further, non-GM buyers with tight tolerances will likely require closer buyer-seller relationships and be less transactional versus conventional marketing. Finally, inter-segment competion amongst processors will be intensified with the introduction of GM wheat. Notably, processors of products requiring non-GM or limited amounts of GM for marketing purposes, will confront greater competition from those that do not, due in part to the lower cost ingredients available to the latter.
Finally, there are strategic implications for intercountry competition between the United States and Canada. Regions within these two countries already have different institutional mechanisms that facilitate quality and marketing and compete vigorously in most markets. If both countries adopt, both gain comparably, with Canada gaining slightly more due to its large acreage. Export market shares are largely unchanged. If one adopts and the other does not, the results change drastically.26 If there were asymmetric adoption, the more likely case would be the United States adopting first.
One way to view this strategic rivalry would be that of tough commitments when prices are strategic complements (Bulow, Geanakopolos, and Klemperer 1985) in 2-stage games. In stage 1, the United States adopts a cost reducing technology. In the second stage, Canada and the United States compete, most likely on prices. A strategic commitment such as a technology that is cost reducing is thought of as “tough” (i.e., any commitment that would be bad for competitors, but it must be transparent and irreversible). Any such commitment would have direct and strategic price effects. The characteristics of the commitment (tough or soft) and 2nd stage competition impacts the longer-run equilibrium.
The asymmetric release and adoption by the United States would be interpreted as a tough27 commitment to both reduce costs and segregate non-GM. Conceptually, this would be equivalent to a leftward shift in the U.S. reaction function in Bertrand competition, assuming prices are strategic complements. The impact of this would be reducing prices in each country, but a larger price reduction on its own price. The strategic side effect of the commitment is for a price reduction in both countries. In this case, the negative strategic effect is less than the direct effect. Fudenberg and Tirole (1991) refer to this as a “Mad Dog” strategy–i.e., with strategic complements, making a tough commitment is akin to an “attack to become top dog, invite battle heedless of costs.” Both the direct and strategic effects should be considered in assessing how such decisions will affect future competition.
Results from our models can be used to interpret these strategic effects. If the United States adopts and Canada does not, the former makes a tough 1st stage commitment. This has the
26An alterative strategic representation would be that of vertical differentiation. This would suggest that the two countries would chose to compete based on the vertical differentiation with respect to aversion to GM content. This is an appealing representation but is not pursued here.
27 A soft commitment, in contrast, would be one that would result in less production than otherwise would have been the case–which is not the case here and would lead to higher prices.
58 impact of reducing costs by about $14/mt on average for adopters. Equilibrium prices in the 2nd stage drop by about $7/mt. Thus as the mad dog, the United States would accrue a cost advantage greater than the reduced equilibrium price change (i.e., the strategic effect would be negative, but not as great as the direct effect). Canadian and HRW wheat growers would be adversely impacted by having to compete against a lower cost competitor. This differential advantage would give the United States a first mover advantage and would be retained until Canada adopts similarly at which time it would diminish.
Of course, there are many other impacts of such an asymmetric release which are not considered here. One is the assurance that proposed segregation mechanisms will serve needs of buyers. The second is that in such a bifurcated market, Canada gains in the large stable Japanese market (assuming Japan would allow itself to be subjected to a bilateral monopoly structure for purchases), and the United States gains in other markets, which are typically smaller and more volatile.
6.4. Limitations
All of the assumptions and relationships used in this study are based on recent, and in most cases, refereed published sources and should be accepted as plausible. Hence, most of the limitations relate to factors not allowed in the welfare model. There are several which are acknowledged.
The model does not consider impacts on other small grains and organics. As production of GM HRS and CWRS wheat improves in profitability due to this technology, other sectors not benefitting from the technology will be adversely impacted. These include other small grains, notably durum wheat, malting barley, etc., and the organic production of HRS wheat. These sectors will suffer in part because their opportunity cost will increase, much like has occurred between these and other current GM row crops, as well as between HRS and HRW wheat as illustrated in this analysis. They will also suffer to a minor degree to the extent that they may require more onerous segregation and/or certification processes to assure their purity when grown or handled in non-specialized farms and facilities.
A second consideration is that it disallows emergence elsewhere in the world for non-GM higher-protein hard wheat as a substitutute. We view this as somewhat unlikely. While minor amounts of higher-protein APH are exported from Australia, the overall protein level has been declining in that country for many years despite attempts to reverse its decline. Other countries do not export notable volumes of higher-protein wheats with the functional characteristics of HRS wheat. If these countries could competitively produce these wheats, one would have thought they would have already done so given their value. The Former Soviet Union (FSU) and other eastern European countries are somewhat of a wild card on their ability to export wheats competitive with those in North America. Nevertheless, the approach here is not limiting because GM averse buyers are allowed to substitute the higher cost of segregation from the United States and Canada for the lower cost GM wheats. Finally, from a practical matter, we have to acknowledge that some of these competing regions are developing GM wheats, though their release is not imminent.
59 Third, we assume the market equilibrium is determined competitively. Strategic behavior of suppliers is ignored both on the part of importers and exporters. While we recognize there may be alternative assumptions on this topic, it seems reasonable. Essentially, we allow a large number of competing regions to compete among one another through a competitive export industry to supply to a large number of independent and spatially separate demanders that are assumed to be atomistic. Other approaches could be considered, but to do so would be by assumption, and we do not have access to data that would allow verification of alternatives. Hence, the competitive assumption used here is retained and defendable.
Finally, we consider only one GM trait, that being RRW which has already been deemed as substantially equivalent to conventional varieties. There are other GM traits under development but their release is years away and measures of their potential productivity gains and/or cost savings do not exist.
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Stokes, Trevor. 2001. “Growing French Acceptance of GM.” Trends in Plant Science 6:2:53.
Stone, S., A. Matysek, and A. Dolling. 2002. “Modeling Possible Impacts of GM Crops on Australian Trade.” Productivity Commission Working Paper No. 1736, Melbourne, Australia, Available at: http://www.pc.gov.au/research/staffres/gmcrops/index.html, Accessed November 8, 2002.
Taylor, R.D., E.A. DeVuyst, and W.W. Koo. 2003. “Potential Impacts of GM Wheat on United States and Northern Plains Wheat Trade.” AAE Report No. 515, Department of Agribusiness and Applied Economics, North Dakota State University, May.
USDA-FAS. 2004a. Unpublished Results of a Survey of FAS Attaches on Importer Views on GM Wheats. USDA-Foreign Agricultural Service, Washington, DC.
USDA-FAS. 2004b. “Biotech Wheat Survey Results.” USDA, Foreign Agricultural Service, Washington, DC, March 9.
USDA-NASS. 2002. Agricultural Statistics Database. USDA-National Agricultural Statistics Service, Accessed July 2002, Available at: http://www.nass.usda.gov:81/ipedb/.
67 USDA-NASS. 2002. International Food Demand. USDA-National Agricultural Statistics Service, Accessed July 2002, Available at: http://www.ers.usda.gov/data1/international Food demand.
U.S. Grains Council. 2002. “2001-02 Value Enhanced Grain Quality Report.” Internet Document, Available at: http://www.vcegrains.org/documents2002veg_report.html.
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69 Appendix A: Supply and Demand for Protein in Hard Wheats
This Appendix provides and documents the major sources of supply and demand elements for HRS and CWRS wheat. Demand is discussed first, followed by supply.
A.1. Import Demand for HRS and CWRS
The United States exports about 50% of its HRS wheat. Major importers are illustrated in Figure 3.2. Major importers from the United States are (in rank order) Japan, Philippines, Taiwan, Italy, and South Korea. Beyond these, there are 70 countries that import levels ranging from 6 million bushels per year to less than 50,000 bushels. Imports by protein are shown in Figure A.1.1. These data illustrate that from the United States, about 95% of its exports of HRS are 13% or greater. Technically, the most common is for 14% or better.
Canadian CWRS wheat (Figure 3.4). 28 The largest importers of CWRS wheat are, in rank order: Japan, United States, Iran, and Mexico. In comparison, Iran does not import U.S. HRS wheat and China imports only a minimal volume, but the volumes have increased in recent years. Finally, about 60% of CWRS wheat exports are >13% protein, though this has not been reported in recent years. This is in contrast to the United States from which 95%of HRS wheat exports are >13%.29
100
90
80
Percent of HRS Exports 70
60 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 Figure A.1.1. U.S. Spring Wheat Exports Protein > 13%, 1995/96-2002/03.
28 Comparable detailed quality data is not publicly available in Canada as in the United States.
29 Data are not routinely reported for more recent years on the percent exported by class/grade/protein.
70 A.2. Supply for HRS and CWRS
Major points from these figures/data (Figures A.2.1-A.2.6) are:
Production of this class of wheat is concentrated in the North Central portion of the continent with the greatest concentration in Saskatchewan and the Northern counties of North Dakota. However, production of HRS is scattered throughout many other states. There have been declining acres in each of the major growing regions. In North Dakota this is likely due to a combination of the Freedom to Farm, and concurrent adoption of competing crops, notably corn, soybeans, and canola. In Saskatchewan this is most likely due to shifts into canola and other specialty grains/oilseeds.
In total, this can be interpreted that the competing crops have gained in agronomic competitiveness relative to HRS wheat. Yields in the primary growing regions do not show significant trends.
There are some interesting comparisons between U.S. and Canada HRS/CWRS wheat production which are apparent in these figures: Acres planted in Canada have fallen much more than that in the United States over the past decade; HRS wheat yields are comparable until 2001 when U.S. yields were 5 bu/ac greater.
Supply of protein (Figure A.2.4) shows that HRS wheat has substantially greater protein than HRW wheat, average protein for HRS wheat in North Dakota exceeds that in Canada, and both have been tending upwards since 1995. In fact, that in 2001 suggests a notable upward shift in protein supplies. Estimates were derived of production of HRS and CWRS wheat with protein greater than 13% (Figures A.2.5-A.2.6). These illustrate that North Dakota and Saskatchewan are by far the largest concentration of production with about 200 million bushels each. Production with >13% in the United States is about 400 million bushels, and that in Canada is about 500 million bushels. The amount in Canada increased over the 5 years prior to 2002, and that in North Dakota decreased through 2002 and increased in 2003.
71 35
30
25 US
Canada 20
15 Planted Area (Million Acres)
10 1990 1992 1994 1996 1998 2000 2002 1991 1993 1995 1997 1999 2001 2003 Figure A.2.1 HRS Planted Acres, 1990-2003.
45
40
US 35 Canada Yields (bu/a)
30
25 1990 1992 1994 1996 1998 2000 2002 1991 1993 1995 1997 1999 2001 2003 Figure A.2.2 HRS Yields, 1990-2003.
72 1100
1000
900
800 US 700 Canada 600
Production (Million bu) 500
400
300 1990 1992 1994 1996 1998 2000 2002 1991 1993 1995 1997 1999 2001 2003 Figure A.2.3. HRS Wheat Production, 1990-2003.
16
15
HRW 14 HRS
13 CWRS
Protein Level (12% MB) 12
11 1990 1992 1994 1996 1998 2000 2002 1991 1993 1995 1997 1999 2001 2003 Figure A.2.4. Protein Levels for HRS and HRW Wheat Production, 1990-2003.
73 500
400
300 SD ND MT 200 MN Production (Million bu) 100
0 1996 1997 1998 1999 2000 2001 2002 2003 Figure A.2.5. U.S. Spring Wheat Production Protein > 13% by State, 1996-2003.
600
500
400 Alberta 300 Saskatchewan Manitoba 200 Production (Million bu)
100
0 1996 1997 1998 1999 2000 2001 2002 Figure A.2.6. Canadian Spring Wheat Production Protein > 13% by Province, 1996-2002.
74 A.3. Supply/demand for Competitors to These Classes
This section provides a summary of production in each of these competing countries.30 Focus is on those regions/classes which prospectively could compete with HRS wheat >13%. The only potential competitors for HRS and CWRS wheat in the world market, besides HRW, is from Australia, and potentially from Russia and the FSU countries.
In France, annual production of hard wheat >13% is about 400,000 mt, or 1% of total. Exports are nil. In fact, France imports higher-protein hard wheats.
In Argentina, most wheat production is in the 12% protein range. There is virtually no ability for segregation due in part to past marketing practices, use of infrastructure for corn marketing, and likely due to past buyer demands. Barriers to expanded production of higher- protein wheats are mostly inability to segregate and store.
Supply and demand for all wheat in Australia are shown in Figure A.3.1. Production has been increasing from around 500 million bushels in the early 1990s, to more recent years in the area of 800-900 million bushels. Only a minor component, about 200 million bushels, are used domestically. The majority is exported, at about 600 million bushels.
The major classes of wheat in Australia are ASW (Australian Standard White) and Feed (General Purpose and Feed). There has been concern that over the past 10 to 20 years there has been a general decline in the protein level of the domestic crop. In response, the AWB has created more classes, segregation, and payments for protein.
That class closest to the end-use characteristics of HRS wheat 13% is what is Australian Prime Hard (APH). Exports of that class have been in the area of 10% of total exports, but in more recent years has fallen to less than 5%. In volume, exports of this class has fallen from a peak of 60 million bushels, to about 30 million bushels in recent years (Figures A.3.2.). This is in part caused by increased use for domestic purposes and due to overall reduced production.
APH is about 3% of total market. The Australians are trying to reverse declining trend in protein (variety marketing, protein premium, etc.) for several years, but there has been minimal progress. Premiums necessary to increase protein are thought to be in the $20/mt range (i.e., 25 c/bu) and farmers would expand nitrogen usage. The maximum production potential would be in the 1 mmt range. The primary export markets for this class are, in rank order, Indonesia at about 13 million bushels, Japan at 8 million, and then Malaysia, Italy, Thailand, and China.
30 Observations made in this section are from communications with Wilson and selected contacts in each of the countries of interest. Though not comprehensive, these are provided here for perspective on the world supplies of higher-protein wheats.
75 1000 900 800
700 Production 600 Imports 500 Domestic Use 400 Exports
Million Bushels Ending Stocks 300 200 100 0 1990 1992 1994 1996 1998 2000 2002 1991 1993 1995 1997 1999 2001 Figure A.3.1 Australia Supply and Demand for Wheat, 1990-2000.
70
60
50
40
Million Bushels 30
20
10 95/96 96/97 97/98 98/99 99/00 00/01
Exports Total: July-June Figure A.3.2. Total Exports of Australian AHP, 1995/96-2000/01.
76 Production in Russia had been declining in the FSU from the 4 billion bushel range in 1990 to about 2.5 billion bushels in the later 1990s, but as is well known, expanded sharply in recent years. Only a very small amount is exported. It is thought that about 30% of the production exceeds 12% protein. This is mostly in the North Caucasus regions (about 65%) and any and all higher-protein would be used domestically and not exported. Basically, Russia is short of higher gluten wheats. The ability to expand would require major changes in the marketing system, premiums paid, technology, and grain storage/segregation system.
A.4. World Production and Exports of Higher-protein HRS Wheats
Using these data, we sought to develop estimates of production and trade for what is defined as higher-protein hard wheats defined as >13% protein.
Production.31 We defined percent of production as: U.S. HRS, about 88% of production (for crop years 1999-2003); Canada is CWRS and about 80% of production; Australia is APH, at about (3-6%) of production; Argentina=8% of production; France is nil at about 400,000 mt (net importer); and Russia/FSU 30% >12%.
These results are shown in Table A4.1. Canada is the largest producer at about 538 million bushels, followed by the United States at 400 million. Then, distantly is the production in Australia and Argentina, each with less than 50 million bushels, and France with less than 15 million. The United States exports a greater percentage of HRS wheat exports at >13%; Canada is 60%, and the other countries are an inconsequential percent. In volume, Canada exports 312 million, followed by about 230 million from the United States.
U.S. production and consumption (assuming 100% of HRS wheat use is of this quality) suggests the United States is slightly deficit. This is due in part to the years used in the average reported and is likely a contributing reason for the 38+ million bushels of imports (from Canada). The other countries are essentially inconsequential in terms of production or trade. On balance, trade in this quality is about 550 million bushels, mostly from Canada and the United States.
31 These were derived using varying sources and manipulations of data on production and distributions (means and std.) on protein levels. In the northern region of the United States (Montana, North and South Dakota, and Minnesota), we have data from the annual crop quality survey from which we can estimate the mean and standard deviation for protein for HRS wheat. Estimates for means and standard deviations are available by province for Canada from the Canada Grains Council. Using these parameters and assuming a normal distribution of protein, the probability of protein equal to or greater than 13% is estimated for each state/province. The percent of production with >13% protein is then multiplied by state/province production and these are aggregated to arrive at totals for the United States Northern Region and Canada. Combining these, we derived estimates of production of HRS>13%. Technically, this would be for the states of Minnesota, Montana, South Dakota, and North Dakota; and the Canadian prairies.
77 Table A.4.1. Production, Use, and Exports for Higher-protein (>13%) Hard Wheats (HRS, CWRS, and APH) U.S. Canada Australia- HRS CWRS APH Argentina France Total ------million bushels------Production 400 538 50 42 5 1,035 Domestic Use 250 101 40 40 5 6 Excess Supply 150 438 10 0 0 599 Imports 30 Exports 230 312 10 0 0 552 Exp>Ex. Sup. -80 125 0 0 0 .47 * These are approximations, based on results/derivations presented earlier. Production is that portion of production with protein >13% and represents a 5-year average; domestic food use of HRS and CWRS wheat in the United States and Canada are assumed to be 100% of protein>13%.
A.5. Summary
World production of higher-protein (>13%) hard wheats is concentrated in the northern tier regions of the United States and Canada. Both produce surpluses of these hard wheats (150 million bushels in the United States and 400 million in Canada) most of which is exported. It is clear that Canada has a greater excess supply but the excess supply in the United States is close to nil. The major importers of HRS 13%+ protein wheat are Japan, Iran, China (from Canada), Philippines, Taiwan, Korea, Venezuela, and Italy. This is followed by more than 70 other countries that import this type of wheat.
There are few competing classes for this type of wheat. The only notable one would be Australia APH, but production of that class has declined in recent years and exports have fallen to less than 30 million bushels. CWRS and HRS wheat are technically near-perfect substitutes from a functional quality perspective. Characteristics of greatest importance to end-users (domestic) are: consistency, absorption, and then followed by numerous other characteristics that varied by millers and bakers.
78 Table A.4.2. Average Exports of Hard Wheats by the United States, Canada, and Australia, by Importer (Selected Countries) Importer U.S. HRS CWRS APH Total ------000 bushels------Algeria 526 4,005 4,531 Bangladesh 552 2,253 2,805 Belgium 5,973 1,507 7,480 Bolivia 504 1,050 1,554 Brazil 575 18,393 18,968 Cameroon 1,079 534 1,613 Chile 607 5,512 6,119 China 3,258 58,353 1,125 62,736 Columbia 3,426 15,852 588 19,866 Costa Rica 3,339 703 4,042 Dominican Rep. 6,844 344 7,188 Ecuador 4,740 5,443 367 10,550 Egypt 1,054 387 99 1,540 El Salvador 2,902 419 3,321 Ghana 4,579 2,807 7,386 Guatemala 2,086 7,899 9,985 Indonesia 4,214 29,632 12,787 46,633 Iran 64,183 64,183 Italy 9,031 7,217 2,352 18,600 Japan 44,245 48,784 8,490 101,519 South Korea 12,992 4,863 17,855 Kuwait 240 1,121 1,361 Malaysia 1,559 6,827 3,312 11,698 Mexico 2,968 19,287 22,255 Nigeria 1,845 4,053 220 6,118 Norway 1,349 485 1,834 Panama 2,637 2,637 Peru 3,817 8,567 12,384 Philippines 36,846 9,995 656 47,497 Rep. S. Africa 5,546 5,434 10,980 Spain 6,073 3,260 456 9,789 Sri Lanka 1,509 4,254 5,763 Taiwan 17,674 1,526 985 20,185 Tanzania 387 66 37 490 Thailand 5,190 4,261 985 10,436 Turkey 4,833 2,667 897 8,397 UK 3,198 11,724 14,922 US 31,066 31,066 Venezuela 11,391 13,145 24,536
79 Appendix B: Comparison of Studies on Import Country GM Aversion
This appendix reports findings from other studies on countries with GM aversion. Tables B1 and B2 summarize the results of surveys by U.S. Wheat Associates (Forsythe 2002) and the Canadian Wheat Board (CWB). Wisner indicated that 6% of HRS wheat exports likely go to countries not requiring labeling of GM. This same percent was applied to durum where exports have been predominately to the EU (66%).
Table B3 provides a summary that is fairly current of market interventions by country. This was abstracted from the recent publication by Foster, Berry, and Hogan (2003).
80 Table B.1. Countries and Previous Assumptions on GM Aversion Country U.S. Wheat Ia U.S. Wheat II CWBb c Algeria Reject Brazil Reject Canada Reject China Not Averse Reject Reject Taiwan Not Averse Reject Colombia Reject Ecuador Reject Egypt Reject EU Averse Reject Reject Indonesia Reject Iraq Reject Japan Averse Reject Reject Malaysia Reject Mexico Reject Philippines Averse Reject South Africa Reject Sri Lanka Reject Thailand Not Averse Reject US Reject Bangladesh Not Reject Chile Not Reject CIS & Baltices Not Reject Costa Rica Not Averse Cuba Not Reject Dom. Republic Not Averse El Salvador Not Averse Ghana Not Averse Honduras Not Averse Iran Not Reject Jamaica Not Averse Libya Not Reject Morocco Not Reject Nicaragua Not Averse Panama Not Averse Peru Not Reject Poland Not Reject South Korea Averse Reject Not Reject Sudan Not Reject Tunisia Not Reject Turkey Not Reject Venezuela Not Averse Not Reject Vietnam Not Reject a U.S. Wheat I and U.S. Wheat II refer to surveys published in Forsythe (2002) and as reported by Gilliam (2002) and USDA-FAS (2004), respectively. b CWB refers to CWB as reported in Kuntz (2001). c Reject means that the buyers would reject wheat with GM (or RRW) content, not that it would reject all wheat.
81 Table B.2. “At Risk” Markets for Canadian Spring Wheat “At Risk” Volume of Canadian Spring % of Total Countries Wheat Exports* CWRS Exports Algeria 55 0.4 Brazil 833 6.3 Iran 1,048 7.9 Italy 186 1.4 Japan 1,322 10.0 Malaysia 114 0.9 Morocco 19 1.0 South Korea 345 2.6 United Kingdom 264 2.0 Venezuela 257 1.9 TOTAL 4,443 33.0 Notes: *Volume derived as a 10-year average, 1989-98, 000's of tonnes. Source: Kuntz, University of Saskatchewan (2001); Canada Grains Council.
82 Table B.3. Sources of Known or Intended Restrictions on Grain (Wheat) Imports
Sanitary/ Adventitious Country Phytosanitary Tol. Labeling Tol. Presence Tol.
EU Prior to 2003 1998 all GM, 2000- 0.9% Scientifically safe, .5% only 3 corn varieties 2003 all human food but no final approval approved > 1%, now all food, oils, and animal feed over 0.9% from GM sources
China Food safety None set All foods certificates required. yet containing GMOs Temp. certificate from 3rd or origin assessments, permanent requires China field tests
Australia All foods or ingred. 1% except where novel DNA or protein removed
Brazil All food for human 01- consumption over 03=4% tolerance 2003 = 1%
Taiwan Products derived from 5% by GMOs that do not weight contain detectable DNA or proteins do not require label
Japan List of foods 5% containing GM exceeding tolerance. Initially 24 foods on list, now 44 excluding oils as no method for verifying content. To be labeled Non- GM must be able to show IP from producer through processing.
Korea, South All products with GM 3% as major input except reduced to those where novel 1% at some DNA or protein later date removed.
Russian Federation All foods and med products derived from GM except those that do not contain novel DNA or protein.
Thailand Food products that 5% contain any GMO ingredient of at least 5% as one of top three ingredients.
83 Sanitary/ Adventitious Country Phytosanitary Tol. Labeling Tol. Presence Tol.
Argentina CONABIA and None SENASAS provide safety assessments. Decision to import is by Sec of Ag.
India None
Indonesia Food derived from biotechnology must be labeled. Plans to extend to GM feeds.
Malaysia Mandatory labeling 3% by may be introduced in volume 2004.
Philippines Voluntary labeling
Saudi Arabia Mandatory on all Appears imported and locally to be 1% produced processed products containing GM ingedients. Extended in 2003 to animal feed, seed, fruits, vegetable, and other products under authority of MOC.
United States Not required unless consumers must be alerted to safety issue. Source: Foster, Berry, and Hogan (2003).
84 Appendix C: Mathematical Specification of the Analytical Model
A model of trade in higher-protein hard wheat was developed to measure changes in welfare and the distribution of welfare. It is a spatial partial equilibrium model that incorporates market segments for GM aversion and segregation costs for each segment. This is distinguished from Furtan, Gray, and Holzman (2002) and others that use non-spatial models and disallow segregation, amongst others. Other features of the model that distinguish it are that it simultaneously determines adoption rates, trade flows, prices, and price differentials by segment and includes adopter and non-adopter cost savings and dockage removal cost savings. Competition is assumed and the model is solved by maximizing the sum of producer and consumer surpluses. Results are used to derive equilibrium adoption rates, prices and price differentials, spatial flows, and production and marketings of GM and non-GM wheat, subject to varying tolerances.
An implicit price formulation is employed and prices paid and received are computed post-optimality. An important feature of our model is demand and supply for wheat by protein level. Protein in wheat is one of the more important hedonic characteristics and clearly distinguishes HRS and Canadian western red spring (CWRS) wheat from most other wheats and from most of hard red winter (HRW) wheat. Indeed Ghoshray found these to be a sub-market which is not substituted by other classes. In our case, we use protein quantities rather than wheat quantity in the demand model (described below) and substitutability is allowed within the higher-protein wheat market segment.
The implied protein demand equations are given as:
(1) QabPii= + 1 ⋅ i where the subscript i denotes the country. Protein quantities consumed are summed across the three wheat classes w,{HRW, HRS, CWRS} across the four market segments t,{GM, 5% GM, 0.9% GM, 0% GM} and producing region j as:
(2) Qqi = ∑ ∑ ∑ ijwt . jwt
The implied supply equations are given as:
QdePjj= + ⋅ .
Protein quantities produced are summed across classes and GM content adopted, and consuming region as:
(3) Qqj = ∑ ∑ ∑ ijwt . iwt
85 The objective function, summing surpluses, is given mathematically as
(4)
The value given in the parentheses in the first line of (4) is the total of areas beneath the individual consuming region’s demand function. The second summation on the first line of (4) is the area beneath the individual producing region’s supply function, or total costs. The second
line subtracts transportation costs from producer j to consumer i (transij). The third line sums the various savings associated with the GM wheat in each type of wheat (gmsavingsjt – zero for 0 percent GM). And, the fourth line subtracts the costs of segregating each type of wheat from producer j (segfeejt) . Markets are allowed to have different preferences for GM aversion which is defined by tolerance, and producing regions are allowed to produce GM and non-GM, as well as to ship different segregations with respect to GM content. The model determines these equilibrium values.
Three additional constraints are imposed to reflect relative demands for each type of wheat by consuming region. From Table B3, the percentage of total protein demands by type are used to constrain the minimum quantities of each wheat type. Using to denote the minimum percentage of wheat by type, we impose:
(5)
Finally,
(6)
(7)
86 These three equations restrict a consuming region’s demands with respect to aversion to GM content. In addition, higher quality wheat types can be used to satisfy demands for lower types, but not vice versa.
We also restrict the ability to substitute HRW for HRS and CWRS. Given process technology and preferences, HRW wheat is allowed to have limited substituitability with HRS wheat. Specifically, we allow HRW wheat demand as a percentage of total demand to increase to no more than10 percent above the baseline, or
(8)
where wintperci is the percentage of baseline total protein demand satisfied with winter wheat.
In Figure C.1, the partial equilibrium quantity, price paid, and price received are depicted. The difference between price paid and received is due to transportation and segregation costs. The area under the demand function given by a-f-Q-e is the first term on the first line of equation (1). The area given by e-g-Q is the second term on line one of equation (1). The area given by price paid-f-g-price received is the total segregation and transportation costs minus GM savings as in lines two through four of equation (1). The GM savings has the effect of shifting the supply function out. In net, equation (1) gives area a-f-price paid plus area price received-g-e, or total surplus.
Equilibrium prices are defined for each market and segment. These are derived from inverse supply and demand equations. Or, producer price received is computed as:
(9) and consumer price paid is computed as:
(10)
The model is one of vertical market differentiation, and there are a number of computational difficulties not encountered in non-spatial models without segments and segregation. We use the protein equivalent within the hard wheat classes and allow limited substitutability between spring and winter wheats. Partitions exist amongst the four market segments with respect to GM acceptance, and we allow the model to determine the allocation to each from the origins. Non-GM is allowed to substitute in GM segments, but not vice versa in markets with partial/no-GM acceptance. We derive the implicit equilibrium price at each market for each segment and from this derive the producer prices at each origin. The GM savings have the effect of shifting the supply function, lowering equilibrium prices to GM market segments, but increasing the differential for non-GM segments. Price differentials between import markets exist due to both transportation costs and segregation costs for each market segment.
87 Figure C.1. Partial Equilibrium with Transportation Costs and Segregation Costs.
88 Appendix D: Approach and Assumptions in Wisner’s Analysis: Market Risks of RR Wheat Introduction 32
Introduction and Overview
This study sought to analyze potential impacts of introducing GM HRS wheat on export markets, in the short term (interpreted as 2-6 years). It is largely descriptive and an assessment in the authors’ views of the potential impacts of introducing GM into HRS wheat in North America. There are three major issues in that analysis deserving of comment and each are addressed below.
Segregation Costs. The underlying assumption of the study is that it is not possible to segregate. The specific approach to segregation is summarized in Table D.1. Costs were used based on a University of Illinois survey of specialty corn growers. These costs were inclusive of premiums for the product (75% of the cost cited, the other costs taken together are 6 c/bu), in addition to other costs associated with IP and testing. These supplemental costs were inclusive of testing of 100% of the product in the market, underutilization of elevators, the requirement of new elevators, and that GM could not use shuttle trains.
Discussion is made that there are risks associated with cross-pollenation and volunteers in wheat, though these are less than corn referring to the VanAcker, Brule-Babel, and Friesen (2003) studies and concludes that “these problems are a substantial risk.” This is even though these risks are fairly negligible and translate to the equivalent of .009 for normal planting rates and decline through time. Pollen drift is also negligible at less than 1% (Hucl and Matus-Cadiz 2001).
These are all unlikely given the marketing system in the HRS wheat producing regions. First, segregation is a routine part of grain handling for many factors. Handlers can and will segregate if possible and if there are incentives (i.e., premiums$marginal costs). Second, inclusion of premiums for grain attributes by definition overstate the cost of segregation and should not be attributed to segregation costs. Third, testing would likely be applied more selectively, would only be applied for that portion of the market requiring a tolerance, and could be supplemented by varying contractual mechanisms to improve shippers, knowledge of the product content. Fourth, there are adequate elevators and storage capacity in the region and new construction to accommodate segregation would be highly unlikely.
Other recent studies in Canola (Foster, Berry, and Hogan 2003) indicate “there is no clear evidence to suggest that there is currently a premium for non-GM canola” (p.16). They do indicate a narrowing in the spread between Canadian (GM) and Australian (non-GM) canola prices. However, there could be a number of explanations for this including increased reliability of supply of Australian canola, problems in disposing of excess Canadian supplies, and changes in relative currencies. They indicated premiums of $US5-10/mt (after IP costs) for containerized canola trade predominately with Japan. For soybeans they provide an average spread between
32 Study prepared for the Western Organization of Resource Councils. A full report is available at www.worc.org.
89 Japanese futures contracts for non-GM and U.S. source soybeans on the Tokyo Grain Exchange. They indicate that the spread (premium) for non-Gm soybeans averaged 7.3% for 2002-03. However, volume of trade in the non-Gm soybean contract was equivalent to 1% of Japan’s annual soybean imports. For corn, the non-GM premiums were derived from a U.S. Grains Council survey of U.S. elevators which reported average premiums of 3.5% of the value of corn. These are summarized in Table D.2.
90 Table D.1. Segregation Costs Analysis/Critique Feature Wisner Assumption Critique/Impact Base cost University of Illinois survey on IP-type costs are not what will be elements speciality corn inclusive of: required by buyers averse to GM product premium and testing. content. Product premium is for indigenous quality and demands for processing traits and should not be a component of IP cost. Supplemental Additional costs imputed as required Testing should vary by geography, costs by Wisner for wheat (numerical time, and autonomous to individual values not shown): 100% of product buyers, and testing every load would tested, shuttles preclude GM, be unnecessary and costly; testing underutilization of elevators, only required on shipments to buyers requirement of new elevators. requiring limits on GM; shuttles facilitate GM marketing; excess capacity in elevators, etc., would facilitate specialization of handling without new construction. Wheat of Buyers of durum, SRW, and other U.S. Grade standards has “wheat of other classes classes would be adversely impacted. other classes” that can be specified to would suffer control levels of HRS in these classes; and visual distinguishability assures integrity. Canada has Claim Unlikely and not supported by comparative evidence. advantage in segregating Starlink Assertion on inability of market to Starlink was released based on feed impacts segregate. approval, not for food use; industry uninformed, pre-planting contract differences not apparent; None of these are analogous in RRW. Tokyo Grain The price differential reflects impact Differential implied in these two Exchange of market discount for GM content. contracts is due to IP specifications price inclusive of product quality differential specifications.
91 Table D.2. Evidence of Non-GM Premiums Canola Soybeans Corn Bulk Non-GM - None - 7.3% of value 3.5% of value (Japan Futures Contract) (Survey of U.S. ($16.09/MT or 44 c/bu Grain Handlers) assuming price of $6/bu) ($3.86/MT or 9.8 c/bu assuming price of $2.8/bu) Containers US$5-10/MT (after IP costs) Source: Foster, Berry, and Hogan (2003).
Market Acceptance. Claims are made about importing countries’ aversion to GM wheat. Presumably, this observation is based on a pre-regulatory approval of the trait, and no provision is allowed for post-regulatory acceptance. Mention is made of 37 countries currently requiring labeling of GM content above thresholds, but documentation is not provided. Wisner indicates that 10 countries are considering membership into the EU which currently has labeling requirements (none of these are importers of HRS or CWRS wheat). Also, allegedly, new countries may consider adding labeling requirements fueled by recent ratification of Cartagena Protocol on Global Biosafety (operational September 11, 2003) and prospects for greater range and numbers of GM grains being adopted.
Aggregate Market Analysis. The study proceeds to assess the market impacts of these issues. No model or framework is provided. No allowance or consideration is made for yield increases, cost reductions for adopters and non-adopters, dockage removal costs, etc., and no provision is allowed for buyers specifying limited GM content in their purchases (Table D.3).
Finally, and critically, the assumption is made that the excess supplies of RRW would be made in the feed market, at those market values.
92 Table D.3. Aggregate Market Assessment Feature Wisner Assumption Critique/Impact Analytical framework No description Yield increase due to RRW Not allowed Likely increase 11-14% Cost reduction due to RRW Not allowed Cost reduction in the $9/acre range Supplies (world) of non- Assumed adequate to Incorrect U.S./Canada origin high meet demands protein Disposal of excess supply of U.S. Feed market Unlikely RRW HRS wheat Market acceptance: U.S. Assumed not accepted U.S. consumers already consume bread products with GM ingredients; aversion is near nil; some segments (about 7%) may be averse and require segregation. Demand elasticities None provided
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