United States Department of Agriculture Research Investments and Market Structure in the Food Processing, Economic Research Agricultural Input, and Biofuel Service Industries Worldwide Economic Keith O. Fuglie Kelly Day-Rubenstein Research Report Paul W. Heisey David Schimmelpfennig Number 130 John L. King Sun Ling Wang December 2011 Carl E. Pray Rupa Karmarkar-Deshmukh da.gov .us rs .e w Visit Our Website To Learn More! w w www.ers.usda.gov Recommended citation format for this publication: Fuglie, Keith O., Paul W. Heisey, John L. King, Carl E. Pray, Kelly Day-Rubenstein, David Schimmelpfennig, Sun Ling Wang, and Rupa Karmarkar-Deshmukh. Research Investments and Market Structure in the Food Processing, Agricultural Input, and Biofuel Industries Worldwide. ERR-130. U.S. Dept. of Agriculture, Econ. Res. Serv. December 2011. Use of commercial and trade names does not imply approval or constitute endorsement by USDA. Photos: Thinkstock. 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A Report from the Economic Research Service United States Department www.ers.usda.gov of Agriculture Research Investments and Economic Research Report Market Structure in the Food Number 130 Processing, Agricultural Input, December 2011 and Biofuel Industries Worldwide Keith O. Fuglie, [email protected], Paul W. Heisey, John L. King, Carl E. Pray, Kelly Day-Rubenstein, David Schimmelpfennig, Sun Ling Wang, and Rupa Karmarkar-Deshmukh Abstract Meeting growing global demand for food, fi ber, and biofuel requires robust investment in agricultural research and development (R&D) from both public and private sectors. This study examines global R&D spending by private industry in seven agricultural input sectors, food manufacturing, and biofuel and describes the changing structure of these industries. In 2007 (the latest year for which comprehensive estimates are available), the private sector spent $19.7 billion on food and agricultural research (56 percent in food manufacturing and 44 percent in agricultural input sectors) and accounted for about half of total public and private spending on food and agricultural R&D in high-income coun- tries. In R&D related to biofuel, annual private-sector investments are estimated to have reached $1.47 billion worldwide by 2009. Incentives to invest in R&D are infl uenced by market structure and other factors. Agricultural input industries have undergone signifi cant structural change over the past two decades, with industry concentration on the rise. A rela- tively small number of large, multinational fi rms with global R&D and marketing networks account for most R&D in each input industry. Rising market concentration has not generally been associated with increased R&D investment as a percentage of industry sales. Keywords: agricultural biotechnology, agricultural chemicals, agricultural inputs, animal breeding, animal health, animal nutrition, aquaculture, biofuel, concentration ratio, crop breeding, crop protection, farm machinery, fertilizers, Herfi ndahl index, globalization, market share, market structure, research intensity, seed improvement. Acknowledgments The authors would like to sincerely thank Patrick Sullivan (USDA, Economic Research Service) for coordinating the peer review of this study and the following individuals for their valuable comments on earlier drafts of the report: Vivienne Anthony and Marco Ferroni (Syngenta Foundation); Allen Baker, Jorge Fernandez- Cornejo, and Sarahelen Thompson (USDA, Economic Research Service); Mark Boggess, Cyril Gay, and Jeff Silverstein (USDA, Agricultural Research Service); Derek Byerlee (CGIAR); Nicholas Kalaitzandonakes (University of Missouri-Columbia); William Muir (Purdue University); Charlie O’Brien (Association of Equipment Manufacturers); Robin Readnour (Elanco Animal Health); Amit Roy (International Fertilizer Development Center); Greg Traxler (Gates Foundation), Harry Vroomen (The Fertilizer Institute), and fi ve anonymous reviewers. We would also like to thank representatives of agricultural input companies for providing R&D and other information on their fi rms and industries. Jennifer Cairns and Jessica Gottlieb provided helpful research assistance and John Weber and Wynnice Pointer-Napper provided excellent editorial and design services. ii Research Investments and Market Structure in the Food Processing, Agricultural Input, and Biofuel Industries Worldwide / ERR-130 Economic Research Service/USDA Contents Summary. iv Chapter 1 Research Investments and Market Structure in the Food Processing, Agricultural Input, and Biofuel Industries Worldwide: Synthesis of Results . .1 Objectives and Methods of Study . .1 Private-Sector R&D Investment in Agriculture, Food, and Biofuel . 4 Market Size and Private Food and Agricultural R&D . .10 Market Structure and R&D in AgriculturalInput Industries. 14 Globalization of Private Agricultural R&D . 17 References . 20 Chapter 2 Private Research and Development for Crop Genetic Improvement . 25 Global Market for Crop Seed . 25 Structure of the Global Seed Industry. 29 Agricultural Biotechnology and the Seed Industry. 36 Trends in Private R&D Investment and Innovation in Crop Genetic Improvement . 38 Factors Infl uencing Future Trends in Private-Sector Seed-Biotechnology R&D . 44 References . 45 Chapter 3 Private Research and Development for Crop Protection Chemicals. 49 Market Size and R&D Spending in the Global Pesticide Industry . 49 Structure of R&D in the Global Crop Protection Industry . 50 Innovation Trends in Crop Protection . 57 Conclusions . 61 References . 62 Chapter 4 Private Research and Development for Synthetic Fertilizers. 66 The Global Agricultural Fertilizer Market and Industry Structure . 66 R&D and Technical Change in the Fertilizer Industry. 68 References . 71 Chapter 5 Farm Machinery Research and Development by Private Industry. 74 Global Farm Machinery Markets and Factors Affecting Farm Mechanization . .74 Farm Machinery Market Structure, Innovation, and R&D Spending. 75 Farm Machinery R&D in the United States . 77 References . 78 iii Research Investments and Market Structure in the Food Processing, Agricultural Input, and Biofuel Industries Worldwide / ERR-130 Economic Research Service/USDA Contents—continued Chapter 6 Private Research and Development for Animal Health . .80 Global Market for Animal Health Products . 81 Animal Health Industry Structure . 82 Industry Investment in Animal Health R&D . .86 References . 88 Chapter 7 Animal Genetic Improvement by the Private Sector . .90 Structure of the Animal Genetics Industry. 91 The Market for Animal Genetics . 98 Research Spending in the Animal Genetics Industry . 101 Implications of Market Structure on Animal Breeding Research. 103 References . 104 Chapter 8 Private Research and Development for Animal Nutrition . 107 Types of Manufactured Animal Feed . 107 Global Market for Manufactured Feed . 107 R&D Spending by Animal Feed Companies . 109 References . 111 Chapter 9 Research and Development in the Food Manufacturing Industry . 113 R&D Spending by the Food Manufacturing Industry. 113 Factors Affecting R&D Investment by Food Manufacturing Firms . 116 Innovation and Productivity in Food Manufacturing . 119 Conclusions . 120 References . 120 Chapter 10 Private Research and Development for Biofuel. 123 Global Production of Biofuels. 123 Biofuel R&D Conducted by Industry . 126 Public Funding for Bioenergy R&D . 132 The Future of Biofuel Research and Biofuels Technology . .134 References . 135 iv Research Investments and Market Structure in the Food Processing, Agricultural Input, and Biofuel Industries Worldwide / ERR-130 Economic Research Service/USDA Summary What Is the Issue? Growth in the productivity of the global food and agricultural system will be largely determined by today’s investments in research and development (R&D). In recent decades, the private sector has become a major player in developing innovations for food and agriculture. Factors spurring private companies to invest in food and agricultural research include the emergence of biotechnology and other new scientifi c developments, the strengthening of intellectual property rights (IPR) over agricultural innovations, new regula- tory requirements, the expansion of markets for improved agricultural inputs and food products, and rising consumer demand for more diverse foods. More recently, rapid growth in the market for biofuel has pushed companies to expand their R&D investments in this area as well. This report quantifi es investment trends by for-profi t companies in food manufacturing, biofuel, and agricultural input R&D and explores how these trends are affected by changes in market demand and industry structure.