economics of biotech fall 2005a by HC120727061543


									Economics of
Presentation to
NDSU Extension Meeting
Sept 21, 2005
               By William W. Wilson

                                      UNITED STATES


                                                          UNITED STATES


Overview and Motivation
Major economic issues
  Cost reductions
  Consumer acceptance
  Segregation, IP and traceability
  Distribution of benefits and costs
Challenges to agbiotechnology in future
              Studies on GM Wheat
Issues in Development and Adoption of GM Wheats, AgBioForum 6(3) 1-12;
Costs and Risks of Testing and Segregating GM Wheat, Rev of Ag. Econ
Adoption Strategics for GM Hard Wheats,
Contracting Strategies for GM Hard Wheats
Costs and Risks of Testing and Segregating GM Hard Wheats in Canada
Welfare Distribution of Introducing RRW in US and Canada
Costs and Risks of Conforming to EU Traceability Requirements in NA Hard
Games and Strategies in Introducing GM Hard Wheats in NA
Technology Price Impacts of GM Technology in Hard Wheat (RRW and FRW)
Licensing and Stacking Games and Strategies in GM Hard Wheats
Background on
Adoption and
Harvested Acres for North Dakota,
            by Crop
Soybean Planted Area (000 A) 1995
Soybean Planted Area (000 A) 2004
Soybean Production 2004
GM Soybean Adoption in ND, SD and
         MN; 2000-2004.
ND Soybean Varieties
Revenue from oilseed production in
North Dakota, 1995-2003
Revenue (in millions of $)

                             500                                                  Soybean
                             400                                                  Canola
                             300                                                  Flax

                             200                                                  Sunflower

                                   1995 1996 1997 1998 1999 2000 2001 2002 2003
Flows of A Biotech Research and
Development Benefits and Costs
Over Time
 Gross Annual
 ($ per year)

                                 5        10   15        20     25   30

 Annual Costs          Research and                 Adoption
 (-$ per year)         development lag              Process

 Source: Alston et al. 2000.
Commercial View of Trait Development

Time for Development: 8-10 years
Cost: $80-100 million (incl. 20-40$ million in costs to
         conform to regulatory system)
  Technical feasilility--proof of concept
  Regulatory Approval--US and ROW
  Commercial acceptance--price discounts
       ƒUS and ROW

       ƒConsumers vs. buyers

  Competitor traits and technologies
  Patent protection--for a period
       Ag Biotech Product Development

                                                                                                 Regulatory submission
                                                                                                 Seed bulk-up
                                                                         Trait integration
                                                                         Field testing
                                                                         Agronomic evaluation
                                                            (50%)        Regulatory data
                                                    Trait development generation
                                                    Field trials
(Probability of                    (25%)
                                                    Pre-regulatory data
  Success)                                          Large scale transformation
                            Gene optimization
                  (5%)      Crop transformation
           High throughput
            screening       Bio-evaluation
                            Greenhouse and field
           Model crop testing

    Year 0        1     2             3     4    5                      6      7      8                 9     10
               Discovery            Phase I                                 Phase III                 Phase IV
                                              Phase II                        Advanced
                    Gene/trait       Proof of                                                          Regulatory
                                                          Early              development               submission
                  identification     concept
Seeds and Traits being Field Tested
by Agbiotech Firms
           Product     Herbicide      Insect     Agronomic     Fungal        Virus
Company    Quality      tolerant     resistant   properties   resistant    resistant
Dow         corn      corn, cotton     corn,        corn
DuPont      corn,     corn, cotton
Syngenta     corn     rice, corn,      corn,        corn      wheat,         beet,
                      sugarbeet       cotton                   corn,      watermelon,
                                                              potato,       tomato
Monsanto     corn,       alfalfa,      corn,       corn,
            potato,     soybean,      cotton,     soybean
           soybean       cotton,     soybean
                      beet, wheat,
                      rice, potato
 Number of field test permits filed by
 private agbiotech firms, 1987-2004






           0   1000     2000     3000      4000      5000   6000
                      Number of Field Test Permits
Number of field test permits filed by
public institutions, 1987-2004
  U of Wisconsin

U of Neb./Lincoln
  U of Minnesota
      U of Idaho


     Montana St.
      Iowa State


                    0   50     100       150      200       250   300
                             Number of Field Test Permits
Applications for Field Trials in North
Dakota, by Crop, 1990-2004

40                                             Sunflower
10                                             Barley

     1990 1992 1994 1996 1998 2000 2002 2004
        1991 1993 1995 1997 1999 2001 2003
Future New Traits (prospective)

   GM row crops: soybeans, canola and corn
     Input traits:

         Further refined input traits
         Output traits refined by feeding efficiency and ethanol
     Output traits:

         Oil content, etc.
         Food use of oils
         BioDiesel (potential)
   Wheat
     Fusarium Resistance (Syngenta)

     Drought Resistance (various state universities)

     RR…door open to be revisited

     Product quality: various forms

   Other small grains—negligible
   Bio-Pharmaceuticals
Myths about AgBiotechnology

Productivity gains/cost savings--typically
 Consumer acceptance
  ƒ selected claims

  ƒ GMA; other crops; and survey realities

  ƒ segments in each market will persist

Segregation technology and costs
Economic Issue 1: Reduced cost of
production and/or output trait
   Some agbiotech traits can
       Reduce the cost of production due to the
       Reduce the cost of competing inputs
       Reduce the cost of producing an output trait
RRW: Elements of Cost Savings
Sources of Cost Savings for RRW:
  Implied in Model Assumptions

       Value of Yield (11-16%)          13.62 $/ac
      Adopter Cost Savings               9.70
      Tech fee                          -6.00
      Dockage rem. costs                 0.33
       Total                               18 $/ac
                                           48 c/b
                                           18 $/mt
Potential Decreases in Crop
Technology Costs

Prices for competing chemicals: Soybeans post intro of RR
   reduced 40-50%
   glyphosate reduced 22% by 1998.
Proposed ND GM traits (Wilson and Huso--NDSU)
  ƒ Prices of competing products to RR:      decrease 35%
  ƒ Prices of competing products to Fus Res: decrease 37%
Retail Price of Pursuit in North
Dakota, 1995-2002
           Prospective Adoption Rates
              for GM Wheats in ND

Allowing RRW, GM FRW, Stacked, and
 Conventional varieties:
Equilibrium adoption in US HRS areas:
 ƒ   GM FRW         34%
 ƒ   RRW            20%
 ƒ   Stacked        31%
 ƒ   Conventional   15%
Economic Issue 2: Consumer Acceptance

    Who benefits:
        Producer benefits--cost reduction and/or increased yield
        Consumer benefits of producer traits
            increased supply, reduced price, and/or new trait
     ƒ   Consumer benefits of output traits
 What Do End-Users Want?
Difficulties in Defining Desired Characteristics
Who is the buyer? Consumers, bakers, millers....
Divergent interests (i.e., multitudes of products) leading to
 fundamentally different market segments (i.e. of desired
Seeking information about characteristics that may not be
 currently available (e.g., storability, nutritional attributes)
Buyer acceptance--discussion
 Claims of buyer aversion should be challenged
   ƒ US Domestic market is by far the dominant market:

        70% of grocery products are GM; and
        bread has GM ingredients already
   ƒ Buyers are naturally averse prior to trait gaining regulatory approval

   ƒ Buyers are not likley fully informed about the functional differences

ƒ Buyers typically express aversion in surveys;

   ƒ in practice accept the products (results of major survey of literature).

     Be cautious of surveys!
ƒ Experimental Auction results:

   ƒ Suggest 7% of market is averse to products containing GM
Buyers Approach is Evolving

Many countries do not have regulatory process
 with scientific integrety
Some will naturally adopt that of US, and, require
 certification (Philipines, China, Mexico)--
 Certificate of Free Trade
Application in the case of GM wheat—see below
Distribution of North American Market
Consumer Acceptance: Summary
   Evolving
       e.g., China
   Segments:
       In nearly all mature markets, one should expect market
        segments to emerge with respect to GM acceptance
           Due to demand, incomes, market maturity, regulations, etc.
           Natural process of market maturity
   Segregation:
       Buyers in most cases have found, or are finding ways to
        make purchases of non-GM even though GM may be the
        predominant crop
           Numerous examples in US on corn and soybeans
           Brazil routinely serves both market segments
           etc
Economic Issue 3: Segregation, IP
and Traceability
Spectrum of Procurement

Spot                                                                                             Vertical
Market           Testing &            Targeting              Contract        Identity            Integration
                 Segregation                                 Production      Preservation
grades                      Origins    Varieties Prod.
                                                                                Proc. certif.
protein                                          Practices
F.N.                                                                                        Assets     Grain

          By         Pre-        Pre-             Acres         Prod.       Quality
          Location   Shipping    Processing                     Practices   Req't.
IP/Segregation are not synonomous
       Desired processes are declared

     ƒ Audits conducted using varying mechanisms

     ƒ Paper trail (sometimes)

     ƒ Identity if preserved

     ƒ Tests may/may not be component of system

     ƒ Grain is segregated based on varying forms of information:

         variety declaration
     ƒ Maintained throughout system in response to incentives

     ƒ Tests assure integrity of segregations

 GM Averse buyers very likely want tests/segregations and traceability, not
Results from Segregation Studies
 Specialization will reduce
Likely specialization with respect to
   ƒ geography

   ƒ handlers

   ƒ farmers

Mitigation of risks and costs: All of these would mitigate
 broader risks to system
Recent Survey of Upper Midwest Elevators

   IP and GM Marketing
       89% handle GM grains
       18% handle IP
       57% use mechanisms of proof
       19% ask for variety declaration
   Certification
       22% HAACP and 19% ISO certified
   Segregation
       Percent of grain segregated: 36%
       Average cost=7c/b
           Greater for small elevators than large
       Cost of modification for enhanced segregation:
           $200,000 or 8c/b
Traceability: European
   April 2004:
       End of the moratorium (in force since 1999).
       EU allows grain from countries using GM seed
        under restrictive conditions:
             Labeling of product containing more than 0.9% of approved
              GM material.
             Maintaining high level of traceability

   January 2005:
       Traceability is obligatory for all food and

    Defined in 1987 (NF EN ISO 8402) as
      the ‘Ability to retrace history, use or location of an entity by the
       means of recorded identification’.
      Ability to trace GMOs and products produced from GMOs at all
       stages of their placing on the market through the production and
       distribution chains’ (EU Parliament, 2003)
    Requirements for Non-GM Grains
        On-Farm: Isolation between GM and Non-GM fields, Buffer stocks, Cleaning,
         Storage adapted, Auditing, Certification, Testing, Traceability,…

        One step back and one step forward: system to identify to whom and from
         whom products are made available.

        Transmission of specified information concerning the identity of a product to the
         next agent: certification record, test records,…

        5 years period of recordkeeping.

    Labeling:
        “this product contains genetically modified organisms” if exceeds the 0.9%
Costs and Risks Management Strategy
Conforming EU Requirements
   Research supported: NDSWC and SBARE
   Prospective costs and risks for wheat from ND to
    conform to EU traceability requirements
   Research report: available
   Costs include
       On-farm:
           isolation, certified seed etc.
           Lower yielding (efficient) varieties vs. GM technology
       Off-farm: testing, segregation, traceability certification
       Risk premiums
Base Case Results: Elements of
Costs (related to GM Wheat)

                                                   Quality Loss
                        50                 5   1
  Costs (c/Non-GM bu)

                                                   Traceability Cost
                        30                         Testing Cost

                                                   Risk Premium

                        10   21
                                                   On-Farm Cost

                                   Base Case

   Risks can be managed,
       Buyer Risk: 0.01%
       Seller Risk: 1.73%
       Risk Premium/Non-GM bu = 21 c/bu

   Total cost about    50c/bu,
   Dominant costs are risk premium and on-
    farm practices.
Economic Issue 4: Distribution of
Benefits and Costs of AgBiotechnology
   RRW Case Study: Background
       Weed pressures in HRS
       Field trials in HRS and CWRS areas
       Opposition began from numerous fronts
   Welfare analysis
       How are benefits of a new technology
           Consumers—lower prices
           Producers—lower costs
           Regulations/GM aversion distort results
Changes in Welfare by Scenario
Change in Producer Welfare:by
Change in Consumer/Import
Welfare:by Scenario
Intuition to Results II:
Intro of RRW
Producers benefit                           +$197 Mill
       After considering all other costs/benfits explicitly modeled
Consumers benefit (in total) +$163 million
       reduced prices/increased supply
Consumers of non-GM segments: Reduced welfare due to
   ƒ higher cost technology (forgo yield increases and on-farm cost savings)
   ƒ require segregation costs

   ƒ non GM must compete with RRW, other crops and markets with no

     segregation costs
   ƒ Longer-term: may have to compete against products not requiring non-

Summary and Future Challenges

   Major changes occurring in agriculture as a result of the
    introduction of agbiotechnology into crops
     Increased profitability

     Changing cropping patterns

   Major economic issues
     Production costs: Decline as result of new technology

     Consumer acceptance: Evolving; but, highly fragmented

     Segregation/IP/Tracebility: Systems are evolving and US
       handlers are penetrating these segmented markets fairly
     Distribution of benefits: GM traits result in consumer and
       producer benefits; but, reduced benefits to those not
       adopting/accepting of the technology
Future Challenges
   Escalation of GM traits
     More specialized and focused on specific segments and industries

     Identifying desired traits: Major challenge for future

          Smaller segments
          Consumers preferences likely reflect different desired
           characteristics; hence making targeting of traits more difficult
   GM traits provide N. America an advantage—first mover advantage
     Due to the legal system to facilitate intellectual property rights, vs. that
       in many other countries
   Small Grains
     Small acres base relative to corn and oilseeds

     Consumer acceptance more fragmented
     Challenge to encourage agbiotech investment and/or risk continued
       loss of area planted: small grains becoming increasing more of
       specialty crop
   GM Research and Investment
     Cost, risk and time required for trait development

     Requires increase in partnering across system for effective

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