Economics of AgBiotechnology Presentation to NDSU Extension Meeting Sept 21, 2005

1. Economics of AgBiotechnology Presentation to NDSU Extension Meeting Sept 21, 2005 By William W. Wilson GREENLAND UNITED STATES (Alaska) CANADA UNITED STATES MEXICO

2. Topics • Overview and Motivation • Major economic issues • Cost reductions • Consumer acceptance • Segregation, IP and traceability • Distribution of benefits and costs • Challenges to agbiotechnology in future .

3. 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 Wheats, • 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

4. Background on AgBiotechnology Adoption and Development

5. Harvested Acres for North Dakota, by Crop

6. Soybean Planted Area (000 A) 1995

7. Soybean Planted Area (000 A) 2004

8. Soybean Production 2004

9. GM Soybean Adoption in ND, SD and MN; 2000-2004.

10. ND Soybean Varieties

11. Revenue from oilseed production in North Dakota, 1995-2003

12. Flows of A Biotech Research and Development Benefits and Costs Over Time Gross Annual Benefits ($ per year) Research Benefits 5 10 15 20 25 30 Research Costs Annual Costs (-$ per year) Research and development lag Adoption Process Source: Alston et al. 2000.

13. 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) • Risks • Technical feasilility--proof of concept • Regulatory Approval--US and ROW • Commercial acceptance--price discounts • US and ROW • Consumers vs. buyers • Competitor traits and technologies • Patent protection--for a period

14. Ag Biotech Product Development (90%) • Regulatory submission • Seed bulk-up (75%) • Trait integration • Field testing • Agronomic evaluation • Regulatory data generation (50%) • Trait development • Bio-evaluation • Field trials • Pre-regulatory data • Large scale transformation (Probability of Success) (25%) (5%) • Gene optimization • Crop transformation • Bio-evaluation • Greenhouse and field trials • High throughput screening • Model crop testing Year 0 1 2 3 4 5 6 7 8 9 10 Phase III Advanced development Phase IV Regulatory submission Phase I Proof of concept Discovery Gene/trait identification Phase II Early development

15. Seeds and Traits being Field Tested by Agbiotech Firms

16. Number of field test permits filed by private agbiotech firms, 1987-2004

17. Number of field test permits filed by public institutions, 1987-2004

18. Applications for Field Trials in North Dakota, by Crop, 1990-2004

19. 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

20. Myths about AgBiotechnology • Productivity gains/cost savings--typically understated! • Consumer acceptance • selected claims • GMA; other crops; and survey realities • segments in each market will persist • Segregation technology and costs

21. Economic Issue 1: Reduced cost of production and/or output trait • Some agbiotech traits can • Reduce the cost of production due to the technology • Reduce the cost of competing inputs • Reduce the cost of producing an output trait

22. RRW: Elements of Cost Savings

23. Sources of Cost Savings for RRW: Implied in Model Assumptions $/ac 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

24. 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) • Prices of competing products to RR: decrease 35% • Prices of competing products to Fus Res: decrease 37%

25. Retail Price of Pursuit in North Dakota, 1995-2002

26. Prospective Adoption Rates for GM Wheats in ND • Allowing RRW, GM FRW, Stacked, and Conventional varieties: • Equilibrium adoption in US HRS areas: • GM FRW 34% • RRW 20% • Stacked 31% • Conventional 15%

27. 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 • Consumer benefits of output traits

28. 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 characteristics) • Seeking information about characteristics that may not be currently available (e.g., storability, nutritional attributes)

29. Buyer acceptance--discussion • Claims of buyer aversion should be challenged • US Domestic market is by far the dominant market: • 70% of grocery products are GM; and • bread has GM ingredients already • Buyers are naturally averse prior to trait gaining regulatory approval • Buyers are not likley fully informed about the functional differences • Buyers typically express aversion in surveys; • in practice accept the products (results of major survey of literature). Be cautious of surveys! • Experimental Auction results: • Suggest 7% of market is averse to products containing GM

30. 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

31. Distribution of North American Market Segments

32. 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

33. Economic Issue 3: Segregation, IP and Traceability

34. Spectrum of Procurement Strategies Spot Market Vertical Integration • Identity • Preservation • Traceability • Proc. certif. Contract Production Testing & Segregation Targeting grades protein F.N. T.W. Prod. Practices Origins Varieties Assets Grain By Location Pre- Shipping Pre- Processing Prod. Practices Quality Req't. Acres

35. IP/Segregation are not synonomous • IP • Desired processes are declared • Audits conducted using varying mechanisms • Paper trail (sometimes) • Identity if preserved • Tests may/may not be component of system • Segregation • Grain is segregated based on varying forms of information: • tests • variety declaration • hunches! • Maintained throughout system in response to incentives • Tests assure integrity of segregations • GM Averse buyers very likely want tests/segregations and traceability, not IP

36. Results from Segregation Studies

37. Specialization will reduce risks/costs • Likely specialization with respect to • geography • handlers • farmers • Mitigation of risks and costs: All of these would mitigate broader risks to system

38. 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

39. Traceability: European Requirements • 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 ingredients.

40. Traceability • 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% threshold.

41. 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

42. Base Case Results: Elements of Costs (related to GM Wheat)

43. Conclusion • 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.

44. 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 distributed? • Consumers—lower prices • Producers—lower costs • Regulations/GM aversion distort results

45. Changes in Welfare by Scenario

46. Change in Producer Welfare:by Scenario

47. Change in Consumer/Import Welfare:by Scenario

48. 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 • higher cost technology (forgo yield increases and on-farm cost savings) • require segregation costs • non GM must compete with RRW, other crops and markets with no segregation costs • Longer-term: may have to compete against products not requiring non-GM

49. 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 efficiently • Distribution of benefits: GM traits result in consumer and producer benefits; but, reduced benefits to those not adopting/accepting of the technology

50. 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 commercialization