Economic Interests
3.1 Regulatory Development
In this section, the economic implications of GM crops are considered at the producer, sectoral and national level. Essentially, GM crops promise considerable private and public economic benefits, extending beyond the agricultural sector and making them an important element in the industrial competitiveness of a nation. Economic interests, in pursuit of these outcomes, support a stable and predictable regulatory framework ensuring technological progress.
At the farm level, production-trait GM crops have been developed to address important production concerns of producers. For instance, herbicide-tolerant varieties address producer concerns about weed
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control, by replacing many synthetic chemicals with one broad- spectrum, postemergent herbicide. Producer’s costs are reduced, as they do not have to spray their fields so often. Bacillus thuringiensis (Bt) varieties with insecticidal characteristics reduce costs by eliminating the need for particular insecticides and the costs of applying those insecticides. Further, the economic benefits of these GM crops are enhanced by their conformity with both conventional agronomic sys- tems and bulk commodity distribution channels, thereby eliminating the need for investment in new implements and segregation practices.
Given the economic benefits, GM crops have been rapidly adopted.
For instance, in the USA in 1998 20.5 million ha of transgenic crops were planted, while in 1999 28.7 million ha were planted, a growth rate in adoption of 8.2%. In fact, the global growth rate of adoption was 12.1% (James, 1999).
The next generations of GM crops, output-trait GM crops and bio- engineered products, are intended to secure farm-level economic ben- efits by exhibiting qualities demanded by specific end-users. In other words, they have value setting them apart from conventional agricul- tural commodities. Producers will receive price premiums to ensure that the valuable varieties are produced under precise agronomic regimes and segregated from non-desired varieties in the field during harvest, storage and transportation.
Beyond the farm level, the genetic modification of agricultural crops encourages the integration of agricultural production both verti- cally within the agricultural sector and horizontally across other sec- tors. Indeed, the knowledge intensification of crop development has created economic opportunities by opening up new customers for agri- cultural production, such as ‘pharming’ or industrial speciality oils.
Along with the private economic benefits, there are public eco- nomic benefits made possible by GM-crop development. Consider first that GM crops are poised in the short to medium term to alleviate the demands on domestic farm-support programmes. As previously dis- cussed in Chapter 2, GM crops essentially represent scientific solu- tions to the public policy problems of variance in agricultural crop quantity and quality. Endogenous technological innovation embedded in the seed can improve crop performance and decrease the reliance of the agricultural sector upon domestic support programmes. In the long term, GM crops are poised to become a major foundation of a nation’s industrial production base, as applications are found across non-food industries. In fact, GM crops must be understood as a com- petitiveness issue of national economic importance with significant global implications. GM-crop technologies allow for the creation of endogenous comparative advantage (Grossman and Helpman, 1991), whereby comparative advantage is no longer based on the natural endowment of factors of production. Instead, the technologies allow
countries to shape their own comparative advantage and determine their economic future. Attracted by this potential outcome, public policies have been designed to ensure an internationally competitive agricultural biotechnology capacity during the so-called agricultural- ization of industry (Shimoda, 1997).
Given the potential economic benefits of GM crops, it is easy to understand support among some interests for the research, develop- ment and commercialization of these varieties. Yet, in order to take advantage of the private and public economic opportunities of GM crops, the jurisdiction must have capacity. Capacity represents the abil- ity of both private and public personnel to apply modern biotechnol- ogy. This requires a sophisticated national infrastructure in terms of human capital, capital equipment and investment capital. Therefore, it is not difficult to see why domestic governments in pursuit of the eco- nomic potential have supported the capacity building of biotechnology in the agricultural sector through various public policy initiatives.
Building capacity is, however, a formidable challenge, where capacity is a function of both time and space. In respect of time, it requires years to acquire the level of scientific human capital neces- sary to conduct research and development at the frontiers of agricul- tural biotechnology. According to Baltimore (1982), the acquisition of the necessary human capital alone requires 30 years of educational development per researcher. In addition, since most of the current ini- tiatives in agricultural biotechnology are driven by the private sector, capacity also requires a mature financial system capable of chan- nelling investment capital towards specific agricultural biotechnology applications.
In respect of space, capacity is linked to the existence of a critical mass of research activity. As previously discussed in Chapter 2, advancements in modern biotechnology generally are applicable across more specific applications, so that a critical mass of research activity focused broadly on advancements in biotechnology assists the development of capacity (Barton, 1998; Theodorakopoulou and Kalaitzandonakes, 1999). It is argued that such a research capacity must have a geographical profile (Zilberman et al., 1997; Phillips and Khachatourians, 2001). Even between developed countries, the private and public economic importance of GM crops creates economic com- petition on the frontiers of science, where the concentration of capac- ity may result in the formation of ‘agricultural industrial complexes’
in the developed countries (Shimoda, 1997; Zilberman et al., 1997).
The capacity issue of agricultural biotechnology has dynamic eco- nomic scale effects. A critical mass of research activity increases the potential for the development of new GM products, while learning effects decrease the time required for GM-product development (Barton, 1998).
An important aspect of the capacity issue in developed countries is the fact that it has been driven by the private sector. As the state has retreated from both basic and applied research into the applications of agricultural biotechnology, the void has been filled by private firms.
This shift in leadership has been readily supported by governments in North America and Europe. Indeed, Table 3.1 provides evidence as to the ‘private’ capacity that exists in GM-crop development.
Following this economic rationale, the supply side of the agricul- tural sector has undergone structural change in order to build capacity.
Increasingly, it has abandoned its traditional structure, where agricul- tural products were bulk commodities and producers were considered to be a homogeneous group. Very little integration occurred as commodi- ties moved along the supply chain through spot market transactions. As
Table 3.1. Examples of integration in the agricultural sector.
Monsanto 1997 acquires Calgene (bio and seed) 1997 acquires Agracetus (bio)
1997 acquires Asgrow Agronomics (seed)
1998 (May) strategic relationship in DelKab Genetics (bio and seed) 1998 (May) ownership position in Delta and Pine Land (seed); cancelled in January 2000 by Monsanto
1998 (May) joint venture with Cargill for food processing and packaging 1998 acquires Holden’s Foundation Seeds (seed) $1100 million 1999 merger with Pharmacia & UpJohn, where the agricultural biotechnology division would be made into a separate legal entity apart from the pharmaceutical operations
Dow Elanco 1997 acquires majority in Mycogen (bio and seed)
Hoechst 1997 in agribusiness venture with Agrevo and Schering acquires majority in Plant Genetic Systems (PGS) (bio) $730 million
Proposed merger with Rhone-Poulenc ‘Aventis’, where agricultural biotechnology (Aventis Agriculture) is separated from pharmaceutical biotechnology (Aventis Pharma)
DuPont 1997 strategic partnership with Pioneer Hi-Bred (PHB) 20% stake establish ‘Optimum Quality Grains’
1999 (March) acquires remaining stake in PHB $7700 million Novartis Merger of Sandoz (pharma), Ciba-Geigy, Ciba Seeds, Northrup-King
Seeds
1999 merger with Astra-Zeneca ‘Syngenta AG’ to take over the combined agricultural biotechnology
Astra-Zeneca 1999 merger of Astra (pharma), Zeneca £53,000 million
1999 merger with Novartis ‘Syngenta AG’ to take over the combined agricultural biotechnology
mentioned, production-trait GM crops remain largely congruent with this traditional system, which is in part responsible for their popularity.
However, output-trait applications or bioengineered products require a greater level of vertical integration along the supply chain to ensure segregation. End-users contract for the production of cus- tomized GM varieties tailored to meet their specific demands. These GM varieties, grown for food or non-food use (e.g. pharmaceutical or industrial chemical uses), must be segregated from other varieties to ensure value capture – that is, to ensure the production and delivery of the high-value GM varieties that end-users want. Additionally, non- food-use GM crops must be segregated for safety reasons to ensure that such GM-crop varieties are kept out of the food supply, because they have not been designed for food production. The agricultural supply chain must become vertically integrated in order to facilitate the research, development, production, distribution, marketing and end use of customized, differentiated GM agricultural products.
Recent restructuring in the traditional agrochemical industries supports this and is indicative of the economic need for vertical inte- gration (see Table 3.1 for some examples). Much economic analysis has focused on the causes of vertical integration, where the key cause is the knowledge intensification of the crop development process. In fact, the knowledge intensification of the GM-seed industry has cre- ated a practical need to ensure segregation for value capture and a commercial need to protect advanced knowledge. This in turn has cre- ated powerful economic incentives for firms in the agricultural life- sciences sector to engage in significant vertical and horizontal integration. It is argued that the result of this integration is the ‘indus- trialization of agriculture’ or the ‘agriculturalization’ of the national economy (Shimoda, 1997; Zilberman et al., 1997; Barton, 1998).
As knowledge, embedded in the seed, has become the future of agricultural production, GM varieties will break the dependence of intensive agricultural production on chemicals. Traditionally, chemi- cals were added postseeding to overcome the production risks, but with modern biotechnology the ability to overcome production risks can be bred into the seed itself. Realizing this, agrochemical firms have moved upstream to acquire the seed and biotechnology firms and hence to own the knowledge. In the short run, production-improved herbicide-tolerant GM varieties have been developed as part of an integrated seed–chemical regime, supported by the agrochemical firms.1 This shifts the chemical use from many different chemicals to one non-selective, broad-spectrum herbicide, hence decreasing the commercial opportunities of agrochemical companies.
1For instance, Monsanto’s Round-up-Ready herbicide-tolerant GM varieties (cotton, maize, soybean and canola/rape-seed) and Agrevo’s Liberty Link herbicide-tolerant GM varieties (e.g. canola/rape-seed, maize, soybean).
But this is a short-run situation. The long run is better character- ized as chemical-free production, due to the endogenous innovation within the seed. For instance, GM crops with Bt properties do not just shift chemical use, they actually decrease overall chemical use.
Consequently, the agrochemical firms have moved upstream to buy into the knowledge base of the future, rather than remaining dependent on chemicals, which are an ever-decreasing share of production inputs.
Economists argue that this upstream movement is both predictable and consistent with economic theory (Kalaitzandonakes and Hayenga, 1999). The agrochemical firms seek to identify, patent and protect the industrial base of their future – knowledge of plant genomics (Joly and Lemarie, 1998). But this is no different from the multinational phar- maceutical giants, which have long been accepted and tolerated.
Similar to pharmaceutical companies, agricultural ‘life-sciences’ firms also face significant research and development (R&D) costs for GM crops and capacity is made more efficient through economies of scale.
Two economic studies have concluded that vertical integration is dri- ven by an economically rational and efficient response to the need to identify, patent and protect the knowledge intensification of the seed industry (Graff et al., 1999; Rausser et al., 1999). This conclusion, combined with the conclusion that agrochemical firms have moved upstream because of the limited future of their chemicals, challenges the popular argument among many critics of GM crops (see Chapter 4) that life-sciences firms are monopolists in pursuit of anticompetitive market power in order to increase the dependence of agricultural pro- duction on chemicals. On the contrary, vertical integration is driven by both the knowledge intensification of the seed industry and the subsequent need to build capacity and secure a competitive position in the agricultural sector by increasing a stake in biotechnology and decreasing the reliance on synthetic chemicals alone.
The firms developing GM crops face two important issues associ- ated with the knowledge intensification of agricultural crops. First is how to be compensated for the knowledge embedded in the seed. One approach is the legal approach. Seed purchases have shifted from tra- ditional spot transactions for conventional seeds to complicated technology-use agreements (TUAs) for GM seeds, associated with a premium ‘technology fee’. In 1999, Monsanto charged a technology fee of US$6.50 bag−1of Round-up-Ready soybean seeds, which repre- sented a 40% premium on the GM seeds over non-GM seeds. Further, TUAs for Monsanto’s herbicide-tolerant soybeans prohibit both the resale of the seeds by the producer (prior to planting and postharvest) and the practice of seed-saving (using harvested seeds for the next crop). While the technology fee compensates the GM-seed developer at the time of purchase, the TUAs attempt to ensure that the developer is compensated for the next crop as well.
An alternative approach for ensuring compensation for the com- mercial use of the knowledge embedded in the seed is the biological approach, through the use of so-called ‘terminator’ or ‘traitor’ technol- ogy.2The objective is to develop GM seeds that are sterile and cannot be used for a second planting or cannot cross-pollinate with other plants. Simply, this approach bypasses the need for legal TUAs. This is actually not a new approach, as F1hybrid varieties of maize seeds used for decades are sterile after harvest and cannot be successfully planted the following crop season.
The second important issue for GM-crop developers, associated with the knowledge intensification of the seed industry, is how to pro- tect their knowledge from other firms. A common approach to vertical integration has been through acquisition and consolidation, rather than other tools of industrial organization such as licensing agree- ments or contractual arrangements for technology use between biotechnology, seed and agrochemical firms. It has been argued that acquisition and consolidation have been the chosen strategy, again not for anticompetitive monopoly reasons, but because of the current regime for intellectual-property protection (Rausser et al., 1999).
Essentially, outright ownership of the knowledge is the sure way to protect it. If intellectual-property protection laws were stronger and internationally respected, then technology licensing would be the chosen strategy and not direct ownership. The economic rationale behind intellectual-property rights (IPRs), such as patents and plant- breeders’ rights (PBRs), is that they provide an incentive both for investment in inventive activities and for technology transfer (Malchup, 1958). Zilberman (1999) argued that a weak IPR regime over GM-crop technologies has encouraged too much agroindustrial concentration, because only direct ownership will ensure that intel- lectual property is protected.
The horizontal integration of agricultural production simply rep- resents an interindustry extension of the issues associated with the vertical integration of the agricultural sector. Horizontal integration is motivated by the output-trait applications and bioengineered prod- ucts, allowing GM crops to meet the demands of new end-users, such as pharmaceutical, nutriceutical or industrial firms.
Given the fundamental role of capacity in the R&D and commer- cialization of GM crops, the significant public and private investment in capital that must be made in order to build capacity and the neces- sary restructuring of the agricultural sector, economic interests natu- rally support a stable regulatory framework that encourages technological progress through a scientific-rationality approach to risk
2Terminator technology is patented by the US Department of Agriculture (USDA) and Delta and Pine Land, now owned by Monsanto, while traitor technology was being developed by UK-based Astra-Zeneca. However, this technology is not in use.
analysis and that clarifies IPRs. This is not to suggest that economic interests ignore safety issues. On the contrary, economic interests gen- erally provide significant scope for safety issues in regulatory frame- works. They often insist, however, that there is a sound scientific basis for determining safety, subject to an objective, rules-based analysis of risk, so that stability and commercial predictability are built into the framework.