Transcript Presentation

Diffentiating GMOs From Non-GMOS
Troy G. Schmitz
Assistant Professor
Morrison School of Agribusiness
Charles B. Moss
Andrew Schmitz
Presented at:
Free Trade: Responding to Opportunities and Challenges
San Antonio, Texas
May 24, 2002
Topics for Discussion
•Show the conditions under which two separate markets can
emerge: one for GMOs and one for non-GMOs
•Show why that in cases where the markets can be separated
there will be a price premium for Non-GMOs
•Discuss why most non-GM corn is not marketed as such
•Discuss why the rate of adoption for GM corn is low and declining
•Show that when IP costs are added to deal with market
segregation problems, total revenue to all corn producers declines
•Show Preliminary Trade Model for Food vs. Non-Food Corn with
IP Costs added
Adoption of GMOs without Difference in Demand
S0
p
S1
S1
ST
ST
p
p
D
Q0Q0Q1 Q1
QT QT
Q
Additional Transaction Costs for non-GMO Producers
•Non-GM corn can be used to satisfy BOTH the non-GM and GM markets.
•GM Corn can be sold only in markets that do not differentiate
•Non-GM corn and soybeans must be tested in order for the producer to receive
a price premium in the non-GM market
•Additional transaction costs exist when selling to the non-GM market:
(1) Cleaning Costs
(2) Planting barriers (safety strips or male plants)
(3) Costs of removing volunteer plants from previous crops
(4) Several costs associated with Identity Preservation through the channel
•Any premiums that may exist for non-GM certified grain MUST account for:
(1) All the deterministic costs mentioned above; AND
(2) The probability that the crop could become contaminated anyway
Case 1: There Exists an Excess Demand for Non-GM corn
P
SN
SN '
P1
(a) Non-GM Crop
(b) GM Crop
IP
Cost
ESG
P2
Price
Prem .
SG
P
P0
DN
DN '
EDN
QND
QNP QS
N
QT
QGD
QGS
DG
Q
Case 2: There Exists an Excess Supply of Non-GM Corn
Additional Costs of Segregating Grain Crops
Additional Cost
Study
(cents/bushel)
Bender et al. (1999)
17
48
Maltsbarger and Kalaitzandonkes (2000a)
16-27
16.4
16-15
Maltsbarger and Kalaitzandonkes (2000b)
16.4-36.6
Lin, Chambers, and Harwood (2000)
22
45
Bullock, Desquilbet, and Nitsi (2000)
30
European Union Directorate-General
18.4
Source: Authors’ compilation.
Crop/
Characteristic
Specialty Corn
Specialty Soybean
High Oil Corn
High Oil Corn
High Oil Corn
High Oil Corn
non-GM Corn
non-GM Soybeans
non-GM Soybeans
non-GM Corn
Adoption Rates of GM Crops in the United States, 1996-2000
Crops
1996
GM Soybeans
Bt Corn
Herbicide-tolerant Corn
Total GM Corn
Bt Cotton
Herbicide-tolerant Cotton
7.4
1.4
3.0
4.4
14.6
NA
1997
1998
1999
Percent of Planted Acres
17.0
44.2
57
7.6
19.1
30
4.3
18.4
8
11.9
37.5
38
15.0
16.8
27
10.5
26.2
38
NA
25.5
All GM Cotton
Sources: Chern (2000); USDA.
43.0
65
2000
54.0
18
6
25.0
15.0
26.0
61
Survey Responses by Ohio Farmers Related to Segregation
and Market Premiums (GM versus non-GM adoption)
Questions
Did you encounter any elevators that
would not accept GM varieties in
1999?
Did you receive premiums for non-GM
varieties in 1999?
Do you plan to segregate GM from nonGM varieties in 2000?
Do you expect premiums for non-GM
varieties in 2000?
Source: Chern (2000).
Corn
Soybeans
Yes
No
Yes
No
Percent of Respondents
4.3
95.7
0
100
7.0
93.0
21.3
78.7
18.6
81.2
35.5
64.5
7.0
93.0
22.3
77.7
U.S. Corn Supply and Use (1980/81-1999/00)a
Year
1980/81
1981/82
1982/83
1983/84
1984/85
1985/86
1986/87
1987/88
1988/89
1989/90
1990/91
1991/92
1992/93
1993/94
1994/95
1995/96
1996/97
1997/98
1998/99
1999/00
Millions Bushels
Production Exports Domestic Feed
Use
6,639
2,391
4,891
4,232
8,119
1,997
4,978
4,245
8,235
1,821
5,427
4,573
4,174
1,886
4,806
3,876
7,672
1,850
5,182
4,115
8,875
1,227
5,266
4,114
8,226
1,492
5,893
4,660
7,131
1,716
6,041
4,789
4,929
2,028
5,232
3,934
7,532
2,367
5,753
4,383
7,934
1,727
6,034
4,609
7,475
1,584
6,332
4,798
9,477
1,663
6,808
5,252
6,338
1,328
6,289
4,680
10,051
2,177
7,165
5,460
7,400
2,228
6,305
4,693
9,233
1,797
6,969
5,277
9,207
1,504
7,264
5,482
9,759
1,981
7,332
5,472
9,431
1,937
7,577
5,664
FSIb
HFCS
Fuel
659
733
854
930
1,067
1,152
1,233
1,252
1,298
1,370
1,425
1,534
1,556
1,609
1,705
1,612
1,692
1,782
1,860
1,913
165
183
214
265
310
327
338
358
361
368
379
392
415
444
465
482
504
532
565
539
35
86
140
160
232
271
290
279
287
321
349
398
426
458
533
396
429
481
540
566
1997-99c
9,465
1,807
7,391
5,539 1,852
545
529
a
Marketing Year Beginning September 1.
b
Food, Seed, and Industrial Use.
c
Three Year Average of 1997/98 through 1999/00 crop years (unweighted).
Source: Feed and Situation Outlook Yearbook, ERS-USDA, Various Issues.
IP Costs and Product Differentiation
P
$s/bushel
P11
S NT
S NF
(2.28)
ST  SNT  SG
IP Cost
$0.58/bu.
P1 (2.06)
P0 (1.85)
IP Cost
$0.29/bu.
P2 (1.77)
P21 (1.70)
DT
DF
q11 q1 q0
(2.17) (2.31) (2.45)
q01
(6.98)
*Elasticity of Residual non-Food Demand = -0.5
**100 percent of food corn use is made up of non-GM corn)
q2 q21
Q
(9.45) Billion bushels
Impact of IP Costs on GM and Non-GM U.S. Corn Prices
IP Costs $0.29 per bushel
Residual Demand
Elasticity –0.5*
Residual Demand
Elasticity –1.2
Percent of Food
Demand GMO-Free
100
50
Percent of Food
Demand GMO-Free
100
50
Corn Price before IP Costs ($/bushel)
1.85
1.85
1.85
1.85
Price of Non-GM Corn: IP Costs ($0.29/bushel)
2.06
2.10
2.10
2.12
Non-GMO Price Received by Farmers ($/bushel)
1.77
1.81
1.81
1.83
Non-GM Corn before IP Costs (billion bushel)
2.45
1.23
2.45
1.23
Reduction in GMO Uses due to IP Costs (billion bushel)
-0.14
-0.08
-0.17
-0.09
Non-GM Corn after IP Costs (billion bushel)
2.31
1.14
2.28
1.14
Change in Undifferentiated Corn Price due to IP Costs ($/bu)
-0.08
-0.04
-0.04
-0.02
Price of Undifferentiated Corn after Additional IP Costs ($/bu) 1.77
1.81
1.81
1.83
Total Revenue before IP Costs (billion $)
17.45
17.45
17.45
17.45
Total Revenue after IP Costs (billion $)
16.74
17.09
17.10
17.29
Change in Total Revenue (billion $)
-0.71
-0.36
-0.35
-0.16
Total IP Costs (billion $)
0.67
0.33
0.66
0.33
*The elasticity of food demand is held constant at –0.5.
Impact of IP Costs on GM and Non-GM U.S. Corn Prices
IP Costs $0.58 per bushel
Residual Demand
Elasticity –0.5*
Residual Demand
Elasticity –1.2
Percent of Food
Demand GMO-Free
100
50
Percent of Food
Demand GMO-Free
100
50
Corn Price before IP Costs ($/bushel)
1.85
1.85
1.85
1.85
Price of Non-GM Corn: IP Costs ($0.58/bushel)
2.28
2.35
2.36
2.40
Non-GMO Price Received by Farmers ($/bushel)
1.70
1.77
1.78
1.82
Non-GM Corn before IP Costs (billion bushel)
2.45
1.23
2.45
1.23
Reduction in GMO Uses due to IP Costs (billion bushel)
-0.28
-0.17
-0.34
-0.18
Non-GM Corn after IP Costs (billion bushel)
2.17
1.06
2.12
1.05
Change in Undifferentiated Corn Price due to IP Costs ($/bu)
-0.15
-0.08
-0.07
-0.03
Price of Undifferentiated Corn after Additional IP Costs ($/bu) 1.70
1.77
1.78
1.82
Total Revenue before IP Costs (billion $)
17.45
17.45
17.45
17.45
Total Revenue after IP Costs (billion $)
16.03
16.74
16.75
17.13
Change in Total Revenue (billion $)
-1.42
-0.71
-0.70
-0.32
Total IP Costs (billion $)
1.26
0.61
1.23
0.61
*The elasticity of food demand is held constant at –0.5.
Preliminary Trade Model for Food vs. Non-Food Corn
Panel A: U.S. Corn Market
Panel B: World Corn Market
ESUS
S
ESUS
ST
P*
P
S
EDUS
S
DT
DN
S
DF
S
DT
EDF
S
S
DF
*
QF QF* QN* QD
S
S
Q N QD
EDUS
EDN
S
EDN
EDF
*
Q =Q
S
S
X F XF
*
*
S
XN X
*
S
XN X
Conclusions
1. The fact that consumers differentiate between GM and non-GM product is
insufficient to generate a price premium for non-GM output.
2. If there is an excess supply of non-GM output, even in the presence of IP
costs, a price differential will not emerge at the farm level.
3. However, if there is an excess demand for non-GM output, a price premium
will be realized at the farm level.
4. In reality, 75% of corn planted in the U.S. is non-GM.
5. The demand for non-GM is much less than 75% of all corn, even when you
combine domestic food consumption and exports for food uses.
6. Premiums for U.S. corn producers for non-GM corn are hard to find
(at the farm level).
7. At current IP cost levels, regardless of the type of corn grown, U.S. farmers
are made worse off due to the introduction of GM corn.