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Directorate-General for Agriculture

Economic Impacts of Genetically Modified Crops on the Agri-Food Sector

3.   Farmers : strong profitability expectations, mixed outcome

The adoption of GM crops by farmers in the US, Canada and in Argentina has proceeded at an unprecedented rate compared to the uptake of conventional hybrids. The economic reasons for this rapid and massive adoption are analysed in section 3.1. The role of agricultural policy in this process is considered in section 3.2. The analysis is based on the available economic literature, which mainly concerns Northern America. It is limited to the two main GM crops under cultivation Herbicide-Tolerant (HT) soybeans and Insect-Resistant (Bt) corn. Two Canadian studies on HT Canola have also been taken into account.

3.1  Economic driving forces: profitability and/or convenience

3.1.1.Factors of profitability: costs and yield
    Profitability is defined as the margin left over to farmers when costs have been deduced from receipts. The profitability of GM crops is judged against corresponding conventional crops.
Table 3.1 Cost and yield comparison of GM vs conventional crops
    On the one hand, GM crops are expected to allow for saving in costs through different/reduced pest control and/or to achieve higher yields. On the other hand, GM seeds are more expensive than conventional ones. Under the assumption that the price of non-GM and GM crops is the same, the latter will become more profitable for farmers if the increased seed costs are offset by savings in pest control costs and/or by higher yields.
    Therefore, yields, seed and pest control costs are key factors for the profitability of GM crops. Figures relating to those factors are summarised in table 3.1, based on various sources.
    3.1.1.1. On the cost-side: the input-effect
    GM seeds are sold at a higher price than conventional ones, as indicated in table 3.1. While convergent figures could be found for HT soybeans (around 15 €/ha additional costs, i.e. a 35% premium compared to conventional seeds), various figures are reported for HT Canola and Bt corn, depending on trade-mark varieties. The most frequently cited figure for Bt corn is a 22 €/ha premium. The price wedge is mainly attributable to the "technological fee" (see subsection 2.2), but it also reflects the fact that markets for both types of seeds are separate.
    As far as weed and insect control is concerned, the situation is different for HT and insect-resistant (Bt Corn) crops.
    HT crops appear to allow for savings in herbicide costs. However cost differences between biotech-based and conventional weed control programmes are not clear-cut and there are wide margins of fluctuations. While the total use of herbicides associated with HT crops (in particular those including glyphosate like Round Up) has increased, the use and price of other herbicides have decreased. According to USDA, the net effect is a decrease in herbicide use. The herbicide effect of HT crops deserves further assessment, both on farm-level and globally, based on the experience of several years of cultivation.
    According to an USDA case-study, insecticide applications are significantly lower for Bt Corn than for conventional varieties. Based on a survey in Iowa (1999), Duffy confirms that applications are reduced but notices increased insecticide costs, hence the net effect is not clear-cut. In addition, Duffy observed slightly higher (+ 17 €/ha) weed control and fertiliser costs for Bt fields. To prevent the emergence of resistance to Bt, US Environmental Protection Agency requires setting up refuges, i.e. non-Bt corn zones next to Bt-fields. This requirement has an impact on the management of Bt crops.

    3.1.1.2. On the receipt side: the yield effect

    Several studies provide evidence about yield gains for Bt corn. Based on 1996-1998 data of the Agricultural Resources Management Data, the USDA has observed that adopters of Bt corn had obtained higher yields than non-adopters. However, this might partly be explained by performance differences between these two groups of farmers. Gianessi and Carpenter (1999) report about average gains of 0.73 tonnes/ha in 1997 and 0.26 tonnes/ha in 1998, respectively, + 9% and +3% compared to 97/98 average yield for corn. The gap between 1997 and 1998 results can be explained by the difference in weather conditions and in insect pressure. Infestation was low in 1998. Other studies (like Alexander and Goodhue, Hyde et al., 1999) show the sensitivity of Bt performance to these two factors.

    By contrast, the yield of HT soybeans appears to be lower than for conventional varieties. A factor of explanation might be that HT genes have not been incorporated in top-yielding varieties.

    Comparing yields of GM and non-GM crops is not a straightforward exercise. Yields depend on a large number of factors, and the inserted trait of GM crops is only one factor amongst others. It is worth recalling (OECD 1999) that first generation genetic modifications address production conditions (pests, weeds), they do not increase the intrinsic yield capacity of the plant. Not surprisingly yield performance of GM crops against their non-GM counterparts depends on growing conditions, in particular on the degree of infestation in insects or in weeds, hence on region of production. Data about yields of GM crops are widely available, however, often specifications on factors which influence yields are missing, such as temperature, weed control applied etc.

    3.1.2. Effective profitability: mixed and unclear results

The available studies do not provide conclusive evidence on the effective profitability of GM crops:
    • HT soybeans: when comparing returns per ha or per labour unit, no significant difference appears between HT and conventional crops.
    • The cost-effectiveness of Bt corn depends on growing conditions, in particular on the degree of infestation by corn borers. Results regarding profitability are contrasted, none can be considered as significant.
    • There are no clear-cut results allowing for comparing the profitability of HT Canola with non-GM crops.
These rather contrasted and unclear results indicate that short term profitability is not the only driving force for adoption of GM crops by farmers.

Other factors must have played a significant role in the rapid extension of GM sowings.

In practice, the most immediate and tangible ground for satisfaction appears to be the combined effect of performance (not necessarily measured by yields) and convenience of GM crops, in particular for herbicide tolerant varieties. These crops allow for a greater flexibility in growing practices and in given cases, for reduced or more flexible labour requirements. This convenience effect should translate into increased labour productivity and savings in crop-specific labour costs. However, this effect is not always assessed in profitability studies. One author (Duffy 1999) concludes that HT soybeans provide the same returns on ha or on labour as conventional crops. But if they allow for reduced labour costs, the same return on less labour means increased profitability. This convenience effect has to be further assessed in particular, the valuation of the labour effect. For the time being, it does not translate into increased profitability, but rather in terms of attractiveness of GM crops for efficiency purposes.

The USDA (1999) has examined different factors affecting the adoption of HT soybeans and concluded that "larger operations and more educated operators are more likely to use the technology". It is very likely that the same applies to Bt Corn. The decision to plant Bt corn is a complex one, it implies assumptions as to the expected degree of infestation, adjustments in planting planning to foresee refuges. Such differences between adopters and non-adopters of biotechnology have to be taken into account when comparing yields and returns obtained on both types of farms. The higher degree of education might echo the skills required for changes in growing and management (e.g. contracting) practices. The farm size of adopters might be a factor explaining, amongst others, the dramatic increase in areas sown to GM crops. The adoption of biotechnology is not size-neutral.

The reviewed studies only compare farm-level and short-term profitability. Profitability of GM crops should be analysed over a longer timeframe. First, there are important yearly fluctuations in yields and prices, and it is difficult to isolate the possible effect of biotechnology. Results are very sensitive to the price of seeds and agro-chemical products on the one hand and to commodity prices on the other hand. In most profitability studies, prices for GM and conventional crops are assumed to be equivalent.

Developments on the supply and on the demand side of the food chain have to be considered together, and this is another reason for assessing profitability over several years.

In the case of HT crops, gains in efficiency should translate into improved labour productivity. In the case of Bt corn, yield gains mean enhanced productivity of land. Both types of effects imply a shift in farmers supply functions. Under given prices, enhanced farm productivity leads to an increase in supply. If the demand function remains unchanged, prices drop. In the long run, enhanced productivity will have an impact on farm restructuring, alongside with many other factors playing a role in this process. While more and more producers are adopting biotech crops, thus contributing to the increase in supply, on the demand side, concerns about GM food are emerging. As a result, segregation between GM and non-GM crops is developing, which implies differentiation in costs and prices.

The economic implications of segregation and identity preservation are analysed in chapter 5. They are likely to change the outset as regards profitability of GM versus non-GM crops.

According to Bullock and Nitsi (1999), only quality enhancing innovations would induce a structural change of the demand function, and possible increases in prices. However, there are not many GM crops entailing quality traits on the market, and prospects are still limited for the medium term.

When considering the profitability of GM crops and the reasons for their rapid adoption, the effect of agricultural policy measures should also be taken into account.

3.2. The effect of agricultural policy: not neutral

In the US as well as in the EU, GM and non-GM crops are not treated differently under the various support schemes, both are eligible. In the US, crops for which GM varieties have rapidly developed are all eligible for support under the flexibility payments, the marketing loan system, as well as for crop insurance.

Soybeans became eligible for flexibility payments and under the marketing loan system in 1996, which is the year of first commercial sowings of GM varieties. Several analysts (FEDIOL, 1999) consider that existing support systems have favoured the development of soybeans sowings. In particular, the loan rate applied to soybeans makes this crop attractive compared to wheat and corn. The area under soybeans is expected to reach a record level in 2000, while prices are low. By mid-November 1999, the USDA estimated that 90% of the 1998 soybeans crop had received a marketing loan benefit, and that the average value of this benefit was worth around 0.44 US $/bushel (14.5 €/t). Oilseed producers are also eligible for the 1999/2000 emergency packages. A specific assistance programme was set up in early February for oilseeds producers, to offset record low market prices. Under this programme, payments for soybeans could average 0.141 US $/bushel
(5.3 €/t), according to calculation by private consultants.

Favourable support conditions for soybeans could have played a role in the rapid uptake of GM technology for this crop. In addition, in a low market price context, the expectation on cost savings is a further driving force for the adoption of the technology.

Eligibility of GM crops under various support schemes limits the price risk of the productivity-enhancing technology. It accounts as another reason for the farmers to focus their planting decision on expected farm-level performance, on cost-efficiency of inputs. In other words, farmers also had an input-oriented approach.

The supply-oriented approach of both biotech companies and farmers has been quickly confronted with reactions stemming from the downstream side of the food chain. Consumer concerns have been echoed and amplified by NGOs and retailers, and they had a cascading effect on the upstream side. These reactions are analysed in the next chapters.

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