Landscape Clubs: Co-existence of GM and Organic Crops

1. Landscape Clubs: Co-existence of GM and Organic Crops By Simon Weseen Hartley Furtan and Dan Dierker

2. Background • Organic farming in Canada, the U.S. and Europe does not permit the use of GMOs • Contamination caused by the introduction of GM canola in Canada has meant that organic canola is no longer grown by organic farmers. • What will happen if GM wheat is introduced? • Loss of organic markets would eliminate a potentially valuable opportunity of Canadian farmers

3. Trade Implications • The organic industry in Canada is rapidly expanding and has become a global industry • 20-25% annual growth rate • $63 million in exports • A majority of organic crops grown in Canada are exported to the U.S. and to Europe (~ 80%)

4. Objective • Objective: Evaluate the economic feasibility of GM and organic crops existing in close proximity on the same physical landscape • Hypothesis: • an institutional structure can be created where GM and organic technologies can co-exist • Producer welfare will be higher than the case where only GM or organic technology exists

5. Theory of Clubs • Introduced by Buchanan (1965) and expanded on by others (Scotchmer 2002, Casella 1992, 2001) • Agents form groups to share the cost of excludable public goods • Optimal club size is determined by an externality, namely crowding • As size increases, the efficiency decreases and costs can exceed benefits

6. Theory of Clubs cont’d • Applied to a variety of issues/problems involving the consumption of goods in competitive markets • Micro: The formation of fitness clubs, restaurant clienteles, academic departments, etc, in competitive markets (B. Ellickson et al, 1999) • Macro: The formation of political jurisdictions (Casella (1996, 2001)) • Casella (2001) examines the role of market size in the formation of jurisdiction • Employs a spatial representation to illustrate club formation • Changes in economic conditions will change trade-offs that determine the borders of jurisdictions

7. Our Model • Club - an institution whose members collectively decide to finance (through a tax, t1) the creation of an of organic farming zone • Excludable good - a zoning law that restricts the use of GM seed varieties within the club •  = productivity parameter or efficiency of the zoning law

8. Our Model cont’d • Club size is limited by downward sloping demand curve for Canadian organic wheat • as supply of wheat increases the price paid for the wheat decreases • Producers will choose to join the organic club until profits from farming organically on the last acre are equal to the profits from farming using GM technology • i.e. Marginal Organic = Marginal GM

9. Initial Assumptions • No buffer zone initially • contamination is eliminated costlessly • GM producers face elastic profit function • Organic Producers face downward sloping profit function • Producers are risk neutral regardless of the production technology that they choose

10. Organic (net profit per organic acre) Organic (,t1)  - 1 + 1 GM(net profit per GM acre) Figure 1: Optimal Organic Club Area Without Buffer Zone

11. Model Second Stage • Exogenously determined buffer zone is incorporated • It is assumed that contamination of the club can be fully prevented (i.e.  = 1) • Producers in buffer zone must produce using conventional technology but face GM prices • Producers in the organic club will compensate buffer zone producers out of tax, t1, such that they are no worse off than they would be if they were outside the club • equal to the difference between conventional and GM price

12. 1) Buffer Zone = b-  2) Tax = fgex =acdb h Organic g e a b f x 3) Club is welfare enhancing if ahf > acdb (tax) c d  b Figure 2: Organic Club with Exogenously Determined Buffer Zone GM

13. Empirical Model • 4 Scenarios • no organic production • organic and GM production with no buffer zone • organic and GM production with 300m buffer • organic and GM production with 400m buffer • Profitability of each technology estimated based on NPVs for ten year rotations for organic, GM, and conventional rotations

14. Empirical Model Cont’d • Estimate change in profits resulting from a change in quantity of wheat produced • Optimal size of organic club determined by maximizing NPVs subject to: • NPVorganic = NPVGM • club tax = buffer zone loss

15. Data • Crop Budgets developed from Agriculture and Agri-food Canada (2000) and Alberta Agriculture (2001) • Demand curve for organic wheat estimated from Hamm (2002) and Furtan (2003) • Buffer zone distances are taken from CFIA (2000) and Hucl and Matuz-Cadiz (2001)

16. Results • Total crop profits under co-existence are ~ $5.527B, while crop profits under GM only are $4.942B • Optimal organic club size occurs at ~ 800,000 acres (160,000 wheat) • 400m buffer - compensation = $250,000 • 300m buffer - compensation = $180,000 • As buffer zone increases, total producer welfare decrease

17. Results

18. Conclusions/Implications • Producer welfare is ~ 12% higher under co-existence than when production is GM only • Compensation Principle holds • Club members can compensate buffer zone producers and still be better off • In economic terms, GM and organic crops do not have to be mutually exclusive • Club theory, used in this way, could have a variety of other applications