Department of Agricultural and Environmental Economics, K.U.Leuven

1. GMO’s in Food: Economic Impact on Various Stakeholders in the EU and in the World This presentation can be downloaded at http://www.biw.kuleuven.be/aee/clo/wp/euwab.htm Email: matty.demont@biw.kuleuven.be Research Financed by VIB (Flanders Interuniversity Institute for Biotechnology), EU 6th Framework SIGMEA Project and Monsanto Course ‘Social and Ethical Aspects of Biotechnology’, ULB, Brussels, 23 November 2006. Matty Demont Erik Mathijs Eric Tollens Department of Agricultural and Environmental Economics, K.U.Leuven

2. Introduction • GM experience gap US vs. EU  • EU has chosen the option to wait through the 1998 moratorium and current coexistence regulation process, postponing release • This option has a value and a cost, i.e. potential welfare effects forgone • The trade-off of both needs to be assessed • in order to know the ex post implications of our decision in the past, i.e. 1998 • in order to know the ex ante implications of future decisions to be taken Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

3. IntroductionSystemic Approach is Needed: Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion Upstream Downstream

4. Introduction • Most of the recent agbiotech innovations have been developed by private sector (upstream) • Therefore, the central focus of societal interest is not on the ROR of R&D, but on distribution of benefits among stakeholders in the technology diffusion chain • But what are the « benefits » and « costs »? Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

5. ethical pros, perception of sustainable and environment-friendly agriculture • less damage on honey bees due to less pesticide use • increase biodiversity in field (herbicide tolerant beet) • yield increase • pest control cost decline • labour savings • non-pecuniary benefits like management savings and ease of use • market effects like price declines and consumer surplus Introduction4 Quadrants of Research in B/C Analyses: • technology fee • other variable costs associated with the introduction of GM crops (irrigation) • market effects like price declines • ethical cons, perception of non-sustainable and non environment-friendly agriculture • decline of environmental externalities due to less pesticide use • gene flow, outcrossing and weediness • development of resistance (insects, weeds) • decline biodiversity (less varieties) • impacts on non-target species (lepidopteran, birds, wildlife, …) • health benefits (Bt crops) • fixed cost engendered by e.g. identity preservation system on the farm

6. Introduction • EUWAB-project (European Union Welfare effects of Agricultural Biotechnology): 1999-2005 • Pre-coexistence • What have we learned so far from ex post and ex ante agbiotech impact assessments in the EU? Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

7. Global Case Studies Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

9. Global Case Studies • Farmers capture sizeable gains • Size and distribution of welfare effects of the first generation of GE crops are function of: 1. Adoption rate 2. Crop 3. Biotech trait 4. Geographical region 5. Year 6. National policies and IPR protection 7. Assumptions and underlying dataset • On average, domestic farmers and consumers extract 2/3 of the benefits while 1/3 is captured by the seed industry Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

10. Upstream Average = 37%

11. Upstream Downstream Global Case Studies • Hence, benefit sharing seems to follow a general rule of thumb: 1/3 upstream vs. 2/3 downstream Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

12. Global Case Studies • This 2:1 rule of thumb seems to be valid for both industrial and developing countries • Typical for large exporting countries: international trade of both the innovation (multinationals) and the commodity  international spillover effects  possibility of immiserising growth (Bhagwati, 1958) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

13. EU Case Studies • De facto moratorium on GM crops: October 1998 – May 2004 (Syngenta Bt 11 maize) • 1998-2002: Adoption stagnated at 25,000 ha Bt maize in Spain, doubled afterwards • 2006: 5 Bt maize growing EU Member States: Spain, Portugal, France, Czech Republic, Germany • De facto moratorium implies a cost to society = deadweight cost or benefits foregone of GM crops • But we need a representative EU case study to show this! Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

14. EU Case Studies Preferable conditions of a good EU case study: • Crop representative for EU agriculture • Crop problem representative for EU agriculture • Important EU export commodity (spillover) • Acceptance of GM variety realistic • GM variety near commercialization • Some impact data available, e.g. field trials Unlike the US, there is no EU case study which fulfills all of the 6 criteria. But we have ex post impact evidence from Spain: 20,000 ha (1998)  70,000 ha (2005)(AGPME) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

15. EU Case Studies Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

16. EU Case Studies Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

17. EU Case Studies • Bt maize resistant against European corn borer (ECB) [Ostrinia nubilalis (Hübner)] and Mediterranean corn borer (MCB) [Sesamia nonagrioides (Lefebvre)] in Spain (Demont and Tollens, 2004b) • Herbicide tolerant (HT) sugar beet in the former EU-15 (Demont and Tollens, 2004a) • Bt maize resistant against ECB in Hungary (Demont et al., 2005) • Bt maize resistant against Western corn rootworm (WCR) [Diabrotica virgifera virgifera LeConte] in Hungary • Herbicide tolerant maize in Hungary • Herbicide tolerant sugar beet in Hungary • Herbicide tolerant oilseed rape in Hungary Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

18. Bt Maize in Spain Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

19. Bt Maize in Spain • 2 corn borers  important losses in Spanish maize production: 9% on average • Syngenta  2 Bt maize varieties: Compa CB & Jordi CB • Today: only MON810 varieties • Government  20.000 ha limit = 5,2% adoption • Analyze 1998-2003 Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

20. Bt Maize in Spain • Farm level analysis: - standard damage abatement function - damage = stochastic (lognormal) - calibrated on real corn borer damage data • Aggregation to national level - Alston, Norton & Pardey (1995) (ANP) - small, open economy - Oehmke & Crawford (2002) & Qaim (2003) (OCQ) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

21. Bt Maize in Spain Introduction HT Sugar Beets Bt Maize Environment Conclusion

22. Herbicide Tolerant Sugar Beets • Effective weed control = crucial • Yield losses up to 100% due to weed competition • Glyphosate and Glufosinate-ammonium = broad-spectrum post-emergence herbicides, low toxicity • Introduction of genes from soil bacteria in beet genome  Roundup Ready ™ (Monsanto) • Broad-spectrum weed control • Less applications • Less volume active ingredient • More flexibility in timing Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

23. Herbicide Tolerant Sugar Beets • Farm level analysis: - assume standard HT replacement programs - compare costs with observed programs - assume technology pricing (see data) • Aggregation to the global level through standard methodologies • Data: ex ante - No adoption of the new technology - No farm level impact data, only field trials - Assumptions: 1. Yield impact 2. Technology pricing - Sources: expert opinions, literature, economic theory, national surveys, Eurostat - Stochastic simulation Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

24. Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

25. Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

26. Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

27. Bt Maize in HungaryEuropean Corn Borer (Ostrinia nubilalis Hübner) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

28. Bt Maize in HungaryWestern Corn Rootworm (Diabrotica virgifera virgifera LeConte) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

29. Bt Maize in HungaryWestern Corn Rootworm (Diabrotica virgifera virgifera LeConte) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

30. Bt Maize in HungaryWestern Corn Rootworm (Diabrotica virgifera virgifera LeConte) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

31. Bt Maize in HungaryWestern Corn Rootworm (Diabrotica virgifera virgifera LeConte) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

32. Bt Maize in HungaryWestern Corn Rootworm (Diabrotica virgifera virgifera LeConte) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

33. Bt Maize in HungaryWestern Corn Rootworm (Diabrotica virgifera virgifera LeConte) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

34. Bt Maize in HungaryWestern Corn Rootworm (Diabrotica virgifera virgifera LeConte) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

35. Bt Maize in HungaryWestern Corn Rootworm (Diabrotica virgifera virgifera LeConte) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

36. Bt Maize in HungaryWestern Corn Rootworm (Diabrotica virgifera virgifera LeConte) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

37. Bt Maize in HungaryWestern Corn Rootworm (Diabrotica virgifera virgifera LeConte) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

38. Bt Maize in HungaryWestern Corn Rootworm (Diabrotica virgifera virgifera LeConte) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

39. Bt Maize in HungaryWestern Corn Rootworm (Diabrotica virgifera virgifera LeConte) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

40. Methodology Micro-economic level: • Develop bio-economic pest damage abatement models • Calibrate on real field data (surveys, expert opinions, literature) • Pre-coexistence • Incorporate uncertainty Macro-economic level: • Model GM crop adoption through partial equilibrium displacement model (EDM) • Incorporate market structure and response • Incorporate trade policies • Incorporate uncertainty Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

41. Data Ex ante: no adoption data available • Data mining, combine different data sources: • National and international statistics • National and regional farmer surveys • Field trials • Expert opinions • Literature • Assumptions • Economic theory • Importance of modelling data uncertainty and conducting sensitivity and scenario analyses Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

42. Results

43. Discussion • Total benefits per hectare are fairly robust measure of value or “size” of the innovation • This value is distributed among input industry and farmers (who share it with consumers) • Market power of input industry is constrained by 5 factors: • Farmer heterogeneity (e.g. Bt maize) • Uncertainty and irreversibility • Competition from chemical industry • Competition within biotechnology industry • Coexistence regulation (EU) • Immiserising growth unlikely due to: • Smaller scale & heterogeneous innovation pattern • Common Agricultural Policy (CAP) protecting farmers against eroding world prices Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

44. Discussion Non-Pecuniary Benefits of HT Crops: Management Flexibility and Convenience Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

45. Discussion Coexistence, the last hurdle to GM crops? European Commission (2003): “Coexistence refers to the ability of farmers to make a practical choice between conventional, organic and GM [genetically modified] crop production, in compliance with the legal obligations for labelling and/or purity standards. The adventitious presence of GMOs [genetically modified organisms] above the tolerance threshold set out in Community legislation triggers the need for a crop that was intended to be a non-GMO crop, to be labelled as containing GMOs. This could cause a loss of income, due to a lower market price of the crop or difficulties in selling it. Moreover, additional costs might incur to farmers if they have to adopt monitoring systems and measures to minimise the admixture of GM and non-GM crops. Coexistence is, therefore, concerned with the potential economic impact of the admixture of GM and non-GM crops, the identification of workable management measures to minimise admixture and the cost of these measures.” Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

46. Discussion • What is coexistence? A cost or an incentive? • The right to choose (farmers & consumers) • Gene flow, pollen drift, contamination, commingling • Coexistence is only relevant • if there is a significant long-term domestic or international (export) consumer demand for non-GM crops (e.g. not cotton) • if this demand translates into market signals (e.g. price premiums for non-GM crops) • if there is a significant farmer demand for cost-reducing transgenic crops (e.g. not ECB-resistant Bt maize in Belgium) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

47. Discussion Coexistence costs borne by 2 incentives: • Farmer profits of GM crops (“GM rent”) • Price premium of identity preserved (IP) crops (“IP rent”) Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion rupture point co-existence costs GM rents IP rentseeking clustering, reallocation of land Phase I Phase II Phase III adoption

48. Conclusion • System approach needed • Case by case • Producers capture an important part of the benefits of transgenic crops: most often between 2/3 and 3/4 • Government’s trade policy can influence the impact of biotechnology (e.g. sugar sector) • Coexistence only relevant when 2 incentives are both present at the same time: GM rent & IP rent Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion

49. The End http://www.biw.kuleuven.be/aee/clo/euwab.htm Email: matty.demont@biw.kuleuven.be Introduction Global Case Studies EU Case Studies Methodology Data Results Discussion