The Economics of Testing for Biotech Grain: Application to StarLink Corn

StarLink corn, a biotech variety not approved for human food use, disrupted the marketing system in 2000 because of inadvertent commingling. Testing protocols have since been established for detection of StarLink in corn shipments to Japan. Domestic food manufacturers, anxious to avoid risks of contamination and product recalls, also test for StarLink kernels. This paper provides an overview of the economics of testing. What are the risks facing buyers and sellers, and how are these influenced by different testing protocols? How do market premiums and discounts, testing costs, and prior beliefs affect the incentives to test? A conceptual model is developed in which sellers can choose whether to pre-test grain prior to shipment. Simulation analysis is used to illustrate the impact of market premiums and other variables on testing incentives and buyer risk.Research and Development/Tech Change/Emerging Technologies,

The Economics of Testing for Biotech Grain: Application to StarLink Corn

StarLink corn, a variety not approved for human use, disrupted the marketing system in 2000 because of inadvertent commingling. This paper provides an overview of the economics of testing grain for biotech content. What are the risks facing buyers and sellers, and how are these influenced by testing protocols? How do market premiums and discounts, testing costs, and prior beliefs affect the incentives to test? A conceptual model is developed in which sellers choose whether to pre-test grain prior to shipment. Through simulation analysis, we illustrate the impact of market premiums and other variables on testing incentives and buyer risk.biotechnology, grain marketing, quality risk, StarLink, testing, Crop Production/Industries,

North American Barley Trade and Competition

International Relations/Trade,

PROCUREMENT STRATEGIES: IMPACTS OF QUALITY RISKS IN HARD WHEAT

Analytical models were developed in this paper to evaluate cost/risk tradeoffs of three alternative procurement strategies in the case of hard red spring (HRS) wheat. Results indicate a naive strategy has the lowest expected cost, but a high probability of not conforming to end-use requirements. Two alternative specifications for the constant share strategy result in higher probabilities of meeting requirements, but at higher costs. The opportunistic strategy results in a higher probability of meeting requirements than either of the other two alternative strategies at a comparable cost.Crop Production/Industries,

TRANSPARENCY AND BIDDING COMPETITION IN INTERNATIONAL WHEAT TRADE

One of the major trade policy problems identified by U.S. interests, including grower groups, traders, and policymakers, is that of pricing transparency. This has been a gnawing issue generally related to the pricing practices of competitor exporting countries with state trading enterprises (STEs). The transparency problem generally refers to the inability to observe rivals' terms of trade (including price, quality, credit, etc.) and is normally associated with commercial exporters competing against STE rivals. The perception being the less transparent competitors (STEs) would have a strategic advantage. A game theory model of bidding competition was developed to simulate the effects of information asymmetry amongst rivals. A Bayes-Nash equilibrium was used to derive equilibrium solutions. Several stylized examples were used to illustrate aspects of competition and to analyze effects on bidding strategies. Results indicate that: 1) anything that reduces uncertainties among rivals would reduce equilibrium bids and prices; 2) bidding situations in which there is less transparency have the effect of increasing bids and prices to buyers, and payoffs to sellers; and 3) increases in the number of rivals have the effect of reducing bids and mitigating the informational advantages of STEs. In all cases, less transparent sellers have an advantage in bidding competition relative to more transparent sellers. That advantage in our stylized case was in the area of 1-2$/mt. However, that advantage is mitigated with an increase in the number of transparent rivals and in the case where more transparent players have acted as agents for an STE and have more information about costs of an STE. Further, cessation of exports under U.S. EEP programs should have decreased the transparency of U.S. firms, increasing their competitiveness in the international grain trade.Price Transparency, Strategic Bidding, Game Theory, Bayesian-Nash, State Trading Enterprises, Export Enhancement Program, Wheat, International Relations/Trade,

Quality Uncertainty and Grain Merchandising Risk: Vomitoxin in Spring Wheat

Marketing, Risk and Uncertainty,

Wheat Cleaning Decisions at Country Elevators

Agribusiness, Marketing,

PROCUREMENT STRATEGIES: IMPACTS OF QUALITY RISKS IN HARD WHEAT

Development and organization of procurement strategies have escalated in importance with maturity of the food processing industry, as well as with the prospect of greater choice attributable to variety development and information technology. Conventional alternatives for procurement range from spot purchases with specifications for easily measurable characteristics, to varying forms of strategies with pre-commitment. In the case of grains these choices are complicated by two factors. First, there is intrinsic uncertainty associated with end-use qualities that are not easily measurable. Second, grain prices and therefore procurement costs vary spatially due to competing market regions. Thus, shifting origins may involve higher cost due to having to bid grain away from its next best market. We posed three procurement strategies and developed analytical models to evaluate the risks and costs among these alternatives in the case of hard red spring (HRS) wheat. The first involves no commitment. The second involves some form of irrevocable commitment and the third entails less commitment. Stochastic simulation models were developed for each with an objective of cost minimization subject to different levels of risk. The results indicate that the naive strategy has the lowest expected cost, but a fairly high probability of not conforming to end-use requirements. The constant share strategies result in higher probabilities of meeting requirements, but at substantially higher costs. The opportunistic strategy results in a higher probability of meeting requirements than either of the other two alternative strategies at a comparable cost.Marketing, Agribusiness,

Economics of Dockage Removal in Barley: Background, Cleaning Costs, Handling, and Merchandising Practices

Marketing,