Research and Development/Tech Change/Emerging Technologies,

Kalaitzandonakes, Nicholas G.

English

Research Papers in Economics

Agricultural Outlook Forum 1999      Presented: Tuesday, February 23, 1999 
 
 
 
A FARM LEVEL PERSPECTIVE ON AGROBIOTECHNOLOGY 
 
Nicholas Kalaitzandonakes 
Associate Professor of Agribusiness 
University of Missouri-Columbia 
1999  
 
It is a pleasure for me to be here this afternoon to offer a farm-level perspective on 
agrobiotechnology. In the next few minutes, I will address the following questions: 
 
•  How much have farmers benefited from first-generation agrobiotechnologies (e.g. herbicide 
resistant and insect resistant crops)? 
•  If tangible on-farm economic benefits from such technologies do exist, how sustainable are 
they? 
•  How much value will be created by second-generation agrobiotechnologies (e.g. quality-
enhanced crops)? 
•  How soon will such value be delivered to the market?  
•  What will the farmers’ value share be?  
 
Let's begin with the first question whose answer is often clouded by the significant variation in 
the performance of first-generation biotechnologies.  I will use here two different indicators to 
gauge on-farm economic benefits from these technologies. The first indicator is indirect and 
infers economic benefits from the response of farmers. The second is more direct and measures 
average economic benefits from technology adoption. 
 
Farmer Response: A Look at Current Adoption Rates 
 
Even the optimists among biotechnology proponents have been caught off guard by its extremely 
fast adoption rates at the farm level. In 1999, just four years from commercial introduction, 
almost 50% of the total US corn, soybean and cotton acreage will be planted with transgenics. To 
put this level of adoption in perspective, consider for example the adoption curve of Roundup 
Ready soybeans against that of the most dominant agricultural technology of the past: hybrid 
corn. To make the comparison more pronounced, I have used the average adoption curve of 
hybrid corn for only Iowa, Illinois, and Wisconsin, which exhibited some of the highest adoption 
rates among different states. The comparison is revealing. In 1999, an estimated 55% of soybean 
acres will be planted with Roundup Ready soybeans (figure 1). It took seven years for the 
selected states to reach similar adoption levels in the case of hybrid corn. In some states it took 
twenty years or more. Bt-corn, Roundup Ready cotton and Bt-cotton also exhibit adoption rates 
significantly faster than hybrid corn (figure 2). 
 
Economists tend to believe that people are rational, responding to incentives and potential 
opportunities. So, looking at these adoption rates, one should assume that opportunities must 
abound. This assumption is consistent with the slim empirical evidence available at this time.  
University trials and impact studies across different agrobiotechnologies lead to the following two 
conclusions:  
 •  There is tremendous variation in the yields and economics of first-generation 
agrobiotechnogies across time and space. Various location- and time-specific factors (e.g. 
weed and pest pressures) are partly responsible for this variation. 
 
•  On average there is significant value delivered at the farm level. 
 
To put things in perspective, consider Roundup Ready soybeans again. University trials and 
farm production data suggest that typically average Roundup Ready soybean yields vary from 3 
bu/a below to 3 bu/a above the average yields of conventional varieties. In many trials, there are 
no statistically significant differences in the yields of conventional and Roundup Ready 
varieties. A farmer typically enjoys a net profit of $10.00/acre - $25.00/acre after all extra 
technology costs have been paid. The profits vary with specific cultivation practices and product 
pricing.  Back-of-the-envelope calculations suggest that in 1999, the on-farm value delivered by 
Roundup Ready soybean technology alone could range from $400million to almost $1billion. 
That's significant value and it does not even account for relevant environmental benefits from 
lower chemical loads or for the economic value of risk reduction associated with the technology. 
Similar calculations suggest that substantial value is being delivered through the rest of the 
commercial agrobiotechnologies as well.  Given the value that is being delivered, adoption of 
first-generation agrobiotechnologies will likely continue to expand at a fast pace.  
 
It may be argued, however, that on-farm economic benefits from first generation 
agrobiotechnologies are transitory. Professor Willard Cochrane taught us back in the 1950s that 
as long as farmers deal with technical innovation in commodity markets they are on a 
"technological treadmill. " The faster they adopt technology and increase supply the faster prices 
fall due to inelastic demand, ultimately resulting in loss of value. This may or may not be true in 
the case of agrobiotechnology. It is possible that most of the first-generation agrobiotechnologies 
are not strongly yield-increasing but instead input-reducing. In such a "no substantial yield 
increase" scenario, the treadmill effects may be small and relevant economic benefits may be 
sustainable. 
 
Will second-generation biotechnologies deliver additional value in the future?  And if so, how 
much? Corn, soybeans, canola, sunflower and other crops are being genetically modified to have 
improved qualities that match the needs of feeders and food processors or provide direct health 
and nutritional benefits to the consumer. More exotic technologies that turn plants into protein 
factories are also being advanced. Several presenters in this conference have discussed the truly 
exciting technologies slated for commercial introduction over the next several years. They also 
expressed their optimism about the value that such agrobiotechnologies will deliver. 
 
Fundamentally, the optimism about the value of such technologies results from simple economic 
principles. Segmentation of a commodity market into a new sub-market where previously unmet 
end-user needs are satisfied and a residual commodity market, result in higher total market value. 
If the commodity market has an upward supply function then both the specialty and the 
commodity market benefit from the segmentation. In addition to creating value, such segmented 
markets are less vulnerable to the technological treadmill phenomenon as demand is typically 
more elastic. Given the large number of crops that are being genetically modified, the product 
attributes being created and the potential end-uses that exist, the possibilities for significant 
decommodification of agricultural markets and sustainable value creation are extremely positive. 
 
A key question then is how soon will such value be delivered to the market? Unlike first-
generation agrobiotechnologies, which fit existing systems with few or no adjustments, second-generation biotechnologies require many. Most importantly, end-users must reach a level where 
they are able to appreciate and take advantage of the value created by quality-enhanced crops. 
Feeders, through feeding trials, must experiment with and align these technologies with genetics. 
Processors must learn how to leverage quality enhancements and build additional value around 
them. Consumers must learn to recognize the products and to correlate nutritional benefits and 
value. Other parts of the system must also adjust. Crop merchandisers, for example, must learn 
how to effectively segregate quality enhanced crops and how to optimize identity preserved 
supply chains. And so on. 
 
The higher the investments required for the commercialization of quality-enhanced crops --
whether in learning or physical infrastructure-- the slower market penetration will be. To be sure, 
there is significant innovation and investment taking place in all parts of the supply chain at this 
time. Feeders and integrators are experimenting with a variety of quality-enhanced crops and 
animal genetics. Significant investments are being made in information systems for the creation 
of virtual markets and management systems appropriate for identity preserved supply chains.  
Most elevators expect that within five years 25% of their turnover will come from quality-
enhanced crops and are either preparing for or carrying out relevant investments in storage suited 
for identity preservation. And so on. All these investments are in line with the high prospect 
values of second-generation biotechnologies. Nevertheless, they also suggest that market 
penetration of such technologies will likely be slower than that of the first-generation.  
 
The final question we need to answer then is how much value will the farmers capture from 
second-generation agrobiotechnologies? An answer to this question is by necessity speculative. 
What is clear at this time is the lower bound of such value. Since farmers can always choose to 
produce commodities, quality-enhanced crops must deliver value at least equal to that delivered 
by commodities. And since as I argued before commodity markets will also benefit from market 
segmentation, farmers will, at minimum, capture value equal to the boost of the commodity 
market. Beyond that, and given that value from quality enhanced crops is distributed through up-
front conjecture and negotiation across the supply chain, individual assets brought to the 
negotiating table by each player will likely determine value distribution. Hence, the relative 
negotiating position of individual farmers in each supply chain will likely determine their share of 
value from second-generation agrobiotechnologies.  
  
Let me then close with an observation. The increasing value share of knowledge inputs in 
agriculture is unmistakable. Agrobiotechnology is currently leading this structural transformation. 
Precision farming, the Internet and other knowledge assets will only strengthen the trend over the 
next few years. Farmers may be in a position to claim a larger share of the value created by 
agrobiotechnology by actively participating in the knowledge transformation of agriculture. But 
that's a topic of another presentation. Thank you. 
 
FIGURE 1 
 
 
Adoption Rates RR Soybeans & Hybrid Corn
0
10
20
30
40
50
60
12345678
Years from Introduction
%
 
o
f
 
T
o
t
a
l
 
A
c
r
e
s
RR Soybeans Hybrid Corn
 
 
FIGURE 2 
 
Adoption of Hybrid Corn, RR Cotton and Bt Corn
0
10
20
30
40
50
60
Years from Introduction
%
 
o
f
 
T
o
t
a
l
 
A
c
r
e
s
Hybrid Corn RR Cotton Bt Corn

A FARM LEVEL PERSPECTIVE ON AGROBIOTECHNOLOGY

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics