Who pays the costs of non-GMO segregation and identity preservation?(Report)

Many people feel that consumption of genetically modified organisms (GMOs) is unhealthy and that growing and distributing genetically modified (GM) crops is environmentally risky. Many farmers believe that they lower production costs by growing GM crops. Dual markets for several agricultural grains and oilseeds have emerged as a result, with some suppliers paying to segregate and preserve the identity of their non-GM products and in turn receiving a price premium. Segregation and identity preservation (IP) costs and price premiums and discounts have engendered political resentment. Many consumers who disfavor GMOs feel that they are paying the costs of IP while some farmers profit from the adoption of GMO technology. Many farmers who grow GMOs feel that they receive lower prices because of an irrational reluctance of some citizens to consume them. Yet, who benefits and who loses from the creation and adoption of GMO technology is not obvious from a theoretical perspective. While non-GMO consumers may pay a price premium, it is neither clear that they pay a higher price than they would have had GMOs never been introduced nor is it obvious that they are the only group paying for IP costs, since changes in one market affect related markets. Our aim is to explore who pays the costs and who reaps the benefits of maintaining a dual-market system of GMOs and non-GMOs.

The economic literature on GMOs and IP already has analyzed much of how model parameterization affects the welfare impacts of GMO introduction in the presence of consumer rejection. Important among these parameters are those that represent farm cost savings from GMO adoption, the extent of consumer aversion toward GMOs, the extent of the market power held by the suppliers of the GMO innovation, and IP costs. The literature has shown that GMO introduction may increase or decrease global welfare depending on the values of these parameters, and different groups are affected in different ways by GMO introduction. As in Lapan and Moschini (2004), Fulton and Giannakas (2004), and Lence and Hayes (2005), we use a model of the introduction of GMO technology by a GMO-innovating firm with market power given partial consumer rejection. We further disaggregate groups affected by the technology, differentiating among differing types of producers and consumers, thereby identifying more specifically winners and losers.

We pay particular attention to the assumptions used to describe IP costs. Most authors have assumed constant per-unit IP costs are borne only by IP producers (Mayer and Furtan 1999; Saak and Hennessy 2002; Lence and Hayes 2005; Sobolevsky, Moschini, and Lapan 2005). Saak (2002) as well as Nadolnyak and Sheldon (2002) pointed out that IP costs for IP producers may vary depending on the size of the IP channel. Fulton and Giannakas (2004) assumed positive and constant IP costs for GMO producers. Lapan and Moschini (2004) assumed that IP costs for non-IP producers are zero in the absence of regulation, but traceability requirements impose costs on GMO producers. We introduce the idea that segregating GM and IP grains throughout the supply chain results in a loss in the flexibility with which grain can be produced, moved, and stored, and therefore creates "indirect" or "external" costs for both non-IP and IP producers. We also argue that the larger the market for the GM grain, the greater are these indirect costs for the IP grain, and vice versa.

We also provide a complete characterization of equilibria after GMO introduction, including equilibria in which some markets disappear (published studies usually concentrate on equilibria with coexistence of GMOs and IP). This helps us to describe, among other things, conditions under which no IP supply stream emerges after GMO introduction (a worry that has been expressed by anti-GMO groups in the European Union). We also describe equilibria in which regular and IP products are marketed at the same price (a possibility that has not been highlighted so far in the literature) and situations in which endogenous costs of IP are high enough to create the emergence of multiple equilibria.

External Costs of Identity Preservation

To maintain IP products separately with a high purity level all along the supply chain, it is necessary to monitor the grain marketing path and clean it every time it is used for IP grain after having been used for GM grain. Cleaning after each use for GM grain may be time-consuming and therefore delay further uses of the grain path, which creates not only direct costs for IP products but also external costs for non-IP products.

To avoid constantly cleaning the equipment, separation of IP and non-IP grains is generally achieved by dedicating moving, storing, and processing equipment to one of the two products, at least for a period of time. This also brings about several types of external costs for each of the production channels (Bullock and Desquilbet 2002). There may be an indirect cost from capacity under-use. This could occur, for example, if grain quantities delivered at a facility dedicated to storing and handling non-GMOs were not sufficient to fill up the non-GMO bins. Handlers may bear additional costs to organize flows of grain delivered by farmers and flows of grains delivered to processors or terminal elevators and adjust them to capacity. If many handling facilities are dedicated to the flow of just one of the two types of grain, then on average farmers have to haul their grain further to deliver it to a grain elevator that handles it. Fuel and labor costs of this extra hauling might typically be small, since farmers often might only need to drive a few extra miles to find an elevator dedicated to their product. But longer grain hauling at harvest time might cost farmers in other ways, as they prefer to harvest rapidly while weather permits to avoid the risk that rain delays the harvest and increases drying costs, etc.

These examples illustrate an important aspect of IP costs: it can be expected that the larger one of the two marketing channels is, the larger the per-unit cost of production, handling, and processing in the other will be. Consider a situation in which the size of the IP channel increases and the size of the non-IP channel decreases. Then, additional handling facilities will start to accept IP crops or will accept them during longer periods of time. IP producers will be able to move, store, and process their grains with fewer constraints, and the per-unit cost of participating in the IP channel will decrease. Yet simultaneously, costs of participating in the regular channel will rise for non-IP producers because they will be more constrained in moving, storing, and processing their products. In our model we assume that the existence of each channel of production creates a negative externality that increases costs of production in the other channel. We also assume that the larger one of the two production channels is, the larger the per-unit external cost of IP in the other will be.

Analytical Framework

We aggregate farmers, handlers, processors, distributors, and retailers, labeling them as simply "producers." We assume that producers are profit maximizers and may produce four goods: an "alternative" good and three different types of a particular grain. The first type is GM grain (indexed by g). The second type of grain (indexed by n) sprouts from non-GM seed, but producers take no steps to prevent its possible commingling with GM grain. Consumers consider g and n to be the same product, which we call the "regular grain" (indexed by r). The third type (indexed by i) is the "IP grain." It is grown from non-GM seed, and efforts are made to preserve its identity and avoid commingling.

GM grain sprouts from GM seed, which when supplied is supplied by a firm or firms called the "innovator(s)." We use v to denote the marginal cost of producing a unit of GM seed, and we assume that this is constant. We say that GM technology has been introduced when v is low enough such that the innovator(s) can profit while charging a price w per unit for GM seed that grain producers are willing to pay. If v is infinitely high, then the innovator(s) can only lose money by setting a price for GM seed that grain producers are willing to pay. In this case, we say that GM technology has not been introduced or does not exist. We make two alternative assumptions for the supply of the GMO innovation. In one case, we assume that a single firm develops, patents, and uses the GMO technology to produce and sell GM seed with market power. In the other case, we assume that the GMO technology is developed and sold (in the form of GM seed) to producers by many competing firms all having the same constant marginal cost of production.

Direct and Externality Costs of IP

We assume that when GMOs are absent from the marketplace, consumers are aware of it. Therefore, in this case there is no demand for the IP grain, and regular producers bear no costs of IP. We assume that after GMO technology introduction, positive per-unit IP costs emerge, [c.sub.i]([Q.sub.r]) = [k.sub.i] + [e.sub.i][Q.sub.r] for IP producers and [c.sub.r]([Q.sub.i]) = [e.sub.r][Q.sub.i] for regular producers, where: [k.sub.i] [greater than or equal to] 0 is the per-unit direct cost of IP for grain i, [Q.sub.r] is the quantity of grain r marketed, [e.sub.i] [greater than or equal to] 0 is the effect of a marginal increase in the economy's production of [Q.sub.r] on the per-unit external cost of producing grain i, and [e.sub.i][Q.sub.r] is the external cost of IP. Parameter [e.sub.r], quantity [Q.sub.i], and [e.sub.r][Q.sub.i] are defined analogously.

Producers' Costs, Prices, Profits, and Supply

Several studies argue that economic benefits from adopting GMOs vary widely among farmers, depending on their weed situations or insect pressures (e.g., Bullock and Nitsi 2000; Fernandez-Cornejo and McBride 2002). We assume the existence of a continuum of producers, each characterized by a parameter distributed uniformly on [0, 1]. Yield is identical for the three grain types n, g, and i and is normalized at one unit per acre, making peracre costs and per-unit costs the same. Per-unit production costs are a[alpha] for the non-GM grain (identity-preserved or not) and w + [a.sub.g][alpha] for the GM grain. Here, a and [a.sub.g] are cost parameters with a > [a.sub.g], and w is the per-unit technology fee adopters must pay for the right to use the GMO technology.

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