The International Consortium on Agricultural Biotechnology Research (ICABR)
Non technical abstract
RESPONSE TO AN ASYMMETRIC DEMAND FOR ATTRIBUTES:AN APPLICATION TO THE MARKET FOR GENETICALLY MODIFIED CROPS
Sergio Lence and Dermot Hayes
Iowa State University
Grain marketing and handling facilities have evolved to minimize handling and production costs and are not set up to offer consumers a choice among various product lines. This system has evolved because in the past few consumers were willing to pay the premiums associated with a differentiated system. Those consumers who have been willing to pay for differentiated grains have participated in small, high-cost, niche markets.
The development and commercialization of genetically modified (GM) grains has created some unusual and difficult problems for those involved in the bulk commodity markets. At first, very few consumers expressed any concern about the technology. This lack of concern coupled with a strong incentive for farmers to adopt has allowed GM grain to capture most of the market. With this majority market share has come access to the bulk handling system that had formerly been utilized for non-GM grains. Soon after GM grains had become the standard in U.S. markets a significant amount of consumer concern emerged. This concern is greatest in food and export markets, but has also been expressed by grain processors who export byproducts to the EU. The market share of these concerned groups is less than 50%.
This paper develops a framework for examining the price and welfare effects of these developments. Results are presented for the short run where supplies are fixed and for the long run when supply is allowed to adapt to market conditions. The parameters chosen for the simulations are specific to the U.S. corn market. However, the general framework presented here is directly applicable to other markets, such as tropical woods, tuna, pork, prison products and diamonds, where some consumers are willing to pay premiums for certificates indicating that environmental, animal welfare, labor and humanitarian standards were met in the production process.
The short-term results show that in most cases non-GM grain becomes another niche product. However, there are some reasonable parameterizations that show a more profound market effect. This situation can occur when the proportion of consumers who are willing to pay a premium in excess of handling costs for non-GM grain is greater than the share of non-GM grain available. In years when these circumstances exist, the farm price of all GM grain will be discounted so that some GM grain is purchased by consumers who have a preference for non-GM grain. In years when these circumstances do not exist, farm prices of GM and non-GM grain will be identical because the marginal consumer will be indifferent between the two types of grain.
The long run results show that in almost all circumstances, consumer and producer welfare is greater after the introduction of GM technology. However, in all instances some consumers and some producers will lose. Consumers with a strong preference for non-GM grain will lose because they must pay farmers a premium to encourage them to grow non-GM grain and pay the handling charges associated with identity preservation. Farmers who do not obtain a substantial cost reduction from producing GM grain will also lose because market prices will reflect the cost savings available to those who obtain a greater cost advantage. There are circumstances where both producer and consumer welfare are lower after introducing GM technology. This can occur when identity preservation is expensive and cost savings are relatively small. Interestingly, this outcome is obtained even though all agents are individually rational.