The International Consortium on Agricultural Biotechnology Research (ICABR)


Home Page Program Field trip to Ravello


Frank Scrimgeour and Svetlana Bohorova
University of Waikato Management School

Economic analysis of genetically modified crops has often focused on annual crops. This paper presents a model for the economic analysis of a perennial crop - kiwifruit. It presents a model to show the impact of genetic modification on crop type, crop volumes, crop production and marketing costs and crop revenues. The analysis reveals the potential for productivity gains and the distribution of the associated rents.

The role of economics in the process of evaluating the gains from biotechnological improvement is two-fold. On one side, the improvement of the genetic traits of the input provides for more cost-effective means of production. The production side issues focus on the quality and quantity of the inputs, the scale of production and associated per unit costs. On the other side, the enhancement of inputs leads to the production of improved and diversified outputs. Thus, when the consumption of these products is evaluated issues such as the degree of quality improvement, the quantity produced and their commercial distribution to niche markets are crucial for determining the price at which the "new" product is likely to sell. This suggests that incentives for biotechnological improvement are driven by the interplay of demand and supply factors in each niche market, as well as the global market for the specific product. Therefore, gains from genetic improvement are a function of the cost-effectiveness of the production process and the revenue generated from the "new" product.

This paper focuses on four key issues. Firstly, the generation of a new input and the utilization of this input into a standardized production process requires a long-term projection of the cost-effectiveness of the project. Biotechnological improvement takes significant time and is costly. There are risks associated with the performance of the "new" input in different deployment environments, which could undermine any quality enhancing effort. The growth rate of the "new" input is another factor to be considered. There are also all types of production, compliance, and biosafety costs that come with this "new" product. Thus, when speaking of a cost-effective process of production we focus on the degree of quality improvement of the input and its faster growth rate over time. These would be considered as the main factors for a supply-side change or shift.

Secondly, the characteristics of the "new" product can be scientifically enhanced, but the question is whether consumers are likely to recognize them and value them more than a traditional product of the same type. Whether demand for the new product is generated and increased would depend on the marketing strategies for product introduction and product placement, as well as the willingness of consumers to buy a product with altered attributes.

Thirdly, the price of the new improved products result from the interaction of the supply and demand curves of the new and the non-altered product in specific markets, and the degree to which there is a world market price for the products. Marketing and pricing strategies are based on interpretation of the relevant elasticities and expectations about the potential for market growth. The price of the new product reflect these interpretations and choices as well as the proportion of quality change, and the mechanisms used to capture rents via royalties and licence agreements.

Fourthly, the gains from biotechnological improvement and their distribution are estimated over time. This recognizes the potential for technical and market advantages to depreciate over time. Since such estimates are done in advance, and future demand for new products and their overall market performance is uncertain, the estimated gains are uncertain and are analyzed accordingly.

This analysis provides a basis for interpreting the recent history of the New Zealand kiwifruit industry and the potential impact of current biotechnological research..