Statement of  William Lesser, Ph.D.
Agricultural Economics, Cornell University

On behalf of The Council on Food, Agricultural, and Resource Economics
Presented to: The Committee on Agriculture, Nutrition and Forestry United States Senate Hearing
to Discuss the Development of Biotechnology

I appreciate this opportunity to provide information to the Senate Agriculture, Nutrition and Forestry Committee about current knowledge and future research needs regarding economic and social impacts of agricultural biotechnology. This information is being presented on behalf of the Council on Food, Agricultural and Resource Economics (C-FARE). C-FARE is a non-profit, non-partisan association actively working to represent the agricultural economics profession in matters of science policy, priority setting, and budget determination at the federal level, and to collaborate with other agricultural science groups and government agencies in these activities.

Enhancing knowledge and improving understanding of economic and social impacts of biotechnology and genomics is a high-priority research area for agricultural scientists. Several examples of how agricultural economists have made significant progress toward this priority are described in the following five broad categories. Clearly more economic and social science research will be necessary to answer many important and unanswered questions.

Farm-Level Effects of Agbiotech: The adoption level of biotech agricultural products presently available on the market is important to the food and fiber industry. Agricultural economists now have available three years of field data to measure the costs and profits of a number of key commodities, including soybeans, corn, cotton, and canola. There is general agreement among most economists that producers, on average, benefit financially from biotech. By one study, benefits are shared 50/50 between farmers and seed companies, in line with long standing trends. It is also important to note that the environment also benefits in the form of reduced chemical use and less erosion when herbicide tolerant crops make no-till cultivation more feasible. Unlike most recent technological innovations, the available agbiotechnologies tend to reduce, rather than increase, management requirements. This factor could help to slow the long standing trend to fewer and larger farms.

At the same time there is a general understanding of the average effects of the first generation biotech crops, also evident is a tendency for wide ranging differences across farms and regions. The reasons appear multifold, some due to farm-level management, some to environmental factors, and some to the technologies themselves. For many crops when the severity of pests, disease and weeds cannot be predicted by planting time, biotech crops are being used as a form of loss insurance. The products though are costly so that new management guidelines are needed to help farmers consider these seeds from a novel management perspective. Studies have shown that supply fluctuations in aggregate account for about a quarter of farm level income changes. Available biotech products provide a mechanism to control part of that variability.

Private Sector Strategies and Public Acceptance: The ultimate effects of agricultural biotechnology will lie in the intersection of public acceptance, corporate strategy, and private use incentives. Public acceptance seems to be moving in the direction of labeling - voluntary or mandatory - but little is presently known of the acceptable forms of labels or the international decision-making entity responsible to establish an orderly system. A labeling system unique to each country will be a severe impediment to trade. Consider for example the complexities of managing shipments if one country allows zero tolerance for products labeled as biotech free while others permit one percent contamination, two percent, etc. At present it is not evident which entity has the authority to negotiate a broad labeling agreement, if there is to be such a thing.

Glimmers into corporate strategy regarding pricing and innovation are beginning to unfold. While much public attention has been focused on consolidation of seed suppliers, analysis to date suggests industry vertical consolidation is a normal process at this early stage, in part to avoid pricing competition between agbiotech and traditional input supplier firms. At the level of interfirm (horizontal) competition, firms appear currently to be engaged in rivalry for market share somewhat akin to what is seen with internet companies, as well as repositioning their product offerings as key pesticide and herbicide patents are expiring. These however are short term trends and we need better insights into long term practices, including corporate strategies to maintain the flow of research funding needed in agriculture. Agriculture does not have the profit potential of software so that adequate research funding becomes a greater issue. This is a very significant area with major potential ramifications for societal welfare here and worldwide.

Supply Channels and Regulation: It is important to realize the ramifications of different regulatory rules applied to agbiotech products. Clearly, the costs of segregating products in the marketplace (identity-maintained products) will be substantial, at least until the volume increases and the system adjusts from its present commodity focus. At present, selection between biotech and non-biotech products is being done largely by choosing among supplier countries. To date, this has been accomplished with no major price effects by realigning supply and demand sources, such as shifting North American supplies to Asia and Brazilian products to Europe, etc. However, further changes in supply or demand (partial bans on biotech foods in Asia, commercialization of biotech crops in Brazil) could well lead to price swings, with ramifications at the individual farm as well as the national level. Additional economic research will help identify when this may occur and suggest possible strategic responses.

But potentially more significant are the threats posed to the world grain and oil products trading system, such as would have come had the expansive biosafety protocol proposed under the Biodiversity Convention been adopted. Restrictions on bans on imports of bioengineered food products such as were recently adopted in Europe raise troubling issues of scientific proof of health effects under WTO rules, rules which appear not to be suited to such strongly felt views as held by Europeans. At all costs a direct confrontation between international agreements and public sentiments should be avoided.

Institutional Analysis and Intellectual Property Rights (IPR): IPR, and patents in particular, are a driving force in the evolution of agbiotechnology, and continued strong protection remains critical to future developments. We must nonetheless take into account mechanisms for mitigating the opportunistic use of patent-conferred monopoly rights when they do occur. Compulsory licensing is possible outside the U.S. where grounds are very restrictive), but the reasons for limited use worldwide are poorly understood. Responsible application of compulsory licensing practices needs further investigation.

Perhaps more significant overall, the absence of commercialization permission for component materials accessed from the private sector is frequently limiting the ability of public sector researchers to release completed products. This is not generally a matter of IPR but rather Material Transfer Agreements which have become ubiquitous worldwide. A more expeditious means is required to establish commercialization agreements. Yet this is but one example of the need to identify (and adequately support) a clear public sector role in the rapidly privatizing food and agricultural sector.

Trade and Development: Regulatory certainty is one major reason for the leading role of U.S. firms in agbiotech research and commercialization. However, in developing countries research shows there may be insufficient means, and incentive, to enforce trade rights, including those for IPR. This means some developing countries can be expected to operate outside the current systems, complicating multinational arrangements and affecting technology transfer. Mechanisms need to be identified to provide positive incentives for the least developed countries to cooperate fully with international trading system.

Thank you for an opportunity to share a summary of scientific information on the economic and social implications of biotechnology. Much of this knowledge has been made possible by federal support for economic and social science research. Clearly, more research will be necessary to answer many important and unanswered economic, social and public policy questions.
 

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