1. Diffentiating GMOs From Non-GMOS Troy G. Schmitz Assistant Professor Morrison School of Agribusiness Charles B. Moss Andrew Schmitz Presented at: Free Trade: Responding to Opportunities and Challenges San Antonio, Texas May 24, 2002

2. Topics for Discussion Show the conditions under which two separate markets can emerge: one for GMOs and one for non-GMOsShow the conditions under which two separate markets can emerge: one for GMOs and one for non-GMOs Show why that in cases where the markets can be separated there will be a price premium for Non-GMOsShow why that in cases where the markets can be separated there will be a price premium for Non-GMOs Discuss why most non-GM corn is not marketed as suchDiscuss why most non-GM corn is not marketed as such Discuss why the rate of adoption for GM corn is low and decliningDiscuss why the rate of adoption for GM corn is low and declining Show that when IP costs are added to deal with market segregation problems, total revenue to all corn producers declinesShow that when IP costs are added to deal with market segregation problems, total revenue to all corn producers declines Show Preliminary Trade Model for Food vs. Non-Food Corn with IP Costs addedShow Preliminary Trade Model for Food vs. Non-Food Corn with IP Costs added

3. Adoption of GMOs without Difference in Demand

4. Additional Transaction Costs for non-GMO Producers Non-GM corn can be used to satisfy BOTH the non-GM and GM markets.Non-GM corn can be used to satisfy BOTH the non-GM and GM markets. GM Corn can be sold only in markets that do not differentiateGM Corn can be sold only in markets that do not differentiate Non-GM corn and soybeans must be tested in order for the producer to receive a price premium in the non-GM marketNon-GM corn and soybeans must be tested in order for the producer to receive a price premium in the non-GM market Additional transaction costs exist when selling to the non-GM market:Additional transaction costs exist when selling to the non-GM market: (1) Cleaning Costs (2) Planting barriers (safety strips or male plants) (3) Costs of removing volunteer plants from previous crops (4) Several costs associated with Identity Preservation through the channel Any premiums that may exist for non-GM certified grain MUST account for:Any premiums that may exist for non-GM certified grain MUST account for: (1) All the deterministic costs mentioned above; AND (2) The probability that the crop could become contaminated anyway

5. Case 1: There Exists an Excess Demand for Non-GM corn

6. Case 2: There Exists an Excess Supply of Non-GM Corn

7. Additional Costs of Segregating Grain Crops

8. Adoption Rates of GM Crops in the United States, 1996-2000

9. Survey Responses by Ohio Farmers Related to Segregation and Market Premiums (GM versus non-GM adoption)

10. U.S. Corn Supply and Use (1980/81-1999/00) a

11. IP Costs and Product Differentiation *Elasticity of Residual non-Food Demand = -0.5 **100 percent of food corn use is made up of non-GM corn)

12. Impact of IP Costs on GM and Non-GM U.S. Corn Prices IP Costs $0.29 per bushel Residual DemandResidual Demand Elasticity –0.5*Elasticity –1.2 Percent of Food Percent of Food Demand GMO-FreeDemand GMO-Free 1005010050 Corn Price before IP Costs ($/bushel)1.851.851.851.85 Price of Non-GM Corn: IP Costs ($0.29/bushel)2.062.102.102.12 Non-GMO Price Received by Farmers ($/bushel)1.771.811.811.83 Non-GM Corn before IP Costs (billion bushel)2.451.232.451.23 Reduction in GMO Uses due to IP Costs (billion bushel)-0.14-0.08-0.17-0.09 Non-GM Corn after IP Costs (billion bushel)2.311.142.281.14 Change in Undifferentiated Corn Price due to IP Costs ($/bu)-0.08-0.04-0.04-0.02 Price of Undifferentiated Corn after Additional IP Costs ($/bu)1.771.811.811.83 Total Revenue before IP Costs (billion $)17.4517.4517.4517.45 Total Revenue after IP Costs (billion $)16.7417.0917.1017.29 Change in Total Revenue (billion $)-0.71-0.36-0.35-0.16 Total IP Costs (billion $)0.670.330.660.33 *The elasticity of food demand is held constant at –0.5.

13. Impact of IP Costs on GM and Non-GM U.S. Corn Prices IP Costs $0.58 per bushel Residual DemandResidual Demand Elasticity –0.5*Elasticity –1.2 Percent of Food Percent of Food Demand GMO-FreeDemand GMO-Free 1005010050 Corn Price before IP Costs ($/bushel)1.851.851.851.85 Price of Non-GM Corn: IP Costs ($0.58/bushel)2.282.352.362.40 Non-GMO Price Received by Farmers ($/bushel)1.701.771.781.82 Non-GM Corn before IP Costs (billion bushel)2.451.232.451.23 Reduction in GMO Uses due to IP Costs (billion bushel)-0.28-0.17-0.34-0.18 Non-GM Corn after IP Costs (billion bushel)2.171.062.121.05 Change in Undifferentiated Corn Price due to IP Costs ($/bu)-0.15-0.08-0.07-0.03 Price of Undifferentiated Corn after Additional IP Costs ($/bu)1.701.771.781.82 Total Revenue before IP Costs (billion $)17.4517.4517.4517.45 Total Revenue after IP Costs (billion $)16.0316.7416.7517.13 Change in Total Revenue (billion $)-1.42-0.71-0.70-0.32 Total IP Costs (billion $)1.260.611.230.61 *The elasticity of food demand is held constant at –0.5.

14. Preliminary Trade Model for Food vs. Non-Food Corn

15. Conclusions 1.The fact that consumers differentiate between GM and non-GM product is insufficient to generate a price premium for non-GM output. 2.If there is an excess supply of non-GM output, even in the presence of IP costs, a price differential will not emerge at the farm level. 3.However, if there is an excess demand for non-GM output, a price premium will be realized at the farm level. 4.In reality, 75% of corn planted in the U.S. is non-GM. 5.The demand for non-GM is much less than 75% of all corn, even when you combine domestic food consumption and exports for food uses. 6.Premiums for U.S. corn producers for non-GM corn are hard to find (at the farm level). 7.At current IP cost levels, regardless of the type of corn grown, U.S. farmers are made worse off due to the introduction of GM corn.