Welfare Effects of Herbicide Tolerant Rice Adoption in Southern Brazil Fabrizio Galli (BASF) Anwar Naseem (McGill) Rohit Singla (McGill) Presented at the 16 th ICABR Annual Meetings, June 25-27, 2012, Ravello

Motivation Protection of intellectual property rights (IPRs) are meant to provide an incentive for private R&D. – Benefit: New innovations; growth (dynamic efficiency) – Cost: Monopoly rents for innovator (static inefficiency) What is the evidence for these claims?

Specific Context Clearfield rice in Brazil – Herbicide tolerant rice – Effective in red rice control – Non genetically modified – Introduced by BASF in 2004; 55% in 2010; half illegally grown – Majority of rice in Brazil grown in Rio Grande do Sul

Objectives Evaluate the farm level impacts resulting from Clearfield Estimate the change in social welfare from introduction of Clearfield Quantify the economic benefits captured by the technology provider Examine surplus changes from introducing stronger IPR system.

Methodology To estimate the economic impact on producers, use economic surplus model of Alston, Norton and Pardey (1995) To estimate benefits to technology supplier use firm profits model of Moschini and Lapan (1997) We assume a small open economy

Economic Surplus Model Small Open Economy

Methodology (cont.) - price of rice in Rio Grande do Sul - quantity of rice produced in RS prior to CR introduction - rice supply elasticity in Brazil - expected proportionate yield change per hectare - proportionate change in input cost per hectare - probability that CR will achieve the expected yield - adoption rate of CR - technology depreciation factor

Methodology (cont.) Firm profits model - Hareau, Mills and Norton (2006) - technology fee charge per hectare - adoption rate of technology - crop area. - research and development costs – sunk costs

Data and parameters - estimation of yield change per hectare -    tt R t A YE CEYE K            1 1

Data and parameters (cont.) - estimation of yield change per hectare -    tt R t A YE CEYE K            1 1

Data and parameters (cont.) - estimation of input cost change per hectare - Source: IRGA (2010).

Data and parameters (cont.) - estimation of input cost change per hectare - Source: Kleffmann (2010).

Data and parameters - summary

Results and discussion -

Results and discussion (cont.) - - specification (1): impact of CR adoption on yield = + 50% (overstated). - specification (2): impact of CR adoption on yield = + 30% (acceptable). Certified CR Yield increase: 15% Cost reduction: 1%

Results and discussion (cont.) - Baseline: NPV of change in surplus, (million USD). - NPV of change in surplus under IPR enforcement, (million USD).

Sensitivity results for yield change

Cost sensitivity analysis Source: IRGA, BASF.

Conclusion - innovators do not extract monopoly rents, corroborating with Falck-Zepeda, Traxler, and Nelson 2000; Falck-Zepeda, Traxler, and Nelson 2000; Pray et al. 2001; Qaim and Traxler 2005; Hareau, Mills, and Norton complete IPR enforcement  economic agents (producers and innovators) would gain considerably and order of beneficiaries not reversed. - favourable economic environment under strict IPRs - official CR more efficient than illegal and conventional rice  dissemination of information.

Limitations and future research - detailed farm level data to assess E(Y) and E(C) - probability distribution to certain model parameters - relationship between adoption and resulting cost reduction - contingent valuation  willingness to pay for Clearfield Rice

Objectives slide: - examine whether the public goods nature of invention is managed by IPR exclusion mechanisms and whether the technology supplier earns economic rents. - favourable economic environment for firms to invest in research (Pray, Govindasamy and Courtmanche 2003). Back up slide