Landscape Clubs: Co- existence of GM and Organic Crops By Simon Weseen Hartley Furtan and Dan Dierker

Background Organic farming in Canada, the U.S. and Europe does not permit the use of GMOsOrganic farming in Canada, the U.S. and Europe does not permit the use of GMOs Contamination caused by the introduction of GM canola in Canada has meant that organic canola is no longer grown by organic farmers.Contamination caused by the introduction of GM canola in Canada has meant that organic canola is no longer grown by organic farmers. –What will happen if GM wheat is introduced? Loss of organic markets would eliminate a potentially valuable opportunity of Canadian farmersLoss of organic markets would eliminate a potentially valuable opportunity of Canadian farmers

Trade Implications The organic industry in Canada is rapidly expanding and has become a global industryThe organic industry in Canada is rapidly expanding and has become a global industry –20-25% annual growth rate –$63 million in exports A majority of organic crops grown in Canada are exported to the U.S. and to Europe (~ 80%)A majority of organic crops grown in Canada are exported to the U.S. and to Europe (~ 80%)

Objective Objective: Evaluate the economic feasibility of GM and organic crops existing in close proximity on the same physical landscapeObjective: Evaluate the economic feasibility of GM and organic crops existing in close proximity on the same physical landscape Hypothesis:Hypothesis: –an institutional structure can be created where GM and organic technologies can co-exist –Producer welfare will be higher than the case where only GM or organic technology exists

Theory of Clubs Introduced by Buchanan (1965) and expanded on by others (Scotchmer 2002, Casella 1992, 2001)Introduced by Buchanan (1965) and expanded on by others (Scotchmer 2002, Casella 1992, 2001) –Agents form groups to share the cost of excludable public goods –Optimal club size is determined by an externality, namely crowding As size increases, the efficiency decreases and costs can exceed benefitsAs size increases, the efficiency decreases and costs can exceed benefits

Theory of Clubs cont’d Applied to a variety of issues/problems involving the consumption of goods in competitive marketsApplied to a variety of issues/problems involving the consumption of goods in competitive markets –Micro: The formation of fitness clubs, restaurant clienteles, academic departments, etc, in competitive markets (B. Ellickson et al, 1999) –Macro: The formation of political jurisdictions (Casella (1996, 2001)) Casella (2001) examines the role of market size in the formation of jurisdictionCasella (2001) examines the role of market size in the formation of jurisdiction –Employs a spatial representation to illustrate club formation –Changes in economic conditions will change trade-offs that determine the borders of jurisdictions

Our Model Club - an institution whose members collectively decide to finance (through a tax, t 1 ) the creation of an of organic farming zoneClub - an institution whose members collectively decide to finance (through a tax, t 1 ) the creation of an of organic farming zone Excludable good - a zoning law that restricts the use of GM seed varieties within the clubExcludable good - a zoning law that restricts the use of GM seed varieties within the club  = productivity parameter or efficiency of the zoning law  = productivity parameter or efficiency of the zoning law

Our Model cont’d Club size is limited by downward sloping demand curve for Canadian organic wheatClub size is limited by downward sloping demand curve for Canadian organic wheat –as supply of wheat increases the price paid for the wheat decreases Producers will choose to join the organic club until profits from farming organically on the last acre are equal to the profits from farming using GM technologyProducers will choose to join the organic club until profits from farming organically on the last acre are equal to the profits from farming using GM technology –i.e. Marginal  Organic = Marginal  GM

Initial Assumptions Initial Assumptions No buffer zone initiallyNo buffer zone initially –contamination is eliminated costlessly GM producers face elastic profit functionGM producers face elastic profit function Organic Producers face downward sloping profit functionOrganic Producers face downward sloping profit function Producers are risk neutral regardless of the production technology that they chooseProducers are risk neutral regardless of the production technology that they choose

 GM (net profit per GM acre)  Organic (net profit per organic acre)   Organic ( ,t 1 ) Figure 1: Optimal Organic Club Area Without Buffer Zone

Model Second Stage Exogenously determined buffer zone is incorporatedExogenously determined buffer zone is incorporated It is assumed that contamination of the club can be fully prevented (i.e.  = 1)It is assumed that contamination of the club can be fully prevented (i.e.  = 1) Producers in buffer zone must produce using conventional technology but face GM pricesProducers in buffer zone must produce using conventional technology but face GM prices Producers in the organic club will compensate buffer zone producers out of tax, t 1, such that they are no worse off than they would be if they were outside the clubProducers in the organic club will compensate buffer zone producers out of tax, t 1, such that they are no worse off than they would be if they were outside the club –equal to the difference between conventional and GM price

 GM  Organic eg fx ab c d h bb 1) Buffer Zone =  b -  2) Tax = fgex =acdb 3) Club is welfare enhancing if ahf > acdb (tax) Figure 2: Organic Club with Exogenously Determined Buffer Zone

Empirical Model 4 Scenarios4 Scenarios –no organic production –organic and GM production with no buffer zone –organic and GM production with 300m buffer –organic and GM production with 400m buffer Profitability of each technology estimated based on NPVs for ten year rotations for organic, GM, and conventional rotationsProfitability of each technology estimated based on NPVs for ten year rotations for organic, GM, and conventional rotations

Empirical Model Cont’d Estimate change in profits resulting from a change in quantity of wheat producedEstimate change in profits resulting from a change in quantity of wheat produced Optimal size of organic club determined by maximizing NPVs subject to:Optimal size of organic club determined by maximizing NPVs subject to: –NPV organic = NPV GM –club tax = buffer zone loss

Data Crop Budgets developed from Agriculture and Agri-food Canada (2000) and Alberta Agriculture (2001)Crop Budgets developed from Agriculture and Agri-food Canada (2000) and Alberta Agriculture (2001) Demand curve for organic wheat estimated from Hamm (2002) and Furtan (2003)Demand curve for organic wheat estimated from Hamm (2002) and Furtan (2003) Buffer zone distances are taken from CFIA (2000) and Hucl and Matuz-Cadiz (2001)Buffer zone distances are taken from CFIA (2000) and Hucl and Matuz-Cadiz (2001)

Results Total crop profits under co-existence are ~ $5.527B, while crop profits under GM only are $4.942BTotal crop profits under co-existence are ~ $5.527B, while crop profits under GM only are $4.942B Optimal organic club size occurs at ~ 800,000 acres (160,000 wheat)Optimal organic club size occurs at ~ 800,000 acres (160,000 wheat) 400m buffer - compensation = $250,000400m buffer - compensation = $250, m buffer - compensation = $180,000300m buffer - compensation = $180,000 As buffer zone increases, total producer welfare decreaseAs buffer zone increases, total producer welfare decrease

Results

Conclusions/Implications Producer welfare is ~ 12% higher under co- existence than when production is GM onlyProducer welfare is ~ 12% higher under co- existence than when production is GM only Compensation Principle holdsCompensation Principle holds –Club members can compensate buffer zone producers and still be better off In economic terms, GM and organic crops do not have to be mutually exclusiveIn economic terms, GM and organic crops do not have to be mutually exclusive Club theory, used in this way, could have a variety of other applicationsClub theory, used in this way, could have a variety of other applications