Economics of Alternative Purity Standards under Conditions of Coexistence Nicholas Kalaitzandonakes University of Missouri-Columbia

Questions posed by Michael for today’s discussion What are the costs for supplying commodities under different tolerance levels? How do these costs vary by the size of the market to be supplied? How are such costs distributed across the supply chain? How risk is factored into such costs? How are such costs affected as the diversity of products increases in the market place How the cost structure varies for products that presence vs. absence of attributes must be ensured ©

Market Evidence – Non-GM Premiums ©

Average Non-GM Premiums in Japan Non-GM Premiums – at point of Import US non-GM exports to Japan MMT of non-GM corn 1.0 – 1.5 MMT of non-GM soybeans Thresholds are at the regulatory level set by Japanese authorities of 5% SoybeansCorn ($/MT) ©

Non-GMO premiums in Tokyo Grain Exchange Non - GMO soybean premium computed as the difference between the TGE non-GMO and conventional soybean price quote off the nearby contract © Source: Parcell and Kalaitzandonakes, 2005

Supplying low AP Threshold Seed Markets Test all bins at bulk storage – choose production from low AP bins (<=0.1) to supply small markets (e.g. Austria, Italy) This system is not as effective when AP in production worsens or low AP markets expand in size Example total market size Austria275,000 units Italy1,200,000 units ©

What could it cost to meet lower AP thresholds if they were broadly enforced? The Case of Seed Corn ©

What could the seed industry do to meet lower AP thresholds if they were broadly enforced? Increase isolation distances of fields from foreign pollen sources Increase number of border rows used Increase number of male rows used Introduce/increase time isolation of seed corn fields from other fields Block-plant production fields Harvest fields separately & commingle field production less Clean more (at planting, harvest, processing and conditioning) Use dedicated equipment and facilities Test more Etc. Potential ways to re-engineer seed corn production process Each resulting in different levels of AP efficiency and compliance costs Which ones to choose and at what cost? ©

Empirical results from the US ©

0.5%BASELINE (current operations) 0.3% AP THRESHOLD 42% 34% 27% 22% Incremental costs for various AP thresholds for representative facilities in the US © Max compliance costs facility Min compliance costs facility RANGE OF INCREMENTAL COSTS (% increase over baseline) Source: Kalaitzandonakes and Magnier, 2004

What factors contribute to increasing costs as AP thresholds decrease? ©

Decreased efficiency in use of assets © Source: Kalaitzandonakes and Magnier, 2004

Decreased efficiency in use of assets © Source: Kalaitzandonakes and Magnier, 2004

Output losses © Source: Kalaitzandonakes and Magnier, 2004

1% 2%0.3% AP THRESHOLD INCREMENTAL COSTS 34% Incremental field costs & discardsIncremental processing costsOther costs 92% 70% 22% 7% Incremental compliance costs by category for a representative facility in the Midwest © Source: Kalaitzandonakes and Magnier, 2004

Empirical results from the EU ©

0.5%BASELINE (current operations) 0.3% AP THRESHOLD RANGE OF INCREMENTAL COSTS (% increase over baseline) 54% 15% 44% 30% 20% Incremental costs for various AP thresholds for representative facilities in the EU © 0.1% ( incomplete data) 68% Max compliance cost facility Min compliance cost facility Source: Kalaitzandonakes and Magnier, 2006

0.5%0.3% AP THRESHOLD 45% 51% 37% 63% 51% Incremental costs for various AP thresholds: Accounting for risk & worse-case scenarios © RANGE OF INCREMENTAL COSTS (% increase over baseline) BASELINE (current operations) Max compliance costs facility Avg 54%± 2 stdv 51% Avg 44%± 2 stdv Source: Kalaitzandonakes and Magnier, 2006

0.1%0.5%0.3% AP THRESHOLD 23% 51% 14% 85% 37% 26% Incremental costs for various AP thresholds: Accounting for risk & worse-case scenarios © RANGE OF INCREMENTAL COSTS (% increase over baseline) BASELINE (current operations) Min compliance costs facility Avg 68%± 2 stdv Avg 20%± 2 stdv Avg 30%± 2 stdv Source: Kalaitzandonakes and Magnier, 2006

0.5% 0.3% AP THRESHOLD INCREMENTAL COSTS Costs of discardsIncremental processing costs Added testing costs Representative structure of compliance costs © 41% 21% 43% 35% 41% 18% Incremental field costs 0.1% Incomplete data Source: Kalaitzandonakes and Magnier, 2006

AP compliance costs in the EU & the US: sources of differences Source: Kalaitzandonakes and Magnier, Various Case Studies per seed facility

Reliability of estimated discard levels Our estimated discard rates for the US and EU have varied from 12-20% for the % AP threshold range at different locations Based on preliminary bin test data made available to us, it appears that our estimated discard rates could be low, especially around the 0.3% AP threshold SEPROMA has proposed that at 0.5% discards would reach 25% and at 0.3% AP discards would be 30% ©

Distribution of incremental costs for various AP thresholds ©

1%0.5%2%0.3% AP THRESHOLD INCREMENTAL COSTS (% increase over baseline) 42% 15% 34% 5% 27% 22% AP compliance costs do not appear to be scale neutral 600,000 Unit Facility 320,000 Unit Facility © Source: Kalaitzandonakes and Magnier, 2004

Probability & level of AP and compliance costs are not evenly distributed across the supply chain Female rows Male row Tassel Female rows AP from pollen flow will likely be higher in seed production – due to underlying pollination process and other factors ©

The pollen cloud is denser in grain production AP from pollen flow will likely be higher in seed production – due to underlying pollination process and other factors Probability & level of AP and compliance costs are not evenly distributed across the supply chain ©

Whole chain AP: A case study from corn wet milling Rejection levels of delivered loads to selected non-GM wet mills Source: Kalaitzandonakes and Kaufman, 2006 Representative non-GM wet mills in the US Work directly with seed companies to secure seed less than 0.45% AP Production takes place in both low and high GM adoption areas –using mostly buffer zones Operate under strict IP & traceability regimes They by-pass much of the commodity system Experience low rejection rates testing at 0.9% AP for final product ©

Whole chain AP: A case study from corn wet milling Source: Kalaitzandonakes and Kaufman, 2006 ©

Source: Borchrave, Kalaitzandonakes, Galvao, Frahan, 2003 Agriculture Trading Crushing Feed Livestock Meat Estimated whole chain IP costs in the EU meat chain ( soy – 1% AP threshold )

Some concluding comments Costs of IP systems vary drastically with market size, thresholds (tolerances), crop, production location (i.e. local GM adoption, weather, morphology, etc), physical/capital assets used, and across the supply chain – with obvious implications for optimal market procurement, regulatory policy and distributional impacts Costs/risks vary by market and institutional environment (e.g. process vs. product-based standards) Global and local markets, generally, have coped well with market segmentation and coexistence What are the market failures (now and in the future) and what are appropriate policies? (e.g. what are optimal AP thresholds? How should they be allocated across the supply chain) ©