Economics of Modern Agricultural Biotechnology: selected issues

GM FOOD: Innovation in a Biotechnology Industry,

CEPR/ESRC Industrial Organisation Workshop, September 10,2002

linda fulponi*OECD, Directorate for Food, Agriculture and Fish

* The views expressed are those of the author and do not represent those of the OECD nor its member countries

Agricultural Biotechnology : redesigning agro-food system

• Agricultural production innovations: – agronomic traits: herbicide, pest and virus resistance, drought

and saline water adaptable among others;

– output/value added traits:processing aids-oils,fats ,enzymes and starches; nutrient and medicinally enhanced foods; industrial use traits;

– livestock and fish: more efficient and productive varieties,

• Agro-food complex - transformed through the tailoring processes and products– value added food chain implies the need for integration of the

different stages of food production

– acceleration of consolidation, concentration and co-ordination

GM food crops: a successful innovation• 4 crops: soybeans, maize, cotton and canola.• 2 traits: herbicide resistant(HR)-Bt insect resistant and

combined traits– HR-75% of GM crop area

• 3 countries : US, Argentina and Canada account for 98% of all GM crops:

– soybean, 95% Argentina; 65% US;

– maize - 15+argentina; 23+ US;

– canola -55% canada;

– cotton- 60% US,

Distribution of Benefits• Users of GM crops:

– Farmers: profits are location, year and crop dependent evidence is still ambiguous overall, but benefits accrue due to management gains

– Food industry: quality and processing improvements, expectations of future developments are high

– Consumers: no identifiable benefits, perceived hypothetical risks

– Model results find that producers and innnovators gain the most but consumers also gain ( Moschini & Lapan, 2000, Falck Zapeda and Traxler, 1999)

Characterizing agricultural biotechnology: forms of ownership and industry structure

• IPR in agriculture: OECD countries– Patents, Plant Variety Protection Certificates--

Material Transfer Agreements• Consolidation/concentration in agro -biotech

industries: genes, seeds and chemicals• Horizontal integration/co-ordination among input

industries and downstream food industry

Pre-biotech era though dominated by public research also had minimal IPR for agriculture

• Hybrid technology: biological ‘ patent form’ (1920)

• Plant Patent Act-1930-US( asexual reproduction)

• International Union for the Protection of Plant Varieties(1961)

Biotech era and IPR

• Plant Breeder Rights: patent like protection but with a breeder’s exemption so protected varieties can be used in breeding programme--so owner can not control germplasm use and farmers have the legal right to save and use seed on their farm.(UPOV convention)

• Material Transfer Agreements: bilateral agreements which control the use of genetic materials for research purposes. Property rights are strong but not on independent discoveries.

• Patents: plants and animals and their gene sequences as well as promoters, markers and methods

• Patents: grant patentee the right to prevent others from the acts of making, using , offering for sale, selling or importing the product/process for one of these purposes for a limited number of years--time limited monopoly.

• A patent must meet requirements: novelty,non obviousness, utility and sufficient disclosure– do they meet this requirement consistently?

• Justification: consequentialist/utilitarian argument– incentives to innovate and to disclose leads to technological progress and

economic growth and thus welfare increases.• “by slowing down the diffusion of technical progress it ensures that there will

be more progress to diffuse” j. robinson

– Does the patent system stimulate innovation?evidence?

– Other ways to create incentives to disclose-- How do we account for open source developments?

– Patent races: socially beneficial or wasteful in the extreme

Biotech patents: US • Utility Patents in biotechnology( US):

– Diamond vs.Chakrabarty (1980): microorganism for remediation of oilspills

– Bayh-Dole Amendment (1980) : grants public research institutes the right to hold patents

– Plants: Hibberd (1985)– Animals: Allen (1987)– WTO-Trips world wide extension of IPR of plants

and animals and other living organisms through patents or sui generis systems.

What’s different about agriculture?

• Discovery vs invention : DNA sequences• Traditional knowledge: valuing cumulative

knowledge• Farmers’ rights to save and to use or trade seeds.

These rights have been reasserted by FAO, given their importance to developing countries.

What’s different about Agriculture?• Seeds: easily reproduced and no protection to copy,

hence legal forms of protection were found to be need by firms to develop their varieties. Thousands of users world wide who can not be monitored– Hybrids: quasi biological patents

• Identification of patented plant product difficult because of natural genetic drift and spontaneous mutation

• Agricultural inventions give rise to derivative inventions resulting in ‘ dependance’(cumulative royalities)

• Infringement difficult to prove for micro-organisms

‘Bio patent’ solution

• GURTS: Genetic Use Restriction Technologies– regulation of gene expression

• regulation of resistance genes to specified times and conditions

• suppress undesirable characteristic of plants in different stages of its development

• limit cross pollination with other varieties, landraces or wild relatives-biosafety

• improved protection of intellectual property rights– source Assinel 2001

–

GURTS

• Syngenta and DuPont: genetic seed sterilisation– US patent 6297426, oct. 2, 2001:identification and

inactivation of a native gene critical to female plant fertility which yields a plant that is functionally female sterile with inducible female fertility

– US patent 6228643, may 8, 2001:new promoter, that control plant traits including fertility that can be activated and restored by chemical inducer

• Wide spread patents on ‘terminator’ technology.

Biotech Patents and R&D: issues • Survey of Researchers(Price, 2000)

– 187 plant breeders : 48% attest to difficulties in getting genetic stocks for private companies and 45% report that this interfered with research.

• Licensing , Cross-Licensing: how easy is the access– developing countries/firms who have no exchange capital

will they be excluded or what price?

– Can the hold up problem impede innovation?

• Patent races with 1 winner: R& D expenditures increase often to do similar work, or to develop patent portfolios– social costs

Patent scope issues• Patent scope :broad patents

– Do they pose barriers for future innovations by pre-empting large areas of research?

– Are competition policy issues?

– Where are the boundaries between science and commerce?

– Agracetus cotton:• all cotton seed capable of germination into a cotton plant comprisign

in its genome a chimeric recombinant gene construction including a foreign gene and promoter and control sequences operable in cotton cells

• covers all transgenic cotton seed that could be developed

• antitrust would apply if agracetus exercised control over cotton seed to set prices in cotton fiber market or extend control to other fibers

Wide scope patents: markers and methods

• US patent no. 6174724:gene marker technology utility patent covers all practical methods of making GE plants using antibiotic resistance markers(Monsanto). But these are already widely used, so what is novel?

• US patent no. 5767378: Positech, marker gene system without antibiotic resistance. Licensing difficulties: public sector researchers must abide by the MTA which gives Syngenta first rights to any results and prohibits the sharing of resulting materials with 3rd parties.

Industry structure: 3Cs - Consolidation, co-ordination and concentration across activities

• Vertical integration of input industries: genetics, seeds and chemicals

• Co-ordinating input complex with downstream agricultural processing and manufacturing domestically and internationally.

Economics of the 3C’s: the biotech stimulus?

• Pre-biotech: no incentive to vertically integrate for homogenous, bulk commodities

• Output differentiation traits focus implies need for vertical integration to ensure segregation and value added capture.

• Knowledge intensification in agriculture outputs: commercial protection of knowledge and vertical integration to ensure output integrity.

Input Industry integration : the biotech incentive

• Pesticide use regulations : agro-chemical industry captures opportunity of ag biotech innovations– focus on knowledge incorporated in seeds that can be linked

to downstream operations;

– M&A in seeds, genes and agro-chemicals rather than licensing and sharing agreements due to weak IPR(Zilberman, 2000)

• To assure returns to knowledge: seed sale structure is altered

• Technology Use Agreements Incentive to vertically integrate genes seeds and chemicals rather than to license or other sharing agreements

– Future focus on quality traits will alter farmers up and downstream relationships by the changing balance of power

Gene Industry : 5 major players-US and Europe

• Patent holders: Monsanto, DuPont, Syngenta, Bayer and Dow– Genomic patents: 47 % MNEs & 34% sme

– DNA sequencing patents: 50% by top 10 MNEs

– Plant variety Protection certificates: CR4 -77%

• MTAs: widespread but little data.

• PVP (Plant Variety Protection Certificates)– Source thomas, simmons & joly, 1999, Hayenga 1999

Seed Companies• Top Seed Companies Seed sales-million US $

• Dupont( Pioneer) 1938

• Monsanto 1600

• Syngenta 960

• Groupe Limagrain 622

• Grupo Pulsar 474

• Advanta 373

• Dow 350

• KWS 373

• Delta &Pine Land 301

• Aventis 267• source: ETC, 2001

Agro-chemical firms

• Top Agro-Chemical sales Share of market million $

• Syngenta 1-6100 20

• Monsanto 2-4100 14

• Aventis 3-3400 11

• Basf 4-3400 11

• Dupont 5-2500 8

• Bayer 6-2100 7

• Dow 7-2100 7• Source: ETC Group and A.Woodburn Associates from Asgrow.

Biotechnology and the agro-food complex

• Biotechnology provides the tools to develop the quality, tailored valued added products that link genes to final products

• In a low margin industry as food it is necessary to increase value added at every stage of the chain and biotechnology offers the solution.

• ‘Dirt to dinner plate’ strategies rely on complementary seed and agrochemical industries and control downstream through integration, alliances and coordination.

Biotechnology and agro-food complexes

• As biotech innovations are geared to final end users in the food system the industry has restructured to capture the gains of the value added products.

• Developments in functional foods, medicinal foods or vitamin and mineral enhanced will make the role of patents for these high valued products even more important across the world.

Agro-food complexes

• Novartis/ADM cluster: genes-seeds -Novartis to ADM grain collecting and processing across the world to alliances with beef and pork packers at the retail level

• Conagra complex with United agri sells biotech seeds and agro-chemicals and owns one of the largest transport companies, Peavey and at the retail level sells Armour, Swift and Hunts.

. Mergers and Acquisition in Agricultural Chemicals, Biotechnology,

Seeds and Food/Feed (Brennan,Pray and Courtmanche, 1999)

Biotech Seeds Agro-chemical Food/feedMonsanto Agracetus(1995)

Calgene(1996)Ecogen(13 percent)MilleniumPhamaceuticals

DeKalb(1996)Asgrow(1997)Holden’sFoundationSeeds(1997)

Cargill International Seeds,PlantBreeding (1998)

Monsanto Cargill Joint venturefeed and food(Cargillacquires Continental)Montsanto brands suchas Nutrasweet

AgrEvo Plant GeneticSystems(1997)Plant Tec

Nunhems, Vanderhave,PlantGenetic systems,Pioneer VegetableGenetics(1997)Cargill US seeds(1998)

Hoeschst&Scherring (94)Hoescht &RhonePoulenc=Aventis

Dupont Curagen(1997)Human GenomeScienceAlliance(1996)

Pioneer(1997 &1998)Hybrinova(1999)

Dupont Quality Grain(Jointventure with Pioneer)Continental alliance,Protein TechnologiesCereal InnovationNutritious foods

Novartis Northrup King, S&G seedsCiba seeds;AstraZeneca-Novartis spin offto Syngenta(1999)

Ciba-Geigy &SandozMerck acquirespesticides;AstraZeneca-Novartis spin offto Syngenta(1999

Gerber FoodsArcher MidlandDaniels joint venturesthrough Land O’ Lakes

Food economy issues

• Importance of agricultural biotechnology on:– Quality and innovation diffusion– Concentration and consolidation in

input,processing and distribution sectors across sectors and countries

• Does concentration in the gene-seed-chemical complex dampen innovation in the sector?

GM food crops : consumer/society issues

• consumer benefits unidentified and uncertain risks • credence good problem : traceability and labeling

issues• EU-negative; US- uncertain; ROW- mixed views • supply driven vs consumer driven (in contrast to

pharmaceuticals)• trade conflicts regarding regulations possible, but

unlikely