80 CALIFORNIA AGRICULTURE, VOLUME 58, NUMBER 2

Horticultural biotechnology facessignificant economic and market barriers

RESEARCH ARTICLE

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Julian M. Alston▼

Technological change has driveneconomic progress in agriculture andwill continue to play a crucial role inthe 21st century. The latest wave oftechnological change in agriculture isbased in molecular biology. Willhorticulture participate? Geneticallyengineered crop varieties have beenadopted on a wide scale in someagronomic crops, but horticulturalcrops face larger hurdles. High costsfor research, development andregulatory approval combined withthe small acreages planted and thediversity of varieties, will limit thepotential for profitable applicationsof biotechnology to many fruits andvegetables, tree fruits and nuts, andnursery crops. In addition, there aremarket barriers. Like most importantchanges in agriculture, modernbiotechnology has met with spiritedpolitical opposition from somequarters. Threats of political actionmay discourage food manufacturersand retailers from adopting biotechproducts that are wanted by someconsumers and may be profitable forgrowers.

Agriculture has been an importantengine of economic development,

and the mainspring of economicprogress in agriculture has been pro-ductivity improvements driven by tech-nological change that is fueled by re-search and development (R&D). SinceWorld War II, agricultural productivityhas more than doubled in the UnitedStates, as in many other countries. Cali-fornia agriculture today produces morethan twice the output of 1950, usingroughly the same total input — although

with less labor and land, and morecapital and purchased inputs.

These gains can be attributed tonew biological, mechanical andchemical technologies, including im-proved genetic material, machines,fertilizers and pesticides, and knowl-edge. The current wave of technologi-cal progress continues this pattern,while emphasizing information tech-nologies and biotechnology — in par-ticular genetically modified (GM)crops. For many, GM crops representthe hope for a future with less hungerand malnutrition, and for a more sus-tainable agriculture with more varied,cheaper and safer food. For othersthey are cause for serious concernabout the environment and foodsafety. Regardless of how we may feelabout it, the juggernaut of technologicalchange continues and the biotechnol-ogy revolution is well under way in theUnited States and other countries.

The challenge for public policy is todetermine what regulations should beapplied to govern the development anduse of these technologies, and whatother types of intervention may be nec-essary, such as public investments inresearch to correct for private-sectorunderinvestment. In the case of horti-culture — the cultivation of fruits andvegetables, tree fruits and nuts, turfgrass,flowers and ornamental crops — these is-sues are sharply drawn because the pri-vate sector has not found it profitable todevelop or commercialize many GMcrops in the current political, legal andmarket environment.

What will happen in biotechnologyapplied to horticultural crops is up tothe government, for a variety of eco-nomic reasons. Some of these aspectsmay be unique to GM horticulturalcrops but many are common to GMcrops generally, and similar issues arisewith some new non-GM technologies.

While agricultural biotechnology has revolutionized agronomic crops such as soybeans,corn and cotton in the United States, thus far virtually none of the produce onsupermarket shelves is genetically engineered. The reasons for this disparity are complex.

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Public, private roles in ag science

Without government interven-tion, the rate of innovation will betoo slow, reflecting both under-investment in research and under-adoption of some research results.Both problems are related to thenature of property rights for re-search results. “Free-rider prob-lems” occur when property rightsare incomplete, and private inves-tors can capture only part of the re-turns to their investments incertain types of research (such asdeveloping new crop varieties); asa result, their incentives to investare reduced. On the other hand,when the rights to research resultsare protected, such as by patents ortrade secrets, the owner of a newvariety can charge monopolyprices, unduly limiting the use ofthat variety. Intellectual propertyrights (IPRs) are a double-edgedsword: to the extent that they pro-vide a greater incentive for invest-ing in research they are also likelyto result in lower adoption rates.

Governments have addressedthe incentive problems in agricul-tural research in several ways. Fed-eral and state governments (as wellas industry) have funded agricul-tural research at public institutionssuch as the U.S. Department of Agricul-ture (USDA) and state agricultural ex-periment stations associated withland-grant colleges. This approach al-lows an increase in total research with-out the problems associated withmonopoly pricing of inventions. How-ever, even though the investment haspaid handsome dividends, it is increas-ingly difficult to sustain the past lev-els of funding for public agriculturalR&D, in the face of general budgetproblems and declining political sup-port for public science funding, in-cluding agricultural science (Alstonet al. 2000). Governments have alsoacted to strengthen IPRs applied toplants and animals as well as me-chanical technologies; and changes

in IPRs, especially in the 1980s, werecrucial for the agricultural biotechnol-ogy development that followed. Partlyas a reflection of enhanced IPRs, in theUnited States, private-sector funding ofagricultural research has been growingfaster than public-sector funding andnow exceeds it.

The balance in agricultural R&D be-tween the private and public sectorsvaries among types of research. For in-stance, until recently the private sectoremphasized agricultural R&D pertain-ing to mechanical and chemical tech-nologies, especially pesticides, whereIPRs are effective; and the governmentwas more important in other areas suchas improving crop varieties. Privateinvolvement was dominant in crop-variety research only in hybrid corn,

where the returns were well pro-tected by technical restrictions oncopying or reusing saved seed,trade secrets and other legalrights. Changes in the institu-tional environment and the formof new IPRs, combined with newscientific possibilities associatedwith modern biotechnology, re-sulted in a shift in the private-public balance in research toimprove crop varieties. As thebalance shifts toward private re-search, new attention must bepaid to old questions aboutwhether the private investmentin crop research will be suffi-cient, whether the allocation ofthose resources (say, amongcrops) will be optimal, whetherthe results will be adopted rap-idly and widely, and what rolethe government should play.

Economic and market aspects

The development of new tech-nologies through R&D is onlyone element of the picture. Thetechnologies must also be ap-proved for commercial applica-tion and economically attractiveenough to be adopted by farm-ers. The experience with otherbiotech crops has lessons for hor-

ticultural biotechnology.Biotech crops have been a commer-

cial reality only for a few years but theyhave made very rapid inroads in someparts of the market. In particular, pest-resistant and herbicide-tolerant corn,soybeans, canola and cotton were rap-idly developed and adopted in theUnited States and to a lesser extent inother countries (James 2000). To date,the successful GM crop varieties haveemphasized “input traits,” related toreducing the use of chemical pesticidesor making them more effective, ratherthan “output traits,” related to productquality. Why has there been rapid de-velopment and adoption of GM crop-ping technologies for these crops andnot other important crops, such as

For many, [transgenic] crops represent the hope for a future with less hunger and malnu-trition, and for a more sustainable agriculture with more varied, cheaper and safer food.For others they are cause for serious concern about the environment and food safety.

— continued on page 84

Large corporations have found it profitable to investin research on genetically engineered agronomic crops,but smaller firms and public institutions such as theU.S. Department of Agriculture and land-grantuniversities undertake much of the research onhorticultural crops. Above, Peter Quail of UC Berkeleyinspects mutant Arabidopsis plants at the Plant GeneExpression Center, a joint venture of UC and USDA inAlbany, Calif.

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Transgenic produce slow to enterevolving global marketplace

Roberta L. Cook

IF and when genetically engineered(GE) horticultural products be-

come more widely available andadopted, they will enter an expandingmarketplace that is becoming globallyintegrated and more consolidated.Fewer, larger firms will control accessto a rising share of the world’s popula-tion, including rapidly growingmiddle-income consumers in the devel-oping world. Consumers everywherewill be increasingly focused on conve-nient, ready-to-eat and value-addedproducts. In order to compete on a glo-bal scale, GE produce must meet thechallenges of the quickly evolving mar-ket for fruits and vegetables.

In the United States alone, the esti-mated final value of fresh produce soldthrough retail and food-service chan-nels surpassed $81 billion in 2002. Eu-rope-wide fresh produce sales throughsupermarket channels alone (excludinggreen grocers and food service) were esti-mated to exceed $73 billion in 2002, andtotal final sales to exceed $100 billion.

Worldwide, consumption and culti-vation of fruits and vegetables is in-creasing. Between 1990 and 2002, globalfruit and vegetable production grewfrom 0.89 billion tons to 1.3 billion tons,and per capita availability expandedfrom 342 pounds to 426 pounds (FAO2003). Much of this growth has oc-curred in China, which is aggressivelypursuing agricultural biotechnology(see page 112).

The global fresh fruit-and-vegetablemarketing system is increasingly fo-cused on adding value and decreasingcosts by streamlining distribution andunderstanding customer demands. Inthe United States and Europe this dy-namic system has evolved toward pre-dominantly direct sales from shippersto supermarket chains, reducing theuse of intermediaries. Food-servicechannels (hotels, restaurants and insti-tutions) are absorbing a growing shareof total food volume and are also devel-oping more direct buying practices. The

year-round availability of fresh pro-duce is now seen as a necessity by bothfood service and retail buyers.

Product form and packaging are alsochanging as more firms introducevalue-added products, such as fresh-cut produce, salad greens and relatedproducts in consumer-ready packages.Estimated U.S. sales of fresh-cut pro-duce were over $12 billion in 2002.Fresh-cut sales are even higher in Eu-rope and beginning to develop in LatinAmerica and Asia as well. The implica-tions of this trend may become as im-portant to the biotechnology industryas the changes in market structure,since fresh-cut processors are increas-ingly demanding specific varietiesbred with attributes beneficial to pro-cessing quality.

International trade

The streamlining of marketingchannels poses both challenges andopportunities for horticultural biotech-nology. A smaller number of largerfirms, controlling more of world foodvolume, now act as food-safetygatekeepers for their consumers, re-flecting the diversity of consumer pref-erences in their buying practices.Where consumers perceive productsutilizing biotechnology to be benefi-cial, retail and food-service firms willprovide them. Products with special-ized input traits valued by consumers,such as unique color, flavor, size or ex-tended shelf-life, are the most likely tosucceed in today’s marketplace.

While large food-service and retailbuying firms and international tradersmay offer easy access to consumer mar-kets, if major buyers adopt policiesunfavorable to GE foods, distributionobstacles could become insurmount-able. Such policies are common amongEuropean food retailers, reflectingstrong consumer concern there overGE products.

The challenge to supply seasonal,perishable products year-round has fa-

82 CALIFORNIA AGRICULTURE, VOLUME 58, NUMBER 2

vored imports, and increased horizon-tal and vertical coordination and inte-gration among shippers regionally,nationally and internationally. Season-ality in the production and consump-tion of perishable commodities, due tonatural climatic conditions, causesmuch horticultural trade to be counter-seasonal, such as the shipment ofSouthern Hemisphere grapes and stonefruits from Chile to the United Statesand Europe in order to meet consumerdemand during the NorthernHemisphere’s winter, when domesticsupplies are low.

Integration among internationaltraders and grower-shippers allowsthem to position themselves as consis-

tent year-round suppliers of differenti-ated products; these firms increasinglyseek out varieties that offer superiorflavor and other attributes. For ex-ample, Sun-World, a California freshfruit shipper is pursuing a strategy ofmarketing differentiated, proprietaryvarieties where possible. These variet-ies must be provided from multiple lo-cations in the Northern and SouthernHemispheres so that shippers can pro-vide customers around the world witha year-round supply of consistent qual-

Global consumption of fruits andvegetables is on the rise, but importantmarkets for California produce growerssuch as Europe and Japan, above, havetaken a cautious approach toward importsof transgenic foods.

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of vegetables in 2001, a 14% share.China has become the leading (and stillgrowing) supplier of fresh vegetables toJapan, with a 57% share. Hence, Japa-nese consumer preferences regarding GEfoods will affect the U.S. fruit industrymore than the vegetable industry.

Countries well known for their fruitexports, such as Chile, Brazil, Argen-tina and Ecuador, have market sharesof 2.3% or less, and Australia and NewZealand hover at the 1% level. Whilesome countries may hold importantmarket shares in certain individualproducts, in general, there is still greatgeographic diversification in the worldfruit and vegetable trade. For fresh veg-etables, the world’s top five exporters(the Netherlands, Spain, Mexico,

United States and China) contributed59% of total export value in 2001. Onlythe United States was ranked withinthe top five both as an importer and ex-porter, making decisions in the UnitedStates regarding biotechnology espe-cially important to vegetable breeders.

Retail markets

Over the past decade the world hasexperienced a high rate of mergers andacquisitions in the grocery retailing in-dustry, both in home country marketsand across borders via foreign direct in-vestment. Over the past decade thistrend led to an estimated 30 firms ac-counting for 10% of global grocery sales(M+M PlanetRetail 2003). Many ofthese chains are European and Asian,but with store locations in numerouscountries, enhancing their global buy-ing power.

Latin America and Asia have experi-enced striking growth in the role of su-permarkets in food retailing over thepast decade, with southern and easternAfrica engaged in the same transforma-tion process (Weatherspoon andReardon 2003). Over the next decadethe rapid evolution of supermarketsshould induce more direct linkages be-tween suppliers and retailers on a glo-bal scale, gradually eroding thedominant role of traditional wholesal-ers, open street markets and small-scalefruit and vegetable vendors, following

ity. Long-term, breeding a set of at-tributes into a particular fruit or veg-etable variety in one location will beinsufficient to meet these goals.

The United States is the world’s larg-est importer and exporter of fruits andvegetables. U.S. imports of fruits andvegetables grew from $6.7 billion in1990 to $10.8 billion in 2001, while im-ports by E.U. countries (including intra-E.U. trade) grew slightly to about $36billion. Germany has long been themost important import market withinEurope, accounting for 12% of worldfruit and vegetable imports in 2001.However, a declining import share forGermany is largely responsible for adrop in the E.U.’s share of world im-ports from 56% in 1990 to 48% in 2001.Japan imported $5.9 bil-lion worth of fruits andvegetables in 2001, ac-counting for about 8% ofworld imports since 1993.

While the influence of the EuropeanUnion and Japan on world horticulturalmarkets has not been growing, theywill remain vitally important. Leadingand emerging fruit and vegetable sup-pliers will continue to vie for these lu-crative markets and will respond tomarket signals conveying evolving Eu-ropean and Japanese preferences re-garding the use of biotechnology.Furthermore, in the case of Japan, de-clining domestic horticultural produc-tion over time and economic recoveryare expected to eventually cause im-ports to rebound.

The importance to the United Statesof European and Japanese preferencesregarding GE foods is evident. In 2001,the United States exported $1.1 billionof fresh and processed fruit, vegetablesand nuts to the European Union andhad a $300 million trade surplus withthe European Union in these products(USDA 2002). Nuts, raisins and fruitjuices are most important, with abouttwo-thirds of the trade in those catego-ries, while fruits such as table grapes,stone fruit and citrus are also impor-tant. In 2001, the United States alsoshipped fresh fruit worth $537 millionto Japan, accounting for 40% of themarket (USDA 2003). On the otherhand, the United States is now a minorplayer in the Japanese vegetable importmarket, shipping $278.3 million worth

With store locations in 10 countries, Wal-Mart is the one U.S. firmwith a global presence, and it is also the world’s largest grocery retailer.

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the trend occurring in the latter half ofthe 20th century in the United Statesand Europe.

With store locations in 10 countries,Wal-Mart is the one U.S. firm with aglobal presence, and it is also theworld’s largest grocery retailer. Ap-proximately 30% of Wal-Mart’s $259billion in global 2003 sales were esti-mated as grocery-equivalent, generat-ing impressive new buying power inthe food industry. To date, Wal-Mart’spolicy is to market GE food products.

As the food distribution system con-solidates, retailers are seeking largersuppliers that come closer to matchingtheir scale, as well as suppliers offeringmore services and marketing support,tailored to their specific needs. This

movement toward account-based mar-keting is making the food system moretechnology-intensive, including the in-troduction of demand-based informa-tion management practices to stimulatesales and profits for retailers. To com-pete effectively, both suppliers andbuyers must be consumer-driven, uti-lizing modern information managementpractices in all aspects of the vertical foodsystem. The adoption (or not) of GEfoods will depend on consumer re-sponse as measured by commercial buy-ers acting as food safety gatekeepers.

R.L. Cook is Extension MarketingEconomist, Department of Agriculturaland Resource Economics, UC Davis.

References[FAO] Food and Agricultural Organiza-

tion. March 2003.United Nations.www.fao.org.

M+M PlanetRetail. 2003.www.planetretail.net.

[USDA] U.S. Department of Agriculture.2002. Gain Report #E22104. EuropeanUnion trade data – multiple commoditiesonly – fruit and vegetables – CY 2001 sta-tistics. Nov. 6. Foreign Agricultural Service,Washington, DC.

[USDA] U.S. Department of Agriculture.2003. GAIN Report #JA3701. Market brieffor Japanese food processing sector. Feb.20. Foreign Agricultural Service, Washing-ton, DC.

Weatherspoon D, Reardon T. 2003 (May).Development Policy Rev: 21(3).

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wheat and rice? The likely reasons re-late to the nature of supply and de-mand for new technology, and theeconomics of adoption.

Benefits to farmers and others. Thetotal benefits from farmers adoptingany new cropping technology are ap-proximately equal to the benefits peracre times the number of acres affected.With pest-resistant crop varieties,these benefits come primarily from re-duced costs for applying chemicalpesticides and increased yields, afteran allowance for regulatory require-ments for refugia to manage resis-tance. The distribution of these totalbenefits between farmers (and ulti-mately food and fiber consumers) onthe one hand, and the technologysuppliers on the other, is determinedby the size of the premium chargedfor the use of the new technology, butthis premium also affects the incentivesfor farmers to adopt the technology.

Economic studies suggest that farm-ers and biotech companies have sharedin the benefits of biotech crops and thatthe net benefits have been large.Gianessi et al. (2002) conducted 40 de-tailed U.S. case studies of biotech culti-vars. They estimated that in 2001, eightbiotech cultivars adopted by U.S. grow-ers provided a net value of $1.5 billionto growers, reflecting increased cropvalues and cost savings. They furtherestimated that the 32 other case-studycultivars would have generated an ad-ditional $1 billion in benefits to growersif they had been adopted, bringingthe total potential benefit in 2001 to$2.5 billion. Of this annual total, thelion’s share was for herbicide-tolerantcrops ($1.5 billion per year), followedby insect-resistant crops ($370 millionper year). These estimates do not repre-sent the total economic impact becausethe geographic analysis was limited inscope, and they do not include any ben-efits to the seed companies and biotechfirms that produced the technology.

Environmental concerns. Privatebenefits and costs from biotech cropsaccrue to growers and consumers of theproducts, along with seed companiesand biotech firms. If the new technol-

eties — even if the product, such asbroccoli, appears virtually identical —to assure availability in the market ev-ery day of the year. Consumers oftenprefer different colors of their favoriteflower. Introducing a trait into a horti-cultural species likely requires its intro-duction into multiple varieties toachieve market success.

Limited market windows. The nichemarket for horticultural crops alsomeans that any single variety is likelyto be successful in only a small fractionof the crop’s total market. In Californialettuce production, a given variety mayhave a market window of only a fewweeks in a specific location as produc-tion moves seasonally around the state.The potential acreage (and sales) of avariety is limited, and unless develop-ment and regulatory costs can bespread over multiple varieties, the po-tential returns on a biotech trait are of-ten too small to be economicallyfeasible (see page 106).

Diversity of horticultural biotech cropscontributes to market hurdles

Kent J. BradfordJulian M. Alston

Many processed products are marketed internationallyand regulatory approval is required in each importingcountry, possibly with each having different testingor labeling requirements.

tively propagated from cuttings orgrafting rather than by seed, or are pe-rennial, bringing different issues forcontainment, stewardship and value.

Multiple niche markets. Unlike thecommodity agronomic crops, horticul-tural markets are highly segmented byfactors such as location, season andconsumer preferences. The horticul-tural market is composed of manyniche markets, and any single productmay be successful in just a few of thoseniches. People in different countries orregions prefer different colors, shapes,sizes and flavors of melons, for ex-ample. Diseases vary by location, so thetypes of resistant varieties required alsovary. Diverse growing conditions andseasons require multiple adapted vari-

Processor requirements. For mostprocessed crops, the processor speci-fies the varieties grown and the raw-product standards. While existingbiotech traits would be beneficial toprocessors, such as high viscosity in to-matoes or insect resistance in sweetcorn, processors are also highly sensitiveto consumer preferences and often haverecognizable brand names that are muchmore valuable than any single product.Processors are wary of jeopardizing theiroverall market position by risking picketsor protests from anti-biotech activists.For example, Dole would have little in-terest in helping its lettuce growers con-trol weeds with herbicide-tolerantlettuce if that would put its global pine-apple and banana markets at risk.

Why is the acreage of biotech agro-nomic crops continuing to in-

crease while commercialization ofhorticultural biotech products stagnates?Representatives of the horticultural in-dustry offered a variety of explanationsat a workshop in Monterey in March2002 (see acknowledgments below).

Species diversity. Virtually all of thebiotech crops currently grown are infour species (soybean, corn, cotton andcanola). This contrasts with the hun-dreds of horticultural species and thou-sands of fruit, vegetable andornamental crop varieties. In mostcases, specific procedures are requiredto genetically transform each species,and the ease with which different vari-eties can be transformed varies widely.Introducing a trait into a specific cropand variety may require considerableresearch and development. The diver-sity of propagation and marketingmechanisms also presents challenges,as many horticultural crops are vegeta-

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fruits. Segregation of products is pos-sible, as for organic foods, but associ-ated costs often require higher prices forprofitability.

Liability is a critical issue, as demon-strated by recalls following the discov-ery of Starlink corn in tortilla chips,when the transgenic variety had notbeen approved for human consumption.The food industry is leery of any situa-tion where its products might be consid-ered adulterated and require a recall.Without practical thresholds for adven-titious (unexpected or accidental) pres-ence of biotech DNA or protein in theprocessed product (as there are forthings like insects found in agriculturalproducts), the risk is high with littlebenefit to the distributor.

Consumer benefits. While the firstwave of biotech products was targetedprimarily to growers, incentives areneeded throughout the marketing chainto share both the risks and the benefits.Products with clear benefits for consum-ers may be needed to develop demand;these will also likely require a pre-mium price to compensate for thetracking and segregation needed to en-sure that the promised quality is deliv-ered. As biotechnology moves beyondthe initial phase of input traits and be-gins to develop output and consumertraits, its developers must pay atten-tion to the interests, concerns and re-quirements of all participants in the

In addition, many processed prod-ucts are marketed internationally andregulatory approval is required in eachimporting country, possibly with eachhaving different testing or labeling re-quirements. Segregating or channelingprocessed products for different mar-kets is possible, but requires extensive(and expensive) changes in current pro-duction and distribution systems.

Distribution requirements. The dis-tribution and retailing of horticulturalproducts is increasingly global and con-centrated (see page 82). Large distribu-tion firms can dictate standardsindependent of any regulatory system,so whether they agree to market a par-ticular product can mean the differencebetween success and failure. Labelingon the basis of whether recombinantDNA techniques were used is not re-quired in the United States, but it is inmany other countries. There is still noconsistency among countries aboutwhat should be on such a label, howmuch information it should provide orwhether it should be voluntary or man-datory.

Traceability is the ability to track aproduct from the market back to thefield or greenhouse where it was pro-duced. While this is possible with someitems, such as fresh flowers, fruits andvegetables, it is more difficult withproducts commingled during process-ing such as canned vegetables and

production, processing, distributionand marketing chain.

K.J. Bradford is Director, Seed Biotechnol-ogy Center, and Professor, Department ofVegetable Crops, UC Davis; and J.M.Alston is Professor, Department of Agri-cultural and Resource Economics, UCDavis, and Associate Director, UC Agri-cultural Issues Center. ”The Workshop on Biotechnology forHorticultural Crops: Challenges and Op-portunities,” held in Monterey in March2002, was sponsored by the Giannini Foun-dation, UC BioStar Project, UC Davis Col-lege of Agricultural and EnvironmentalSciences, UC Division of Agriculture andNatural Resources, UC Agricultural IssuesCenter and UC Davis Seed BiotechnologyCenter. Presenters included Ted Batkin(California Commodities Committee andCitrus Research Board), Fred Bliss(Seminis Vegetable Seeds), Neal Gutterson(formerly of DNA Plant Technology), Su-san Harlander (BioRational Consultants),Kathy Means (Produce Marketing Associa-tion), Irvin Mettler (formerly of SeminisVegetable Seeds), Carlos Reyes(Monsanto), Chuck Rivara (California To-mato Research Institute), David Schmidt(International Food Information Council),Terry Stone (Monsanto), Larry Stults(Syngenta) and Mary Zischke (Dole FreshVegetables).

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With regard to horticultural crops, consumer preferences vary. They may want severaldifferent melon varieties or flower colors, left. Garden and lawn-care products such asturfgrass, right, could provide inroads for genetically engineered varieties.

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market acceptance may differ sufficientlyto limit their adoption. Rather than an-other farmer, the relevant buyer for thesecrops is a food processor, manufactureror retailer who may be reluctant to risknegative publicity or to risk losing con-sumers who would prefer a biotech-freelabel or who may not be confident thatthe biotech and nonbiotech grain can besegregated.

Processors and retailers. It is notsufficient that farmers and consumersperceive net benefits from GM crop va-rieties. The adoption of biotechnologymust provide net benefits to other par-ticipants in the marketing chain, suchas food processors and retailers. Pricingof the technology may be a critical fac-tor. Even if the new technology is morecost-effective than the traditional alter-native, monopolistic pricing couldmean that the technology supplier re-tains a large share of the benefits. Thecost savings passed on to processorsand consumers may be a small fractionof the total benefits, rendering incen-tives for processors, retailers and con-sumers to accept the technologycomparatively small. Processors and re-tailers can effectively block a new tech-nology if it does not clearly benefitthem, even if there would be net ben-efits to the general public.

Fixed costs. The size of the marketmatters. The cost to develop a new va-riety is essentially the same whether it

is adopted on one acre or a millionacres, but the benefits are directly pro-portional to the number of acres onwhich the variety is adopted. This iswhy biotech companies have focusedon developing technologies for morewidely planted agronomic crops, espe-cially feed-grain and fiber crops forwhich market barriers are lower.

The technology developer must alsoobtain regulatory approvals. It is diffi-cult to obtain precise information oncosts of regulatory approval for biotechcrops and chemical pesticides, but ac-cording to available estimates, the totalcost of R&D — from “discovery” tocommercial release of a single new pes-ticide or herbicide product — exceeds$100 million, and regulatory approvalalone costs more than $10 million. Anew technology must generate enoughrevenue for the developer over its life-time to cover these costs, and for somecrops the total acreage is simply notsufficient. Given the large fixed costsassociated with regulatory approvalsfor specific uses, agricultural chemicalcompanies have concluded that the po-tential market is too small to warrantthe development of pesticides for manyof California’s specialty crops, whichhave become technological orphans.

It does not follow that the govern-ment should invest in developing newconventional or GM pest-control tech-nologies for these orphan crops. If the

ogy involves environmental risks (assome fear may be the case with biotechcrops) or replaces technology that in-volves environmental risks, there willbe additional environmental costs andbenefits to take into account as an ele-ment of national costs and benefits. Forinstance, pest-resistant crops can reducethe application of broad-spectrum chemi-cal pesticides, which are hazardous tofarmworkers, compromise food safetyand impose a burden on the environ-ment. The economic studies to date havenot assessed these environmental costsand benefits. However, Gianessi et al.(2002) estimated that adoption of theeight current cultivars allowed a reduc-tion in pesticide use of 46 million poundsin 2001, and the 32 potential cultivarscould have allowed a further reduction of117 million pounds. The relevant com-parison then is between the environ-mental risks associated with thesebiotech crops and those associated withthe annual burden on the environmentof 163 million pounds of chemical pes-ticides that could be avoided by grow-ing biotech crops instead – 66 millionpounds in California alone, where 185.5million pounds of pesticides were usedin 1999 (Mullen et al. 2003)

Market acceptance. On the demandside, farmers will adopt biotech variet-ies if the perceived net benefits to themare large enough, and this depends onthe perceived market acceptance of GMcrops. Concerns have been raised aboutthe possibility that GM crops may be un-safe for consumers because of allergensor other, as yet unidentified risk factors,about risks to the environment and to theeconomy from uncontrolled genetic drift,and about the moral ethics of tamperingwith nature. The GM varieties that havebeen developed and adopted extensivelyto date have not experienced significantprice discounts because of buyer resis-tance. This can probably be attributed tothe nature of the crops. For feed grains,the buyers are other farmers who arecomfortable with the technology, and forfiber crops such as cotton the food safetyconcerns do not apply. For the majorfood grains, wheat and rice, even if thefarm-production economics potential ofGM varieties is as large as for feed grains,

Corn Soybeans Cotton Canola Papaya

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Significant percentages of acres planted to major U.S. row crops and one minorhorticultural crop (papaya) were genetically engineered varieties in 2002 (canola) and2003. These crops were transformed to provide traits attractive to growers rather thanconsumer-oriented traits like taste or nutritional value.

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current regulatory policy and process isappropriate and efficiently imple-mented then the high cost is not exces-sive; if a new technology cannotgenerate benefits sufficient to pay thosecosts, then it is simply not economicalto develop that technology. The ques-tion for technology orphan crops iswhether it is possible to reduce thecosts of R&D and regulatory approvalsufficiently to make it profitable for thenation and the private sector to changetheir orphan status.

Markets for horticultural biotech

On the supply side, “horticulture”includes an enormous diversity of fruitand vegetable crops, but it also in-cludes many nonfood species, such asornamentals, flowers and recreationalturfgrass. Collectively these horticul-tural crops compare well with majoragronomic crops in terms of total valuein the United States. However, they usemuch less acreage, and the market sizefor some biotech products depends onboth acreage and production value. In2000, the United States produced fruits,nuts and vegetables with a total valueof more than $28 billion, of which Cali-fornia contributed about $14 billion(table 1). In addition, horticulture in-cludes a small number of larger-scalecrops (such as potatoes and onions,apples and wine grapes) as well as alarge number of smaller-scale crops(such as Brussels sprouts and persim-mons). At current costs for R&D andregulatory approval, it is unlikely thatbiotechnology products will be devel-oped and achieve market acceptancefor many of these smaller-scale crops inthe near future (see sidebar, page 84).Further, experimentation with perenni-als such as grapes, nuts and fruit treesis comparatively expensive (becausethe experimental unit is larger andtakes more time), and it is costly tobring new acreage into production orreplace an existing vineyard or orchardwith a new variety.

On the demand side, the market forhorticultural products, especially freshfruits and vegetables, is undergoing im-

portant changes associated with thechanging structure of the global foodindustry (see sidebar, page 82). Increas-ingly fewer and larger supermarketchains have been taking over the globalmarket for fruits and vegetables, espe-cially fresh produce, and changing theway these products are marketed. Be-cause fresh produce is perishable andsubject to fluctuations in availability,quality and price, it presents specialproblems for supermarket managerscompared with packaged goods.Supply-chain management, and theincreasing use of contracts that specifyproduction parameters as well as char-acteristics and price, is replacing spot

markets for many fresh products. A de-sire for standardized products, regard-less of where they are sourced aroundthe world, could limit the developmentand adoption of products targetingsmaller market segments, unless retail-ers perceive benefits and provide shelfspace for diversified products — suchas biotech and nonbiotech varieties ofparticular fruits and vegetables.

On the other hand, an increasinglywealthy and discriminating consumingpublic can be expected to continue todemand increasingly differentiatedproducts — with an ever-evolving listof characteristics such as organic, low-fat, low-carbohydrate and farm-fresh.

TABLE 1. Value of production and acreage for selected commodities, 2000

Value of production Area grown

Commodity California U.S. California U.S. World

Fruits and tree nuts . . . . . . . million $ . . . . . . . . . . . . . . . thousands of acres . . . . . . . .Almond 655 655 500 500 4,136Apple 142 1,326 31 445 13,517Apricot 27 32 19 20 951Avocado 310 326 59 65 827Grapefruit 55 285 15 145 620Grape, all types 2,804 3,072 827 946 18,503Kiwi 14 14 5 5 136Orange 514 1,683 196 815 8,930Peach/nectarine 358 595 103 191 5,114Strawberry 840 1,086 28 48 575Total* 7,285 12,626 2,464 4,092 NA

Vegetables and melonsArtichoke 71 61 9 9 307Asparagus 144 221 37 77 2,645Bell pepper 172 527 21 62 969Carrot 322 438 85 123 2,357Cauliflower 212 249 42 47 2,259Garlic 140 155 29 35 2,660Lettuce 1,581 1,872 211 284 2,079Melon 372 704 90 290 10,175Onion 189 736 50 166 557Potato 209 2,591 44 1,348 49,490Tomato 948 1,809 311 432 9,745Total* 6,718 15,560 1,734 2,820 NA

Field cropsCorn for grain 65 18,499 205 72,440 340,580Cotton 807 4,260 914 13,053 82,000Rice 217 1,050 548 3,039 380,019Soybeans 0 12,467 0 72,408 183,804Wheat 104 5,782 487 53,133 532,545Total* 1,586 47,514 4,738 328,449 NA

*Totals include many other crops in addition to those listed.NA = not available.Sources: USDA National Agricultural Statistical Service and California Agricultural Statistics Service for California and

U.S. data; United Nations Food and Agricultural Organization for world data; Cotton Incorporated for worldacreage of cotton.

To date, the successful GM crop varieties have emphasized “input traits,” related toreducing the use of chemical pesticides or making them more effective, rather than“output traits,” related to product quality.

88 CALIFORNIA AGRICULTURE, VOLUME 58, NUMBER 2

Hence retailers will have to balance thecost savings and convenience associ-ated with global standardizationagainst the benefits from providing agreater range of products, which willinclude GM products when retailers be-gin to perceive benefits from stockingthem. Unlike other types of foods,fruits and vegetables are often con-sumed fresh and in clearly identifiableand recognizable form. This has impli-cations for perceptions of quality andfood safety that may influence con-sumer acceptance — perhaps favorably,for instance, if a genetically modifiedsweet-corn could be marketed asreduced-pesticide (see page 99).

Other elements of GM horticulture —such as nonfood products, ornamentalsor turfgrass — have advantages interms of potential market acceptance.GM trap crops, which provide pesticideprotection for other crops, and GM sen-tinel crops, which signal the presence ofpests or provide other agronomic indi-cators — may be used in food produc-tion without overcoming barriers ofacceptability to market middlemen orconsumers (see page 89). Biotechnologyproducts designed for home gardenersmay be more readily accepted becausethe grower is the final consumer.

Market acceptance in the UnitedStates is also linked to continued accessto export markets, particularly in theEuropean Union and Japan where re-strictions have been applied to biotechfoods. The relative importance of thedomestic market could help to accountfor the success of the GM feed-graintechnologies in the United States, and itmay also help to account for the successof these and other GM technologies inChina. China is comparatively impor-tant in horticultural biotechnology —its investment in agricultural biotech-nology is second only to the UnitedStates, but with a different emphasis,including significant investment in hor-ticultural biotechnology (see page 112).

Implications for government policy

The technological potential for GMhorticultural crops appears great, par-ticularly when we look beyond the “in-put” traits that have dominatedcommercial applications to date, to op-portunities in “output” traits, such aspharmaceuticals and shelf-life enhance-ments. Because delays in socially ben-eficial technologies mean forgonebenefits, there may be a legitimate rolefor the government in facilitating afaster rate of development and adop-tion of horticultural biotechnologyproducts. For instance, the governmentcould reform property-rights institu-tions to increase efficiency and reduceR&D costs. IPRs apply to research pro-cesses as well as products, and limitedaccess to enabling technology or simplythe high cost of identifying all of therelevant parties and negotiating withthem, may be retarding some lines ofresearch — a type of technologicalgridlock (Binenbaum et al. 2003).Nottenburg et al. (2002) suggest a gov-ernment role in improving access to en-abling technologies. Similarly, thegovernment could revise its regulationsto increase efficiency and reduce costsfor regulatory approvals. Instead of re-quiring a completely separate approvalfor each genetic transformation “event,”it may be feasible to approve classes oftechnologies with more modest specificrequirements for individual varieties.

The government could also reducesome barriers to adoption, especiallymarket acceptance of biotech foodproducts, by providing informationabout their food safety and environ-mental implications. The biotech in-dustry and agriculture can have aninfluence here, too. The general edu-cation of consumers and market inter-mediaries about biotech productsmay be facilitated in a process oflearning by experience with products —such as nonfood applications, orhome garden applications — thathave good odds of near-term successbecause of low barriers to market ac-ceptance and good total benefits.

J.M. Alston is Professor, Department ofAgricultural and Resource Economics, UCDavis, and Associate Director for Scienceand Technology Policy, UC AgriculturalIssues Center.

References

Alston JM, Chan-Kang C, Marra MC, et al.2000. A Meta-Analysis of the Rates of Re-turn to Agricultural R&D: Ex Pede Herculem.IFPRI Research Rep No 113. Washington, DC:International Food Policy Research Institute.

Binenbaum E, Nottenburg C, Pardey PG,et al. 2003. South-North trade, intellectualproperty jurisdictions, and freedom to oper-ate in agricultural research on staple crops.Econ Devel Cultural Change 51(2):309–36.

Gianessi LP, Silvers CS, Sankula S, Carpen-ter JE. 2002. Plant Biotechnology: Currentand Potential Impact for Improving PestManagement in U.S. Agriculture; An Analy-sis of 40 Case Studies. Washington, DC: Na-tional Center for Food and AgriculturalPolicy. www.ncfap.org.

James C. 2000. Global Review ofTransgenic Crops: 2000. ISAAA Brief No 23.Ithaca, NY. www.agbiotechnet.com.

Mullen JD, Alston JM, Sumner DA, et al.2003. Returns to University of California PestManagement Research and Extension: Over-view and Case Studies. ANR Pub 3482, Oak-land, CA.

Nottenburg C, Pardey PG, Wright BD.2002. Accessing other people’s technologyfor non-profit research. Australian J Ag Re-source Econ 48(3):389–416.

Supporters of agricultural biotechnologybelieve it can help to reduce pesticide useand provide more abundant food for anever-increasing global population. Govern-ment can play a role in guaranteeing safetywhile ensuring that unreasonable hurdlesare not preventing its broader distribution.Far right, aerial spraying of pesticides; right,a produce market in Ethiopia.

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