SPECIAL ISSUES: BIOTECH

June 16, 2001

GMOs Effect on the Soybean Marketing System
By Karen Bender, Principal Research Specialist in the Department of Agricultural and Consumer Economics in the U of I's College of ACES.

The application of biotechnology to soybeans originally was expected to increase the value of the crop to both growers and processors through the development of varieties with enhanced product characteristics. Despite those expectations, GM soybeans with next agronomic traits have arrived on the market first. Holders of biotechnology patents saw this as an important element of the rollout of biotechnology. They expected that producers would adopt these GM soybeans for efficiency reasons. Products with new intrinsic traits would follow after buyers and sellers became accustomed to the new agronomic traits.

Because soybeans that are modified for agronomic traits are nutritionally and physically identical to existing soybean varieties, traditional supply chains would seem adequate for distribution of the first genetically modified soybeans. Since these soybeans do not affect value to the end-user, they do not need to be physically differentiated from non-modified varieties.

Public concerns about GMOs, however, have lead to the need, in some instances, for segregation of modified soybeans from non-modified varieties. The future structure of the markets for genetically modified crops is uncertain and farmers and processors are faced with making investment and production decisions in a turbulent business environment.

The short-term effect of recent resistance to GM soybeans has been confusion along the supply chain. Firms must identify which of their customers require non-genetically modified soybeans, determine how the soybeans can be segregated throughout the supply chain, and evaluate whether existing testing technologies can ascertain if soybeans they receive are genetically modified.

These are not trivial issues, even with the limited number of biotechnology products available in the market. It is estimated that about 54 percent of the 2000 U.S. soybean crop was planted to genetically modified soybeans, with almost all of these genetically modified in terms of agronomic traits.

Many unresolved issues still exist. In the long run, will soybeans with modified agronomic traits be marketed in the same way as non-modified soybeans? Will there be distinct, separate markets for output trait-modified soybeans, or will there be some simpler aggregate market where all attribute combinations for soybeans will be treated in common?

At a practical level, these uncertainties have profound economic consequences for both buyers and sellers in the supply chain. Will non-genetically modified soybeans command a price premium? What is the liability for delivering mixed loads and can one be insured against this liability? How will technologies for sampling and testing, segregation requirements, and labeling be incorporated into the market – as mandatory or voluntary programs?

The development of many distinct, specific markets would amount to a revolution in soybean marketing. The structure and behavior of the existing supply chain for soybeans are driven by homogeneity. Farmers produce soybeans, all of which are considered the same, although produced from among hundreds of varieties.

Whether delivered at harvest or from storage, the first handler receiving the soybeans is not interested in differentiating these soybeans for different end-uses, but wishes to blend them to meet physical limits for numerical grades in outbound shipments. The soybeans are transported to soybean processors who crush the soybeans into two components: soybean oil and soybean meal. Soybean oil is then sold to food and industrial users, while soybean meal is primarily utilized in feed rations for livestock.

The handlers in the traditional soybean supply chain typically have large volume storage units, and their profit is created by turning over a very large volume of soybeans at very small margins. Since soybeans are considered a homogenous product, large volume storage units are very efficient. Similarly, soybean processors can crush large volumes of homogenous soybeans, with an objective of maximizing yield of oil and meal. This traditional supply chain for soybeans has been in place since the production of soybeans in the United States began in earnest in the 1960s.

An alternate, quality-based supply chain has existed in parallel to the homogenous commodity market and has been used for some differentiation of soybeans, particularly in markets for tofu and organic soybeans. The identity-preserved supply chain consists of a specialty grain firm contracting variety-specific soybean production with farmers, specifying particular production and management requirements as contract terms. Generally, this system is focused on small-scale lots of very high-valued soybeans whose added value compared to commodity soybeans is greater than the additional costs of production, handling, and segregation.

If soybeans with modified agronomic traits cannot be commingled with non-modified soybeans, then the ability of firms to capture economies of scale in production, storage and processing will be compromised. A shift away from homogeneity may also affect the strategies of the specialty grain firms in existing identity-preserved market channels, as they consider whether to expand to larger volume, but lower value-added, differentiated soybeans. Either way, the continued controversy over GMOs is bound to have a major effect on the current soybean marketing system.

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