Measuring the Incentive to Adopt Roundup Ready Soybean Technology 

By David Bullock, associate professor of Food and Agricultural Policy in the Department of Agricultural and Consumer Economics at the University of Illinois.

The rapid adoption of Roundup Ready technology in recent years provides ample evidence that many U.S. farmers have expected to obtain cost and risk reductions by planting Roundup Ready soybeans. But several pertinent questions about the economics of Roundup Ready soybeans remain. A complicating factor is that only one company, Monsanto, holds the patent on Roundup Ready technology. Monsanto therefore possesses a good deal of what economists call “market power” in the current soybean industry.

Firms that enjoy considerable market power charge higher prices than those that would come about in a competitive market. Indeed, there is a substantial price premium on Roundup Ready soybean seeds. The question, then, is whether we can expect the cost and risk savings from Roundup Ready soybean technology to be substantial enough to allow many or few farmers to pay the price premium for Roundup Ready soybean seeds, and still make an economic profit.

Also, we must ask how the introduction of Roundup Ready soybean technology affects the incomes of farmers who do not adopt it. Finally, we would like to have a better understanding of how the introduction of Roundup Ready soybean technology will affect the income and well-being of consumers of soybean products.

Data collected from a survey of 1,398 farms in eight Midwest states show that for most farms the cost of using non-Roundup Ready herbicide programs has decreased since the introduction of Roundup Ready technology. On average for all farms (conventional-till and no-till), the least expensive herbicide program in 1995 cost $5.50/acre more than the least expensive non-Roundup Ready herbicide program in 1999.

Our calculations therefore imply that in general even farmers electing not to use the Roundup Ready technology benefitted from its introduction. These savings came from the drop in non-glyphosate herbicide prices between 1995 and 1999. On some farms, non-Roundup Ready herbicide plan costs were more than $15.00 per acre lower in 1999 than in 1995. For a minority of farms, non-Roundup Ready herbicide plan costs were higher in 1995 than in 1999.

For most farms in our sample, the herbicide and labor cost savings from using Roundup Ready technology in 1999 were not sufficient to cover the premium price for Roundup Ready seeds in that year. That is, if we ignore the potential cost savings from lower management costs and the risk-control benefits of a wider open time window for spraying, then for most farms in our survey the 1999 price premium on Roundup Ready seeds was set high enough to cause the cost of using Roundup Ready technology to exceed that of using non-Roundup Ready technology.

Excluding the price premium on Roundup Ready seeds, costs averaged $4.14/acre lower when using Roundup Ready seeds than when planting conventional seeds. However, the seed price premium was approximately $6.25 per acre, implying that for the average farm, production costs using Roundup Ready technology would exceed those using non-Roundup Ready technology by $2.11/acre. The number was $2.18/acre for conventional-till acres, and $1.94/acre for no-till acres.

That the premium on Roundup Ready technology for many farms in our survey was higher than the labor and herbicide cost savings from that technology should come as no surprise. Our calculations did not account for cost savings from lower management costs and a wider open time window for spraying. Yet, even if we had included these important effects in the analysis, we would not expect those who own the right to Roundup Ready technology to have set the price premium low enough to make Roundup Ready technology profitable for all farmers.

The technology is not sold to “average farms,” but rather is sold to many different kinds of farms attempting to control different types of weeds. The owners of the rights to the technology, in trying to recoup R&D costs and deliver a high return on investment to stockholders, naturally would set a price premium high enough such that only some fraction of farmers decide to purchase the new technology. Accordingly, for many farms in our survey, adoption of Roundup Ready technology was quite profitable, in some cases by more than $20.00 per acre.

The profitability of employing the new technology depended specifically on the types of weed problems faced on a farm. The Results imply that if we ignore management cost savings , then for most farms in our survey using a Roundup Ready plan "didn't pay"-costs savings were not great enough to cover the premium on the price of Roundup Ready seeds. That we have ignored management costs savings from a Roundup Ready plan is important--for many farmers these savings are quite high.

 The data further indicate that, while farms in every state vary greatly in their potential cost savings/increases from adopting Roundup Ready technology, the farms with the highest potential savings tend to be concentrated in the western Corn Belt, and farms with the highest cost increases are concentrated in the eastern Corn Belt.