SPECIAL ISSUES: BIOTECH

April 16, 2001

What's Fair in the Market for Genetically Modified Seeds?
By Peter Goldsmith, assistant professor of agribusiness and farm marketing in the Department of Agricultural and Consumer Economics at the University of Illinois.

Former U.S. Agricultural Secretary Dan Glickman has spoken several times about "fairness to farmers." He especially raised concerns about the effects of the increased concentration among suppliers and their marketing tactics. It would seem, in fact, that defining exactly what is "fair" stands at the heart of the genetically modified seed question.

The firms that supply genetically modified seed, herbicides, and related inputs to farmers today are using strategies new to the industry. Intellectual property rights, patent protection, vertical coordination, brand management, product bundling, extensive levels of research and development, and large capital flows have become important drivers of their behavior. Risks for these firms are great because product life cycles are highly variable and most innovations never make it into the marketplace.

There appear to be two major sources of concern between biotechnology supply firms and agricultural producers. First, innovations such as genetically modified seeds command a price premium in the marketplace. This fact conflicts with a fundamental belief of agriculture in the justness of marginal cost pricing and competitive markets. Second, faced with large investments and greater risks, biotechnology firms try to mitigate the risks through more extensive supply chain control by means of vertical integration, licensing, restrictive contracts, technology fees, and bundling.

As result, we are today faced with the question of which is more just--a competitive seed input market with competitive prices or a wide product distribution or a monopolistically competitive market with price premiums and more limited product distribution?

At the root of this structural change in the seed industry are the new technologies that underlay the competitive arena. Biotechnology, at this early stage, involves "long-jump" innovations with high levels of investment, extensive risk taking, and relatively lengthy cycle times from investment to market. The character of the underlying technology has driven corporate strategy and industry structure. The seed industry continues to be in the throes of a very active mergers and acquisition stage as firms try to link capital, research and development, and marketing. These new life science conglomerates, in turn, conduct themselves differently than their predecessors.

Despite this increased industry concentration, marketing power appears to be muted. This arises principally from the relatively elastic demand for genetically modified crop systems. Farmers not only have alternatives among genetically modified products, but there are unmodified substitutes available. The sector is extremely dynamic and seed firms face numerous challenges, risks, and uncertainties which impact their conduct, especially when consumer and environmental issues are factored in.
There is, in fact, little evidence today of excessively high prices, which would be a sign of significant market power. Alternatively though, the use of product bundling and product "renting" indicate that the market is far from competitive. With respect to bundling, if no real difference exists between glyphosate herbicides, for example, then the herbicide market becomes distorted. At the same time, a seed-herbicide bundle may well be the best way technologically to produce crops.

Another concern is the need for sufficient returns to flow back to the innovating firm. If seed could be legally replanted, as is the case in some international markets, then investment would probably be slowed or discontinued. And, indeed, there has been some evidence that unprotected intellectual property rights produce under-investment.

Although there is no firm evidence of predatory monopolies at this time, farmers will likely have to learn how to deal with non-competitive markets in the future. In a global economy, technology is going to be a critical component of U.S. agricultural competitive advantage. Other countries have advantages in labor costs or government support, while the U.S. has an edge in technology.

Three responses may serve the U.S. farmer well in this changing landscape. If farmers feel that input suppliers have excessive market power, they can direct their cooperatives to invest in biotechnology research and development or seed production to offset any inequities. They also can achieve greater and more competitive access to biotechnology inputs through organizational forms such as corporations, limited liability companies, or cooperatives.

Finally, the best way to thwart market power is to foster innovation. By supporting an active research and product development environment, agricultural producers can do much to ensure a next generation of competitive technologies.

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