The Economics of Biotechnology in Field-Crop Production

Lowell D. Hill and Wojciech J. Florkowski

U.S. scientific leaders in the development of agricultural biotechnology can contribute to the economic growth of many countries by commercializing plant cultivars that possess improved genetic characteristics. The potential for increased production and decreased costs has been emphasized by most researchers. But limited resources, the high cost of research, and the undesirable effects of past adoptions of technology have made the public and research community more aware of the importance of evaluating other economic impacts before adopting the new biotechnologies. Additional information is needed about the price and income effects of the increased production and about who gains and who loses market share, income, and welfare - the distributional effects of economic change.

The U.S. Department of Agriculture (USDA) and the Office of Technology Assessment of the U.S. Congress have studied the impacts of agricultural biotechnology and other modern technologies. But most of the studies have avoided the issues of the changes in income and welfare among firms, regions, and economic sectors as the technologies have been commercially adopted.

Policy analysts of economic and social consequences have often relied on qualitative evaluation without quantifying the results. Useful insights into relationships among the important variables can be obtained by quantifying at least those consequences that emanate from direct changes in the quantities produced. Subsequent changes will cause additional adjustments in quantities, and the ripple effects quickly go beyond the capacity of simplifying mathematical models.

The Study

A study was carried out to provide estimates of the welfare changes associated with commercialization of alternative plant biotechnologies. Twelve specific plant technologies were selected for the study: symbiotic changes, new rhizobia strains, altered protein content, virus- resistant varieties, bacteria-resistant varieties, fungus-resistant varieties, insect- resistant varieties, frost-tolerant varieties, herbicide-tolerant varieties, heat-tolerant varieties, plant growth regulators (PGRs), and ice-retarding bacteria. The principal criterion for selection was the probability of rapid commercial adoption.

The effects of these alternative biotechnologies on major crops were measured for ten regions of the country, covering both nonirrigated and irrigated land. The model used published statistics on the cost and quantities of inputs applied per acre for nine row crops: barley, corn, cotton, oats, peanuts, rice, wheat, sorghum, and soybeans.

Welfare is measured by consumer and producer surpluses. The analysis gives information about the potential regional reallocation of agricultural land to alternative uses and about welfare gains to consumers. The models used in the analysis demonstrate long-term, aggregate effects of each new technology, assuming full adoption. Impacts of each technology were examined independently of the other eleven; no simultaneous adoption of two or more technologies was allowed in the model.

Model Solutions

Model solutions show a decrease in total acreage used for the production of the nine crops included in the analysis after the introduction of biotechnology. Irrigated and nonirrigated land withdrawn from production is located in the Delta and Southeast and, to a smaller extent, in the Appalachian, Mountain, and Northern Plains regions. The affected regions represent a range of different climates and growing conditions that offers a potential for developing specialized agricultural production.

The decrease in acres planted to row crops resulting from yield-increasing technology will slow the degradation of the environment. Replanting the withdrawn land with perennial or cover crops would lower soil erosion. The technologies that would cause the largest relocations of crops and prove beneficial from the standpoint of soil protection are the use of PGRs, heat-tolerant cultivars, bacteria- and virus-resistant plants, and cultivars with altered protein content.

The four technologies most beneficial to society, as measured by the change in total surplus (consumer plus producer returns), are cultivars with altered protein content, virus- and bacteria-resistant cultivars, and cultivars responding to PGRs. This ranking was largely influenced by the size of consumer surplus, which was the highest for these technologies. All biotechnologies negatively affected producer surplus - the smallest effect being that from commercialization of cultivars with altered protein content, and the largest being the effect of widespread use of PGRs. Assuming no change in demand, a larger volume of commodities causes lower gross income in the aggregate as a result of a percentage decrease in prices that is greater than the percentage increase in output. In the cost data used in this model, the new technologies did not sufficiently reduce the cost of production to compensate for lower prices.

Thus, the introduction of new technologies decreases aggregate farm income, as measured by producer surplus. Realized income on an individual farm may decrease or increase, depending on market price, skillful application of the new technologies, and benefits of early adoption. The reduction in farm income shown by the models is the direct result of increased supply under the assumed price elasticities. The negative effects on the producer sector can be alleviated by expanding demand, finding new uses, and controlling supply through government action; by transferring income from consumers, processors, and other groups that benefit from lower crop prices; and by lowering production costs.

Aggregate income of the agricultural sector in each region will be affected differently as a result of differences in crop rotations, importance of certain crops in a region, and the different yields and costs of production in each region. For example, a larger portion of total farm income will go to producers in the Midwest who have a comparative advantage in production of row crops.

Conclusion

The impact of biotechnology illustrates a polar case of a long-term full adoption of twelve separate technologies applied to a limited number of field crops. The information about potential future land allocation and welfare changes contributes to the constantly expanding pool of knowledge concerning predictions of the impact of agricultural technology.

Specifically, this study indicated to agricultural research administrators the perceived probabilities of developing different biotechnologies and economic impact of their commercialization. Allocation of research funds may be determined not only by the short-term success in developing a technology but also by its long-term welfare effects. Welfare effects, in turn, may not be limited to the easily quantifiable changes in total surplus. These may also include the effect on quality and sustainability of natural resources, such as unpolluted water or uneroded soil. Some of the biotechnologies considered in this study would lower pesticide use and withdraw land from agricultural production.

Policymakers may use the information from this study to formulate policy goals that would make the necessary adjustments easier and to fully explore benefits offered by the use of biotechnology in crop production. For example, programs for alternative land use or economic programs that sustain rural community growth may be needed as agriculture diminishes in importance.

For farmers and farm groups contributing funds for research and market development, the results of this study suggest paying more attention to the demand for agricultural crops. Traditional food, feed, and fiber use of grains, oil crops, and cotton could be augmented by industrial uses of crops. Industrial use of agricultural crops would change the demand structure and create new markets. Research funds applied toward research on new uses of commodities and on feasibility studies of new markets could make biotechnology work to the benefit of farmers.

This article is excerpted from a recent Station bulletin, Economic Impacts of Commercial Applications of Biotechnology in Field Crop Production. Bulletin 799 is available for $3 from the Office of Agricultural Communications and Education, (217)333-2007.

Lowell D. Hill, L.J. Norton Professor of Agricultural Marketing, Department of Agricultural Economics, and Wojciech J. Florkowski, assistant professor of agricultural economics, University of Georgia and Georgia Experiment Station, Griffith, Georgia


Previous | Return to Index | Next Section