A decade after the general introductionof new agricultural biotechnology inputs,the technology remains engulfed in controversy that impacts the economics of regulation.

Some consumers are reluctant to acceptproducts of the new technologies, whichprimarily benefit agricultural producers byoffering the potential to reduce productioncosts. In some developed countries, geneti-cally-modified (GM) commodities or prod-ucts made with GM commodities have beenbanned from the market, or are selling atdiscounts relative to non-GM counter parts.Consumer resistance may lessen or disap-pear as agricultural biotechnology productswith direct consumer benefits are created.Until then, consumer resistance complicatesboth regulatory and economic issues.

There are four broad issues regardingregulation of agricultural biotechnologies:

• How to improve the regulatory framework,

• Consumer attitudes toward agricultural biotechnology,

• Impacts of biotechnology regulation on markets, and

• Access to agricultural biotechnology in developing countries.

Regulatory framework

In the United States, the 1986Coordinated Framework for Regulation of Biotechnology, and other legislationthrough which Congress regulates

biotechnologies, disperse regulatory responsibility to multiple federal agencies:

• USDA’s Animal and Plant Health Inspection Service (APHIS)

o Has jurisdiction over introduction of genetically engineered plants and veterinary biologics.

o Under the Plant Protection Act (PPA), grants permits for developing or importing GM organisms at the experimental stage.

o Regulates pesticide-tolerant crops only during experimentation.

• U.S. Environmental Protection Agency (EPA)

o Has jurisdiction over pesticides

Economics of Regulation of Agricultural BiotechnologiesConsumer preferences, industry structure and economic

forces shape the regulatory process

Issue Report | August 2005

engineered into plants, microbial pesticides and novel microorganisms.

o Regulates distribution, sale, use and testing of pesticidal substances, including plant-incorporated protectants such as Bt, just as chemical pesticides have been regulated under the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA), or underthe Toxic Substances Control Act (TSCA) if FIFRA does not apply.

o Regulates pesticide products sold commercially.

• Department of Health and Human Services’ Food and Drug Administration (FDA)

o Has jurisdiction over food and feed uses of biotechnology.

o Regulates foods and feed derived from new plant varieties.

o Under the Federal Food, Drug and Cosmetic Act (FFDCA), enforces pesticide tolerances—as determined by EPA—on foods. If bio-engineered substances do not differ from substances currently found in food, FDA approval is not required, nor is it required that the product be labeled for bioengineered ingredients.

The result is that regulation of agricultural biotechnologies may differ

greatly depending on the statute underwhich they are regulated. For example,GM crops that include a pesticidal sub-stance will face a more demanding stan-dard than those that do not because theyare subject to the EPA market regula-tions of pesticides, rather than only theplant introduction regulations of APHIS.New economic analysis is needed thatincludes models of adoption behavior,profit effects, risk premiums and changesin conventional pesticide use associatedwith potential EPA decisions. At issueare the real and hypothetical risks to theenvironment and human health.

The underlying framework forbiotechnology regulation lacks importantfeatures, including balanced pre-marketversus post-market regulation, riskassessments that consider both positivesand negatives, and economic considera-tions of benefits versus costs. The actionof private firms and regulatory standardsthat are too stringent may be causingcurrent regulations of agriculturalbiotechnology to be stricter than optimal.

The United States has a permissiveapproach to technology risk, while theEuropean Union (EU) has a more precautionary approach. These differingperspectives create the potential for varied interpretations in regulatory testing.The impacts of these variations are likely to increase as GM technology is used to produce pharmaceutical orindustrial chemicals in plants and animals.

In earlier years, most new agriculturaltechnologies were developed in the public sector. Today, the private sector is a major research innovator. Criticscontend regulators are too close to theindustry they regulate, and industry isexercising excessive political clout onlegislative activities. In response to thebacklash against traditional views of government regulation, political actiongroups have formed around privateinterests. The relative strength, and ultimately the political power, of thesegroups are determined by their respec-tive resources, the homogeneity of theirmembers’ interests, and their ability tocontrol their members’ behavior.

Consumer attitudes

Farmers and consumers are heteroge-neous relative to agricultural biotechnologyproducts. Understanding this heterogeneityis important to understanding farmers’adoption of the technologies, farmercompliance with refuge requirements andconsumer acceptance and resistance toGM products. The agricultural biotech-nology industry has developed and marketed input traits. Farmers haveaccepted these traits because they reduceexpected costs of production and greatlyreduce risks of chemical exposure to farm workers.

Pest resistance to GM-products andrefuge management are important issuesto farmers. Twenty percent of a producer’sacreage in a Bt or pesticide-tolerant cropmust be set aside to non-biotech crops.These refuges provide a breeding groundfor Bt- and pesticide-vulnerable pests,slowing development of pest resistanceto GM technology. Acreage of non GM-adopters also serves as a refuge.Empirical evidence suggests farmers’non-compliance is an issue. To date,resistance has been a minor problem,but that could change as farmersincrease adoption of GM technologies.

Labeling for GM content in foodproducts is controversial. In a recent

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study, 87% of U.S. consumers and 99% of Norwegian consumers said GM labeling was extremely or somewhatimportant. This result is interpreted aspreferences when labeling is costless.When told that GM labeling mightincrease food costs by 5%, the percentageof consumers in the U.S. and Norway indicating that labeling was extremely orsomewhat important dropped by 44 percentage points. This indicates thatconsumer preferences for GM-labelingin Western developed countries is price responsive.

In the United States, labeling could be required under the NutritionLabeling and Education Act of 1990, orunder FDA food safety legislation. TheNutrition Labeling Act is explicit aboutthe scientific evidence required to support the linkage of food intake tohealth outcomes. Current GM-foodproducts do not meet this standard,except for golden rice. The United Stateshas adopted the position that only GM

products that are substantially differentfrom their non-GM counterparts must be labeled. Currently, no GMproducts fall under this mandatorylabeling requirement.

Voluntary labeling is possible, buthas economic impacts. Producers of“superior” and likely higher-priced products benefit by identifying its type.Since some consumers may discountproducts that they know contain GMcontent, the “superior” product is non-GM. If labeling is voluntary, non-GMproducers would have to bear the cost of labeling to attain the higher price,which they consider unfair. Labelingpolicies can also be used as non-tarifftrade barriers, and the United States hasraised this issue with the EU.

Market Impacts

The current regulatory frameworkfor biotechnologies in the United Statesprevents efficient functioning of markets

and denies or delays post-patent farmer and consumerbenefits. The agriculturalbiotech industry is concen-trated in three large U.S.and three foreign firms. Thesocial contract is that aninventor reveals to otherswhat he or she has inventedand, in return, receives amonopoly on use of theinvention for 20 years.With public-sector innova-tions, intellectual propertyrights have historicallyserved primarily to allocatepriority claims to discoveries,but need not be for income generation.

This all changed withthe Bayh-Dole Act of 1980.It gave the income-generat-ing right to a discovery orinvention from federally-funded research to the non-federal partner. This Act

strengthened the incentive of universities to patent and to license new inventions which has made university research more applied. Patents have a long history of protectinginventions and providing incomestreams to inventors in the private sector and their employers. Costly testing to meet federal regulatoryrequirements and infringement suitsreduces the expected profits going tothe original inventors and developers.When an invention goes off patent,other parties are free to enter the market with generic products.

Pesticide regulation demonstrateshow Bt biotechnology regulation mightbe approached, as both are regulatedunder the same statutes. For chemicalpesticides, post-patent competition canlead to 20% to 50% price reduction,even with only a 10% to 20% genericmarket penetration, and transfer profits from monopolistic developersunder patent protection, to farmers and consumers when they gain access to generic products.

This annual transfer can amount to several times the competitive profits that exist in the industry after generic products are introduced. Thus, firmsproducing generic products that providethis competition can expect to receiveonly a fraction of the profits of earlyinnovator companies, but they mustengage in costly testing to satisfy federalregulatory requirements.

Under loopholes in FIFRA regardingthe sharing of regulatory testing costsbetween market developers and genericentrants, the original entrant can manip-ulate the sharing process in a way thatdiscourages and/or prevents entry byfirms producing generic products. When this occurs, farmers and consumers never receive the major share of benefits from innovation towhich they would otherwise be entitledunder patent policy.

3Issue Report | August 2005

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Furthermore, these regulatory costscreate an entry barrier for small firmsand an advantage for larger firms. That advantage has increased asantitrust policies have allowed mergersand acquisitions. Economies of scale inobtaining regulator compliance are acontributing factor to the emergence of a few dominant firms in the U.S.agricultural biotech industry. It wouldbe expected that these firms would beastute in making political contributionsto promote or protect their private interests.

Access for developing countries

Agricultural biotechnology has apotentially important dimension indeveloping countries. Some countries ofSub-Saharan Africa and parts of Asiatotally missed the Green Revolution,and continue to face issues of povertyand food scarcity. Development of agricultural biotechnology is at a primitive stage in these countries, andpolicy makers are ill prepared to deal withthe regulatory issues of such technologies.

Great potential exists for biotech-nologies to help address hunger problemsin Africa, but no development has takenplace because of insignificant economicincentives for biotechnology developers.The six largest multinational agriculturalbiotechnology firms make money byselling GM traits through contracts thatprevent second-generation use of seedstock. Companies will not risk profits toenter markets that lack a reliable systemof contract enforcement.

The EU’s conservative policies onagricultural biotechnology cost its society

little as the input traits in current GMproducts are not well suited to EU crops.But the EU position has discouragedbiotechnology development world-wide.Estimates are that the world has realizedonly about $1 billion of the $8 billionpotential annual benefits from GMcrops. China and India are two develop-ing countries realizing large social benefits from GM products, especiallyBt cotton.

Alternatives to regulation

One alternative to regulation is acommercial commodity grading systemthat includes a labeling policy supportedby legally enforceable contracts. Evenwith product labeling, however, buyersand sellers face risks regarding tolerancelevels and GM and non-GM segregation.

For a buyer, the risk is receivingproduct that should be rejected forexceeding minimum impurity levels toqualify as non-GM. The risk to the seller is having product rejected eventhough it is within tolerance standards.These risks are complicated by thepotential for accidental commingling ofproduct—an event that can occur at anylocation within the production and marketing system.

Other issues include whether non-GM and GM are meaningful grades,and whether the high cost of segregatingproduct outweighs the benefits of thetechnology that necessitates it. Anotherissue is whether government regulatoryprograms, even in the United States, are too stringent, in light of the fact that not even one human health liabilityclaim has been awarded against GM products.

References

W.D. Chern and K. Rickertsen. “A Comparative Analysis of ConsumerAcceptance of GM Foods in Norwayand in the USA,” R.E. Evenson and V.Santaniello, Eds., Consumer Acceptanceof Genetically Modified Foods,Cambridge, MA: CABI 2004, pp. 95-110.

C. James, “Preview: Global Status of Commercialized Transgenic Crops:2003,” ISAAA Briefs No. 30, Ithaca,NY: ISAA, 2003.

R.E. Just, J. Alston and D.Zilberman, eds. Economics of Regulation of Agricultural Biotechnologies(New York, Springer Publishers, forthcoming late 2005)

Economics of Regulation ofAgricultural Biotechnologies was aMarch 2005 conference sponsoredby Farm Foundation and NC-1003, a multi-state research committeewhich examines impact analysis anddecision strategies for agriculture

research. This Issue Report is basedon discussions at that conference.Contributing authors are WallaceHuffman of Iowa State University, and Richard Just of the University of Maryland.

Farm Foundation's mission is to improve the economic and social well -being of U.S. agriculture, the food system and rural communities by

serving as a catalyst to assist private- and public-sector decision makersin identifying and understanding forces that will shape the future.

The Source

This publication is intended to be a vehicle to stimulate discussion and debate about challenges facing agriculture and rural America.

4 Farm Foundation Issue Report | Issue Five, August 2005