No. 7-1998

Transgenic Virus Resistant Potatoes in Mexico:

Potential Socioeconomic Implicationsof North-South Biotechnology Transfer

Matin QaimAgricultural Economist

Center for Development Research (ZEF)

Published by: The International Service for the Acquisition of Agri-biotechApplications (ISAAA).

Copyright: (1998) International Service for the Acquisition of Agri-biotechApplications (ISAAA) and Center for Development Research (ZEF).

Reproduction of this publication for educational or other non-commercial purposes isauthorized without prior permission from the copyright holder, provided the source isproperly acknowledged.

Reproduction for resale or other commercial purposes is prohibited without the priorwritten permission from the copyright holder.

Citation: Qaim, M. 1998. Transgenic Virus Resistant Potatoes in Mexico: PotentialSocioeconomic Implications of North-South Biotechnology Transfer. ISAAA Briefs No.7. ISAAA: Ithaca, NY. pp. 48.

Edited by: David Alvarez and Anatole Krattiger.

Author’s address: Center for Development Research, Universität Bonn, Walter-Flex-Str. 3, D-53113Bonn, Germany, Tel.: ++49-(0)228-73-18 41, Fax: ++49-(0)228-73-18 69, E-Mail:mqaim@uni-bonn.de Web: http://www.zef.de

ISBN: 1-892456-09-5

Available from: The ISAAA Centers listed below. For a list of other ISAAA publications, contact the nearest Center:

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isaaa@cornell.edu

Also on: www.isaaa.cornell.edu

Cost: Cost US$ 10 per copy.Available free of charge for developing countries.

i

Contents

Executive Summary ....................................................................... iii

List of Figures ................................................................................. v

List of Tables .................................................................................. v

List of Abbreviations and Acronyms.............................................. vi

1. Introduction ................................................................................................................................................1

2. Conceptual Framework ...............................................................................................................................22.1 Scenario Approach .............................................................................................................................22.2 Methodology ......................................................................................................................................32.3 Data for Analysis ................................................................................................................................5

3. The Mexican Potato Sector..........................................................................................................................63.1 National Potato Production ................................................................................................................63.2 Potato Marketing and Trade Channels ...............................................................................................15

4. The Recombinant Potato Technology ........................................................................................................204.1 Background of Agricultural Biotechnology in Mexico .......................................................................204.2 The Biotechnology Transfer Project ...................................................................................................204.3 Agronomic Technology Potentials .....................................................................................................224.4 Technology Adoption ........................................................................................................................244.5 Technology-Inherent Risks.................................................................................................................274.6 Biosafety Developments ....................................................................................................................27

5. Counting Potential Technology Benefits and Costs ...................................................................................285.1 Benefits at the Individual Farm Level .................................................................................................285.2 Structure of Scenarios to be Analyzed ...............................................................................................295.3 Aggregate Benefits and Distributional Effects .....................................................................................315.4 Costs of the Technology Project ........................................................................................................335.5 Summary Measures of Economic Effects ............................................................................................335.6 Sensitivity of Results ..........................................................................................................................34

6. Conclusions and Policy Implications .........................................................................................................35

Acknowledgements........................................................................................................................................37

References .....................................................................................................................................................37

Appendix A: Supplementary Tables and Figures ...........................................................................................40

Appendix B: List of Personnel Contacted......................................................................................................47

iii

Executive Summary

Despite the rapid international development of bio-technology, we still lack knowledge and informationabout how low- and middle-income countries can bestaccess this promising technology. Nor are the socio-economic repercussions of applying biotechnology inthese countries’ agricultural sectors well understood.This study seeks to fill in some of the gaps in ourknowledge by analyzing a biotechnology transfer proj-ect that provided proprietary recombinant potato tech-nology to Mexico.

In 1991, the government of Mexico and the private UScorporation Monsanto entered into a North-South bio-technology transfer agreement in which Monsantoagreed to donate non-conventional virus resistancetechnology for potatoes. ISAAA developed andbrokered the agreement, and the Rockefeller Founda-tion provided funding for the project. Two public Mexi-can research institutes, CINVESTAV and INIFAP,carried out product development and adapted the tech-nology to local potato varieties. In 1993, the first trans-genic potato field trials in Mexico took place. Therelease of three transformed varieties (Alpha, Norteñaand the red variety Rosita) with resistance to the potatoviruses PVX and PVY is expected in 1999. After seedmultiplication by national seed producers, farmers’technology adoption could start from the year 2000onwards, under optimistic assumptions. In addition, anew project phase began in 1997, when Monsanto do-nated technology that confers resistance to PLRV, aneconomically more important virus in Mexico than PVXor PVY, but for which non-conventional resistance hadnot previously been available. The release to seedgrowers for multiplication of Norteña and Rosita varie-ties resistant to all three viruses is scheduled for 2001.The use, however, of the PLRV technology in Al-phathe country’s most popular and widely used po-tato varietyis prohibited in the current licensingagreement. Since none of these technologies have yetreached farmers’ fields, the socioeconomic effects ofthese innovations are quantitatively analyzed within anex ante framework by means of an equilibrium dis-placement model of the Mexican potato market.

The most pressing phytosanitary problem in Mexicanpotato production does not have biotechnological norconventional solutions. Virus resistance nevertheless isthe priority need for which proven technologies areavailable. The limited use of pathogen-free seed mate-rialonly 23 percent of the land devoted to growingpotatoes is cultivated with certified seedsleads to vi-rus-induced yield losses that are much higher than in

countries with better developed potato seed industries.Genetic resistance is therefore likely to considerably in-crease potato yields, even without additional inputs.On average, the potential net yield gain of the trans-genic varieties is projected to be 5 percent with resis-tance to PVX and PVY only, with an increase to 22percent when resistance to PLRV is added. These pro-ductivity increases will raise income levels for Mexicanpotato farmers and will also benefit domestic consum-ers, who will pay lower prices as long as the interna-tional potato trade remains limited. In a closed potatoeconomy, consumers would capture about half of thetotal economic benefits created by these biotechnologyapplications. Increased international potato tradeapossible outcome of the NAFTA trade agree-mentwould slightly reduce the overall advantage ofthe technology, though with an increased benefit sharefor domestic producers.

This study includes an analysis of hypothetical scenar-ios in which the Alpha variety also possesses resistanceto PLRV. The results show that if Monsanto were to do-nate PLRV resistance for the Alpha variety, then theproject’s Internal Rate of Return (IRR) would increasefrom 50 to 64 percent, and, even more impressively,the aggregate benefits of the biotechnology transfercould triple. The additional cost of including this resis-tance would be low because of Mexico’s previous ex-perience in related technology development.Furthermore, because Alpha is not widely grown incountries other than Mexico, Monsanto’s own com-mercial interest in transforming the variety would notbe more than moderate.

New agricultural technologies are often criticized forfostering inequality among farmers. The potential ef-fects of the distribution of recombinant potato technol-ogy, therefore, are explicitly considered in this study interms of different farm sizes. On average, potato farmsin Mexico are larger than those devoted to more basicfood crops. In addition, potato production is predomi-nantly for commercial purposesproduction forhousehold consumption is negligible. Still, there arestriking differences between different potato farm types.In the northern parts of the country, large potato pro-duction units with advanced technological standardspredominate, while in the central and southern parts ofMexico there are more small, resource-poor farms. Thesmaller the farm, the fewer the purchases of certified,clean seed material. Most of the smaller producers usefarm-saved seeds or buy tubers destined for the freshmarket from larger producers. The repeated vegetative

iv

reproduction of potato seeds leads to a constant virusbuildup in the stock, so that virus-induced yieldlossesand thus agronomic technology potentialsarehighest in smaller farming systems. So, while PVX-PVY-PLRV resistant varieties decrease per unit productioncosts on large farms by 13 percent, small-scale produc-ers’ costs are even cut by 32 percent. These significantbenefits would be limited, however, by the current seeddistribution system, which is based upon a farm type-specific pattern of variety use. Many small and me-dium-scale farmersespecially those cultivating inhigher altitudesoften use local red colored varieties,which are less susceptible to potato late blight than im-ported cultivars. But wealthier large-scale farmers, theprimary market for certified seeds, never use these redvarieties. Private seed producers, therefore, have no in-centive to sell them. In fact, Mexico has no formal seedmarket for colored potato varieties. Establishing a seeddistribution system for these potato varieties is essentialto making the benefits of biotechnology available to allof Mexico’s potato farmers. While CINVESTAV worksto transform the most important red vari-etyRositafor virus resistance, and while transgenicbreeder material will be available at the R&D level, theinstitutional bottleneck in the current seed distributionsystem will hamper efforts to multiply and disseminateit. Without particular programs developed to addressthese constraints, the adoption of biotechnology by re-source-poor farmers would be unsatisfactory, and thiswould create greater income disparities between largeand small-scale farmers.

In order to increase the participation of small and me-dium-scale farmers in the new technology, a subsidizedseed distribution mechanism for the transgenic Rositavariety is proposed. Its implementation could be basedon an already existing instrument for the country’smaize and bean sectors under the national programAlianza para el Campo. To speed up the adoption ofimproved varieties by smaller farmers, government or-ganizations buy certified seeds of maize and beans atcommercial prices and sell them to resource-poorfarmers at subsidized rates. Extending this program toinclude potatoes would help to equalize the benefits ofthe recombinant technology. The guaranteed demandfor transgenic Rositas by the state would automaticallycreate enough incentive for private seed producers tostart handling this variety. Moreover, these subsidieswould exclusively address those most in need, sincewealthier large-scale farmers do not use the red variety

Rosita. Scenario calculations demonstrate that the pro-posed distribution mechanism would have positive im-plications in terms of equity and would enhance overallefficiency at the same time: the IRR would rise from 50to 59 percent. These results clearly show that a newtechnology’s general agronomic suitability for a certainenvironment is only one element that influences its ac-tual effects. The institutional factors and support sys-tems that make possible the technology’s diffusion andapplication are also crucial aspects that determine itssocial and economic impacts.

Apart from the immediate advantages to Mexico’s potatosector, the biotechnology transfer project will have posi-tive repercussions of a much broader scope. The trans-genic potatoes are the first recombinant technology to bereleased by national organizations in Mexico. To thispoint, institutional constraints in the NARS and a lack ofeffective cooperation between institutes have preventedbiotechnology from reaching farmers’ fields. Under theproject, new inter-organizational connections have beenestablished between CINVESTAV, a leader in molecularresearch, and INIFAP, with its experience in potatobreeding. The transfer also significantly contributed tohuman-capacity building, increased self-confidence anddirected R&D to well-defined goals. Moreover, it en-hanced international relations between involved re-searchers and stake-holders. The experience the NARSgained through the transfer project can already be seen,for instance, in the 50 percent reduction in time neededto develop PLRV resistance in comparison to the firstPVX-PVY technology. This positive institutional evolutionwill facilitate Mexico’s own biotechnology generation, aswell as the acquisition and adaptation of foreign tech-nologies in the future. In addition, the project establishedand consolidated biotechnology regulatory mechanismsin Mexico, a sine qua non for any country wishing to takepart in the biotechnology revolution. All these develop-ments might produce positive technology spillovers forother developing countries too.

If appropriate social support mechanisms can be im-plemented, the project could successfully demonstratethat modern proprietary agricultural biotechnology ap-plications can help low- and middle-income countriesmeet their urgent development objectives. Donor or-ganizations should recognize that such transfer pro-grams are great opportunities to promote an equitableinternational biotechnology evolution that will open upnew vistas of technological and institutional innovation.

v

List of Figures

Figure 1: Conceptual framework for ex ante technology analysis................................................................................2Figure 2: Technical change on the Mexican potato market.........................................................................................4Figure 3: Development of potato production in Mexico (1961-1997) .........................................................................7Figure 4: Map of the main potato producing states of Mexico ....................................................................................9Figure 5: The potato seed distribution system in Mexico ..........................................................................................12Figure 6: Wholesale potato price development in Mexico-City during 1996 and main harvesting seasons of

important potato producing states ........................................................................................17Figure 7: Time frame of the biotechnology transfer project.......................................................................................22Figure 8: Structure of analyzed scenarios .................................................................................................................30

Figure A 1: Production shares of the main potato producing states of Mexico (1996)................................................41

List of Tables

Table 1: Regional differences in Mexican potato production ......................................................................................9Table 2: Cycles in certified potato seed production..................................................................................................12Table 3: Average potato enterprise budgets per ha by farm type (in 1998 M$)..........................................................14Table 4: Average per unit cost of potato production by farm type (in 1998 M$)........................................................16Table 5: Development of Mexico’s import tariffs and quotas for fresh potatoes within the NAFTA (1994-2004)........18Table 6: Cost of potato production in Mexico and in the USA (in 1998 M$).............................................................18Table 7: Potato expenditure shares of Mexican households (percent) .......................................................................19Table 8: Current average virus-induced potato yield losses and potential net yield gains through transgenic

resistance by farm type (percent) ..........................................................................................24Table 9: Production shares of different potato varieties by farm type ........................................................................25Table 10: Potato enterprise budgets per hectare without technology and with PVX-PVY resistance technology

by farm type (in 1998 M$)....................................................................................................29Table 11: Potato enterprise budgets per hectare without technology and with PVX-PVY-PLRV resistance

technology by farm type (in 1998 M$) .................................................................................29Table 12: Benefits and distributional effects of the technology for the different scenarios..........................................32Table 13: Summary measures of economic effects for different scenarios .................................................................34

Table A 1: Regional indicators of potato production in Mexico ................................................................................40Table A 2: Cumulative technology adoption under the current seed distribution system

(without special distribution mechanism) .............................................................................41Table A 3: Cumulative technology adoption under the assumption of a specially established seed distribution

mechanism for transgenic Rositas.........................................................................................42Table A 4: Shift factor K without and with seed distribution mechanism for transgenic Rositas

(Alpha not included for PLRV)..............................................................................................42Table A 5: Shift factor K without and with seed distribution mechanism for transgenic Rositas

(Alpha included for PLRV)....................................................................................................43Table A 6: Annual technology-induced changes in economic surplus in the ‘No Trade’ scenarios

(in thousand 1996 M$).........................................................................................................44Table A 7: Annual technology-induced changes in economic surplus in the ‘Trade’ scenarios

(in thousand 1996 M$).........................................................................................................45Table A 8: Financial cost of the technology project (in thousand 1996 M$)..............................................................46

vi

List of Abbreviations and Acronyms

ABC Agricultural Biosafety Committee

APHIS Animal and Plant Health Inspection Service of the USDA

c.i.f. Cost Insurance Freight

CIMMYT Centro Internacional de Mejoramiento de Maíz y Trigo (International Maize and Wheat Im-provement Center)

CINVESTAV Centro de Investigación y de Estudios Avanzados (Center for Research and Advanced Studies)

CIP Centro Internacional de la Papa (International Potato Center)

CONPAPA Confederación Nacional de Productores de Papa (National Potato Confederation)

f.o.b. Free on Board

FAO Food and Agriculture Organization of the United Nations

GM Gross Margin

INEGI Instituto Nacional de Estadística, Geografía e Informática (Mexican Statistical Institute)

INIFAP Instituto Nacional de Investigaciones Forestales, Agrícolas y Pecuarias (National Institute for Ag-ricultural Research)

IPRs Intellectual Property Rights

IRR Internal Rate of Return

ISAAA International Service for the Acquisition of Agri-biotech Applications

M$ Mexican Peso

NAFTA North American Free Trade Agreement

NARS National Agricultural Research System

NGO Non Governmental Organization

NPV Net Present Value

NYG Net Yield Gain

PLRV Potato Leafroll Virus

PVX Potato Virus X

PVY Potato Virus Y

R&D Research and Development

SAGAR Secretaría de Agricultura, Ganadería y Desarrollo Rural (Ministry of Agriculture)

SECOFI Secretaría de Comercio y Fomento Industrial (Ministry of Foreign Trade)

SNICS Servicio Nacional de Inspección y Certificación de Semillas (National Service for Seed Inspectionand Certification)

SNIM Servicio Nacional de Información de Mercados

Std. Dev. Standard Deviation

UNAM Universidad Nacional Autónoma de México (National Autonomous University)

UPOV Union pour la Protection des Obtentions Végétales (Union for the Protection of New Varieties ofPlants)

US$ United States Dollar

USDA United States Department of Agriculture

ZEF Zentrum für Entwicklungsforschung (Center for Development Research)

1

1. Introduction

Although modern biotechnology holds great promisefor developing countries, the application of biotech-nology in these countries is more a matter of heateddebate than reality. Meanwhile, the technology evolu-tion in the industrialized world continues to rapidlyprogress (James, 1997). Developing countries and de-velopment organizations are eager to identify strate-gies that will ensure that the new technology does notbypass themespecially the small-scale farmers whostand to benefit most. They seek to harness its poten-tial in order to meet stated development objectives,which involves not only defining their R&D prioritiesbut also developing policies to adequately shape theirinstitutional frameworks. Because genetic engineeringdiffers from other technologies in many respects, poli-cies derived from previous technology experiencemight be inappropriate (Cohen, 1994). More specificinformation, therefore, is needed to guide the deci-sion-making process. This study attempts to providesuch information through an ex ante analysis of thesocioeconomic implications of new transgenic potatotechnology in Mexico.

In 1991, a North-South biotechnology transfer be-tween the private life-sciences company Monsanto(USA) and the Center for Research and AdvancedStudies (CINVESTAV), a public Mexican organization,was initiated. The project was brokered by the Inter-national Service for the Acquisition of Agri-biotechApplications (ISAAA), which also provides institutionalsupport throughout the implementation phase. Fund-ing for the transfer project was provided by theRockefeller Foundation. The transfer agreement in-cludes Monsanto’s donation of genes and know-howto CINVESTAV for the development of local varietiesof virus-resistant, transgenic potatoes. In the followingyears, related research was conducted both at Mon-santo and CINVESTAV. Transgenic potatoes were fieldtested in Mexico for the first time in 1993, and multi-location field trials have been taking place since 1997in cooperation with the National Institute for Agricul-tural Research (INIFAP). The commercial release of thefirst mature technology is expected in 1999. This willbe one of the first approved transgenic crop varietiesthat local scientists in a developing country have pro-duced through gene transfer and product develop-ment. The project is also of particular interest becauseof its explicit private-public interaction. The domi-nance in industrial countries of private sector biotech-nology research requires the international community

to identify and develop new and innovative models oftechnology transfer for the benefit of developingcountries. An analysis of the Monsanto-Mexico proj-ectone of the first of its kind worldwidecan pro-vide some initial insights into this challenge.

The transfer project’s main beneficiaries will be theproducers and consumers of Mexico’s potato sector,which will be directly impacted by the use of trans-genic potatoes. This study evaluates and quantifies thebenefit potentials produced by technology improve-ments through a market equilibrium displacementmodel; in a further step these benefits are contrasted tothe corresponding costs of research and extension.Moreover, the equity implications of the technologyare explicitly analyzed. Poverty in Mexican agricultureis a widespread phenomenon and small-scale farmersare particularly affected (McKinley and Alarcón,1995). The project regards resource-poor small-scalefarmers as the main target group. Therefore, distribu-tion effects are scrutinized in terms of farm sizes.Strategies to disseminate the technology and place it inthe hands of small-scale farmers have not yet beenidentified. It is hoped that the study can provide someimpetus in this respect, too. To gain a better under-standing of the importance of developing such strate-gies, the impacts of different policy alternatives onefficiency and equity are juxtaposed within scenarioconsiderations. In addition to the direct benefit poten-tials of the technology in the Mexican potato sector,the transfer project also produces more indirect insti-tutional benefits in the national agricultural researchsystem (NARS). Because these indirect benefits are dif-ficult to be quantified, they are qualitatively discussed.

Chapter 2 briefly presents the conceptual frameworkof the pre-release technology study and of the datacollection procedures. Chapter 3 offers an overview ofthe Mexican potato sector, discussing the general as-pects of its role in Mexican agriculture and describingthe different potato farming systems. Details of theNorth-South biotechnology transfer and characteristicsof the recombinant potato technology are discussed inchapter 4, and its economic evaluation in terms ofbenefits and costs for different defined scenarios is car-ried out in chapter 5. The last chapter draws conclu-sions and discusses the policy implications of theresults of the study, one of the first quantitative indepth analyses of the socioeconomic implications ofmodern biotechnologies in a developing country.

2

2. Conceptual Framework

Recombinant potato technology in Mexico has notyet been commercially releasedit has not yet beenplanted in farmers’ fields. It could be argued that it istoo early for a quantitative evaluation because noth-ing is actually observable. However, evaluating tech-nology only after ex post data is available suffers fromthe disadvantage of producing results that cannotserve as policy guidelines for optimizing the technol-ogy’s socioeconomic effects. An ex ante framework,therefore, has been developed to deliver quantitativeand timely information on the potential implicationsof the introduction of biotechnology. For a more de-tailed discussion of the conceptual issues regarding exante biotechnology evaluations, see Qaim and vonBraun (1998).

2. 1 Scenario ApproachEx ante analyses of technology are associated withuncertainty. Many future events are unknown andmust be anticipated. The basic research for the proj-ect analyzed here has already been carried out byMonsanto, and the project itself is in the final stagesof technology development. Much is already known,therefore, about the technology itself. Still, we lackfacts about the future diffusion and application of thetechnology. Appropriate assumptions for these stages

are necessary to arrive at realistic conclusions. Thestructure of these assumptions can be visualized by abranched tree as shown in Figure 1. Eventsand thusassumptions (shown as little circles) are not merechance parameters but depend on policy decisions atdifferent levels. The degree and speed of technologyadoption by farmers, for example, depends on insti-tutional mechanisms at the level of factor and inputmarkets (e.g., seed prices, extension efforts, access torural credit, etc.). Similarly, the technology’s influ-ence on producer prices depends on the nationalpotato market price and trade policies, among others.The assumption patterns lead to different scenarios,which are numbered from 1 to 8 in Figure 1.

Carrying out benefit-cost calculations for these sce-narios will reveal the economic effects of policy al-ternatives yet to be determined. Thus, constraints inthe institutional arrangements can be identified andadjustment decisions made accordingly. Although thetechnology has almost left the development stage,testing different assumptions within R&D is stillworthwhile because the contractual arrangementsbetween Monsanto and CINVESTAV are flexible. In-quiring about the effects of transforming different po-tato varieties, for example, may suggest policy and

Figure 1: Conceptual framework for ex ante technology analysis

Scenario Results and Recommendations

Potato Market (Techn. Application)

NARS (Techn. Development)

Factor Markets (Techn. Diffusion)

1 2 3 84 75 6

Monsanto (Basic Research)

ISAAA

3

strategy changes. The evolution of technology is not aunidirectional process, but consists of linkages andfeed backs between different stages of its develop-ment. The framework depicted in Figure 1 representsthese dynamics, and its use will help shape optimaltechnology support mechanisms.

2.2 MethodologyTime is an important factor when evaluating the eco-nomic impacts of technology. The benefits of re-search usually lag significantly behind the researchinvestments themselves, and neglecting this fact leadsto overestimating net benefits. In our case, the con-sideration period will start in 1991 (year 0), the be-ginning of the technology transfer project. This meansthat the cost of the basic research for the technologyis not considered. Since we merely analyze the tech-nology transfer project to Mexico, this is correct be-cause the basic research itself carried out byMonsanto will have impacts in other countries, too.The analysis captures a period of time up until theyear 2015 (year 24), during which benefits and costswill be juxtaposed on an annual basis. After that timeframe, the technology may become obsolete or besubstituted by other innovations. Moreover, costs orbenefits accruing after that period will not considera-bly change the results because of the discountingprocedure. We calculate the Net Present Value (NPV)and the Internal Rate of Return (IRR) as economicsummary indicators of the technology. Equations (1)and (2) show the underlying formulas:

( )∑= +−

=24

0 1tt

tt

r

CBNPV (1)

( )∑= +−

=24

0 10

tt

tt

IRR

CB(2)

where r is the discount rate, and Bt and Ct is thestream of benefits and costs in year t, respectively.

How to Measure Technological BenefitsWhen dealing with the quantification of technologi-cal benefits, the question of adequate welfare meas-ures arises. The use of welfare measures in benefit-cost analyses has been extensively discussed in theeconomic literature. Like most of the other empiricalstudies, we use economic surplus criteria. Althoughfrom a theoretical point of view this procedure doesnot correctly treat the income effect of price changes,this problem is qualified by other sources of inaccu-racy in technology evaluations, such as estimatingtechnology-induced productivity change (cf. Alston etal., 1995). Different authors have shown that agri-cultural technologies related to one market may alsohave positive repercussions on other markets evenbeyond the farm sector (e.g., Hazell and Ramasamy,1991). For the purpose of the quantitative model,however, we focus only on the potato market. This

appears justified because potato production employsonly a very small fraction of all the factors involved inMexican agriculture, and so no significant spilloverinto other markets should be expected. The possibilityof technological innovation creating broader institu-tional innovation, which could further facilitate bio-technology dissemination in Mexico, is disregarded inthe model. These possible benefits receive separateattention in a qualitative discussion.

Starting from an initial price and quantity equilibriumin the Mexican potato market, the new transgenic vi-rus resistant varieties will increase the productivity ofpotato production and will therefore cause the potatosupply curve to shift downwards. This is conceptuallyshown in Figure 2, where S0 is the supply curve with-out, and S1 is the supply curve with the introductionof the transgenic varieties. The shift of the supplycurve (equilibrium displacement) changes the welfareof potato producers and consumers. The change inproducer surplus is equal to area ebcd minus areap0aep1. Whether this is a net gain or a loss for pro-ducers depends on the price elasticities of supply anddemand.1 Consumers realize a benefit through thelower prices they have to pay for a unit of potatoes.The gain in consumer surplus is represented by areap0abp1. As chapter 3 demonstrates, this conclusionholds for a closed potato economy such as Mexico’s.Imports of fresh potatoes from the USA and Canada,however, could increase in the future due to theNAFTA. Taking into account potato production vol-umes in the NAFTA member countries, Mexicowould then be a small potato importing country inthe terminology of trade. Potato producers wouldthen face a totally elastic demand curve so that thetechnology would not entail a change of the potatomarket price. All of the change in economic surpluswould accrue to potato producers. Since it is notclear exactly how trade flows will develop over time,the open economy alternative will be accounted forin the scenario calculations.

There has been a controversial debate in the literatureabout the nature of the supply curve shift (cf. Nortonand Davis, 1981). Whether the shift is parallel, im-plying the same absolute shift for high and low costproducers, or pivotal, indicating a lower absolute shiftfor low cost producers, has not been determined ontheoretical grounds. The issue remains an empirical

1 For non-economists it might be surprising that producerscould suffer a welfare loss through new agricultural tech-nologies under certain market constellations. This is so be-cause the productivity gain will induce increases of theproduced quantities, which in turn decreases the equilib-rium price. If the percentage price loss is greater than theproduction increase, the farmer has lower revenues than inthe initial situation without the technology. Price decreasesare particularly relevant if price responsiveness of consum-ers is low for the commodity of interest.

4

Figure 2: Technical change on the Mexican potato market

b

a

e

q1q0

price

quantity

S0

S1

p0

p1

D

c

d

question. In subsequent chapters this study arguesthat a parallel shift is the more likely alternative forMexico’s potato technology. To formulate supply anddemand functions, we assume linear curves to makehandling them algebraically easier. Although little isknown about the true shape of the curves, differentauthors have shown that errors of functional mis-specification in many cases are small, particularlywhen the research induced supply shift is parallel(e.g., Voon and Edwards, 1991; Zhao et al., 1997).

Distribution AspectsNew agricultural technologies have often been criti-cized for reinforcing inequality among producers andfostering income concentration (e.g., Griffen, 1974).Resource-poor, small-scale farmers are the primary tar-get group of this technology project, so a special focuson this group of farmers is appropriate when analyzingits technological implications. This requires, however,some modifications to the basic market model outlinedabove. Binswanger (1980) and Hayami and Herdt(1977) were the first to include aspects of producer in-come distribution into the equilibrium displacementframework. The approach anticipates a disaggregationof the total industry supply curve into the partial supplycurves of defined producer groups. We consider pro-ducer groups of different farm sizes, all facing the sameaggregate demand curve. This allows for divergent ratesof technical change attained by individual farm groups,which is important because the technology’s adoptionrates and potential to increase productivity may varyamong different farming systems. The following model

assumes market clearing at a single pricepotatoes areassumed to be an homogeneous product, regardless ofwho produces them or where they are produced:

Supply:

( )iisis tcpqq ,,, = (3)

Demand:

( )pqq dd = (4)

Market clearing:

∑=

=n

idis qq

1, (5)

where qs,i is the potato quantity supplied and tci is thetechnical change realized by producer group i. qd isthe total quantity demanded while p is the price be-ing the same for consumers and all n producergroups. Differentiating equations (3) to (5) leads to thefollowing system:

Supply:

+= iis

is

is Kp

dp

q

dq,

,

, ε (6)

5

Demand:

p

dp

q

dqd

d

d ⋅= ε (7)

Market change:

∑=

=⋅n

i d

d

is

isi q

dq

q

dqss

1 ,

,(8)

where εs,i is the price elasticity of supply and ssi is thesupply share of producer group i. εd is the price elas-ticity of demand. Ki is the proportionate vertical shiftdown in the ith supply curve due to a cost reduction.Equation (8) can be solved for the relative change ofthe equilibrium price:

p

dpK

p

dpss d

n

iiisi ⋅=

+⋅∑

=

εε1

,

(9)

⇔

( )

( )∑

∑

=

=

⋅−

⋅⋅=

n

iisid

n

iiisi

ss

Kss

p

dp

1,

1,

εε

ε

(10)

The change in the equilibrium price and the changesin the quantities produced and consumed are suffi-cient for calculating the implications of the economicsurplus. Annual change in producer surplus (PS) forthe individual producer groups, annual change inconsumer surplus (CS) and the change in total eco-nomic surplus (TS) due to technical progress are de-fined as follows (cf. Alston et al., 1995):

Change in PS:

⋅+⋅

+⋅=∆

is

isiisi q

dqK

p

dpqpPS

,

,, 5.01

(11)

Change in CS:

⋅+⋅⋅−=∆

d

dd q

dq

p

dpqpCS 5.01

(12)

Change in TS:

∑=

∆+∆=∆n

ii CSPSTS

1

(13)

In the open economy alternative, there is no changein consumer surplus. The change in producer surplusfor the individual groups is:

Change in PS:

( )isiiisi KKqpPS ,, 5.01 ε⋅⋅+⋅⋅=∆(14)

This model is appropriate for analyzing the distribu-tional consequences of the new transgenic potato va-rieties among different farm sizes. It will be the basisfor the aggregate benefit calculations in chapter 5.The calculations have to be carried out for all theyears of the consideration period in which shifts ofthe supply curve are caused by the technology. Forthe summary measures of economic effects, thechange in TS can then be inserted in equations (1)and (2) to represent the gross annual benefit (B) in agiven year t.

2.3 Data for AnalysisData requirements for the study can be subdividedinto two broad categories. First, potato market data isneeded. As the algebraic formulations indicate, thisinvolves produced and consumed quantities, pricesand price elasticities associated with supply and de-mand. On the producer side, the data must be disag-gregated in accordance with the different farmgroups. This market related data was taken from theavailable literature and from Mexican agriculturalstatistics. Special considerations must also be madeabout the evolution of the figures over time. Detailson that as well as the individual published sourcesare given throughout the text when the data are pre-sented. Second, information on the technology itselfand its implications for agricultural practice areneeded. The downward shift factor of the supplycurve is summarized in the model formulation as K,which contains the different parts of information thatare not observable yet. Ki,t, (i.e., the shift factor for theindividual producer group i in a given year t), is de-fined as:

tipotiti ACK ,,, ⋅= (15)

where Ci,pot is the potential per unit cost reduction ofgroup i attributable to the transgenic technology, andAi,t is the group and time-specific technology adop-

6

tion rate. In the case of neutral technical change, Ci,potcan be calculated as the technology-induced poten-tial net yield gain (NYG) divided by the price elastic-ity of supply. But the transgenic potato varieties tendto save land, so we compare enterprise budgets forthe individual groups both with and without the an-ticipated technology in order to derive realistic esti-mates of the per unit cost reduction.

As indicated in section 2.1, the different parametersneeded for the analysis are not just unknown futurefacts but depend a great deal on decisions made atthe different stages of the technology evolution (seeFigure 1). In order to get a better understanding of thisframework, two interview surveys were carried out,one in the Mexican NARS, and the other one in thepotato farmers’ surroundings. These surveys alsohelped to supplement market-related data that werenot available in secondary sources.

NARS SurveyCompiling information at the stage of the NARS pre-dominantly aimed to learn more about the recombi-nant virus resistance technology. This involved dataon R&D costs, a time pattern of the technology evo-lution, and information to derive the aforementionedpotential net yield gain (NYG). Semi-structured inter-views with eight researchers directly associated withthe technology projectfour from CINVESTAV andfour from INIFAPwere conducted for this purpose.In addition, one potato seed producer that had al-ready multiplied transgenic potatoes for field trialpurposes was surveyed. To gain an insight into thecontractual arrangements of the North-South technol-ogy transfer, one representative each from Monsantoand ISAAA was contacted. Taking into account thestatements of people directly associated with the re-search project raises the problem of biased informa-tion due to vested interests or subjective viewpoints

(cf. Mills and Karanja, 1997). So we included in thesurvey a number of interviews with independent re-searchers and experts of the potato sector to get amore objective picture. This was particularly impor-tant because published data on current yield lossescaused by virusesa crucial determinant to derivethe NYGare hardly available in Mexico or else-where. Furthermore, different scientists from the In-ternational Potato Center (CIP) in Peru wereinterviewed to obtain external viewpoints about po-tatoes and their problems. A complete list of thecontacted experts is given in Appendix B.

Farmers SurveyThe survey in the farmers’ surroundings focused ongathering insights into potato farming systems. Thesemi-structured interviews concentrated on farmers’access to markets, sources of tuber seeds, experienceswith other technologies, the input-output relations ofpotato production, and other specific problems asso-ciated with growing potatoes. These data made itpossible to realistically anticipate how the technologycould change current production patterns and perunit cost figures. Another crucial variable obtainedfrom this information is the technology adoption rate(A). For the analysis of the distributional conse-quences of the new potato varieties, potato farmerswere subdivided into three groups according to farmsize (small-scale, medium-scale, and large-scale). 12interviews with each group36 interviews inallwere carried out in six of the most importantpotato producing states of Mexico. The surveyedstates are Sinaloa, Coahuila, and Nuevo Leon in thenorthern part of the country and Michoacan, Mexico-State, and Puebla in the central and southern regions.In all of these states, the survey of the farmers wassupplemented with field experience and by two inter-views with agricultural engineers (12 in total) of dif-ferent provincial rural organizations.

3. The Mexican Potato Sector

Although potato production in industrialized coun-tries has declined during the last 30 years, this trendwas more than offset by production increases in de-veloping countries, which actually caused world-wide production to rise (FAO/CIP, 1995). In the early1960s, developing countries accounted for approxi-mately 11 percent of worldwide potato production.In the early 1990s they accounted for 31 percent.Significantly, the area cultivated with potatoes in thisgroup of countries has grown faster than that of anyother major food crop over the past 30 years. Scott(1996) mentions different reasons for the greater in-terest of developing countries in potatoes. On theproduction side, the increased use of high yieldingrice and wheat varieties with shorter duration haveenabled farmers to grow an additional crop on the

same fields, and potatoes fit very well into these ro-tation patterns. On the consumption side, the grow-ing incomes of food consumers have diversified poorpeople’s cereal-based diets, increasing demand forpotatoes. Thus, potatoes become an increasinglyimportant source of food, rural employment, and in-come in developing countries. These global trendswill likely continue into the future. From a globalviewpoint, Mexico is not a very large producer ofpotatoes, but among the Latin American countries itranks fifth after Colombia, Brazil, Argentina andPeru.

3.1 National Potato ProductionFigure 3 shows the development in Mexico of thepotato area, production, and average yields from

7

Figure 3: Development of potato production in Mexico (1961-1997)

0

10

20

30

40

50

60

70

80

90

100

110

120

130

1961 1966 1971 1976 1981 1986 1991 1996

Are

a, P

rodu

ctio

n

0

2

4

6

8

10

12

14

16

18

20

22Y

ield

Area ('000 ha)

Production (0'000 t)

Yield (t/ha)

Source: Based on data from FAO (1998).

1961 to 1997. The area cultivated with potatoes grewsignificantly up until the late 1970s. Over the lasttwenty years there has been a slight decreasing trend.In 1996, about 63,000 hectares of potatoes were har-vested, accounting for 0.4 percent of the country’stotal land under annual crops. In Mexico, however,potato is viewed as a horticultural crop, and amongthe annual horticultures it ranks second after tomatoin terms of area. In 1996, potatoes made up 2.6 per-cent of the national plant production sector’s value(INEGI, 1997a), a significant rise given the previousfigure of only 1 percent in 1985 (Bonilla et al. 1992).Potato yields and overall potato production increasedconsiderably. Yields per hectare tripled from 1961 to1997, and national production even quadrupled. Dueto intensified production and technical progress inthe potato sector, the close convergence of area andproduction in the 1960s and 1970s has since loos-ened somewhat. Current average yields in Mexico of20.5 tons per hectare are lower than those of theUnited States or Western Europe (33 t), but they areamong the highest in Latin America. While the im-portance of potato production for processing pur-poses has also increased during the last ten years andwill continue to do so, the lion’s share of total pro-duction in Mexico is for the fresh market. It is esti-mated that 70 percent of the production volumes are

sold as fresh potatoes, 15 percent are used as tuberseeds, and the remaining 15 percent are sold to thefood processing industry (SAGAR/INIFAP, 1997).2

3.1.1 Potato VarietiesThe most important potato variety in Mexico is Alpha,accounting for 60 percent of the total production vol-ume. Alpha is an old, white-colored Dutch varietythat was introduced to the Mexican market over 50years ago. It can be marketed as fresh potato or forindustry use. While Alpha was formerly important inthe United States, it has since almost completely dis-appeared due to the availability of superior varietieswith higher yields and better quality for processingpurposes. The same holds true for other potato pro-ducing regions in the world. In Mexico, however, Al-pha is still the dominant variety because of its positivepost-harvest performance. Mexico is one of the fewcountries where potatoes are washed before arrivingat retail outlets. Moreover, in the Mexican marketingchain, potatoes are often exposed to sunlight. Alphacan stand these conditions better than other varieties,leading to lower post-harvest losses and better con-sumer acceptance. But when industry demand for

2 For comparison: In the USA, 60 percent of potato produc-tion is for processing purposes (FAO/CIP, 1995).

8

processing potatoes rose during the past ten years,new white varieties entered the Mexican market,slightly reducing Alpha’s importance. Varieties withbetter processing characteristics, such as Atlantic, Gi-gant, Herta and others, are gaining ground in Mexico.The basic germplasm for these varieties is predomi-nantly imported from Canada, the United States, orThe Netherlands. All white varieties together accountfor 85 percent of Mexico’s national potato produc-tion.

The remaining 15 percent are local red-colored va-rieties, Rosita being the most important. The nationalpotato-breeding program of INIFAP breeds the localvarieties.3 Many of these varieties are highly resistantto late blight (Phytophtora infestans) (cf. Flores andCadena, 1996; Parga and Flores, 1995). Because theCentral Plateau of Mexico is the geographic origin ofPhytophtora infestans, a great number of wild potatospecies possess resistance to this fungus pathogen(Niederhauser, 1989). This makes Mexico a favorablebreeding location for late blight resistance. Varietiesbred by INIFAP are even used in parts of Asia and Af-rica. In Mexico, however, larger farmers never use thecolored, local varieties. Notwithstanding the muchhigher susceptibility of Alpha, Atlantic, and other im-ported varieties to late blight, resource-rich farmersprefer them because they are better accepted by con-sumers and industry. Resource-poor farmers, in turn,often cannot afford the necessary heavy fungicide ap-plications. And so those cultivating potatoes underthe highland conditions of Central Mexico frequentlyuse red local potato varieties.

3.1.2 Phytosanitary AspectsEconomically, the most important potato disease inMexico is late blight, caused by the fungus Phytoph-tora infestans. Although local varieties with a highdegree of resistance to late blight have been releasedby INIFAP, many of them were not widely adopted.Especially among larger farmers, the disease is con-trolled by the extensive use of fungicides; in somecases up to 30 fungicide applications per crop cyclehave been reported (Parga and Flores, 1995). Ac-cording to the interviewed experts, the second mostimportant potato disease in Mexico is purple topwilt.4 This is caused by mycoplasma pathogenstransmitted either through the tuber seed or by leaf-hoppers as vectors. Viruses follow next in economicimportance. Among the viruses, the potato leafroll vi-rus (PLRV) causes the most severe yield losses, fol-lowed by potato virus Y (PVY), and potato virus X(PVX) (Salazar, 1997). Apart from virus transmissionthrough infected seed material (secondary infection),

3 INIFAP also bred white local varieties like Ireri, Mi-choacan, Norteña and others, some of which are also suit-able for processing. Yet, these varieties did not yet findlarge-scale applications.4 The local Spanish name of the disease is punta morada.

PLRV and PVY are spread by aphids (primary infec-tion). Primary infection of PVX is through directphysical contact. In general, secondary infectionscause greater yield losses than primary infectionsalone because the virus invades the growing plantsystematically (Hill, 1990). There are no chemicalmeans to directly combat viruses or mycoplasmas.Prophylactic measures include using certified patho-gen-free seeds and controlling insect-vectors with in-secticides. Other potato diseases with economicimportance in Mexico are blackleg, caused by bacte-ria, nematodes, and other fungal diseases (Fusariumand Verticillium). Because of the great susceptibility ofpotatoes to different diseasesaggravated by favor-able climatic conditions for pests in Mexicothecrop receives some of the highest amounts of pesti-cides in the country.

3.1.3 Potato Producing Regions24 of the 32 Mexican states produce potatoes. Thegeographic location of some of the major producingstates is shown in the map in Figure 4. Only five ofthese states (Sinaloa, Nuevo Leon, Mexico-State,Guanajuato, and Puebla) make up 54 percent of thenational production. Individual production shares ofthe main potato producing states are shown in FigureA1 in Appendix A. Due to the diverse agroclimaticconditions in its different regions, Mexico is one ofthe few countries worldwide where potato productiontakes place year round and fresh potatoes enter themarket every month. National production peaks inlate summer and fall, the harvesting time of thespring-summer cropping season. Still, around 40 per-cent of all potatoes are produced in the fall-winterseason (SAGAR, 1996). In some regions (e.g., Sinaloaon the Pacific Coast) it is too hot to produce potatoesduring the summer months. In other regions, how-ever, a considerable proportion of farm-ersespecially those with access toirrigationcultivates potatoes in two cycles per year.

Production conditions in the North vary significantlyfrom those in central and southern Mexico. Potatoproduction in the North is predominantly an activityof large-scale farmers cultivating white varieties usingadvanced production technologies. In the central andsouthern regions, by contrast, there are also manysmall-scale farmers engaged in potato production,particularly in the states of Puebla, Tlaxcala, Vera-cruz, and Mexico-State, where potatoes are some-times grown more than 3000 m above sea level. AsTable 1 indicates, almost all of the production in theNorth takes place under irrigated conditions, whileless than half of the production in the South is irri-gated. Analogously, average yields are significantlyhigher in the North. Highest yields are obtained in theregion of Coahuila and Nuevo Leon, with an averageof some 35 tons per hectare. In Puebla and Veracruz,on the other hand, average yields only reach around

9

Figure 4: Map of the main potato producing states of Mexico

Table 1: Regional differences in Mexican potato production

Prod. Share of Farm Types

Share of IrrigatedProd.

Small(< 5ha)

Medium(5-20 ha)

Large(> 20 ha)

Share of WhiteVarieties

Aver. Yield(t/ha) a

North 0.96 0.01 0.19 0.80 1.00 23.5

Central and South 0.46 0.23 0.28 0.48 0.70 17.0

Total Mexico 0.72 0.12 0.24 0.64 0.85 19.8a This is a 1994-1996 average.

Sources: See Table A1 in Appendix A.

11 tons. Given these facts, it is not surprising that thenorthern states account for some 52 percent of totalproduction, while they make up only 44 percent ofthe national potato area. A more complete descrip-tion of the individual states’ indicators can be foundin Table A 1 in Appendix A.

3.1.4 Potato Farming SystemsBefore the 1992 land reform, 42 percent of the totalagricultural land in Mexico was common ejido land(Randall, 1996). The ejidatarios (ejido members) had

user rights but were not allowed to rent or sell theland. Although some forms of common productionexisted, most of the potato enterprises operated on anindividual basis. The 1992 agrarian reform gave for-mal land titles to the ejidatarios. Today, potato pro-duction is almost exclusively a private and individualactivity, and so no differentiation will be made be-tween ejido and non-ejido farming systems.

In many Latin American countries, potato cultivationtakes place predominantly in small production

10

unitsoften less than one hectarewith much of theproduce kept for household consumption (cf. Scott,1985; Zeballos, 1997). This is different in Mexico.Although no reliable statistical data on farm sizes inthe Mexican potato sector exist, it is evident that po-tato producers are larger on average than producersof basic food crops.5 Potato farms of less than onehectare are rare, and production is first and foremostfor commercial purposes. Even on the smaller farmsthe share of potatoes kept for household consumptionis below 10 percent. Because potato is a much moreinput intensive crop than are basic cereals grown inMexico, cash income is needed to produce it, whichis why it is primarily a commercial crop. The produc-tion cost per hectare of potatoes under small-holderconditions is usually two to three times higher thanthat of maize (Biarnès, 1995). The substantial cashoutlay for agricultural inputs along with high interan-nual price and yield fluctuations make potato pro-duction a comparatively risky business, particularly inrain-fed areas. In unfavorable years resource-poorpotato farmers must abandon their production. Still,the average expected income from potato cultivationis higher than that of other crops, which makes it at-tractive. Colin (1995) found that scarce financial re-sources are the main constraint to expanding potatoproduction for small-scale farmers in Mexico. For thepurpose of this study, we subdivide all Mexican po-tato producers into three groups according to the areacropped with potatoes. The parameter area has aclose correlation with other variables, such as overallhousehold income, technology level, and potatoyields, which makes it a good indicator of living stan-dards for potato producing farm households (cf. San-tiago and Ruvalcaba, 1995).

• The first group consists of small-scale farmerswith less than 5 hectares of potatoes. Almostnon-existent in the northern potato regions, thisgroup makes up the majority of all potato farmersin many central and southern statesan esti-mated 70 percent in Puebla and Veracruz, for in-stance. In highland areas, small-scale farmingsystems are the only form of agricultural use.Most of the small potato producers cultivate po-tatoes for commercialization, in addition tomaize and beans partly for home consumption.In altitudes over 3000 m, where potatoes can stillbe grown, farmers practice a cropping rotationwith feeding oats. Here, the cultivation of redpotato varieties predominates. Small-scale farm-ers generally do not have access to irrigation.Due to low average yields on comparatively

5 The latest Mexican Agricultural Census of 1991 gives aver-age hectare amounts per potato producing unit by state.However, this refers to the official situation before the 1992land reform. These figures do crucially underestimate thesize of today’s production units because since 1992, manyejido farmers rented or sold their land to larger producers,which was officially prohibited before the reform.

small holdings, the production share of thisgroup is much smaller than the number of pro-duction units might suggest. As Table 1 shows,the small-scale farmers make up about 12 per-cent of the total national production.

• The second group consists of medium-scalefarmers with potato growing areas between 5and 20 hectares. While in the northern statessuch farms would be considered small, in manycentral and southern states farmers with 20 hec-tares are among the largest producers of the re-gion. Medium-scale potato farmers grow mostlybasic food crops in addition to potatoes. De-pending on the region, some of them also engagein the production of other horticultural crops. Itis estimated that about half of the medium-scalefarmers have access to irrigation facilities. Me-dium-scale farmers cultivate white potato varie-ties as well as local red ones. The contribution ofthis group to national potato production is 24percent.

• The third group consists of large-scale farmerswith potato growing areas of more than 20 hec-tares. This is the dominant potato farm type innorthern Mexico, where many producers haveholdings of more than 100 hectares. Apart frombasic food production, cropping patterns ofteninclude vegetables and other horticultural cropsfor national and international markets. Almost100 percent of the large-scale farmers producepotatoes under irrigated conditions. They useonly white potato varieties. Large-scale farmersaccount for 64 percent of the national potatoproduction.

3.1.5 Potato Seed IndustryAccording to Pray and Ramaswami (1991), the seedindustry is considered to consist of all enterprises thatproduce or distribute seeds.6 Thus, the seed industrycomprises the levels of plant breeding research, seedproduction, and seed distribution.

Potato BreedingAs stated earlier, INIFAP, partly in cooperation withuniversity research potato breeding, conducts Mex-ico’s national potato program. INIFAP’s main locationfor its potato program is near the city of Toluca. Inaddition, new potato lines are developed and evalu-ated at other INIFAP sites in Mexico to test their re-gional suitability. The responsible authority for theapproval of variety release and registration is the Na-tional Service for Seed Inspection and Certification(SNICS). Apart from INIFAP, there are also foreignsources of potato germplasm. While Alpha material

6 When talking of potato seeds, potato tuber seed is meanthere. The use of true potato seed in Mexican agriculture isnegligible.

11

has already been in use in Mexico for a long time, inrecent years the use of other externally bred varieties(Atlantic, Gigant, Herta, etc.) gained importance inthe country’s potato sector. Much of the basic breedermaterial for these varieties is imported from Canada.Other countries exporting potato germplasm to Mex-ico are the United States and The Netherlands.

Seed ProductionAlthough seed production for basic crop species wastraditionally the task of the National Seed ProductionCompany (PRONASE), private enterprises, in fact,have carried out potato seed production. Until thelate 1980s, however, the major share of certified po-tato seeds (some 75 percent) was imported primarilyfrom Canada. Superior technology and more favor-able climatic conditions gave Canadian seed produc-ers a cost advantage in spite of the high transportationcost. This situation changed somewhat in 1988, whenthe use of tissue culture techniques was introducedinto the Mexican seed industry (Fernández, 1989).Furthermore, an import ban on potato seeds from1992 to 1995 helped to develop a more competitivenational seed production sector.7

Today, there are 17 private producers of certified po-tato seeds in 7 different states of Mexico (Mexico-State, Chihuahua, Guanajuato, Baja-California, Coa-huila, Nuevo Leon, and Sinaloa). The seed producersobtain the basic germplasm for the varieties in theform of seedlings or minitubers from INIFAP or fromforeign suppliers. 10 of the 17 enterprises have theirown laboratory equipment, which allows them to usehigh temperature treatment and micropropagationtechniques in order to obtain pathogen-free seedlings.These seedlings are planted for one cycle in greenhouses before several cycles of field cultivation fol-low for seed multiplication. Table 2 shows the differ-ent cycles as well as the corresponding seedcategories of the national certification system. Pricesper unit of seeds decrease in each cycle, and com-mercial sales to potato farmers seldom take placebefore the level of registered I seeds.

Seed DistributionNo special seed distribution system exists in Mexico.Those farmers that use certified or registered seedsbuy the material directly from the seed producingenterprises without intermediaries. Often, potatofarmers producing in one region personally travel toother regions in order to choose their planting mate-rial for the next season. The farmer covers the cost ofseed transportation. Because of interregional tradeand the comparatively high number of seed suppliersin different regions, the potato seed market in Mexico

7 For 1996 and 1997 it is estimated that around 20 percentof the certified potato seeds used in Mexico were imported(CONPAPA, 1997a). Moreover, basic germplasm is im-ported for seed production within the country.

can be regarded as quite competitive. Only some 23percent of the area devoted to potato production,however, is cultivated with registered or certified seedmaterial (i.e., 77 percent is planted with seeds frominformal sources (CONPAPA, 1996)).

Large-scale farmers buy potato seeds in regular in-tervals and often recycle them for two to three pro-duction cycles. Although many of them acquirecertified seeds annually, they usually buy fresh ma-terial only for part of their total potato area. Some ofthe large-scale farmers have green house equipmentso that they can produce their own high quality po-tato seedsoften with foreign germplasm. Medium-scale farmers rarely use certified seeds. The majorityof them acquire seeds from informal markets (i.e.,they buy potatoes destined for the fresh market fromlarger farmers and use them as seed material.) Thepurchased potatoes are usually recycled for a cou-ple of years. Small-scale farmers never buy potatoseeds on formal seed markets. For the most part theyrecycle their own seeds from the previous harvest.Small amounts of potatoes for sowing are sometimesbought from neighbors or farmers of the same re-gion, so there is little renovation of seed material.

There are several factors that limit a more wide-spread use of certified potato seeds, especiallyamong smaller farmers. Lack of information aboutthe advantages of using high quality seeds is surelyone of them. One should keep in mind, however,that seeds account for a large share of the total costof potato production (see section 3.1.7). Using cer-tified seeds at a significantly higher cost increasesrisk and presupposes timely liquidity. Another con-straint for small-scale farmers is that they have lim-ited access to formal seed markets. As mentionedabove, there are no traders to mediate between seedproducers and consumers. While it makes sense forlarge-scale farmers to travel to distant regions to buyseeds, this is grossly inefficient for the smallamounts small-scale farmers need.

The described patterns of seed sources for the indi-vidual farm groups have different implications fordifferent potato varieties. As described in section3.1.4, large-scale farmersthe primary consumersof the formal seed marketexclusively cultivatewhite varieties. Local red varieties are only grownby small-scale and to some extent by medium-scalefarmers in higher altitudes. These farmers do not buycertified seeds, so there is no effective demand forformal seed markets to sell red varieties. Conse-quently, there is no incentive for potato seed pro-ducers to handle them. In fact, no enterpriseproduces certified seeds for red varieties. Figure 5represents the potato seed industry. As the figure in-dicates, medium and small-scale farmers producingred varieties are completely disconnected from theformal system.

12

Table 2: Cycles in certified potato seed production

Cycle 0 1 2 3 4 5 6 7

Location LaboratoryGreenHouse Field Field Field Field Field Field

Result TissueCulturedSeedlings

Minitubers Pre-BasicSeeds

BasicSeeds

RegisteredI

Seeds

RegisteredII

Seeds

RegisteredIII

Seeds

CertifiedSeeds

Source: Gálvez (1997).

Figure 5: The potato seed distribution system in Mexico

Large-Scale Farmers with Green

Houses

Large-Scale Farmers

Medium-Scale Farmers

(White Varieties)

Small-Scale Farmers

(White Varieties)

Medium-Scale Farmers

(Red Varieties)

Small-Scale Farmers

(Red Varieties)

Foreign Potato Seed Producers

Foreign Germplasm Suppliers

INIFAP Potato Program

National Potato Seed Producers

3.1.6 Other Factor Markets and Rural InstitutionsCreditPublic development banks have traditionally pro-vided the main share of agricultural credit in Mexico.Low repayment rates, subsidized interest ratespartlynegative in real termsand the difficulty of mobiliz-ing rural savings led to inefficiencies and constantlyshrinking amounts of loan disbursements (Arroyo andLeón, 1996). Because of the higher relative transac-tion cost when dealing with small amounts of credit,small-scale farmers were particularly affected by

these developments. The financial system was re-structured in 1988, and private banks gained in im-portance. Farmers’ access to credit remained limited,however, due to the lack of collateral within the ejidosector and the inflationary problems associated withhigh and volatile nominal interest rates. Even with theintroduction of formal land titles for ejido land in1992, the situation did not improve because ofdeeper structural impediments in the rural economy,which were exacerbated by tightened monetary poli-cies during the 1994/95 financial crisis. As stated ear-

13

lier, potato production is a much riskier business thanthe cultivation of other crops. As a result, credit forpotato growing is almost unavailable. Again, smallerfarmersproducing potatoes under rain-fed condi-tionsare the most affected. Only two of the inter-viewed small and medium-scale potato farmersreported that they had some experience with formalagricultural credit at all, and this was under the sub-sidized interest rate circumstances of the 1980s. In-formal credits based on family kinship or friendshipgenerally involve smaller amounts of money for con-sumptive purposes, and they are mostly only on ashort-term basis (Colin, 1995). It was argued in sec-tion 3.1.5 that the lack of timely financial resourceavailability is one reason for the scant use of certified,clean potato seeds among smaller farmers. Myhre(1996) even includes limited access to credit as oneof the main constraints for rural modernization inMexico.

Extension and Technical AssistanceTraditionally, different public institutions imple-mented agricultural extension in Mexico.8 Partly, thisservice was combined with credit provision. Themain emphasis of the government-implemented advi-sory services has always been on staple food produc-tion, mostly maize, beans, and to a lesser extent otherbasic grains. But within the overall structural adjust-ment efforts, the Mexican agricultural extensionservice was thoroughly reformed and government ex-penditures were sharply reduced (OECD, 1997). Cur-rently, occasional training for suppliers of privateservices and temporary cost-sharing programs forfarmers that contract private specialists are supportingthe privatization of technical assistance. In the 1995-2000 National Development Plan the programAlianza para el Campo was launched. Alianza para elCampo seeks to stimulate technological develop-ments in the Mexican agricultural sector (cf. SAGAR,1997). The program fosters the decentralization ofdecision-making in agricultural policies, and its indi-vidual components are tailored to the specific needsof different producer groups. Experts stated that theybelieved Alianza para el Campo might be an effectiveinstrument to modernize the agricultural sector, pro-vided that the program continues over time. The pro-gram’s components, however, once againpredominantly focus on basic grainspotato produc-tion is not included. And so, while the larger potatoproducers of northern Mexico hire their own full-timeagricultural engineers, small-holder potato growershave no access to technical assistance. This hampersthe dissemination of innovations in the potato sector

8 Often, the establishment of new governments in six-yearcycles was associated with the creation of additional organi-zations in the rural economy. Over time this led to an exag-gerated number of organizations entailing inefficiencies dueto a wide spreading of available resources, lack of continuityof individual programs and uncertainties in implementingbecause of partly overlapping mandates.

among small-scale farmers. An indication of this gapbetween applied research and agricultural productionis that several local, well-adapted new potato varie-ties that have been bred and released by the INIFAPpotato program have so far not been widely adoptedby Mexican farmers.

Producer OrganizationsIn 1988, the National Potato Confederation(CONPAPA) was established to integrate different lo-cal and regional producer associations, some ofwhich existed previous to that date. CONPAPA repre-sents potato producers vis à vis state and federal gov-ernments and vis à vis upstream and downstreampotato market enterprises (CONPAPA, 1997b). Amajor activity of CONPAPA in the early 1990s wasthe successful protection of potato producers’ inter-ests in the NAFTA negotiations with the United Statesand Canada. Since then, the organization has soughtto improve potato production and marketing by pro-viding information through seminars, documentationservices, and other activities. Membership inCONPAPA presupposes the existence of a local pro-ducer organization. Although today there are 29 af-filiated local associations, CONPAPA mostlyrepresents larger potato producers. None of the inter-viewed small-scale producers reported membershipin a potato growers’ association. It is evident that abetter organization among smaller farmers could bebeneficial for many reasons, the most important ofwhich being a more efficient commercialization oftheir potato crops and better access to financial andtechnical services.

3.1.7 Cost of Potato ProductionTable 3 shows the average variable cost of potatoproduction differentiated by farm type. The underly-ing sample consists of 36 farmers, 12 for each of thethree groups. Corresponding to the less intensivecropping patterns of small potato growers, their costof production per hectare is much lower than it is forthe larger farmers. Nevertheless, even for small-scalefarmers the cost of production in absolute terms issubstantial. Small-holders also use considerable pro-portions of purchased inputs, which underscores thecrop’s status as predominantly commercial for allfarm types in Mexico. The different figures of the farmtypes’ enterprise budgets are derived as arithmeticmeans of the individual farmers’ statements in thesurvey. In some cases, the variation of statements ishigh (see Table 4 for standard deviations of importantvariables). This is particularly so between individualstates, with a notable North-South gradient. Large-scale farmers in Coahuila and Nuevo Leon, for exam-ple, have average variable costs of almost 50,000 M$per hectare, whereas the same category of farmers inPuebla only invests about half of this amount. Themain differences are due to agro-chemical use, withthe highest intensities in the northern and northeast-ern potato regions of Mexico.

14

Table 3: Average potato enterprise budgets per ha by farm type (in 1998 M$)

Small-Scale Medium-Scale Large-Scale

Amount of Seed Potatoes (t/ha) 3.00 3.13 3.72Cost per t of Seed Potatoes a 1880.13 2385.58 3047.07

Gross Margin Calculation

Rent for Area 166.67 587.50 831.67Cost for Seed Potatoes 5640.40 7466.88 11335.08Chemical Seed Treatment b 350.00 350.0 730.00

Irrigation (Operation Cost) 0.00 420.00 1216.67Fertilizers 2144.44 4076.25 6059.67Pesticides 2100.00 4743.75 9897.17Hired Labor 1358.33 3606.25 4577.92

Total Variable Cost 11759.84 21250.63 34648.17Yield (t/ha) 11.10 20.86 31.75Farm-Gate price per t 1568.33 1963.75 1947.83Gross Revenue 17408.50 40963.83 61843.71Gross Margin 5648.66 19713.20 27195.54

Notes: 1 US$ = 8.30 M$ according to the average official exchange rate in early 1998. Minor deviations from the ex-pected sums and products in the enterprise budgets are due to rounding errors.a The cost per t of seed potatoes is not an observable market price. For the derivation of the figures, the frequency of seedpurchases among farm types and the individual seed sources were accounted for. Farm-saved seeds were valued at 20percent above the farm-gate price of fresh potatoes to adjust for the cost of storing the tubers, including storage losses.b Often, the seeds are treated with fungicides and nematicides before sowing.

Source: Author’s interview survey (1998).

Per hectare cost differences, however, do not giveinformation about the competitiveness of farmers indifferent regions because the obtained yield levels arealso significantly different (see below for competitive-ness considerations).

Cost StructureIn all cases, seed potatoes account for the largest pro-portion of the total cost of production. While seedsmake up around one third of the variable cost formedium and large-scale farmers, they represent al-most half of the cost for small-holders. But it shouldbe noted that because they usually use farm-savedseeds this cost is not associated with an equal mone-tary outlay for small farmers. This is also why the costper unit of seed potatoes is higher for medium andlarge-scale producers who purchase seed materialmore often. For purchased seeds, the cost per unit in-cludes the cost of transportation from the seed sup-plier to the potato farm. The given figures also takeinto account the fact that medium and large-scalefarmers occasionally reproduce their own seed mate-rial (cf. section 3.1.5).

Pesticides also make up a considerable share of theproduction cost for all three farm types. For small-scale farmers, pesticides rank third after seeds andfertilizers, but for the other two farm types they ranksecond in the overall cost structure. On average, fun-gicides account for half of the total pesticide cost.The share can even be higher, particularly for farmersgrowing varieties with a great susceptibility to lateblight. Insecticides make up the rest of the pesticidebudget.9 They are primarily used to control virus andmycoplasma vectors, and to a much lower extent toavoid direct insect damages. In general, pesticide ap-plications on potatoes are very high in comparison toother field crops grown in Mexico. Especially in thelarge-scale farming systems of the North, where thelack of financial resources is not a serious constraint,pesticide deployment is often overdone. Althoughmany large farmers have hired private agriculturalengineers for technical assistance, knowledge of effi-cient, environmentally sound pest management israther low. Against the background of trade liberali-

9 Weed hoeing is usually done manually so that herbicidesare used only seldom. Although nematicides are used some-times, too, the cost is negligible on average.

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zation and increasing competition with foreign potatoproducers, introducing integrated pest managementstrategies could be important for improving produc-tivity, especially in the large farm sector.

Although fertilizer budgets between farm types varyconsiderably in absolute terms, the importance of fer-tilizers in relative terms is more or less the same forall three groups: it accounts for 18 percent of the totalvariable cost of production. As regards hired labor,even small-scale farmers employ seasonal workers.Potato is a labor-intensive crop, and labor require-ments exceed the on-hand labor capacity of the farmfamily, especially during the peak sowing and har-vesting season. To a great extent, both sowing andharvesting procedures are carried out manually. Thisis also true for many of the large farms, which areusually highly mechanized otherwise, because of thecomparatively low cost of unskilled labor in Mexico.Since harvesting activities claim by far the highestamount of total labor, overall labor requirements perunit area may vary significantly according to obtainedyields. The statements of surveyed farmers on totallabor employed in the potato crop varied between 45and 120 man-days per hectare and production cycle.A similar range is reported by Santiago and Ruval-caba (1995), with a national average of 90 man-days.

ProductivitiesAs could be expected from the production intensities,average potato yields increase with the farm size andso do gross revenues per hectare. Farm-gate pricesreceived by small-scale farmers are lower than theyare for the other groups. This divergence can mainlybe attributed to three factors:

• Small-scale farmers have limited price informa-tion and comparatively low amounts of potatoesto sell, so they have little power to negotiateprices.

• Small-scale farmers often live in more remote ar-eas, which makes the cost of marketing the pro-duce higher and results in lower farm-gateprices.

• The quality of potatoes produced by small-holders is often below that of larger farmers interms of form, size, and physical defects of tu-bers. Moreover, small farmers often produce redpotato varieties, which command lower pricesthan white varieties.

The lower yields and lower prices received by small-scale farmers entail significantly lower revenues andgross margins in comparison to the other groups. Thesmall-scale farmers’ average gross margin per hectareis only 29 percent, and 21 percent of that for the me-dium and large-scale farmers, respectively. From amarket efficiency point of view, however, it is moreappropriate to consider the cost of production perunit of produce instead of the gross margin. The unit

cost of potato production for the different farm typesis shown in Table 4.

It is somewhat surprising thatdespite significantlydistinct production conditions and intensitiesthecosts of production per unit of output are similar forthe three farm types. The same holds true for the totalunit cost, including the fixed cost. Direct data onfixed costs were not collected within the interviewsurvey. Valdivia (1995), however, could show thatthe average per hectare cost for machinery in Mi-choacanexpressed as a percentage value of thevariable costis almost identical between the differ-ent potato farming systems (approximately 8 percent).We make the same assumption for other fixed costitems, which is realistic because substantial econ-omy-of-scale-effects do not occur. Large-scale farmersusually have sophisticated building facilities and theyoften employ several permanent workers and em-ployees (including engineers, secretaries, etc.).Smaller producers do not face such overhead costitems. Given these considerations, fixed costs asabout 10 percent of the variable costs appear to be agood approximation.

Table 4 also shows the standard deviations of the in-dividual cost figures in the sample. As was mentionedabove, the range of the individual farmers’ per hec-tare values is quite high. But it is interesting that stan-dard deviations of per unit costs within the groups aremuch lower. This strengthens the claim that the con-siderably different production patterns in Mexico donot have severe implications on capital productivity.As regards farm types, there are no significant effi-ciency differences between small and large potatoproducers, a finding consistent with Biarnès et al.(1995).10

3.2 Potato Marketing and Trade Channels3.2.1 Potato CommercializationThe major wholesale markets for fresh potatoes inMexico are Mexico-City, Guadalajara, and Monter-rey, with smaller wholesale outlets in a few other cit-ies. These wholesale markets may be suppliedthrough different channels. Many farmers sell theirpotatoes directly to the wholesalers. Larger farmershave their own means of transportation; smaller farm-ers pay volume fees for hired trucks. Apart from thisdirect marketing channel, there are different local andregional agents acting as intermediaries between pri-mary producers and wholesalers, especially forsmaller farmers with limited amounts of potatoes. Theform of payment that farmers receive from wholesal-ers or intermediary traders may vary within one year.During times of scarce supply, cash is paid when theproduce is handed over. Often during times of mar-

10 This statement assumes a homogeneous product producedby all farm types, i.e. it is abstracted from quality aspects.

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Table 4: Average per unit cost of potato production by farm type (in 1998 M$)

Small-Scale Medium-Scale Large-Scale

M$ Std. Dev. M$ Std. Dev. M$ Std. Dev.

Variable Cost per ha 11759.84 3162.73 21250.63 4398.41 34648.17 8975.20

Total Cost per ha 12935.83 3479.01 23375.69 4838.25 38112.98 9872.73

Var. Cost per t of Production 1059.45 30.81 1018.60 66.90 1091.28 102.59

Total Cost per t of Production 1165.39 33.89 1120.46 73.59 1200.41 112.85

Note: 1 US$ = 8.30 M$ according to the average official exchange rate in early 1998.

Source: Author’s interview survey (1998).

ket saturation, however, producers sell their potatoesat uncertain prices on a commission type basis andreceive their money after one or two weeks. One rea-son for the delayed payment is that the traders washthe potatoes, which often reveals problems of inferiorquality (cf. Elizondo, 1989).

The wholesale markets are the main centers for thedistribution of potatoes to the different retail outlets ofthe count