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Wednesday, August 18, 2010

What Is The Rationale For Seed Prices?


Instead of ordering seed for your 2011 crop just because it will produce a corn stalk, you probably are ordering seed corn because of the bugs it kills, what herbicides won’t touch it, and the stresses it will withstand while producing a profitable yield. Many farmers buy seed based on its traits, rather than yield, but how do companies price such a product?

While biotechnology still comes with controversy, it has improved productivity and changed the way seed is priced in the US. University of Wisconsin economists Kyle W. Stiegert, Guanming Shi, and Jean Paul Chavas use farm level information from seed prices for the years 2000 through 2007 to analyze trait bundling and bundle pricing, among other issues. Their analysis covers the growth of genetically modified crops as acreage planted with them grew from 4.2 million in 6 countries to 309 million in 25 countries. Before 2000, the only genetic traits available were single traits for herbicide resistance in soybeans and insect resistance in corn and cotton. The development of stacked traits has occurred since 2000.

The spread of the technology can be attributed to government regulations, farm demand and consumer demand. But the researchers say the commercial value is suggested through the price premiums paid by farmers for GM seeds compared to the price of conventionally bred seeds. Research and development of new traits is an important part of the production cost of the seed, and in the past few decades, private sector R &D has increased sharply and that has lead to higher seed costs. The development of seed corn from private research and development is designed to pass those costs onto farmers, compared to research and development of seed wheat which comes from publicly funded check off programs. That means the cost of seed wheat will reflect only a small part of the R & D cost. Soybean seed began on a public work bench, and has shifted to private companies.

Since the 1980’s the US biotech industry has received numerous patents, which have precluded anti- trust oversight of the use the technology within the highly concentrated GM seed market. The biotech firms have also vertically integrated with seed distribution firms to offer the GM seeds and compete with independent companies, even though the independent companies have purchased access to the same biotech traits. However, one pending lawsuit that pits Monsanto against DuPont is focused on combining traits from different companies into one seed. But in another case, Syngenta has received permission to combine cotton genes from Monsanto and Bayer.

For genetically modified seed, the acreage share is over 80% for corn, beans, and cotton, but the growth patterns for single traits and stacked GM seeds are different. The use of stacked genes in corn began after 2005, but beans remain a single traited seed. The market prices for biotech seeds reflect both the cost of production and the benefits to the farm operators using them. Although seed companies must show profitability, the seed prices cannot exceed the benefit farmers see from the use of the seed.

The Wisconsin researchers say the price of the biotech seed that you will buy for 2011 will include trait stacking/bundling, perceived agronomic conditions in each region—pest infestations, rainfall, etc.—availability of substitute seeds, commodity prices, and farmer income. They have found the price of stacked seeds is sold at a discount, compared to the individual cost of the traits in seeds. They say farmers benefit because it gives them access to multiple traits and reduces the cost of the traits. There were also some instances of multiple stacked traits being sold for a premium price. They report that is closely tied to the herbicide tolerance trait, and is noticed primarily in the core of the Cornbelt, instead of along the fringe.

Seed prices may also be related to the concentration within the industry, which raises issues about the exercise of market power. But at the same time, such concentration may benefit research and development, the rate of adoption of biotechnology, and the progress made in agriculture. To analyze the issue of market concentration, the Wisconsin researchers found evidence of departures from marginal cost pricing, reflecting that market power does influence seed prices paid by farmers.

Another relationship within the industry is vertical integration and licensing. For soybeans, seed prices under vertical integration are higher than under licensing, which the researchers say indicates the biotechnology firms may increase the exercise of market power and the firms’ ability to extract economic benefits from seed dealers and farmers, and the economists add, “Biotech firms can recover the R&D expenditure more effectively through direct sale under vertical integration than through licensing fee revenue.”

Mergers are part of the biotech seed landscape, and the researchers say the concern about the few players in the game should be a public concern. They rhetorically wonder if concentrated markets will lead to higher prices, fewer choices, and the closure of independent seed companies. The economists say their most common finding is the discounted price for a package of stacked traits, however they say increased competition can also be associated with efficiency gains and lower seed prices.

Posted by Stu Ellis on 08/18 at 02:02 AM | Permalink

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