There is good evidence that foreign regulations have affected export demand for transgenic crops, but there is mixed evidence of price premia for traditional non-GM grains. For example, after the United States started growing GM corn, EU corn imports from the United States dropped from 2.1 million metric tons in 1995 to just under 22,000 metric tons by 2002 [USDA, Foreign Agricultural Service 2003b]. Notably, however, the gap in U.S. corn sales to the EU was filled by Argentina, a transgenic producer that only grows varieties approved by the EU . On the other hand, imports of U.S. corn byproducts to the EU have dropped only slightly since 1995 . The U.S. GM soybean export share in Europe has suffered as well, declining by more than 50 percent since 1997 . Price premia exist for non-U.S. corn in Japan and the Republic of Korea, traditional soybeans in Japan, and non-transgenic corn at elevators in the U.S., typically ranging from 3 to 8 percent . However, there is little evidence for price differentials between the GM and non-GM product in the canola market . The global market for rice differs from the market for soybeans in that the majority of rice sold is for human consumption rather than for animal feed. As a result, the market-acceptance issue is likely to be a key determinant of the success of transgenic rice adoption in California . As can be seen in Table 1, the export market for California rice accounts for approximately one-third to one-half of total annual production with Japan and Turkey as the major destinations. California Japonica rice imported by Japan is channeled through a quota system that was negotiated at the Uruguay Round in 1995. Most of California’s rice exports are purchased by the Japanese government and used for food aid and for other industrial uses, vertical grow racks including food and beverage processing .
Only a small portion of this imported high-quality rice is released into the domestic Japanese market . Turkey is reportedly attempting to severely restrict imports of transgenic crops through health regulations, despite importing corn and soybeans from the United States , while Japan requires labeling of 44 crop products that contain more than 5 percent transgenic material as one of the top three ingredients . Currently, several varieties of HT and viral resistant rice have entered the Japanese regulatory system for testing but have not yet been approved for food or feed use . As an illustration of potential market resistance, Monsanto suffered setbacks in Japan in December 2002 when local prefecture authorities withdrew from a collaborative study to develop a transgenicrice cultivar after being presented with a petition from 580,000 Japanese citizens . In 2002, China imposed additional restrictions on transgenic crops, including safety tests and import labeling . However, this action may be nothing more than a trade barrier to reduce soybean imports from the United States. In addition, China is worried that introducing biotech food crops may jeopardize trade with the EU. Nevertheless, China is not taking a back seat in transgenic crop research, as it has a major ongoing research program on biotech rice and other crops and is predicted to be an early adopter . There is also some skepticism in the United States with regard to GM crops. Aventis was sued in 2000 over accidental contamination of taco shells by transgenic corn that was not approved for human consumption, resulting in an expensive food recall. The company subsequently decided to destroy its 2001 LibertyLink® rice crop rather than risk its potential export to hostilenations . Kellogg Company and Coors Brewing Company have publicly stated that they have no plans to use transgenic rice in their products due to fears of consumer rejection, and several consumer and environmental groups favor labeling of foods made from transgenic crops . For most food and beverage products manufactured by these companies, however, rice accounts for a small input cost share, resulting in little financial incentive to support GM crop technology.
In May 2004, Monsanto announced that it was pulling out of GM wheat research in North America, partly due to consumer resistance. This has important implications for commercialization of GM rice because both grains are predominantly food crops. Many California rice farmers are concerned over the confusion regarding GM crops and do not want to jeopardize export market sales. This fear has been exacerbated by Measure D on the November 2004 ballot in a major rice-producing county that would have prohibited farmers from growing GM crops.13 A 2001 survey of California growers performed by the University of California Cooperative Extension showed that, of the respondents, 24 percent planned to use transgenic varieties, 37 percent would not, and the remainder were undecided . Of those growers who answered “no,” 78 percent responded that market concerns were a reason. Nevertheless, if profitability at the farm level increases, it is likely that a subset of California producers will adopt the technology . Presumably, those with the most significant weed problems and hence the highest costs would be the first to adopt.UCCE produces detailed cost and return studies for a wide variety of crops produced in California, including “Rice Only” and “Rice in Rotation.” The studies are specific to the Sacramento Valley region where virtually all California rice is produced. Figures on herbicide applications are based on actual use data as reported by DPR and UC Integrated Pest Management Guidelines . The most recent study completed for rice is by Williams et al. and is used as the basis for this study. As the potential adoption of transgenic rice is unlikely to significantly change farm overhead expenses on average, we focus on returns and operating costs per acre as reported in the sample-costs document. However, given weed-resistance evolution, changing regulations from DPR, and changes in the 2002 Farm Bill, the baseline cost scenario is adjusted here to account for changes in herbicide-use patterns, prices of herbicides and rice, and projected government payments. Using information from the 1999 pesticide use report compiled by DPR, the 2001 sample costs assume applications of bensulfuron and triclopyr, both broadleaf herbicides, on 25 and 30 percent of the acreage, respectively, and applications of the grass herbicides molinate and methyl parathion on 75 and 45 percent, respectively, of the acreage.
These figures are updated using data from Rice Pesticide Use and Surface Water Monitoring, a 2002 report by DPR, as interpreted by the authors. We maintain the assumption of two applications of grass herbicides, although we increase the treated acreage to 80 and 60 percent with one application composed of 40 percent molinate and 40 percent thiobencarb and the other composed of propanil on 60 percent of the acreage. Broadleaf control was adjusted to one application of triclopyr on 45 percent of the total rice acreage. Finally, vertical cannabis all cash operations are assumed to be financed at a nominal interest rate of 10.51 percent in accordance with the UCCE sample-costs document . As such, any change in the cost structure directly affects interest on operating capital, though the magnitude tends to be small. Overall, these updates result in a per-acre cost increase of $17.69 over the 2001 cost study. Estimated farm-level revenues are adjusted as well. To more accurately represent the current world rice market , we assume the market price per cwt at harvest is the average price from 1986 through 2002 of $6.50 with average yields at 80 cwt per planted acre. Government payments are divided into two components: direct payments and countercyclical income-support payments as described by USDA, ERS . In accordance with the 2002 Farm Bill, direct payments are calculated at 85 percent of average yields at $2.35 per cwt. Williams et al. estimate that growers of approximately 95 percent of planted acres have received this payment in the past, so the total direct payments are multipliedby 0.95. Countercyclical income-support payments are calculated using the ERS formula, which we can summarize as 85 percent of average yields at $1.65 per cwt. Incorporation of these changes results in a $28.01 increase in gross revenue per acre over the 2001 UCCE sample-costs study. The original and adjusted costs and returns per acre are reported in Table 2. Given the public nature of experimental data on LibertyLink® rice grown in California and the full cooperation of Bayer CropScience through phone interviews and email correspondence, we use this transgenic variety as the basis for our analysis . We assume a price for Liberty® herbicide of $60 per gallon16 and an application rate of 0.446 pounds of AI per acre [500 grams AI per hectare ] in accordance with the company’s projected label recommendations . To fully represent the fact that weed infestations will differ across plots, scenarios for transgenic cultivation are presented for both one and two applications of the herbicide on 100 percent of the acreage.The latter result is a direct consequence of the cost differential between ground and air applications of herbicides; ground applications of glufosinate cost approximately $12 per acre while air applications range from $6 to $7.25 per acre . The savings in chemical costs, however, drive the overall cost savings associated with transgenic rice and are explained using the information provided in Table 3. While the price of glufosinate per pound of AI is greater than all of the chemicals under consideration with the exception of triclopyr, the application rate per pound of AI is only 6 to 13 percent of the average herbicide control system. This decreases the cost of herbicide materials per acre by almost 62 percent as shown in the last column Table 2. When these results are combined, net returns over operating costs increase in the range of $45.89 to $74.90 per acre depending on the herbicide application rate, or $0.57 to $0.94 per cwt. Thus, this baseline scenario, which assumes perfect substitutability between medium-grain transgenic LibertyLink® rice and conventional varieties in terms of market acceptance and yields, predicts considerable economic incentives for rice growers to adopt transgenic varieties with similar characteristics due to their increased profitability. It is important to recognize, however, that these results are based on average costs over the entire Sacramento Valley rice growing region and utilize aggregate data to estimate the conventional herbicide weed-management regime. Individual growers, of course, will most likely differ in regime from these averages depending on the characteristics of the specific operation. Those growers with “superior” land, as defined by lower aggregate weed-management costs, would benefit the least from adoption of transgenic rice while those with marginal land or serious weed-resistance problems tend to benefit more from the herbicide-management cost savings offered by the transgenic system and are hence most likely to adopt. To further investigate these issues, the assumption of perfect chemical substitutability, which essentially drives the assumption of identical yields, can be relaxed. A severely infested plot with a large, resistant seed bank of watergrass or some other weed would likely experience yield increases with adoption of a transgenic control system. Such yield gains have been observed in practice for HT soybeans and HT canola in the range of 0 to 20 percent . However, yields are not necessarily guaranteed to increase for all plots. Under generally ideal conditions, a yield drag of between 5 and 10 percent for medium-grain cultivars of LibertyLink® rice relative to conventional varieties has been observed in California rice field trials. This is consistent with similar field trials of HT soybeans. Such losses would decrease revenues and would thus reduce the increased profitability of adoption of this new technology. Yield drag should not be an issue with most growers given the advanced, widespread state of weed resistance to currently licensed chemicals for rice weed control in the Sacramento Valley. However, it is important to note that, in the short run, a few producers could actually experience a slight yield drag if the new technology was adopted; this is not expected to persist in the long run.17 A fall in demand for California rice due to consumer concerns, coupled with increased supply as a result of productivity gains, could cause rice prices to decline over time and decreasing net returns in the presence of yield changes. Similarly, a price premium for non-transgenic rice varieties could erode net-returns differences between traditional and HT cultivars but benefit conventional rice producers.