economics of alternative purity standards under conditions of coexistence nicholas kalaitzandonakes...

Economics of Alternative Purity Standards under Conditions of Coexistence

Nicholas KalaitzandonakesUniversity of Missouri-Columbia

Questions posed by Michael for today’s discussion

What are the costs for supplying commodities under different tolerance levels?How do these costs vary by the size of the market to be supplied?How are such costs distributed across the supply chain?How risk is factored into such costs?How are such costs affected as the diversity of products increases in the market placeHow the cost structure varies for products that presence vs. absence of attributes must be ensured

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Market Evidence – Non-GM Premiums

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Average Non-GM Premiums in Japan

Non-GM Premiums – at point of Import US non-GM exports to Japan

3.2 - 4.2 MMT of non-GM corn1.0 – 1.5 MMT of non-GM soybeans

Thresholds are at the regulatory level set by Japanese authorities of 5%

Soybeans Corn

($/MT) ($/MT)

2000 16 14

2001 16 12

2002 16 10

2003 20-22 10

2004 22-27 10

2005 22-28 10

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Non-GMO premiums in Tokyo Grain Exchange

-0.250

-0.050

0.150

0.350

0.550

0.750

0.950

1.150

1.350

5/18

/200

0

6/18

/200

0

7/18

/200

0

8/18

/200

0

9/18

/200

0

10/1

8/20

00

11/1

8/20

00

12/1

8/20

00

1/18

/200

1

2/18

/200

1

3/18

/200

1

4/18

/200

1

5/18

/200

1

6/18

/200

1

7/18

/200

1

8/18

/200

1

9/18

/200

1

10/1

8/20

01

11/1

8/20

01

12/1

8/20

01

1/18

/200

2

2/18

/200

2

3/18

/200

2

($/b

ushe

l)

Non - GMO soybean premium computed as the difference between the TGE non-GMO and conventional soybean price quote off the nearby contract

©Source: Parcell and Kalaitzandonakes, 2005

Supplying low AP Threshold Seed Markets

0%

5%

10%

15%

20%

25%

30%

35%

0 0.1 0.2 0.3 0.4 0.5 0.9 2 >2

Hypothetical Company A Bin AP Frequency Distribution

Test all bins at bulk storage – choose production from low AP bins (<=0.1) to supply small markets (e.g. Austria, Italy)

This system is not as effective when AP in production worsens or low AP markets expand in size

Example

total market size

Austria 275,000 unitsItaly 1,200,000 units

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What could it cost to meet lower AP thresholds if they were broadly enforced? The Case of Seed Corn

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What could the seed industry do to meet lower AP thresholds if they were broadly enforced?

Increase isolation distances of fields from foreign pollen sourcesIncrease number of border rows usedIncrease number of male rows usedIntroduce/increase time isolation of seed corn fields from other fieldsBlock-plant production fieldsHarvest fields separately & commingle field production lessClean more (at planting, harvest, processing and conditioning)Use dedicated equipment and facilitiesTest moreEtc.

Potential ways to re-engineer seed corn production process

Each resulting in different levels of AP efficiency and compliance costsWhich ones to choose and at what cost?

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Empirical results from the US

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0.5%BASELINE(current operations)

0.3%AP THRESHOLD

42%

34%

27%

22%

Incremental costs for various AP thresholdsfor representative facilities in the US

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Max compliance costs facility

Min compliance costs facility

RANGE OF INCREMENTAL COSTS

(% increase over baseline)

Source: Kalaitzandonakes and Magnier, 2004

What factors contribute to increasing costs as AP thresholds decrease?

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Decreased efficiency in use of assets

©Source: Kalaitzandonakes and Magnier, 2004

Daily utilization of a dryer

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

8-Aug 23-Aug 7-Sep 22-Sep 7-Oct 22-Oct

Baseline

0.5%

0.3%

Decreased efficiency in use of assets


Net number of bags produced

0

50000

100000

150000

200000

250000

300000

350000

8-Aug 8-Sep 8-Oct 8-Nov 8-Dec 8-Jan 8-Feb 8-Mar 8-Apr

Baseline

0.5%

0.3%

Output losses

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Net number of bags produced

0

50000

100000

150000

200000

250000

300000

350000

8-Aug 8-Sep 8-Oct 8-Nov 8-Dec 8-Jan 8-Feb 8-Mar 8-Apr

Baseline

0.5%

0.3%


1%2% 0.3%AP THRESHOLD

INCREMENTAL COSTS

34%

Incremental field costs & discards Incremental processing costs Other costs

92%

70%

22%

7%

Incremental compliance costs by categoryfor a representative facility in the Midwest


Empirical results from the EU

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0.5%BASELINE(current operations)

0.3%AP THRESHOLD



54%

15%

44%

30%

20%

Incremental costs for various AP thresholdsfor representative facilities in the EU

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0.1%(incomplete data)

68%

Max compliance cost facility

Min compliance cost facility


0.5% 0.3%AP THRESHOLD

45%

51%

37%

63%

51%

Incremental costs for various AP thresholds:Accounting for risk & worse-case scenarios

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BASELINE(current operations)

Max compliance costs facility

Avg 54%± 2 stdv

51%Avg 44%± 2 stdv


0.1%0.5% 0.3%AP THRESHOLD

23%

51%

14%

85%

37%

26%

Incremental costs for various AP thresholds:Accounting for risk & worse-case scenarios

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BASELINE(current operations)

Min compliance costs facility

Avg 68%± 2 stdv

Avg 20%± 2 stdv

Avg 30%± 2 stdv


0.5% 0.3%AP THRESHOLD

INCREMENTAL COSTS

Costs of discards Incremental processing costs Added testing costs

Representative structure of compliance costs

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41%

21%

43%

35% 41%

18%

Incremental field costs

0.1%

Incomplete data


AP compliance costs in the EU & the US: sources of differences

Nbr of fieldsAvg size

(ha)Min (ha)

Max (ha)

93 38 6 121

Europe1,177 3 0.2 27

North America

Production Field Information

Source: Kalaitzandonakes and Magnier, Various Case Studies

per seed facility

Reliability of estimated discard levels

Our estimated discard rates for the US and EU have varied from 12-20% for the 0.5-0.3% AP threshold range at different locations

Based on preliminary bin test data made available to us, it appears that our estimated discard rates could be low, especially around the 0.3% AP threshold

SEPROMA has proposed that at 0.5% discards would reach 25% and at 0.3% AP discards would be 30%

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1% 0.5%2% 0.3%AP THRESHOLD

INCREMENTAL COSTS

(% increase

over baseline)

42%

15%

34%

5%

27%

22%

AP compliance costs do not appear to be scale neutral

600,000 Unit Facility

320,000 Unit Facility


Probability & level of AP and compliance costs are not evenly distributed across the supply chain

Female rows

Male row Male row

Tassel

Female rows

AP from pollen flow will likely be higher in seed production –

due to underlying pollination process and other factors

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The pollen cloud is denser in grain production

AP from pollen flow will likely be higher in seed production –

due to underlying pollination process and other factors

Probability & level of AP and compliance costs are not evenly distributed across the supply chain

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Whole chain AP: A case study from corn wet milling

Rejection levels of delivered loads to selected non-GM wet mills

7.8%

6.8%6.5% 6.4%

5.8%

3.6% 3.3% 3.1%

2.2% 2.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

30.07 48.86 78.18 97.73 130.3

Avg Field Size (Acre)

Rej

ecti

on R

ate

Location A Location B

Source: Kalaitzandonakes and Kaufman, 2006

Representative non-GM wet mills in the US

Work directly with seed companies to secure seed less than 0.45% AP

Production takes place in both low and high GM adoption areas –using mostly buffer zones

Operate under strict IP & traceability regimes

They by-pass much of the commodity system

Experience low rejection rates testing at 0.9% AP for final product

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Source: Borchrave, Kalaitzandonakes, Galvao, Frahan, 2003

Agriculture Trading Crushing Feed Livestock Meat

Estimated whole chain IP costs in the EU meat chain(soy – 1% AP threshold)

Some concluding comments

Costs of IP systems vary drastically with market size, thresholds (tolerances), crop, production location (i.e. local GM adoption, weather, morphology, etc), physical/capital assets used, and across the supply chain – with obvious implications for optimal market procurement, regulatory policy and distributional impactsCosts/risks vary by market and institutional environment (e.g. process vs. product-based standards)Global and local markets, generally, have coped well with market segmentation and coexistenceWhat are the market failures (now and in the future) and what are appropriate policies? (e.g. what are optimal AP thresholds? How should they be allocated across the supply chain)

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economics of alternative purity standards under conditions of coexistence nicholas kalaitzandonakes...

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