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The Economics of Biotech

The economics of biotech

Biotechnology has been held out both as an industry and as a technology which will spur the development of the countries of the South and lift them from the realm of underdevelopment. The following article considers whether there is any justification for this optimism and whether it would be prudent for developing countries to devote their limited financial resources to the development and application of this technology.

By Chee Yoke Heong and Chee Yoke Ling

GENETIC engineering has raised expectations and spurred public financing as well as private investments. At the same time, it is probably the first time in history that a new technology is subject to public debate and scrutiny.

Biotechnology covers a wide range of activities, from tissue culture to genetic engineering. However, it is biotechnology that involves the manipulation of genes that is now widely touted as a key technology of the future. The other heavily promoted one is information technology. But just as the dot.com hype turned out to be a bubble that burst while the digital divide is gaining permanency, the economic viability of biotechnology is now seriously questioned. In fact the biotech corporations are feeling the financial heat as few biotech products have been successfully made or marketed and many biotech firms are making losses.

The latest casualty is Monsanto. In October the global agriculture giant announced that it was pulling out of the European breeding and seed business for wheat and barley. This was due to the failure to introduce genetically modified (GM) hybrid wheat to Europe, and the company’s decision to cut costs. Under the restructuring exercise, Monsanto is to close its European cereal business headquarters at Trumpington, Cambridgeshire (UK).

The major GM seed producer also said it will end its research in plant-made pharmaceuticals (biopharm) as part of the overhaul of the company that would result in the laying off of 7-9% or about 1,200 of its global workforce.

Monsanto is also cutting its costs tied to the slowing herbicides business, its bread and butter for years. As the patent for the chief herbicide ingredient of Roundup (glyphosate) expires in three years’ time, it is trying to shift its business focus to seeds and biotechnology traits for corn, soybeans, and other crops.

Meanwhile, the company reported a widened quarterly net loss of US$188 million, compared with a net loss of US$27 million in the same period for 2002. Its shares fell as much as 6% as the company projected 2004 earnings below current estimates. This is largely due to the massive August 2003 agreement to settle several lawsuits amounting to US$390 million. The litigation involved a Monsanto chemical plant that made polychlorinated biphenyls, or PCBs, decades ago in Alabama, that residents claimed caused property and health damage.

Analysts observe that Monsanto’s troubles are the result of over-ambitious expectations of genetic modification of agricultural seeds faced with growing concerns over health and environmental hazards and consumer rejection.

Another bubble?

October was also the busiest month in three years for initial public offerings (IPOs) in the biotech sector in the US, where biotech companies account for about 20% of the backlog of IPOs in registration.

But according to a Financial Times (FT) report of 10 November, investors ‘view biotechs as the most speculative category of new stock issuance’ because they are wary of betting on businesses that have yet to show a profit. A fund manager specialising in new issuance was quoted as saying that these companies’ work ‘is basically to discover things. That work is not marketable and does not generate any revenue until they have a product that is past human trials and in production. How on earth do you value these companies?’

Thus the sporadic flurry of IPO activity needs closer scrutiny. The FT report pointed out that biotech IPOs have posted an average first-day gain of 2.5% and an average gain of 2.4% in the aftermarket. Compare that with first-day returns of 14% for non-biotech IPOs and a 34% gain on the aftermarket.

Bankers specialising in biotech told the FT that investors were most interested in companies in the later stages of product development, which were closer to profitability. The deals that have fared worst have been those for early-stage companies. But another fund manager was quoted as saying that even though later-stage companies were far more attractive, they ‘keep coming out at lower and lower prices’ because ‘investors want a discount’. In fact, two of the drug companies that came into the market in November were priced near the low end of their range, and within a few days their share price had fallen below their issuance level.
It is thus very risky for developing countries to put their hopes in promoting venture capital in the biotech sector.

Indeed, investors’ confidence in biotech stocks has been cautious for a while. Biotech companies raised US$20 billion in stock offerings worldwide in 2000 but only a fourth of that in 2001 and only US$843 million in January-August 2002. One in seven public biotech firms has a year’s worth of cash or less, and 39 of 249 public biotech firms surveyed were trading in the US at US$1 or less at end-July 2002 (Seattle Times, 19 August 2002).

Biotech centres

These facts are important for developing countries to know as many are planning to invest a lot of money in biotech. What does it take to create a thriving and financially successful biotechnology centre?

The answer is far from comforting, according to a 2002 study carried out by Brookings Institution, a policy research institute based in Washington DC. (For the full report, see http://www.brook.edu/dybdocroot/es/urban/publications/biotech.pdf )

The study looks at the growth and decline of biotech centres in the 51 major metropolitan areas in the US. It finds that the industry is highly volatile (half of the biotech companies formed in the 1970s have folded or merged with other companies). The process of setting up a successful company is protracted, requiring substantial funding. The uncertainties in product development and economics are so great that most small biotech companies have failed over the last two decades.
‘The apparent scale of research funding required for becoming a biotechnology centre may be beyond the reach of most metropolitan areas,’ the study concludes, adding that most biotech firms operate at a loss, spending large amounts on research and development for several years in advance of earning any sales revenue. The typical biotech firm spent about US$8.4 million on research and development and earned revenues of just US$2.5 million in 1998.

Biotechnology activities are highly concentrated within those metropolitan areas that combine a strong research capacity with the ability to convert research into substantial commercial activity. These are places with a high concentration of capital flow, a critical ingredient in the development process, as well as leading universities and research institutes as sources of intellectual and human capital.

Only nine of the 51 metropolitan areas surveyed contained the necessary ingredients, with Boston and San Francisco emerging as the two established and dominant centres of the US biotech industry, which also has the largest density of biotech research firms in the world.

Government financing, a criterion that would be taxing especially to developing-country governments, is also required to boost growth. The study notes that the biotech centres in the US receive heavy support and subsidies from the government; for example, the National Institutes of Health provide substantial research funding, totalling US$229 million in 2000, to the biotech centres, with three-fifths going to the nine key areas. The study concludes that it would be a mistake to believe biotech centres would take off like computer technology centres. Unlike the boom created by the personal computer and Internet, biotechnologies are often quite expensive and most biotech products are applicable to only a narrow fraction of the population.

Another shortcoming of the biotech centres is that even the successful ones do not contribute significantly to the economies in terms of job creation. Most biotechnology firms are quite small: nationally only 44 have more than 1,000 employees. Biotech firms typically contract with global pharmaceutical firms to produce, market, and distribute successful products rather than attempting to create their own capacity to do so. In the two largest concentrations of biotech activity, Boston and San Francisco, none of the largest biotech firms is among either region’s 25 largest private employers.

Aside from the risks associated with biotech centres, the attractiveness of investment in biotech companies is also volatile. According to BioCentury, an industry newsletter, shares in the top biotech firms dropped 43% in the period January to July 2002, as the scandal around ImClone hit sentiment on biotech counters and reverberated through the broader market.

These falling stock prices brought the price-earnings (PE) ratios of biotech firms down to 32. Most other industries have traditionally enjoyed PE ratios of 15 to 20, leaving it an open question whether biotech firms will hold their value at this level or continue to plummet.

The sorry state of biotech stocks is also said to have a dampening effect on the many smaller firms in the industry. BioCentury listed 61 public firms in the US (out of 494 companies worldwide) that had a year or less worth of cash on their balance sheets at the end of the first quarter. (Two or more years’ worth of cash is vital to young biotech firms.)

Deja vu

Concerns over the future of biotech firms trigger a sense of deja vu for as far back as in 1999 Deutsche Bank had expressed caution over investing in biotech-related companies especially those involved in agricultural biotechnology, to the point of advising investors to sell their holdings in one seed company as well as the sector in general.

In its report entitled ‘GMOs are dead’, the Bank’s analysts noted the very quick turnaround in investor confidence in the biotech industry, remarking that while ’30 days ago, the investment community accorded only positive attributes…today, the term GMO has become a liability’.
It predicted that GMOs (genetically modified organisms), ‘once perceived as the driver of the bull case for this sector, will now be perceived as a pariah’.

As the ImClone saga and the dented confidence in corporate America, coupled with the strong anti-biotech consumer sentiment especially in Europe, reverberates in the industry, biotech companies and the centres that are to emerge are likely to face increasing risks as investment prospects.
A major study by the EU reviewed the available economic literature, and concluded that the results have been mixed and that more research needs to be conducted.1

The EU report on the economic impacts of GM crops (2002) found that acceptance of GM crops by farmers in the US, Canada and Argentina was driven mostly by ‘expectations’ of profitability and that GM crops ‘do not prove to be significantly more profitable than conventional counterparts’ – profitability is expected to be derived at in terms of increase in yield and/or cost savings. Other acceptance factors of more importance were performance (other than by yields) and convenience of GM crops, in particular for herbicide-tolerant varieties. The monetary aspect is secondary or indirect, such as savings from use of pesticides or reduction in labour costs.

The case of RR soybeans

However, even the expectation of higher yields is an illusion, as shown in the case of Roundup Ready (RR) soybeans in the US. (The soybean is genetically engineered to be resistant to the herbicide glyphosate.) Studies showed that in most field trials the GM crop shows lower yields than the conventional varieties. According to Benbrook, the average yield drag across all varieties tested was 3.1 bushels an acre or 5.3%, adding that in some areas of the Midwest, the best conventional variety sold by seed companies produces yields on average 10% or more higher than comparable Roundup Ready varieties.2

He concluded that the RR soybean yield drag and technology fee impose a sizable indirect tax on the income of soybean producers, ranging from a few percent to over 12% of gross income per acre.
In addition, RR soybean does not reduce pesticide use, but instead increases its use and thus could eat into profits. In 1998, farmers growing RR soybeans used two to five times more herbicide per acre, compared to the other popular weed management systems used on most fields planted with conventional varieties.

A study commissioned by the EU Commission showed that farmers, both organic and conventional farmers, would face high additional costs if GM crops are commercially grown on a large scale in Europe.3

The study on the co-existence of GM and non-GM farming found that commercialisation of GM oilseed rape and maize and to a lesser extent potatoes will increase costs of farming for conventional and organic farmers at a range between 10 and 41% of farm prices for oilseed rape and between 1 and 9% for maize and potatoes.

The EU study states that in oilseed rape production the co-existence of GM and non-GM crops in the same region, even when ‘technically possible’, would be ‘economically difficult’ because of the additional costs and complexity of changes required in farming practices in order to avoid genetic contamination.

Both organic and conventional farmers would probably be forced to stop saving seed and instead buy certified seed, because of the increased risk of GM impurity for seeds that have been exposed to field contamination.

The study predicts that smaller farms would face relatively higher costs compared to larger entities, and that cultivation of GM and non-GM crops in the same farm might be unrealistic even for larger farms.

Another new study from Lincoln University, New Zealand shows that release of GM crops will have no financial benefit for producers. The details were presented at a biotechnology symposium at Victoria University in Wellington on 5-6 September 2003, which examined the impacts of GM. Dr Caroline Saunders and Bill Kaye-Blake from Lincoln University’s agribusiness and economics research unit, in their paper ‘Economic impacts of producing GM food in NZ’4, said that GM food releases have not benefited producers anywhere in the world, and economic modelling5 shows the situation for New Zealand is no different. The study looked at 16 commodities including three types of oils, beef and sheep, five dairy products, cereals, kiwifruit and apples. Since developing countries are looking to genetic engineering to boost their agricultural production and exports, just as NZ is doing, this study has important lessons for them to consider.

The Lincoln University study found that producers will only benefit from GM crops when consumers demand them, and New Zealand producers do not have anything to gain from growing GM food as consumer demand is currently for non-GM food. For example, UK supermarkets do not want GM feed used in animal production. There are price premiums for non-GM products in Japan, the US, Korea and the EU.

The study warns that any potential for increased productivity from GM crops would not lead to higher producer returns, saying it is better to have greater demand through shorter supply. This is because control of access to the GM technology is an important variable for profitability. In addition, if NZ can lower production costs without other countries doing the same, only then can farmers gain. Similar results have been seen from models on the US situation in other studies.

The study also notes that most benefit goes to the owners of intellectual property. There are considerable differences in the benefits to producers depending on whether the technology is available domestically or overseas.

Social fallout

Whoever controls technology in terms of proprietary claims also largely determines access even if that technology may be beneficial and has no adverse environmental and health effects. GM application is part of a package of high investment and inputs, thus making it inevitably large-scale to be profitable. This has serious social impacts.

Experiences in countries that have entered into large-scale commercial agriculture using GM technology show a consistent pattern of higher concentration of capital, increased inputs, monoculture and the rapid marginalisation of small farmers. As countries grow the same few GM crops, there is also the danger of entering another round of commodity production which is plagued by fluctuating prices. Community structure, and traditional knowledge and practices are accordingly undermined and eroded.

Governments in many developing countries are lured by the as-yet-unsubstantiated promises of GM. So there is a rush to set up biotech clusters and centres along the US model, including in Singapore, Malaysia, India and China. Kenya and South Africa are also placing hopes and precious public funds in this sector.

Before going further, these and many other countries should look at the experience of Argentina. It is a valuable case study of the pitfalls of these ambitions. The soy boom that started in 1970-80 saw high world prices for grains and oilseeds. Cattle-raising coupled with agricultural cycles was replaced with permanent crop cultivation (soy in rotation with wheat, maize or sunflower). Small farms disappeared and large holdings took over. Contractors with bank credits and large machinery managed farms of up to 2,000 acres.

In the 1990s, commodity production, especially soy, was promoted and these contractors were replaced by large financial funds that invested in even bigger holdings of up to 20,000 acres. These were often rented to landless poor farmers who then had no choice but to buy the whole package of seeds, fertilisers and herbicides/pesticides. Fertiliser use increased from 0.3 million tons in 1990 to 2.5 million tons in 1999. With increased production costs and low prices in the 1990s, farmers with land were forced to sell or rented out their land cheaply to the financial funds. Those who rented land could not afford it anymore. An estimated 7,000 families migrated to urban areas each year and rural land concentration escalated.

When Roundup Ready GM soy was introduced in 1996, Argentina was drawn into a deeper crisis. Six years after this introduction, 28 million acres or 95% of soybean crops are GM. Since soy is not traditionally consumed in the country, the crop is an export commodity, used mostly for animal feed.
However, there is widespread consumer rejection of GM food and even GM animal feed (increasing amounts of GM soy are fed to animals). This is caused by concerns over health and environment as the public realises that there has been little or no independent biosafety research and post-release monitoring. As scientific evidence emerges on the real and potential hazards, an entire economy can become vulnerable.

Poverty and hunger are now major problems for Argentina and the current government is seeking ways to bring almost two million people back to the rural sector.

The claims that RR soy will lead to reduced herbicide use have also been proven wrong. In 1997/98 glyphosate use was 28 million litres; this rose in 1998/99 to 58 million litres, and in 1999/2000 it reached 100 million litres. This trend is expected to result in serious herbicide resistance triggering another round of problems.

Another worry is the likely adverse impact of glyphosate use on RR soybean root development, nodulation and nitrogen fixation. Where there is drought or relatively infertile fields, the effects are worse. This was observed by a team of scientists at the University of Arkansas. All this means that yields can drop dramatically, leading to income loss and related social problems. (Roundup Ready maize is also commercially grown.)

Such disasters ultimately explode into social disruptions which are difficult if not impossible to reverse.

The irony, and tragedy as seen in the case of Argentina, is that there are truly sustainable options for productive agriculture that nurtures biodiversity, maintains high yields and is socially and economically viable. These options have not been given the same attention and priority in the formulation of research and agriculture policies. As for aspirations to ensure a healthy society, what is needed is preventive health care, safe and affordable medicines and treatments – much of which also does not lie in genetic engineering.

It is encouraging that there are growing public and scientific debates and discussions around the world on the safety, ecological and social-justice dimensions involved in making technology choices. There is a collective responsibility on governments and citizens to make those choices in an informed and open manner, and not to rely on the corporations that sell the hype to determine the technologies that shape our lives and society.

Chee Yoke Heong is a researcher with Third World Network. Chee Yoke Ling coordinates TWN’s environment programme.

Endnotes

1 Commission of the European Communities, 2002. Economic Impacts Of Genetically Modified Crops On The Agri-Food Sector – A First Review. Working Document Rev. 2 Directorate-General for Agriculture
2 Benbrook, C., 2003. ‘Economic and Environmental Impact of First Generation Genetically Modified Crops: Lessons from the US’. Report available at http://www.biotech-info.net/first_ generation_GMC.pdf
3 Bock, Anne-Katrin, et al., 2002. ‘Scenarios for co-existence of genetically modified, conventional and organic crops in European agriculture’. Institute for Prospective Technological Studies – Joint Research Commission of the European Commission. Report is available at http://www.jrc.cec.eu.int
4 Paper presented at the Impacts of Emerging Biotechnologies Symposium, Foundation for Research, Science & Technology, New Zealand, 5-6 September 2003
5 ‘Economic risks & opportunities from the release of GMOs in New Zealand and the Lincoln Trade and Environment Model’ by Dr Caroline Saunders and Bill Kaye-Blake, presented at the above Symposium.

June 15th, 2004 | Category: Economic Issues
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  »

The economics of biotech

The economics of biotech

Biotechnology has been held out both as an industry and as a technology which will spur the development of the countries of the South and lift them from the realm of underdevelopment. The following article considers whether there is any justification for this optimism and whether it would be prudent for developing countries to devote their limited financial resources to the development and application of this technology.

By Chee Yoke Heong and Chee Yoke Ling

GENETIC engineering has raised expectations and spurred public financing as well as private investments. At the same time, it is probably the first time in history that a new technology is subject to public debate and scrutiny.

Biotechnology covers a wide range of activities, from tissue culture to genetic engineering. However, it is biotechnology that involves the manipulation of genes that is now widely touted as a key technology of the future. The other heavily promoted one is information technology. But just as the dot.com hype turned out to be a bubble that burst while the digital divide is gaining permanency, the economic viability of biotechnology is now seriously questioned. In fact the biotech corporations are feeling the financial heat as few biotech products have been successfully made or marketed and many biotech firms are making losses.

The latest casualty is Monsanto. In October the global agriculture giant announced that it was pulling out of the European breeding and seed business for wheat and barley. This was due to the failure to introduce genetically modified (GM) hybrid wheat to Europe, and the company’s decision to cut costs. Under the restructuring exercise, Monsanto is to close its European cereal business headquarters at Trumpington, Cambridgeshire (UK).

The major GM seed producer also said it will end its research in plant-made pharmaceuticals (biopharm) as part of the overhaul of the company that would result in the laying off of 7-9% or about 1,200 of its global workforce.

Monsanto is also cutting its costs tied to the slowing herbicides business, its bread and butter for years. As the patent for the chief herbicide ingredient of Roundup (glyphosate) expires in three years’ time, it is trying to shift its business focus to seeds and biotechnology traits for corn, soybeans, and other crops.

Meanwhile, the company reported a widened quarterly net loss of US$188 million, compared with a net loss of US$27 million in the same period for 2002. Its shares fell as much as 6% as the company projected 2004 earnings below current estimates. This is largely due to the massive August 2003 agreement to settle several lawsuits amounting to US$390 million. The litigation involved a Monsanto chemical plant that made polychlorinated biphenyls, or PCBs, decades ago in Alabama, that residents claimed caused property and health damage.

Analysts observe that Monsanto’s troubles are the result of over-ambitious expectations of genetic modification of agricultural seeds faced with growing concerns over health and environmental hazards and consumer rejection.

Another bubble?

October was also the busiest month in three years for initial public offerings (IPOs) in the biotech sector in the US, where biotech companies account for about 20% of the backlog of IPOs in registration.

But according to a Financial Times (FT) report of 10 November, investors ‘view biotechs as the most speculative category of new stock issuance’ because they are wary of betting on businesses that have yet to show a profit. A fund manager specialising in new issuance was quoted as saying that these companies’ work ‘is basically to discover things. That work is not marketable and does not generate any revenue until they have a product that is past human trials and in production. How on earth do you value these companies?’

Thus the sporadic flurry of IPO activity needs closer scrutiny. The FT report pointed out that biotech IPOs have posted an average first-day gain of 2.5% and an average gain of 2.4% in the aftermarket. Compare that with first-day returns of 14% for non-biotech IPOs and a 34% gain on the aftermarket.

Bankers specialising in biotech told the FT that investors were most interested in companies in the later stages of product development, which were closer to profitability. The deals that have fared worst have been those for early-stage companies. But another fund manager was quoted as saying that even though later-stage companies were far more attractive, they ‘keep coming out at lower and lower prices’ because ‘investors want a discount’. In fact, two of the drug companies that came into the market in November were priced near the low end of their range, and within a few days their share price had fallen below their issuance level.
It is thus very risky for developing countries to put their hopes in promoting venture capital in the biotech sector.

Indeed, investors’ confidence in biotech stocks has been cautious for a while. Biotech companies raised US$20 billion in stock offerings worldwide in 2000 but only a fourth of that in 2001 and only US$843 million in January-August 2002. One in seven public biotech firms has a year’s worth of cash or less, and 39 of 249 public biotech firms surveyed were trading in the US at US$1 or less at end-July 2002 (Seattle Times, 19 August 2002).

Biotech centres

These facts are important for developing countries to know as many are planning to invest a lot of money in biotech. What does it take to create a thriving and financially successful biotechnology centre?

The answer is far from comforting, according to a 2002 study carried out by Brookings Institution, a policy research institute based in Washington DC. (For the full report, see http://www.brook.edu/dybdocroot/es/urban/publications/biotech.pdf )

The study looks at the growth and decline of biotech centres in the 51 major metropolitan areas in the US. It finds that the industry is highly volatile (half of the biotech companies formed in the 1970s have folded or merged with other companies). The process of setting up a successful company is protracted, requiring substantial funding. The uncertainties in product development and economics are so great that most small biotech companies have failed over the last two decades.
‘The apparent scale of research funding required for becoming a biotechnology centre may be beyond the reach of most metropolitan areas,’ the study concludes, adding that most biotech firms operate at a loss, spending large amounts on research and development for several years in advance of earning any sales revenue. The typical biotech firm spent about US$8.4 million on research and development and earned revenues of just US$2.5 million in 1998.

Biotechnology activities are highly concentrated within those metropolitan areas that combine a strong research capacity with the ability to convert research into substantial commercial activity. These are places with a high concentration of capital flow, a critical ingredient in the development process, as well as leading universities and research institutes as sources of intellectual and human capital.

Only nine of the 51 metropolitan areas surveyed contained the necessary ingredients, with Boston and San Francisco emerging as the two established and dominant centres of the US biotech industry, which also has the largest density of biotech research firms in the world.

Government financing, a criterion that would be taxing especially to developing-country governments, is also required to boost growth. The study notes that the biotech centres in the US receive heavy support and subsidies from the government; for example, the National Institutes of Health provide substantial research funding, totalling US$229 million in 2000, to the biotech centres, with three-fifths going to the nine key areas. The study concludes that it would be a mistake to believe biotech centres would take off like computer technology centres. Unlike the boom created by the personal computer and Internet, biotechnologies are often quite expensive and most biotech products are applicable to only a narrow fraction of the population.

Another shortcoming of the biotech centres is that even the successful ones do not contribute significantly to the economies in terms of job creation. Most biotechnology firms are quite small: nationally only 44 have more than 1,000 employees. Biotech firms typically contract with global pharmaceutical firms to produce, market, and distribute successful products rather than attempting to create their own capacity to do so. In the two largest concentrations of biotech activity, Boston and San Francisco, none of the largest biotech firms is among either region’s 25 largest private employers.

Aside from the risks associated with biotech centres, the attractiveness of investment in biotech companies is also volatile. According to BioCentury, an industry newsletter, shares in the top biotech firms dropped 43% in the period January to July 2002, as the scandal around ImClone hit sentiment on biotech counters and reverberated through the broader market.

These falling stock prices brought the price-earnings (PE) ratios of biotech firms down to 32. Most other industries have traditionally enjoyed PE ratios of 15 to 20, leaving it an open question whether biotech firms will hold their value at this level or continue to plummet.

The sorry state of biotech stocks is also said to have a dampening effect on the many smaller firms in the industry. BioCentury listed 61 public firms in the US (out of 494 companies worldwide) that had a year or less worth of cash on their balance sheets at the end of the first quarter. (Two or more years’ worth of cash is vital to young biotech firms.)

Deja vu

Concerns over the future of biotech firms trigger a sense of deja vu for as far back as in 1999 Deutsche Bank had expressed caution over investing in biotech-related companies especially those involved in agricultural biotechnology, to the point of advising investors to sell their holdings in one seed company as well as the sector in general.

In its report entitled ‘GMOs are dead’, the Bank’s analysts noted the very quick turnaround in investor confidence in the biotech industry, remarking that while ’30 days ago, the investment community accorded only positive attributes…today, the term GMO has become a liability’.
It predicted that GMOs (genetically modified organisms), ‘once perceived as the driver of the bull case for this sector, will now be perceived as a pariah’.

As the ImClone saga and the dented confidence in corporate America, coupled with the strong anti-biotech consumer sentiment especially in Europe, reverberates in the industry, biotech companies and the centres that are to emerge are likely to face increasing risks as investment prospects.
A major study by the EU reviewed the available economic literature, and concluded that the results have been mixed and that more research needs to be conducted.1

The EU report on the economic impacts of GM crops (2002) found that acceptance of GM crops by farmers in the US, Canada and Argentina was driven mostly by ‘expectations’ of profitability and that GM crops ‘do not prove to be significantly more profitable than conventional counterparts’ – profitability is expected to be derived at in terms of increase in yield and/or cost savings. Other acceptance factors of more importance were performance (other than by yields) and convenience of GM crops, in particular for herbicide-tolerant varieties. The monetary aspect is secondary or indirect, such as savings from use of pesticides or reduction in labour costs.

The case of RR soybeans

However, even the expectation of higher yields is an illusion, as shown in the case of Roundup Ready (RR) soybeans in the US. (The soybean is genetically engineered to be resistant to the herbicide glyphosate.) Studies showed that in most field trials the GM crop shows lower yields than the conventional varieties. According to Benbrook, the average yield drag across all varieties tested was 3.1 bushels an acre or 5.3%, adding that in some areas of the Midwest, the best conventional variety sold by seed companies produces yields on average 10% or more higher than comparable Roundup Ready varieties.2

He concluded that the RR soybean yield drag and technology fee impose a sizable indirect tax on the income of soybean producers, ranging from a few percent to over 12% of gross income per acre.
In addition, RR soybean does not reduce pesticide use, but instead increases its use and thus could eat into profits. In 1998, farmers growing RR soybeans used two to five times more herbicide per acre, compared to the other popular weed management systems used on most fields planted with conventional varieties.

A study commissioned by the EU Commission showed that farmers, both organic and conventional farmers, would face high additional costs if GM crops are commercially grown on a large scale in Europe.3

The study on the co-existence of GM and non-GM farming found that commercialisation of GM oilseed rape and maize and to a lesser extent potatoes will increase costs of farming for conventional and organic farmers at a range between 10 and 41% of farm prices for oilseed rape and between 1 and 9% for maize and potatoes.

The EU study states that in oilseed rape production the co-existence of GM and non-GM crops in the same region, even when ‘technically possible’, would be ‘economically difficult’ because of the additional costs and complexity of changes required in farming practices in order to avoid genetic contamination.

Both organic and conventional farmers would probably be forced to stop saving seed and instead buy certified seed, because of the increased risk of GM impurity for seeds that have been exposed to field contamination.

The study predicts that smaller farms would face relatively higher costs compared to larger entities, and that cultivation of GM and non-GM crops in the same farm might be unrealistic even for larger farms.

Another new study from Lincoln University, New Zealand shows that release of GM crops will have no financial benefit for producers. The details were presented at a biotechnology symposium at Victoria University in Wellington on 5-6 September 2003, which examined the impacts of GM. Dr Caroline Saunders and Bill Kaye-Blake from Lincoln University’s agribusiness and economics research unit, in their paper ‘Economic impacts of producing GM food in NZ’4, said that GM food releases have not benefited producers anywhere in the world, and economic modelling5 shows the situation for New Zealand is no different. The study looked at 16 commodities including three types of oils, beef and sheep, five dairy products, cereals, kiwifruit and apples. Since developing countries are looking to genetic engineering to boost their agricultural production and exports, just as NZ is doing, this study has important lessons for them to consider.

The Lincoln University study found that producers will only benefit from GM crops when consumers demand them, and New Zealand producers do not have anything to gain from growing GM food as consumer demand is currently for non-GM food. For example, UK supermarkets do not want GM feed used in animal production. There are price premiums for non-GM products in Japan, the US, Korea and the EU.

The study warns that any potential for increased productivity from GM crops would not lead to higher producer returns, saying it is better to have greater demand through shorter supply. This is because control of access to the GM technology is an important variable for profitability. In addition, if NZ can lower production costs without other countries doing the same, only then can farmers gain. Similar results have been seen from models on the US situation in other studies.

The study also notes that most benefit goes to the owners of intellectual property. There are considerable differences in the benefits to producers depending on whether the technology is available domestically or overseas.

Social fallout

Whoever controls technology in terms of proprietary claims also largely determines access even if that technology may be beneficial and has no adverse environmental and health effects. GM application is part of a package of high investment and inputs, thus making it inevitably large-scale to be profitable. This has serious social impacts.

Experiences in countries that have entered into large-scale commercial agriculture using GM technology show a consistent pattern of higher concentration of capital, increased inputs, monoculture and the rapid marginalisation of small farmers. As countries grow the same few GM crops, there is also the danger of entering another round of commodity production which is plagued by fluctuating prices. Community structure, and traditional knowledge and practices are accordingly undermined and eroded.

Governments in many developing countries are lured by the as-yet-unsubstantiated promises of GM. So there is a rush to set up biotech clusters and centres along the US model, including in Singapore, Malaysia, India and China. Kenya and South Africa are also placing hopes and precious public funds in this sector.

Before going further, these and many other countries should look at the experience of Argentina. It is a valuable case study of the pitfalls of these ambitions. The soy boom that started in 1970-80 saw high world prices for grains and oilseeds. Cattle-raising coupled with agricultural cycles was replaced with permanent crop cultivation (soy in rotation with wheat, maize or sunflower). Small farms disappeared and large holdings took over. Contractors with bank credits and large machinery managed farms of up to 2,000 acres.

In the 1990s, commodity production, especially soy, was promoted and these contractors were replaced by large financial funds that invested in even bigger holdings of up to 20,000 acres. These were often rented to landless poor farmers who then had no choice but to buy the whole package of seeds, fertilisers and herbicides/pesticides. Fertiliser use increased from 0.3 million tons in 1990 to 2.5 million tons in 1999. With increased production costs and low prices in the 1990s, farmers with land were forced to sell or rented out their land cheaply to the financial funds. Those who rented land could not afford it anymore. An estimated 7,000 families migrated to urban areas each year and rural land concentration escalated.

When Roundup Ready GM soy was introduced in 1996, Argentina was drawn into a deeper crisis. Six years after this introduction, 28 million acres or 95% of soybean crops are GM. Since soy is not traditionally consumed in the country, the crop is an export commodity, used mostly for animal feed.
However, there is widespread consumer rejection of GM food and even GM animal feed (increasing amounts of GM soy are fed to animals). This is caused by concerns over health and environment as the public realises that there has been little or no independent biosafety research and post-release monitoring. As scientific evidence emerges on the real and potential hazards, an entire economy can become vulnerable.

Poverty and hunger are now major problems for Argentina and the current government is seeking ways to bring almost two million people back to the rural sector.

The claims that RR soy will lead to reduced herbicide use have also been proven wrong. In 1997/98 glyphosate use was 28 million litres; this rose in 1998/99 to 58 million litres, and in 1999/2000 it reached 100 million litres. This trend is expected to result in serious herbicide resistance triggering another round of problems.

Another worry is the likely adverse impact of glyphosate use on RR soybean root development, nodulation and nitrogen fixation. Where there is drought or relatively infertile fields, the effects are worse. This was observed by a team of scientists at the University of Arkansas. All this means that yields can drop dramatically, leading to income loss and related social problems. (Roundup Ready maize is also commercially grown.)

Such disasters ultimately explode into social disruptions which are difficult if not impossible to reverse.

The irony, and tragedy as seen in the case of Argentina, is that there are truly sustainable options for productive agriculture that nurtures biodiversity, maintains high yields and is socially and economically viable. These options have not been given the same attention and priority in the formulation of research and agriculture policies. As for aspirations to ensure a healthy society, what is needed is preventive health care, safe and affordable medicines and treatments – much of which also does not lie in genetic engineering.

It is encouraging that there are growing public and scientific debates and discussions around the world on the safety, ecological and social-justice dimensions involved in making technology choices. There is a collective responsibility on governments and citizens to make those choices in an informed and open manner, and not to rely on the corporations that sell the hype to determine the technologies that shape our lives and society.

Chee Yoke Heong is a researcher with Third World Network. Chee Yoke Ling coordinates TWN’s environment programme.

Endnotes

1 Commission of the European Communities, 2002. Economic Impacts Of Genetically Modified Crops On The Agri-Food Sector – A First Review. Working Document Rev. 2 Directorate-General for Agriculture
2 Benbrook, C., 2003. ‘Economic and Environmental Impact of First Generation Genetically Modified Crops: Lessons from the US’. Report available at http://www.biotech-info.net/first_ generation_GMC.pdf
3 Bock, Anne-Katrin, et al., 2002. ‘Scenarios for co-existence of genetically modified, conventional and organic crops in European agriculture’. Institute for Prospective Technological Studies – Joint Research Commission of the European Commission. Report is available at http://www.jrc.cec.eu.int
4 Paper presented at the Impacts of Emerging Biotechnologies Symposium, Foundation for Research, Science & Technology, New Zealand, 5-6 September 2003
5 ‘Economic risks & opportunities from the release of GMOs in New Zealand and the Lincoln Trade and Environment Model’ by Dr Caroline Saunders and Bill Kaye-Blake, presented at the above Symposium.

May 12th, 2004 | Category: Socio-Economic
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