while returns to farmers from GM crops remain doubtful, the returns to date to the biotech industry are in no doubt...
The Bt Premium Price: What Does It Buy?
The Impact of Extra Bt Corn Seed Costs on Farmer Earnings and Corporate Finances
A Special Report for IATP
Dr. Charles M. Benbrook
Benbrook Consulting Services
February 21, 2002
Access the Executive Summary and eight page abbreviated version as posted on the IATP Website
Access the full report containing 6 tables
The entire What's in it for farmers? series is posted on the IATP website.
excerpts from What’s in it for farmers?
The Bt Premium Price: What Does It Buy?
Impacts of the Bt Corn Price Premium on Corporate Profits
When Does It Pay to Plant Bt Corn?
The case of Bt corn, thus far, suggests that farmers will be expected to finance a greater share of seed industry intellectual property, research, and development costs from their per acre earnings.
The evidence also suggests that these costs are markedly higher for new corn varieties including traits introduced via genetic engineering. Since Bt corn has been introduced, corn seed expenditures grew at $1.34 per acre annually between 1995-1999, compared to just $.30 per year in the previous five years. The impact of the Bt corn premium on seed industry profits has been remarkable. The Bt corn premium boosted earnings for Pioneer Hi-Bred by 7.3 percent, Monsanto by 9 percent, and Syngenta by over 18 percent between 1998-2000. Based on current seed-pesticide industry pricing policies and financial performance goals, it is likely that the purchase of technologies like Bt corn will transfer another slice of farm income from growers to the seed-biotechnology industry.
This report focuses on two questions. First, how has the added cost of Bt corn impacted trends in farm-level production expenses and profitability? And second, how has the $659 million premium that farmers have paid for Bt corn impacted the financial performance of the seed-biotech industry?
Every acre planted to Bt corn has increased farmer seed expenditures an average of $9.80 per acre, about a 35 percent jump.
...The data in Tables 1-2 show that the technology fee and other premiums charged for Bt corn has shifted to the seed-biotech industry a portion of the economic return farmers have traditionally received when investing in advanced corn genetics. The high costs of the new science that makes Bt corn possible is clearly one reason why farmer-costs have risen more sharply than when earlier advances in corn genetics were brought to market.
It is clear that Bt corn has been costly to develop and market, in large part because of its reliance on genetic engineering techniques and dependence on intellectual property. Higher costs require seed companies to ask farmers to pay more per acre of seed. This trend, especially if it continues, could have significant long-term implications for farm-level costs, returns, and profits, especially if new genetically engineered varieties deliver modest economic returns in an era of downward pressure on crop prices.
Three companies captured nearly all the $659 million premium farmers have paid for Bt corn ?
* Pioneer Hi-Bred and its parent, Dupont has earned close to one-half.
* Monsanto, through its seed subsidiaries DeKalb and Asgrow and contracts with independent seed producers, received slightly over 20 percent.
* Syngenta, through Novartis and Garst Seeds subsidiaries and its contract partners among the smaller, independent seed companies, was paid just over 30 percent.
...The impact of the Bt corn premium on seed industry profits has been remarkable. In the case of industry-leader Pioneer Hi-Bred, the Bt corn premium boosted earnings from seed corn sales by 7.3 percent over the 1998-2000 period. In terms of Pioneer Hi-Bred’s after-tax income, the Bt corn seed premium was almost 20-times greater, reflecting the loss of $100 million in 1999. Put another way, without the Bt corn premium, Pioneer Hi-Bred would have lost almost $200 million over this three-year period, or over 7 percent of total revenue from corn seed.
Even when swallowed within an industrial giant the size of Dupont, Pioneer’s Bt corn premium made a difference, increasing Dupont’s after tax income by 2 percent over this period.
Bt corn had a similar impact on Pioneer and Monsanto revenues from corn seed sales, reflecting the fact that both Asgrow and DeKalb continued to offer many more conventional corn varieties than Bt hybrids. Over the three-year period, the Bt premium accounted for just over 9 percent of Monsanto seed corn sales. The contribution of Bt corn price premiums to Monsanto’s "Net Income" was much greater - close to 50 percent over this three-year period...
Clearly, the ability to charge about a 35 percent premium for Bt corn varieties has helped biotechnology and seed companies improve their financial performance.
Without the price premium, the collapse of confidence in agricultural biotechnology among investors would have happened quicker and taken a much bigger bite out of the stock value of these corporations.
Still, seed and pesticide companies have and will continue to be profitable. The emergence of biotechnology has created a new income stream linked to intellectual property rights, an income stream that now appears essential to cover the higher cost of developing and marketing genetically engineered varieties.
The case of Bt corn, thus far, suggests that farmers will be expected to finance a greater share of seed industry intellectual property, research, and development costs from their per acre earnings and that, in the end, their financial position may suffer as a result. It is also clear that the corn seed industry is fast becoming an operating division of pesticide companies. The biotech portion of the seed industry already is.
Pesticide companies have traditionally earned a much higher rate of return than common in the seed industry. If DuPont/Pioneer, Monsanto, Syngenta, Bayer, Dow Agrosciences and other major players in the now combined seed-pesticide industry expect seed divisions to deliver returns comparable to earnings from pesticide sales, farmers will be asked to pay markedly more for seed in the future.
The historic disparity in seed and pesticide company profits, coupled with the biotech revolution, leads to a chilling prospect. The day may come when relative rates of return to investments in new seed-genetic technologies will be compared to the profits from pesticide-based technology. Already, corporate R+D managers in major companies like Syngenta, Monsanto, and Dupont/Pioneer are struggling with new options and issues in allocating R+D resources.
The emergence of Bt corn and its impacts on industry and farmers deserves more thoughtful study and open debate. Better understanding of how to maximize the benefits of the ag biotech revolution are needed, as well as better ways to fairly share the costs, risks, and benefits that flow in its wake. But based on current seed-pesticide industry pricing policies and financial performance goals, it appears likely that the purchase of Bt corn will, for the foreseeable future, transfer another slice of farm income from growers to the seed-biotechnology industry.