The Consequences of Biotechnology: A Broad View of the Changes in the Canadian Canola Sector, 1969 to 2012
Derek G. Brewin
University of Manitoba, Winnipeg, Manitoba
University of Lethbridge, Alberta, Canada
This article is a broad assessment of the effect of biotechnology on canola in Canada. We examine the effects of biotechnology on the canola industry in terms of area, varieties, and yields, as well as the returns to research and firm-level benefits. Evidence of the privatization of the canola industry is seen in the dominance of the private sector in the registration of new canola varieties. The latest development in the sector is the dominance of a few private firms, which raises new concerns.
However, the literature and our calculations indicate considerable benefits from canola research and recent technological advances. The area seeded to canola varieties, the number of varieties available, and canola crop yields have been on an upward trend for 50 years. Current producer benefits were estimated to be more than $1 billion and breeding firm returns were more than $700 million.
Key words: biotechnology, canola, mergers, plant breeding, returns to research, technical use agreements.Introduction1
In the discussion of the consequences, opportunities, and challenges of modern biotechnology, few crops have seen a more significant impact than that of canola in Canada. The introduction of biotechnology and intellectual property rights (IPRs) has completely transformed the canola sector in Canada. Prior to 1970, almost all agricultural research in Canada was performed in public institutions, and research results were shared freely. All varieties were open-pollinated and non-transgenic, and there were no effective plant breeder rights (PBRs). In the mid 1980s, PBRs were established in several countries, and some private breeders started to be active in Canada. As technology advanced, patent offices started to recognize biotech processes including herbicide-tolerant (HT) canola. The new patents led the creators of HT canola to use license agreements, which were used to compel farmers to continue to pay for the technology at each planting rather than retaining seed from previous crops. Emerging canola hybrids also facilitated seed replacement, as they require the purchase of seeds every year in order to keep desirable traits. In 2012, a few private firms dominate canola research investment and they control most of the research output both in terms of new varieties and proprietary biotechnology.
The changes in canola seed led to an area increase from less than a half million hectares (ha) in 1968 to more than 8 million ha forecasted for 2012; from less than 5% of crop land in Canada to over 30%. Canola revenues are forecasted to be over $8 billion in 2012 (Agriculture and Agri-Food Canada [AAFC], 2012). Although initial public-sector research was a vital first step, the role of biotechnology was pivotal in creating HT varieties; this in turn facilitated the mass production of hybrid varieties. Together, patentable HT technology and hybrid seeds sales fostered a boom in private canola variety development and farm-level production. While previous studies have shown very high rates of return to canola research, more recent studies have revealed lower (market) rates of returns (Malla, Gray, & Phillips, 2004).
While the introduction of biotechnology and the enforcement of IPRs have created incentives to undertake canola research, it also created a number of complex issues. For instance, concerns have been raised with respect to market concentration as firms merge in the canola seed and herbicide market. More recently, firms have also started using gene trait cross-licensing agreements to facilitate technology sharing (e.g., Galushko, Gray, & Smyth, 2010; Smyth & Gray, 2011; Stiegert, Shi, & Chavas, 2010). Gene trait cross-licensing agreements have led to worries about the close relationships these agreements require between the few dominant firms left in the sector. Furthermore, there have been concerns over the ‘freedom to operate’ problem that exists in agricultural biotechnology when rival firms create economic barriers for the commercialization of second-generation GM crops. There have also been concerns about the pricing of new canola varieties in a concentrated sector, the rules of using new technology, and the appropriate government role in today’s biotech canola industry. This has coincided with a change in the nature of technology and the property rights for these research products. Thus, while the enforcement of IPRs creates incentives to undertake research, it also creates a number of complex impediments to future progress and a potential need for new policies to effectively address today’s challenges in the canola industry.
The goal of this article is to assess the effect of advancing biotechnology on the canola industry in Canada. The next sections provide an overview of the canola industry in Canada and then present some IPR issues. The adoption of the biotechnology in the canola industry in terms of area, varieties, and yield are discussed and assessed next. Then, we examine the economic impact of adopting biotechnology in the canola industry in terms of returns to research and firm-level benefits, followed by our conclusion and implications.
A Crop Called ‘Canola’
The name ‘canola’ was first used in 1978 when a modified rapeseed was developed by Canadian breeders Baldur Stefansson and Keith Downey2 using traditional breeding techniques with modern testing procedures. The word canola can only be applied to rapeseed varieties that are “less than 2% erucic acid and…less than 30 μmol of glucosinolates per gram of air-dried, oil-free meal” (Casséus, 2008, p. 2). Like most of the agricultural research done in Canada before 1985, Stefansson’s and Downey’s research was publicly funded. Total public investments in rapeseed in the early 1970s were around $18 million (Malla et al., 2004). The rise of breeder’s rights did lead to some private-sector breeding investments in the mid 1980s, but the most dramatic shift in canola seed development began with the invention of HT varieties and soon thereafter the release of hybrid varieties in the mid 1990s. The first HT canola was introduced in 1996. HT canola has become very popular; it is now a trait in most of Canada’s canola crop.
The area planted to canola has grown as varieties with improved yields and herbicide resistance made it a favorite crop in Western Canada. The area planted has been growing steadily since 1971 to well over 7 million hectares in 2011 (see Figure 1).
Figure 1. Area in hectares of rapeseed and canola, 1943 to 2011.
Source: Statistics Canada (2011)
The popularity of canola with farmers and the possibility of huge revenues from seed sales have led to significant private investments in canola breeding (Gray, Malla, & Phillips, 2001; Malla & Gray, 2005). Currently, the vast majority of canola research is managed by the private sector (see Figure 2). Despite the considerable growth in the canola industry, even the private sector’s most stringent supporters argue for continued support from the public purse. Note the references to public research and government support in the following quote:
Figure 2. Research expenditure in the canola industry (1960-1999).
Source: Gray et al. (2001)
This quote demonstrates the political push for a continued role for government policy and financial support even in the privately dominated canola seed market. Private researchers still benefit from base research and financial research incentives, and as the sector evolves, policy might need to focus on the problem arising from concentration among the firms and relaxing the freedom to operate. However, there is no doubt that the implementation of PBRs and the implementation of IPRs through technical agreements helped transform this industry. The next section will discuss some of the theory and practice of IPRs in Canada’s canola industry.
Intellectual Property Theory and Practice in Canadian Canola
As canola changed from a predominantly open-pollinated, conventional crop to a hybrid HT crop, the role of the private sector expanded. This was facilitated by improving PBRs and testing the patents for biotechnology in court. In 1970, 83% of the total $18 million spent on canola research was from public sources, and 17% was from private sources (Gray et al., 2001; Malla & Gray, 2005). In 1980, research investments were 69% public and 31% private. By 2000, the private sector’s share of canola research had grown to 70% of the total $149 million invested. Today, private research firms dominate the canola industry (see Figure 2).
HT has been deemed by many developed countries, including Canada, to be a patentable process and this patent protection has been used to compel farmers to sign technical use agreements (TUAs) when they buy HT seed. The TUA normally forbids the famers from saving some of their production for seed next year and forces new seed purchases every year in order to use HT technology. The patent protection was tested and upheld in the landmark case of Monsanto v. Schmeiser, which was eventually considered by the Supreme Court of Canada in 2004 (Lexum, 2004).
HT was also a valuable tool in solving the challenging problem of creating hybrid canola varieties. HT systems facilitate crossing because herbicides can be used to sterilize one half of a population of plants in the field (P. McVetty, personal communication, 2011). Hybrid technology does two things. First, it eventually fueled increases in yield because of the hybrid vigor that comes from crossing different parent lines: current hybrid varieties are normally at least 20% higher yielding than open pollinated options.4 Second, the move to hybrid varieties further supported private incentives to develop new canola varieties because hybrid seeds are sold after the last crossing. Subsequent use of this seed will not lead to the same hybrid vigor yields. Farmers using hybrid varieties require new seed each year, so seed sales are significant. Hybrids now make up 85% of all canola seeded area in Canada.
Together with the patent-supported TUAs, hybrid seed sales have led to significant returns to the private sector. Revenues from seed sales in the canola market are now normally in the neighborhood of $100/hectare in most of Western Canada (Manitoba Agriculture, Food, and Rural Initiatives [MAFRI], 2011; Saskatchewan Ministry of Agriculture [SMA], 2011).
Various authors have argued that the economic benefits for producers by growing HT canola are significant (e.g., Gusta, Smyth, Belcher, Phillips, & Castle, 2011; Phillips, 2003; Serecon Management Consulting, Inc., 2001, 2005). These benefits come from the agronomic benefits of new HT varieties as well as the gain in productivity from improved breeding and hybridization (Veeman & Gray, 2010).
The introduction of biotechnology and IPRs has completely transformed the range of varieties in the Canadian canola industry. Prior to 1995, the dominant varieties in terms of area were all developed by public institutions. Single varieties dominated the area for several years at a time. Then PBRs were introduced. From 1995 to 1998, 88% of the 104 varieties registered were private. Today, almost all of the canola varieties available are private and more than 96% of the total varieties are HT (see Tables 1 and 2). In 2001, private firms earned more than $250 million in seed sales revenue and had effectively crowded out all public-sector varieties (Gray et al., 2001; see also Figure 3). In 2012, seed sales will be closer to $800 million. Moreover, most canola patents are held by private companies. The public sector also has moved to protect and actively commercialize IPRs (see Tables 3 and 4).5
Table 1. New varieties developed by institution and by period.
Table 2. Adoption rate for HT canola varieties (million acres).
Figure 3. Crop research revenues in the canola industry.
Source: Gray et al. (2001)
Table 3. Ownership of oilseed herbicide-tolerance patents in Canada: 2006.
Table 4. Ownership of canola patents in Canada: 2011.
Prior to effective PBRs and IPRs, most research was a result of public investment, and the products of research (or research output) were also in the public domain as public goods (e.g., Malla & Gray, 2003, 2005). Government intervention was justified primarily on the basis that research outcomes were non-excludable (meaning that the inventor did not have the ability to exclude others from using, reproducing, or selling the new technology or products created from R&D), thus creating limited private R&D incentives. The government intervened to correct the market failure.
The introduction of biotechnology, IPRs, TUAs, and hybrid varieties has allowed the creation of excludable goods in the canola sector. This in turn created incentives for private investment because the inventor could extract most of the economic rents from research investments by retaining ownership over the new technology (Malla & Gray, 2003, 2005). Despite the considerable growth in private investment, the government continues to make large public investment in research—especially in basic research. This may create a positive spillover to private firms, as many successful industries are based on breakthrough innovations created in the public sector, and in turn could result in excess firm entry into the industry (Gray & Malla, 2011).
At the same time, the non-rival (meaning that anyone can use the technology created from R&D over and over again) nature of research output has tended to create a concentrated research industry as firms move to capture economies of scale and scope, and technologies are marketed at a price that exceeds marginal cost. A further push towards concentration occurs when firms adopt strategies to preserve their own freedom to operate through vertical integration, mergers, acquisitions, and joint-venture arrangements. The concentrated nature of the research industry and the exclusive ownership of key pieces of IPRs give research firms some degree of market power; through higher prices, this reduces the incentive for product innovation and adoption downstream (Malla & Gray, 2003; Moschini & Lapan, 1997). Galushko et al. (2010) also showed that the move to protect IPRs in the canola industry has reduced the sharing of knowledge in both the public and private sector, increasing significantly the cost of conducting canola breeding research. Hence, the structure of the canola and broad agricultural research industry has been fundamentally altered.
The canola sector has seen mergers.6 Some 25 firms have released successful seed varieties, but mergers and acquisitions have reduced the major firms to 14 (not including three universities). Table 5 lists the private firms—some of which have been amalgamated—by their share of seed revenues in 2008. The four largest firms currently involved in canola seed sales are: Bayer Crop Science, Dow Agrosciences, Monsanto, and Pioneer Hi-Bred. Together they control 85% of all seed sales. Bayer has more than 55% of all seed revenues due to the success of their Liberty Link system.7 The 10.48% shown for Monsanto underestimates their success of their Roundup Ready glysophate technology, which is used by all of their competitors except Bayer—and even Bayer will likely start to use it with recent cross-licensing agreements.
Table 5. Share of seed revenues for 2008, by firm or public institution.
It has also been argued that concentrated breeding firms would try to capture much of the benefit farmers received from new traits through seed costs or TUAs. For example, the Fulton and Keyowski (1999) calculations suggested that the ‘average’ farmer was no better off using various seed/herbicide systems. This pricing of TUAs and now the pricing of hybrid seed is a great concern to primary producers who feel captive to a few large firms (Keystone Agricultural Producers [KAP], 2011). However, we show that in 2011, competition and prices have been strong enough that most farmers see a significant gain from new technologies over open-pollinated, non-HT canola varieties.
Additionally, when IPRs are well established, the negotiation of the rights to use innovations can become difficult and expensive, especially when a research product embodies many pieces of IPRs. Specifically, the introduction of a single genetic trait into a product of biotechnology can require the use of many separate pieces of IPR. Before the innovator can have ‘freedom to operate’ the innovator must reach an agreement with each of the other patent owners. If the ownership of the IPR is dispersed, negotiating ‘freedom-to-operate’ agreements to share the proceeds from the innovation is an expensive, time-consuming process and can be subject to delay by any of the parties involved (Falcon & Fowler, 2002). The high transaction costs associated with the exchange of IPR have also adversely affected the structure of the private and public research industries and have created an economic barrier for the commercialization of second generation GM crops.
The resulting problems in freedom to operate could create a tragedy of the anticommons that results in the underuse of resources and less innovation (e.g., Buchanan & Yoon, 2000; Falcon & Fowler, 2002; Graff, Cullen, Bradford, Zilberman, & Bennett, 2003; Heller & Eisenberg, 1998; Wright, 1998). “The anticommons arise whenever individuals have the ability to exclude others from using a resource but cannot use the resource themselves” (Smyth & Gray, 2011, p. 184). A tragedy of the anticommons can occur when there are economies of scale in germplasm development, but issues with property rights (freedom to operate) lead to less innovatory activity as competing inventors block activity with patent protection (Galushko & Oikonomou, 2007). Hence, too many property rights could lead to less innovation, as competing patent rights could actually prevent research activities to be undertaken or products from reaching the marketplace.
More recently, Canadian canola firms have moved away from mergers and acquisitions towards gene trait cross-licensing agreements to facilitate technology sharing (Galushko et al., 2010; Smyth & Gray, 2011; Stiegert et al., 2010). For example, an important gene trait cross-licensing agreement was made between the largest life science firms in the canola sector—Monsanto and Bayer Crop Science—in order to fight against the tragedy of anticommons (Smyth & Gray, 2011). Canola varieties with traits owned by these two firms account for more than 85% of the market. Smyth and Gray (2011, p. 187) provided four possible reasons for the recent switch to gene trait cross-license agreements:
Details of the Success of Canola: Area, Varieties, and Yield
The first metric of the success of canola is the area of land that farmers were willing to commit to it. As rapeseed turned into canola and open-pollinated public varieties gave way to privately controlled HT and hybrid varieties, the area of land seeded to canola in Canada has exploded over time. Figure 1 shows the growth in area of rapeseed/canola from 1943 to 2011 (Statistics Canada, 2011). There are three marked increases in area: one increase occurred around 1970—with the low-erucic-acid ‘canola’ varieties; another jump occurs around 1995, when private breeders and HT varieties entered the market; and the third growth in area began about the time that very-high-yielding Liberty Link hybrids were developed (2004), and the growth continues at present.
The AAFC estimates the area planted to canola in 2012 will be just over 8 million hectares (AAFC, 2012). This would be the first time it has ever been seeded on more hectares than spring wheat in Canada. Production was estimated to be 14 million metric tonnes in 2011. The industry had a target of 15 million metric tonnes by 2015 (Canola Council of Canada [CCC], 2008). This target could be met in 2012 if AAFC forecasts are correct. The flexibility of herbicide tolerance and the higher-yielding hybrids—along with good prices—have made canola a vitally important crop on the Canadian prairies in terms of revenue.
A second key metric of the major shifts in the canola sector is the ownership and number of varieties of canola entering the market place. Table 6 lists the 50 leading varieties in terms of area seeded between 1960 and 2008.8 Figure 4 shows the area of dominant varieties over time and the breeders who were releasing them. As discussed above, the dominant varieties from 1965 to 1989 were bred by public researchers. Just two of these varieties where used to seed over 9 million hectares in aggregate, at a time when the total area of canola seeded in Canada was normally less than 3 million hectares per year.
Table 6. Top 50 Canadian canola varieties by area 1965 to 2008 (listed according to release).a
Figure 4. Top canola varieties by area and dominant breeders over time, 1960 to 2008.
Sources: ASG (n.d.); Gray et al. (2006); MASC (2011); Prairie Pools, Inc. (n.d.); Seed Manitoba (n.d.); SSG (2011); Statistics Canada (2011); and authors’ calculations.
The private-sector seed returns discussed in the sections above had a direct effect on variety development and seeded area. These rights were being established in the late 1980s and early 1990s. Full PBRs were enacted in Canada in 1990 (Phillips, 2001). In the late 1980s, a private cooperative from Sweden—Svalöf Weibull AB—began breeding in Canada. They were encouraged to invest in Canada by improved rules in seed registration and the higher returns from seed sales that resulted. By 1994, the dominant seeded varieties in terms of area in Western Canada were from Svalöf. They had bred several high-yielding varieties and were starting to be a market leader. Svalöf varieties and AAFC’s AC Excel made up 60% of seeded area in 1994. Svalöf’s Legend went on to be seeded on more than 200,000 hectares for six years. Between 1989 and 2008, Svalöf released some 75 canola varieties, 10 of which were in the top 50 in terms of total area.
The first commercially successful canola hybrid was released in 1992 by Advanta. It was seeded on around 6% of the seeded area in 1994. In 1996 Monsanto introduced several glysophate-tolerant varieties. Competing private firms introduced imazethapyr/imazamox(imaz) and glufosinate-tolerant varieties in 1996 and 1997. A glufosinate-tolerant variety was introduced in 1996 by Aventis (which became part of Bayer) and an imaz-tolerant variety was introduced in 1997 by Pioneer (Harker, Blackshaw, Kirkland, Derksen, & Wall, 2000). Herbicide resistance became a key characteristic in the late 1990s. As Fulton and Keyowski (1999) argued, HT canola may have been priced initially at nearly its full benefit to farmers. This may have dampened the initial HT impact on area, but HT was clearly a production tool that farmers valued and it became a standard in the industry. From 1996 to 2007, HT varieties went from 10% to 96% of total area seeded (CCC, 2010). By 2012, privately bred, hybrid, HT canola varieties dominate Canadian acreage. No publicly-owned, open-pollinated variety has seen any significant area since 2001.
The biotechnology that created HT was also helping some firms (especially Bayer/Aventis) to develop hybrid varieties because it facilitated crosses with HT and non-HT parents. The rise of very-high-yielding hybrids seems to be behind the last big jump in area that began in 2004. By then, herbicide resistance was also a major factor in seed choice. Higher-yielding hybrid varieties, especially the Liberty Link varieties, saw a significant increase in market share from 2003 to 2008.
Another part of the development of canola seed breeding was the rise of higher-quality oils. High-eurcic-acid rapeseed varieties used as industrial lubricants were seeded on several hundred thousand hectares in the mid-1990s. Most of them were developed at the University of Manitoba. Dow Agrosciences released several high-omega-9 and low-linolenic oils under the brand name Nexera in 2000. Just over 1 million hectares were seeded to Nexera varieties from 2000 to 2008. Cargill introduced competing varieties with similar characteristics to Nexera in 2001. Cargill’s Victory varieties were seeded on just over 800,000 hectares from 2001 to 2008.
Crop yield has been widely used as a partial productivity measure in the crop sector. However, measuring crop productivity in terms of crop yields is a very difficult task. For example, the impact of changes in yield; changing land uses, such as reduced summer fallow; more cropping diversity; and changes in cropping technology, such as reduced tillage on productivity cannot be easily separated from one another (Veeman & Gray, 2010). Furthermore, important quality changes are not captured in the yield estimates even though they increase the value of the crop. For example in the case of canola, quality changes such as the canola transformation from rapeseed (in the early 1970s), the introduction of HT and hybrid canola varieties (in the middle 1990s), as well as the introduction of canola varieties high in oleic acid (in the early 2000s) are not accounted for in the yield estimates (Veeman & Gray, 2010).
It has been shown in the literature that the average (actual farm) canola crop yields have increased moderately over time, while acreage-weighted research trial yield indexes (yields in experimental trials) grew unevenly but quite rapidly. Specifically, it has been shown that yield trends of the average farm yields for the major crops grown in Canada (wheat, barley, canola, corn, soybean, peas) exhibit constant absolute growth but a declining proportional growth rate (see Figure 5; Veeman & Gray, 2010). From the 1960s to 2007, the yields of canola—like the other major crops—increased by about 60%, and a linear trend was supported from the data in this period; this implies a constant absolute growth and declining proportional growth rates in yield. Regarding research trials or experimental yield indices for canola, it was also concluded that
Figure 5. Canadian crop yields, 1960-2007 (base 1960-1964=100).
Source: Veeman and Gray (2010), [CANSIM Database].
Figure 6. Research trial yield indexes for selected Canadian crops, 1960-2006 (1960-1964=100).
Source: Veeman and Gray (2010), based on research trial data and seeded area.
The yield indexes presented in Table 6 use reported experimental trials from government and farmer cooperative sources to show the same basic pattern as Veeman and Gray suggested above.9 Using some of the pre ‘canola’ varieties as the starting index (100), drastic yield jumps have occurred due to single varieties like Westar in 1984 (122), Delta in 1990 (132.4), Garrison in 1993 (147.9), and InVigor 2663 in 2000 (162.3). There were dominant varieties with lower yields in the late 1970s and mid-1990s as the breeders worked around the drags suggested by Veeman and Gray that were caused by the conversion of rapeseed to canola and the introduction of HT. The current dominance of hybrids is also shown in Table 6. Since the introduction of hybrid HT InVigor 2663, only one variety that saw any significant area was not a hybrid; it offered a yield disadvantage of nearly 30% over the top-yielding hybrid.
The overwhelming evidence from the review of a growing seeded area and changing varieties, in terms of ownership and yield potential, is that canola has been readily adopted by farmers as a viable and adaptable crop. Public canola breeding has largely been replaced by an emerging and evolving private sector, and that sector has developed drastically improved seeds.
Economic Impacts: Returns to Research and Farmer Benefits
Agricultural research typically generates very high returns on investment. It was estimated based on 294 post-war studies from around the world of returns to agricultural R&D investment (1,858 estimates) that the annual internal rate of return (IRR) averaged 64.2% per year for research only, 46.3% per year for research and extension combined, and 75.6% per year for extension only (Alston, Marra, Pardey, & Wyatt, 1998). It was concluded that “there is no evidence to support the view that the rate of return has declined over time” (Alston et al., 1998, p. 27). Furthermore, a summary of the Canadian studies on returns to agricultural research (1978-2001) revealed that
In a more recent study that examined the gains to canola research in the presence of intellectual property rights and research subsidies (1960-1999), it was shown that the rate of return to canola research has diminished since the early 1980s and approached market rates by the mid-1990s (Malla et al., 2004; see also Figure 7, Model 1 & 2). Specifically, the average IRR initially exceeded 25% per year but steadily declined from 1970 to 1999; it eventually approached the level of market returns. Furthermore, the IRR for the marginal dollars invested each year showed a much more dramatic decline and was below a market rate for IRR during the 1990s. Consequently, it was concluded that
Figure 7. The marginal and average IRR for canola research 1968-1999.
Source: Malla, Gray, and Phillips (2004).
Finally, it was suggested that when nearly complete IPRs exist, government incentives for research (e.g., research subsidies) could reduce social welfare (Malla et al., 2004). This poses a clear problem when compared to the request for public funds mentioned by the president of the Canola Council above.
Additionally, a number of studies have examined the economic benefits of genetically-modified, herbicide-tolerant canola (GMHT) for producers and revealed significant gains. Specifically, it was estimated that the producers’ benefits from GMHT range from $60 to $70 million in 2000 (Serecon Management Consulting, Inc., 2001; Phillips, 2003, respectively). According to the report by Serecon Management Consulting, Inc. (2001), the main determinants of the producers’ benefits were improved yield, slightly increased fertilizer usage, increased seed costs, decreased tillage use, improved soil moisture conservation, decreased summer fallow, improved rotation flexibility, lower dockage, and decreased herbicide inputs. Phillips (2003) estimated the broad economic impacts on the global economy with the adoption of the new technology, as well as the direct and indirect effects on producers; these included higher seed costs, lower herbicide costs, fewer herbicide applications, lower dockage, and earlier seeding. Finally, the study by Serecon Management Consulting, Inc. (2005) for the CCC examined the management of volunteer GMHT canola and assessed that there were net benefits to growing GMHT canola instead of open-pollinated, non-HT varieties.
Recently, Gusta et al. (2011) also examined the producers’ benefits from GMHT based on an 80-question producer survey from 2007. The survey was focused on three major impacts: reduced tillage (cost of weed control), cost of volunteer control (when GMHT canola becomes an in-crop weed or volunteer), and spillover (multi-year benefits due to fewer weeds or easier weed control on fields next year). They concluded that “the new technology generated between $1.063 billion CAD and $1.192 billion annual net direct and indirect benefits for producers from 2005-2007; this is partly attributed to lower input costs and partly attributed to better weed control” (Gusta et al., 2011, p. 1; also see Table 7). The Serecon Management Consulting, Inc. (2001) and Phillips (2003) studies did not take into account the impact of any spillovers or any increased costs from controlling volunteer canola like the study of Gusta et al. (2011).
Table 7. Economic benefit of GMHT Canola (2005-07; all figures in million $CAD).
In addressing returns to heterogeneous farm populations, Fulton and Keyowski (1999) estimated and compared the producer benefits of different canola product lines (Roundup Ready, Liberty Hybrids, and open pollinated) for 1999 values. They argued that
However, when we update Fulton and Keyowski’s estimates of benefits to farmers under different production systems using current 2011 values, farmers (and breeders) appear to gain significantly by using the new technologies versus open-pollinated canola (see Table 8). Specifically, using 2011 costs and AAFC price forecasts (AAFC, 2012), the average benefits for producers using Roundup Ready and Liberty Link appear to be over $850/ha and are much higher than an open-pollinated system. These gains remain significant even under a wide range of canola prices (see Appendix Tables A1 and A2). Using yield tests for the dominant varieties (the same sources as used for Table 6), we calculate a much lower yield for an open-pollinated system relative to the other systems.10 At current prices, these higher yields for new technologies create a significant benefit, even with higher costs to use the new technologies. The gains from better seeds far outweigh the costs for the seed, TUA, and herbicide. Farmer benefits from Bayer’s Liberty Link system and the dominant Roundup Ready systems are estimated around $133 per hectare more than the returns to open-pollinated systems. These two systems account for 94% of the area seeded to canola in Canada (CCC, 2010). Looking at system-wide benefits, we use AAFC’s 2012 estimate for seeded area for canola of 8 million hectares. It appears that average farmer benefits (an aggregate of Roundup Ready, Liberty Link, and Clearfield systems) would be over $1 billion for 2012. This large figure does not include the farmer benefits due to heterogeneity, as the differences between farmers can further augment these average benefits—as was shown by Fulton and Keyowski (1999).
Table 8. Canola product lines: A system comparison of costs and benefits.
Additionally, breeding firms also significantly benefit from the new technologies even over a range of prices (see Table 8 and Appendix Tables A1 and A2). Currently, the average seed and TUA costs to producers total just under $125/ha for canola across Western Canada (MAFRI, 2011; SMA, 2011); combined with the 2012 AAFC areas estimates, these result in approximately $1 billion in revenues to the seed industry. Furthermore, Gray et al. (2001) estimated private research investments at roughly $100 million in 2001 (or around $130 million in 2012 dollars). So, breeders face some research costs and they must also produce the seed itself. The seed production costs are lower for canola because of the low seeding rates (6.2 kg/ha of seed can yield 1,800 kg/ha) relative to other crops used in Canada, such as wheat. Even if seed production costs are $5,000 per hectare for seed growers, total seed production costs would be less than $140 million.11 Consequently, given seed revenue, research cost and seed production, the net benefit or return to breeders could approach $750 million in 2012. This does not include any return from herbicide sales.
Like farmers, the distribution of benefits to canola research firms likely varies widely. Note that currently a single firm (Bayer) receives around 55% of total seed revenues. Monsanto is also getting significant revenues from their own seed sales and in royalties from their competitors who are using Roundup Ready technology (on nearly half of the area). However, as Figure 4 showed, the area of winning varieties is falling over time and the length of time a variety dominates the market is decreasing as well; this affects the risks of canola seed production, especially for smaller firms. The chances of developing a variety with the area and lasting power of Westar or Tobin are getting very low. This reduces expected returns and has likely led to lower research investments for smaller firms. For the dominant firms, current seed revenues offer a substantial capital advantage over their smaller competitors and the ownership of patents on market-tested technology can earn them extra benefits in royalties for several decades. The large firms are booming and the small firms face reduced opportunity, thus the sector is expected to contract further.
Conclusion and Implications
The introduction of biotechnology and the development of IPR protection in plant breeding provided new incentives for massive private investment into canola research, but it also resulted in research fragmentation and patent/IPR ownership; a series of mergers and acquisitions; and, more recently, a need for gene trait cross-licensing agreements. All of these changes could affect the incentives for product innovation, variety adoption downstream, knowledge sharing, and could increase the cost of conducting research. Other issues—such as freedom to operate, economic barriers for the commercialization of new varieties, the underuse of resources, and less innovation (tragedy of the anticommons)—could affect the returns to research and the distribution of benefits. Some research suggests the returns to research have begun to drop off toward market rates (Malla et al., 2004). Current budgets presented above, however, suggest significant gains to producers and returns to breeders in the current seed market.
The overall assessment of the effect of advancing biotechnology on the canola industry in Canada is very important, especially given that few crops have seen a more significant role than that of canola in Canada in terms of the consequences, opportunities, and challenges of advancing biotechnology.
To address the assessment of biotechnology on canola, we draw on related literature and attempted our own estimates. We examined the effects of biotechnology on the canola industry in terms of area, varieties, and yields, as well as the returns to research and firm-level benefits. The success of canola as a major crop in Canada is linked to the modification of the seed, initially by public researchers and more recently by private researchers mainly through biotechnology. Evidence of the privatization of the canola industry is seen in the dominance of the private sector in the registration of new canola varieties which has coincided with a change in the nature of the technology and the property rights for these research products. The dominance of a few firms is the latest development in the sector. As of 2008, a single firm—Bayer—controlled 55% of seed sales, and four firms control roughly 85% of seed sales. The recent need for cross-licensing agreements has linked the two most dominant firms in the sector—Bayer and Monsanto—in a joint venture. This level of concentration could lead to inflated prices. This suggests regulations concerning anti-competitive behavior may be key to advancing the sector in the future.
However, the literature and our calculations indicate that there are, overall, considerable benefits from canola research and recent technological advances. The area seeded to canola varieties, the number of varieties available, and canola crop yields have been on an upward trend for 50 years. Producer behavior—as measured by seeded area and chosen varieties—suggests farmers are happy to adopt innovations in seed/herbicide systems. Private breeding firms appear to be benefiting as well, although recent estimates of returns to research are lower and approaching market rates. At currently high seeded areas and high prices, producer benefits were estimated to be more than $1 billion and breeding firm returns were more than $700 million. Various authors have also argued that the economic benefits for producers by growing HT canola are significant (e.g., Gusta et al., 2011; Phillips, 2003; Serecon Management Consulting, Inc., 2001, 2005). These benefits come from the agronomic benefits of new HT varieties as well as the gain in productivity from improved breeding and hybridization (Veeman & Gray, 2010).
To summarize, the canola industry has benefited enormously from biotechnology but not without some cost. While the problems noted in this article regarding concentration might create some regulatory challenges, the current gains to producers from biotechnology and returns to research firms in the Canadian canola industry are beneficial.
1 Although it contains a significantly different analysis, parts of this article began as a chapter for the upcoming book, Handbook on Agriculture, Biotechnology, and Development, by Smyth, Castle, and Phillips.
2 There is a small controversy over who the “Father of Canola” was: Manitoba claims it was Stefansson, who developed low-erucic acid varieties in 1968, and Saskatchewan claims it was Downey, who improved the sorting techniques used by several breeders as they chased the low glucosinolates in 1970. Scientific papers clearly show they were working together along with other researchers at the AAFC Research Station in Saskatoon (Downey & Harvey, 1963) and the University of Manitoba (Stefansson, Hougen, & Downey, 1961).
3 The Honorable JoAnne Buth was named to Canada’s Senate in January 2012.
4 The highest-yielding popular recent hybrid is Invigor 5070; indexed at 178.0, it is 20% higher yielding than the most recently bred, widely planted, open-pollinated, non-HT variety Quantum, which has an index of 147.9. Some open pollinated HT varieties are indexed closer to the hybrid yields, but these have not been widely used since 2000. Since 2000, total hybrid yields on seeded land have been roughly 24% higher than open-pollinated yields.
5 In 2005, 75% of Canadian university IPR license agreements with private firms were exclusive in nature, which is also common practice among US institutions (Gray & Malla, 2011).
6 Svalöf Weibull AB, a subsidiary of the Swedish Farmers Supply and Crop Marketing Association, created a new company with BASF (Phillips, 2001).
7 A single variety, InVigor 5020, raises revenues roughly equal to the total revenue for the three next-largest firms.
8 The area for these varieties was based on Prairie Pools Inc. until 1997; after that, it was based on producer surveys by Western Canadian crop-insurance providers (ASG, 2011; MASC, 2011; SSG, 2011). Some varieties could have been missed—especially after 1997—due to poor survey results in some years.
10 Fulton and Keyowski (1999) might have had a different data source, but the dominant open-pollinated variety for 1999 was Pioneer Hi-Bred’s 46A65, which had a tested yield of about 82% of Bayer’s Invigor 2273. Pioneer’s 46A65 is still the open-pollinated variety in 2011.
11 Each of the eight million seeded ha will need 6.2 kg of seed or a total of 49,600 metric tonnes of seed. About 27,600 ha of production would be needed to supply that seed. This would cost around $138 million at $5,000/ha.
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The authors wish to thank Cecil Nagy at the Department of Bioresource Policy, Business, and Economics at the University of Saskatchewan for his insights and assistance with the canola varieties data.
Table A1. Canola product lines: A system comparison of costs and benefits. Low price ($300/tn).
Table A2. Canola product lines: A system comparison of costs and benefits. High price ($700/tn).
Suggested citation: Brewin, D.G., & Malla, S. (2012). The consequences of biotechnology: A broad view of the changes in the Canadian canola sector, 1969 to 2012. AgBioForum, 15(3), 257-275. Available on the World Wide Web: http://www.agbioforum.org.
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