Optimal supplier testing and tolerance strategies for genetically modified (GM) wheat

A stochastic optimization model was developed to determine optimal testing strategies, costs, and risks for dual marketing of genetically modified (GM) and non‐GM wheat in an export supply chain. The optimal testing strategy is derived that minimizes disutility of additional system costs due to testing and quality loss. Cost components were estimated including those related to testing, quality loss, and a risk premium to induce shippers to undertake dual marketing as opposed to handling only non‐GM crops. Uncertainties were incorporated for adventitious presence and commingling, variety declaration, and test accuracy. Sensitivities were performed for effects of variety risks and declaration, penalty differentials, buyer tolerances, risk aversion, and GM adoption. Results indicate testing and segregation can be performed at a relatively low cost and risk to buyers.     

Costs and Risks of Segregating GM Wheat in Canada

An analytical model was developed to explore prospective costs and risks of alternative testing strategies for a marketing system in Canada which markets both genetically modified (GM) and Non‐GM wheats. The problem is solved using stochastic optimization, base case results are defined, and sensitivities conducted to evaluate impacts of selected variables. Added costs include: testing, rejection, and a risk premium which is required for handlers to be indifferent between the current and the proposed dual system. Protocols would require testing at the point of loading at the primary elevator, and export elevator, and supplementing this information with some form of grower variety declaration. There are several sources of inherent risks in such a system. For buyers, the cumulative impact of these is the risk of receiving GM content in a Non‐GM shipment. For sellers, it is the risk of having a Non‐GM shipment rejected. For sellers, the risk of rejection was typically less than 2%, and for buyers, the risk was typically less than 0.02%. Nous avons élaboré un modèle analytique pour explorer les coûts et les risques potentiels de la mise en place de nouvelles stratégies pour analyser le grain si le Canada décidait de commercialiser du blé génétiquement modifié (GM) et du blé non génétiquement modifié (NGM). Le problème est résolu à l'aide d'une optimisation stochastique; des scénarios de référence sont définis et des tests de sensitivité sont effectués pour évaluer l'impact de variables sélectionnées. Les coûts supplémentaires comprennent les coûts d'analyses, les coûts liés au rejet ainsi qu'une prime de risque exigée pour que les manutentionnaires demeurent indifférents entre le système actuel et le système double proposé. Les protocoles obligeraient la tenue d'analyses au point de chargement du silo primaire ainsi qu'au silo terminal, auxquelles s'ajouterait une certaine forme de déclaration du céréaliculteur sur la variété. Ce genre de système comporte plusieurs sources de risques inhérents. Pour les acheteurs, l'impact cumulatif est le risque de recevoir un chargement de blé NGM contenant du blé GM. Pour les vendeurs, c'est le risque qu'un chargement de blé NGM soit rejeté. Pour les vendeurs, le risque de rejet était généralement inférieur à 2%, et pour les acheteurs, le risque était généralement inférieur à 0.02%.     

Identifying Strategies to Mitigate Handling Risks in the Canadian Grain Supply Chain

The introduction of new generation agricultural products has generated an increased need for efficient and accurate product segregation across a number of Canadian agricultural sectors. As a key component of wheat handling in the Canadian grain industry, grading of wheat for value‐added blending has historically been accomplished by visual identification. As of 2008 in Canada, visual identification was eliminated for all primary classes of wheat and replaced by an alternative system of wheat declaration. Given the high costs of testing each truck and railcar for quality assurance, the declaration system must rely on incentives and trust as there is now considerable potential for accidental or opportunistic misrepresentation throughout the grain supply chain. This research attempts to identify cost‐effective handling strategies and policies so as to maintain the integrity of the supply chain under the new declaration system. An agent‐based simulation model is developed to capture the effects of individual heterogeneity as well as behavioral adaption to the declaration system within the modern wheat supply chain. The simulated results are used to identify superior testing strategies for handlers, along with the relative risks and costs associated with each of the testing strategies.     

Grading, Minimum Quality Standards, and the Labeling of Genetically Modified Products

We relate the labeling of genetically modified (GM) products to the theory of grading and minimum quality standards. The model represents three stages in the supply chain, assumes a vertical product differentiation framework, allows for the accidental commingling of non-GM products, and treats regulation as a purity threshold for non-GM products. We find that a non-GM purity level that is too strict leads to the disappearance of the non-GM product, and that some quality standard benefits farmers. Indeed, the standard that is optimal from the perspective of producers is stricter than what is optimal for consumers and for societal welfare.     

EU and US Regulations for Handling and Transporting Genetically Modified Grains: Are Both Positions Correct?

Differences in the way GM grains are treated in the US and the EU motivate the question of whether there is a single correct policy towards identification of such products. This issue is addressed here, based on a mathematical model that assumes that the cost of maintaining identity on non-GM markets is borne by the non-GM industry. The economic welfare impacts of introducing GM technology depend on the levels of consumer concern and production cost savings, and the cost of maintaining non-GM grain identity. The introduction of a new cost-reducing GM technology often increases total welfare as one might expect. However, society loses when GM production cost-savings are small and consumers are highly concerned about GM grain because introducing GM technology creates a need to preserve the identity of non-GM grain. Taken together, the results suggest that the US may have maximized welfare by not requiring labeling of GM corn and soybeans, and that the recently approved EU legislation enforcing labeling of GM crops also makes sense in the EU. The reason for this is that consumer concern in the EU appears to be greater than in the US, and fewer EU producers stand to benefit from cost savings in GM corn and soybean production.     

Innovation and Trade with Endogenous Market Failure: The Case of Genetically Modified Products

A partial-equilibrium, two-country model is developed to analyze implications from the introduction of genetically modified (GM) products. In the model, innovators hold proprietary rights, farmers are (competitive) adopters, some consumers deem GM food to be inferior in quality to traditional food, and the mere introduction of GM crops affects the costs of non-GM food (because of costly identity preservation). Among the results derived, it is shown that, although GM innovations have the potential to improve efficiency, some groups can be made worse off. Indeed, it is even possible that the costs induced by GM innovations outweigh the efficiency gains.     

Genetically Modified Crops: Their Market and Welfare Impacts

A framework is developed for examining price and welfare effects of the introduction of genetically modified (GM) products. In the short run, non-GM grain generally becomes another identity-preserved product. However, more profound market effects are observed under some reasonable parameterizations. When calibrated to reflect the U.S. corn market, introducing GM technology increases aggregate welfare over a wide range of scenarios, unless the corresponding production cost savings are small and consumers are seriously concerned about GM products. The possibility that GM technology may reduce aggregate welfare is interesting because the model assumes rational agents and does not include regulatory constraints.     

Risk and marketing behavior: pricing fed cattle on a grid

A seven‐year comparative study of grid pricing versus average pricing of slaughter cattle was conducted to evaluate carcass quality market signals. The primary objectives of the study are to determine: (1) if market signals sent through the grid pricing system indicate an improvement in the grid incentive mechanism over time, (2) how changes in the grid premium and discount structure associated with carcass quality affect the market risk premium, and (3) if changes in price risk (variance) affect producer marketing decisions. An Exponential‐Autoregressive‐Conditional‐Heteroskedasticity‐in‐Mean (EARCH‐in‐Mean) modeling procedure was adopted. Empirical results suggest that the grid premium and discount structure is slowly adjusting carcass quality market signals to encourage marketing on a grid and discourage marketing by the pen. The inclusion of the conditional variance in the empirical model indicates that variance associated with the carcass quality risk premium adds financial risk associated with the adoption of grid pricing.     

Balancing productivity and trade objectives in a competing environment: should India commercialize GM rice with or without China?

India is considering approving genetically modified (GM) rice, but it fears losing rice exports to sensitive countries with import regulations on GM food, and may wait for China to lead the way. Using a multiregion, computable general equilibrium (CGE) model, we simulate the economic effects of introducing GM rice in India with or without China in the presence of labeling and import approval regulations of GM food in GM sensitive importing countries. We find that the welfare gains with GM rice in India would largely exceed any potential export loss, and that the segregation of non-GM rice could help reduce these minor losses. We also find no significant first mover advantage for India or China on GM rice. The opportunity cost of segregation of non-GM rice is much larger for sensitive importers than for India, which suggests that these importers would have the incentive to pay for the cost of segregation.     

Consumption effects of genetic modification: what if consumers are right?⋆

This paper develops a model of differentiated consumers to examine the consumption effects of genetic modification (GM) under alternative labelling regimes and segregation enforcement scenarios. Analytical results show that if consumers perceive GM products as being different than their traditional counterparts, GM affects consumer welfare and, thus, consumption decisions. When the existence of market imperfections in one or more stages of the supply chain prevents the transmission of cost savings associated with the new technology to consumers, GM results in welfare losses for consumers. The analysis shows that the relative welfare ranking of the ‘no labelling’ and ‘mandatory labelling’ regimes depends on: (i) the level of consumer aversion to GM products; (ii) the size of marketing and segregation costs under mandatory labelling; (iii) the share of the GM product in total production; and (iv) the extent to which GM products are incorrectly labelled as non‐GM products.     

Differentiating the consumer benefits from labeling of GM food products

Although recurrent evidence is found that consumers have different willingness to pay for GM and non-GM products, there is disagreement in the scientific community about the size of consumer benefits from GM labeling. In this article we use a theoretical model based on a standard constant elasticity of substitution (CES) to explain the importance of the quality effect. It is shown that failing to consider the quality effect may yield an overestimation of benefits from GM labeling, voluntary or mandatory.     

Comment on sustainability and innovation in staple crop production in the US Midwest

This comment highlight issues when comparing genetically modified (GM) crops to non-GM ones across countries. Ignoring structural differences between agricultural sectors and assuming common yield trajectories before the time of introduction of GM crops results on misestimating the effect of GM varieties. Further data collection and analyses should guide policy-makers to encourage diverse approaches to agriculture, rather than excluding specific technologies (like GM crops) from the onset.     

Price premiums,payment delays,and default risk: understanding developing country farmers’ decisions to market through a cooperative or a private trader

Smallholder farmers in developing countries face a competitive disadvantage in modern agricultural supply chains. Joint marketing through cooperatives is a potential tool to mitigate these disadvantages; yet cooperatives’ success in these settings is uneven at best. We develop an analytical model to study a farmer's choice of selling to a private trader who pays cash on delivery but may exercise market power or a cooperative that promises a price premium but delays payment and carries a concomitant risk of default. In the presence of impatient and risk‐averse farmers, we show that these factors can severely limit smallholder patronage of a cooperative, despite a promised price premium. We then construct and parameterize a simulation model to fit a profile of heterogeneous farmers within a prototype developing‐country village, and study the optimal decisions of farmers regarding marketing through a cooperative versus a private trader. Results suggest that modest improvements in either timeliness of payment or probability of default can induce a substantial increase in a cooperative's market share and economic viability. Extending the simulation analysis to a dynamic setting shows how implementing reasonable policies to improve a cooperative's payment timeliness and default probability can markedly improve its growth trajectory.     

Supply Chain Management in Cereal Grains: A Case Study from the U.S. Milling Wheat Industry

This paper studies supply chain management in the grain industry by investigating the effects of wheat quality on marketing arrangements between wheat producers, grain handling companies and processors. Wheat quality is defined by many different characteristics, broadly categorized into physical and intrinsic quality attributes. The complexity of wheat quality places limitations on the effectiveness of industry grading schemes in assuring end-use quality. In the U.S., wheat grading factors mostly reflect physical characteristics. Moreover, the U.S. wheat industry does little to regulate the intrinsic quality of new cultivars. Consequently, there is functional quality uncertainty in the U.S. wheat market, encouraging some individual processors to segregate wheat based on their own quality specifications. The costs and benefits of wheat segregation are illustrated with a case study of wheat procurement taken from the U.S. flour industry. Pendleton Flour Mills Inc. operates a stringent testing program to segregate wheat supplies with specific intrinsic quality attributes from the U.S. wheat market. The paper concludes that the inadequacy of the U.S. grading system in guaranteeing functional quality provides some processors with an incentive to manage the supply chain for milling wheat.     

DYNAMIC FARM—LEVEL PLANNING MODEL FOR BEEF FEEDLOT PRODUCTION AND MARKETING

The study is aimed at formulating and empirically applying a dynamic farm-level model for the planning of optimal beef feedlot production and marketing strategies. A dynamic programming (DP) model is used to calculate the optimal feeding schedule (i.e. liveweight gain sequence), market liveweight and stock replacement for a single bull calf over a one-year planning period, taking into account seasonal fluctuations of planning parameters such as beef prices, feeding costs, nutritional requirements, and stock replacement costs and obtainability. The DP model includes a linear programming (LP) subroutine for calculating least-cost feed rations. The planning model is empirically applied using data and assumptions representative offeedlots in the Coastal Plain region of Israel where most feedlot production and marketing decisions are made by ‘rule-of-thumb’ using set liveweight gain sequences, market standards and stock replacement decisions. The empirical findings indicate that the profitability of feedlot production and marketing could be increased by an average of 10% over that obtained from ‘rule-of-thumb’ decision rules.     

Protecting Biotechnology IPRs in Developing Countries: Simple Analytics of a Levy Solution

High transaction costs and an absence of institutional infrastructure in developing countries prevent comprehensive enforcement of intellectual property rights and generate obstacles to the adoption of genetically modified (GM) crop technology. Governments of developing countries that are members of the World Trade Organization are faced with two options when licensing GM crop technology: (1) attempt to regulate GM crops to the standards of the Agreement on Trade‐Related Aspects of Intellectual Property (TRIPS) or (2) allow a black market in GM seeds and risk trade retaliation from the GM innovator's host country through a TRIPS trade complaint. This paper develops a conceptual model that frames the adopting country's range of licensing options, including a new levy system, and derives welfare measures for each option. The model illustrates how a levy on GM technology can be a welfare‐increasing policy for developing countries, and the operation of a levy is discussed. The conceptual model is applied to Brazil's soybean market and quantitative economic surplus measures are estimated within a calibrated welfare model for a range of licensing scenarios. The model's results suggest that a levy may interfere with the long‐term prospects for innovators to collect monopoly rents in adopting countries.     

On the regulation of spatial externalities: coexistence between GM and conventional crops in the EU and the ‘newcomer principle’*

Pollen‐mediated gene flow is one of the main concerns associated with the introduction of genetically modified (GM) crops. Should a premium for non‐GM varieties emerge on the market, ‘contamination’ by GM pollen would generate a revenue loss for growers of non‐GM varieties. This paper analyses the problem of pollen‐mediated gene flow as a particular type of production externality. The model, although simple, provides useful insights into coexistence policies. Following on from this and taking GM herbicide‐tolerant oilseed rape (Brassica napus) as a model crop, a Monte Carlo simulation is used to generate data and then estimate the effect of several important policy variables (including width of buffer zones and spatial aggregation) on the magnitude of the externality associated with pollen‐mediated gene flow.     

GM crop technology and trade restraints: economic implications for Australia and New Zealand*

How much might the potential economic benefit from enhanced farm productivity associated with crop biotechnology adoption by Australia and New Zealand (ANZ) be offset by a loss of market access abroad for crops that may contain genetically modified (GM) organisms? This paper uses the Global Trade Analysis Project (GTAP) model to estimate effects of other countries' GM policies without and with ANZ farmers adopting GM varieties of various grains and oilseeds. The gross economic benefits to ANZ from adopting GM crops under a variety of scenarios could be positive even if the strict controls on imports from GM‐adopting countries by the European Union are maintained, but not if North‐East Asia also applied such trade restaints. From those gross economic effects would need to be subtracted society's evaluation of any new food safety concerns and negative environmental externalities (net of any new environmental and occupational health benefits), as well as any extra costs of segregation, identity preservation and consumer search.     

Analysis of a supply-control program under uncertainty and imperfect competition: Chinese cabbage in Taiwan

Researchers have often attributed the farm–wholesale price spread, after adjusting for marketing costs, as compensation for marketing firms' risk bearing. However, price spreads in excess of marketing costs can also be due to marketing firms' exercise of market power. In settings where both imperfect competition and marketer risk aversion are plausible, a modeling framework must be sufficiently general to accommodate both types of behavior. This article develops and estimates such a model in the context of fresh produce marketing and develops the implications for analysis of supply‐control programs. The model is applied to the production and marketing of Chinese cabbage in Taiwan and specifically to the analysis of supply‐control programs implemented in this industry by the Taiwanese government. The empirical results provide little support for the hypothesis that marketing firms exhibit risk averse behavior, but they do show that marketing firms exercise oligopsony power in procurement of the product from farmers, and that this power is positively related to the quantity supplied in each market period. This provides a heretofore unexplored impetus for supply controls intended to raise producer incomes. However, such controls are also rendered less effective by imperfect competition because marketing firms capture part of the benefits from supply reduction.     

Optimal Investment in Transportation Infrastructure When Middlemen Have Market Power: A Developing-Country Analysis

Transportation costs and buyer market power reduce prices and income received by farmers in developing countries. Transportation costs directly affect the marketing margin and also exacerbate market power by limiting farmers' access to buyers. This article develops a multistage spatial model to determine optimal investment in transportation improvements, taking account of impacts on marketing costs and competition. The beneficial impact of investments from farmers' perspective is mainly through enhanced competition, meaning significant under-investment may occur if this effect is ignored. However, the optimal investment depends on the relative importance of transportation costs; in some settings, transportation improvements reduce farm prices because buyers rationally over-compensate farmers for these costs.