Segregating genetically modified and nongenetically modified corn in a marketing channel

Abstract

The adoption of GM corn in the United States depends on many factors including segregation costs, which have minor impacts on aggregate welfare. Because the demand for nonGM corn is small relative to its supply, no premium for nonGM corn can be generated in excess of the segregation costs. An outward shift in the supply of corn resulting from the adoption of GM varieties has a greater impact on aggregate welfare than do the segregation costs required to satisfy the GM-free demand. A 10% increase in the aggregate supply of GM corn increases aggregate welfare by more than US $250 million. However, nonadopters of GM corn lose while adopters can gain or lose depending on the nature of the aggregate demand curve for US corn.

Notes

¹Bt is short for Bacillus thuringiensis, which is a natural bacterium that has been used as an insecticide. Bt corn refers to the insertion of the Bt gene into the corn's DNA that modifies the corn plant to produce a protein that is toxic to the European corn borer (Hyde et al., 2001).

²All prices are given in US dollars.

³This study refers to segregation costs instead of identity-preservation costs. We assume that segregation costs refer to the maintenance of dual-marketing channels, while identity-preservation costs refers to stricter tolerances imposed by traceability.

⁴The estimated segregation costs in the articles cited are in US $ per bushel (bu). The authors have converted these cited estimates to metric equivalents for consistency.

⁵Specifying different demand curves is similar to the wheat-adoption scenario discussed by Ulrich et al. (1987) in which high-protein varieties command a higher price than do high-yielding wheat varieties. Similarly, Schmitz and Gray (2000) specify different demands for feed and malting barley.

⁶As discussed by Schmitz et al. (2004), the aggregate derived demand for corn is the sum of numerous individual derived-demand relationships. Each of these derived-demand relationships will have different tolerances for GM corn. As previously indicated, both Frito Lay and Taco Bell have responded by purchasing only GM-free corn. The exact strategy implemented by each firm will undoubtedly depend on various considerations including the quantity of corn used, the perceived sensitivity of the demand for their outputs regarding GMOs and segregation costs. In addition, organizations such as the Association of Official Seed Certifying Agencies (IdentityPreserved.com 2004) may provide uniform strategies by designing mechanisms to certify nonGM content.

⁷There is no excess supply of corn that is segregated or ‘certified’ as GM-free.

⁸The aggregate demand elasticity can be derived as the weighted average of the disaggregated demand elasticities. Mathematically in which η _T is the aggregate demand elasticity, η _i is the demand elasticity of the ith demand component and w_i is the share of the ith demand component in total demand. Under this formulation, it is not necessary for the components of the demand elasticity to be constant. In this scenario, the aggregate demand elasticity is held constant at −0.30, while the demand elasticity for the derived demand for nonGM corn is decreased to −0.1. In order to keep the aggregate demand elasticity constant, the elasticity of the derived demand curve for GM (or undifferentiated corn) becomes relatively more elastic (−0.3043).