Induced innovation in agriculture

Two interesting things Michael Roberts learned at the recent NBER ag workshop:

1. On the political economy of agricultural subsidies: Bruce Babcock suggests that the reason we subsidize field crop farmers and do not subsidize vegetable crop or livestock farmers is that supply of field crops is inelastic, which gives these farmers (or the owners of the land on which these farmers farm) a stronger incentive to seek rents in the form of subsidies. This incentive doesn't exist for other kinds of agriculture because the relatively elastic supply will quickly dissipate potential rents. This view was new to me and makes a fair amount of sense.

2. The real crux going forward with regard to agricultural production, biofuels, demand growth coming from Asia, and what all this will mean for food prices going forward is the extent of induced innovation. In other words, will (or has) the prospect for higher commodity prices induced greater yield growth, perhaps through further development and adoption of genetically modified crops? And if so, to what extent? Economists tend to be technological optimists and I wouldn't call myself a pessimist. But I am skeptical about finding clear and compelling evidence of induced innovation--I think this is very hard to detect in the data.

On the question of induced innovation, I think we can disaggregate further into privately and publicly funded research. High crop prices will certainly induce private investment in agricultural research by polarizing companies like Monsanto as long as there is sufficient intellectual property protection for them to reap the financial rewards. There are promising signs that high food prices are also attracting attention back to publicly funded agricultural research, but this induction mechanism is less direct and perhaps more prone to breaking down.

I agree that induced innovation is probably very hard to prove empirically, and the lag between investment and sizable effect on yields is probably on the scale of decades.

Finally saw Food, Inc.

So I finally watched Food, Inc. (long overdue); I came in with a somewhat skeptical attitude and felt similarly afterward (perhaps that says more about me than about the film). It makes some good points – for example, Kevin’s Law should pass, and much of industrial livestock production looks gross. I don’t object at all to the muckraking style (in the fine tradition of Upton Sinclair). But I felt much of the movie was grafting broader populist themes like “corporations are bad” and “our political system is broken” onto the agriculture and food world, rather than making nuanced and well-argued points that are specific to the latter.

Monsanto might be crossing the line when they attack someone like Moe Parr with litigation (emphasis on "might" - Monsanto has its own side of the story). But the broader argument that “farmers have saved seed for thousands of years” is specious given the importance of intellectual property to spurring innovation. Monsanto’s Roundup Ready soybeans could not have gone from 2% market share in 1996 to 96% market share in 2007 without offering really substantial benefits to farmers, benefits that could never in a million years have been developed through traditional seed selection and breeding. So while wrongful prosecution is not OK, enforcing the contract farmers who use Roundup Ready seed sign to not save their seed is fine with me.

My biggest disagreement with Michael Pollan et al is with how they disparage “efficiency” and are blasé about food prices (“good food costs more”). In the movie they even show a poor Hispanic family that wants to buy broccoli and pears, but they’re too expensive, so they get Big Macs instead. Michael Pollan’s response is “we need a system in which the bad food costs more than the good food.” I am all for ending ag subsidies (dare we hope the word is moving in that direction?), which are one weight that tilts the playing field. But moving to less efficient staple crop production methods will only increase prices and take up more land, resulting eventually in more deforestation and environmental degradation (particularly in the developing world), not to mention more malnourished people. And it won’t even bring broccoli within the purchasing power of the Gonzalez family. In fact, it’s easy to imagine a more extensive production system increasing the value of land and thus the price of all food crops, healthy or not.

Monsanto's patent expiration dance

Via Parke Wilde at U.S. Food Policy, an interesting NYT article on the dynamics of patent expiration on Monsanto's widely-used Roundup Ready 1 soybeans, which occurs in 2014.

In letters to seed companies and farm groups this week, Monsanto said that it would allow farmers to continue to grow its hugely popular Roundup Ready 1 soybeans even after the patent protecting the technology expires in 2014.

The letter countered a widespread impression in the agriculture business that Monsanto planned to force farmers and seed companies to migrate to a successor product called Roundup Ready 2 Yield, which will remain under patent and is more expensive.

Monsanto is trying to position this as a clarification rather than a retreat:

Gerald A. Steiner, executive vice president for corporate affairs at Monsanto, said Thursday that Monsanto was not changing its policy on how it would handle the soybean patent expiration, but was merely clarifying its intentions.

“What’s different,” he said, “is we have made a very comprehensive communication of what we are going to do.”

But the widespread impression in the seed business was that Monsanto was backing away from a previous policy.

Monsanto appears to have strong legal protections in their existing contracts, but it doesn't look like those will stand up to the weight of public criticism:

Some seed industry executives and academic soybean specialists say that Monsanto was not planning to renew licenses for that Roundup Ready 1 trait that expired before 2014, so that seed companies would have no choice but to move to Roundup Ready 2.

But in its letters this week, Monsanto said it would now extend all contracts for Roundup Ready 1 until the patent’s expiration date. It also said it would not enforce language in some contracts that would have required seed companies to destroy or return Roundup Ready seed when the patent expired.

But Monsanto may have another out a few years down the road:

Still, it is uncertain how long Roundup Ready 1 would survive in generic form. Some nations require licenses for the import of genetically engineered crops to be periodically renewed. Monsanto said it would maintain those licenses through 2017. But if they expired after that, American farmers would not be permitted to export the Roundup Ready 1 generic soybeans to certain countries, which would discourage them from growing those crops.

One final thought - Monsanto is much-demonized as a monopolist and worst, but it is hard to get textbook industry structure and competition in industries which require massive R&D investments. Those investments simply don't get made privately without patent protection, which looks suspiciously like a monopoly after the fact.

Monsanto

Interesting Economist article on "whether Monsanto is a corporate sinner or saint."

I haven't yet seen Food, Inc., but this reminds me to.

Via Duncan Green, to whose blog I just subscribed.

Research: Higher temperatures TERRIBLE for staple crops

I knew Michael Roberts had a good blog; I didn't know he was working on monumentally important and relevant research on the impact of temperature on staple crop yields:

We set out to develop a better statistical model linking weather and U.S. crop yields for corn, soybeans and cotton, the largest three crops in the U.S. in production value. Our major new finding is that (by far) the best predictor of yield is a measure of extreme heat: how much temperatures exceed about 29C (84F) during the growing season. The threshold varies somewhat by crop--29C is the threshold for corn. Below this threshold, warmer temperatures are more beneficial for yields, but the damaging effects of temperatures much above 29C are staggeringly large.

They introduce a measure I had not seen before, but makes a lot of sense - "degree days above 29C".

A good measure extreme heat is degree days above 29C. This is calculated as (Degrees Above 29C x Days) summed up for all time (including fractions of days) at each temperature above 29C. The more degree days above 29C, the lower are corn yields. Historically, average degree days above 29C during the growing season were about 57. Under the slow warming scenario (we cut emissions to 50 percent of 1991 levels by 2050) this number is projected to rise to 194 by 2070-2099 and corn yields are estimated to decline by 46 percent [emphasis mine]. Under the fast-warming (business as usual) scenario, degree days above 29C are projected to increase to about 413, and estimated corn yields decline 82 percent [emphasis mine].

Their findings on adaptation are particularly troubling:

Somewhat surprisingly, we find no evidence that farmers in the warmer south have been successful in adapting to the higher frequency of temperatures above 29C. This is troublesome as we hoped to learn from warmer regions how farmers might adapt to more frequent temperature extremes.

What are the implications?

These big estimated impacts are important because the U.S. is by far the largest producer and exporter of agricultural commodities. This is especially true for corn and soybeans, which are two out of the world's four most important staples (the other two are wheat and rice). If U.S. yields go down a lot, it drives up prices of staple food commodities all around the world. Almost surely the poor in other parts of the world, particularly developing countries that import food, would suffer far more than the U.S. would.

And the caveats?

There are three major caveats: (1) CO2 fertilization may offset some of these negative effects--something still under significant debate; (2) Seed companies (Monsanto) might develop more heat tolerant crops in the future (but we find little evidence of adaptation in the past); and (3) Farmers will be able to offset some of the losses by shifting where they grow different kinds of crops.

There are more detailed findings in his post. I'll say again that this appears to be critical research that highlights the consequences of climate change for both the broad world food system and U.S. farmers in particular. In fact, it would be great if this were publicized more broadly and were able to shift the opinions of some obstinate agricultural states on the importance of addressing climate change.

Update: He answers my question on longer growing seasons:

R: Great research - love your approach and the conclusions are frightening (but better that we know, and have our eyes wide open).

One other mitigating factor I can imagine is longer growing seasons - any idea how much this could counterbalance the fall in yields? (probably not much, just curious)

Michael: R,

Thanks for your comment and good questions.

We did investigate adjusting growing seasons by moving everything back one month (see the supplement). This does offset damages a little (I recall about about 10 percentage points in the long-run worst-case scenario, but see the supplement for a precise number). We were wary about moving things much earlier since the sunlight and sun orientation would shift so much and the the model implicitly holds these fixed.

Why GM seed companies need IP protection and high margins (a.k.a. crop biotech is like pharma)

GM seed companies (particularly Monsanto) are favorite villains of critics of Big Ag. While I’m not an unapologetic defender, I think this post from the Center for a Livable Future exemplifies some of the unfairness in this view. It begins with a single instance of seed failure (280 South African corn farmers used Monsanto seeds and their resulting crops were damaged; Monsanto agreed to pay compensation) and springboards to a broad range of accusations:

The problem is that Monsanto is a monopoly in global GM seed production and sales… And that is what it comes down to, Monsanto is a company and its goal is ultimately profit, not the welfare of the people who rely on them.

This is only one instance of reckless business moves. In India there has been a recent wave of suicides due to the shackles placed on the individual farmer by Monsanto. As showcased in the recent documentary Food Inc. Monsanto holds farmers to unrealistically high and unprecedented standards. The goals of our society have always revolved around progress and science, but here we see one company placing a stopper on that goal by coercing farmers to use their product.

Well, Monsanto isn’t technically a monopoly (Syngenta, DuPont and Novartis BASF also have major GM seed sales) but since the industry is an oligopoly we can let that pass. And I am not and expert on crop seeds, but as far as I know Monsanto does nothing to prevent farmers from using the non-GM seeds they have used for decades, and the farmers generally choose to pay more for GM seeds because they enable much higher yields (concrete examples to the contrary are welcome).

More pernicious, though, are the ideas underlying the condemnation of seeking profit, “high standards” and stopping “progress and science.” The latter makes no sense – clearly without Monsanto there wouldn’t have been as much advancement in GM seed science and technology. I think what is meant is that Monsanto develops these new technologies and then, meanly and immorally, does not share them with everyone who could benefit.

Students of business will notice a structural similarity to another highly profitable and highly criticized industry – pharmaceuticals. Developing drugs (like GM crop seeds) requires literally billions of dollars of R&D, and this investment doesn’t happen unless the product’s economics reward blockbuster discoveries with high profits to remunerate the prior investment and high levels of risk and failure in the process. Unfortunately, from a societal point of view, once a useful new drug or seed has been developed, the R&D investment is a sunk cost and the populist argument that everyone should benefit – regardless of ability to pay – is easy to make. And its easy to ignore in the short term that if IP rights get trampled on to the extent that businesses are not confident that they’ll earn an attractive risk-adjusted return on their investments, those investments will dry up and that precious flow of new technologies will cease down the road.

To summarize more concisely, 1) GM seeds enable higher agricultural production and more efficient use of scarce resources like land and water, and 2), high profit margins and IP protection are necessary if we wish to incentivize continued innovation in this area. Genuine GM food safety issues would be a sign that something in the model is broken from a social perspective, but profits and enforcement of intellectual property rights do not.