State-Contingent Demand for Herbicide-Tolerance Seed Trait

Article excerpt

Suppose a farmer had to apply a herbicide pre-emergence or not at all. The advent of a herbicide-tolerance trait innovation then provides the option to wait for more information before making a state-contingent post-emergence application. This option to wait can increase or decrease average herbicide use. For heterogeneous acre types, trait royalties increase with the level of uncertainty about the extent of weed damage. Royalties are largest when acre infestation susceptibility types are bunched around the type indifferent to applying the herbicide in the absence of the trait. The trait complements (substitutes for) information technologies that facilitate informed post-emergence (pre-emergence) decisions.

Key words: genetics, information inputs, patent value, post-emergence, real option

(ProQuest Information and Learning: denotes formulae omitted.)

Introduction

Agriculture in North and South America has seen rapid adoption of genetically engineered crop varieties. While demand-side concerns remain as serious impediments to the development of markets for these varieties, cost, yield, and risk considerations have provided the supply side with strong incentives to adopt (Kalaitzandonakes). This analysis is concerned with developing an economic framework to study the advent of a patented genetic trait for crops vulnerable to a pest hazard that requires costly remedy.

The class of hazards in question includes a potentially serious weed problem after crop emergence, where a herbicide-tolerance (HT) trait would provide a cheap post-emergence solution to the realized hazard. In a 2000 study of genetic engineering in integrated pest management, Hess and Duke wrote:

To date, herbicides that are used in HT crops are applied post-emergence, which allows herbicide application based on need. Unless the weed population is extreme, the application can be delayed until an assessment of the weed population and species present can be made to determine the optimum herbicide type and concentration to use (p. 130).

Clearly, HT crop varieties provide the flexibility to wait for and use additional relevant information on a weed infestation if and when it becomes available after crop emergence. In this study, demand for these varieties is shown to be an increasing function of the extent of post-emergence uncertainty about the post-emergence weed problem. This is because the management flexibility provided by the trait is most useful when pre-emergence decisions must be made in an uninformed environment.

The analysis also explains why the trait innovation may increase or decrease herbicide use. Use will increased if the trait allows penetration into new applications, perhaps where the targeted weeds are a relatively minor problem. Herbicide use will be decreased if the trait is mainly adopted on acres that had formerly been routinely sprayed. In addition, this investigation shows how the distribution of cropland susceptibility types also matters in determining trait royalties. The trait will be most effective in commanding royalties if acre types are concentrated around the point of indifference between a pre-emergence spray and not spraying at all.

HT crop varieties have had significant effects on U.S. agri-input markets over the period 1996 through 2002 (Fulton and Giannakas; Holmberg; Fernandez-Cornejo, Klotz-Ingram, and Jans). U.S. Department of Agriculture (USDA) survey data estimate HT seed accounted for 75% of all soybeans, 56% of all cotton acres, and 10% of all corn acres sown in the United States in 2002 (Fernandez-Cornejo and McBride). The trend is likely to continue over the early years of the 21st century. Bridges documents that the USDA had processed some 1,584 permits and notices for HT in regulated organisms in 1999, accounting for 27% of all such permits and notices.1 While not all HT varieties have been genetically engineered, genetic engineering was involved in the development of such HT varieties as bromoxynil tolerant cotton (brought to market in 1995), glufosinate tolerant canola and corn (1997), and glyphosate (i. …