Segregation of Grain Markets: Consequences for Price Behavior
McNew, Kevin, Smith, Vincent H., Journal of Agricultural and Resource Economics
The introduction of genetically modified grain and oilseed products at the farm level and resistance for these products by consumer groups have led to segmentation in grain markets. This study explores the implications for market price behavior for a segregated soybean market for genetically modified (GM) and non-GM varieties. A stochastic dynamic simulation model of production and storage is solved, and Monte Carlo simulation procedures are used to examine price behavior between GM and non-GM soybeans. The results suggest important differences in price behavior between GM and non-GM soybeans. The results obtained in the model simulations are compared with evidence from the Tokyo Grain Exchange, where non-GM and GM soybean futures contracts have traded simultaneously since May 2000. The evidence from the Tokyo Grain Exchange contracts is largely consistent with the results of the simulation model. Price correlations between the Tokyo Grain Exchange non-GM and GM soybean contracts tended to be similar in magnitude to those found in the simulations.
Key words: genetically modified organisms, soybeans, storage
Genetic engineering of crops represents a substantial breakthrough in agricultural technology. In the United States, the most widely used applications of this technology are BT Corn and Roundup Ready(R) Soybeans, first introduced in 1995. These first-generation transgenic crops are designed to lower farm production costs by reducing input costs and, as a result, have been rapidly adopted by U.S. farmers. In 1996, for example, less than 10% of the total areas planted to corn and soybeans in the United States consisted of genetically modified (GM) varieties. By 2002, over 35% of U.S. corn acreage and 75% of U.S. soybean acreage were planted to GM crops.
While many U.S. farmers have embraced this technology, many consumers have been more skeptical because of perceived health and environmental risks. Consumer and environmental groups in the European Union and Japan, both of which are major buyers of U.S. grain commodities, have been especially vocal about these concerns. As a result, some foreign food manufacturers have decided not to accept GM crops altogether, others have developed plans to institute labeling programs, and some foreign governments have introduced regulations requiring labeling and, in some cases, product segregation for GM products.1
The short-run reaction by participants in the U.S. grain market has been to segregate commodities by GM and non-GM varieties. A 1999 survey found that 11% of all Midwest grain elevators were segregating corn and 8% were segregating soybeans, with more elevators expected to segregate in the future [U.S. Department of Agriculture, Economic Research Service (USDA/ERS) 2000a]. As a result of segregation, price differences have begun to emerge with non-GM crops at a premium to GM crops. However, only limited anecdotal evidence is available on the size of these premiums, and there is even less information about how these premiums will behave in the future. In addition, the U.S. markets for GM and non-GM commodities are relatively unsophisticated, consisting of spot cash exchanges and contracts for delivery, but no futures or options contracts. For soybeans, however, GM and non-GM soybean futures contracts have been available on the Tokyo Grain Exchange since 2000.
Most previous research on GM issues has been related to welfare effects and the distribution of benefits (Moschini, Lapan, and Sobolvesky; Kalaitzandonakes) as well as consumer issues such as food safety and labeling (Caswell 1998, 2000; Caswell and Mojduszka; Hobbs and Plunkett; McCluskey; Feldman, Morris, and Harrington). This study explores issues concerning how segregated U.S. grain markets for GM and non-GM soybeans are likely to behave. Segregation does not just separate production and demand along GM and non-GM lines. It also requires that inventories, a key element in determining price behavior in grain markets, be segregated as well. …