Does GMO Regulation Enhance Monsanto's Market Power?
I've been wondering for a little while about Monsanto's growing market power in the seed business. Monsanto's growing dominance has coincided with expansion of genetically modified seed. That doesn't mean one caused the other. But there may be a causal link that comes from strong regulation of GMOs relative to traditionally bred crops. This regulation makes it too costly for small or public entities--like universities--to develop GMO seeds and take them to market. The only way to do it is to be really big and have deep pockets like Monsanto does.
This has been the complaint of Ingo Potrykus, who in 1999 invented "golden rice," a genetically modified crop fortified with vitamin A. Potrykus has been working ever since to get the product approved internationally. He would like to help some of the millions that die or become afflicted with blindness due to vitamin A deficiency. Clearly, there is not much money in selling seeds to poor people, so this is not a business Monsanto would get into. And despite overwhelming evidence that golden rice is safe, it could still be another year or more--13+ years in total--before Potrykus gets his seed to market.
Coming back to Monsanto and their market power: The key thing here that worries me is that commodity demand is very inelastic. Prices are super sensitive to quantities. Thus, if Monsanto comes up with a higher-yielding seed and sells it on the same scale it currently sells its various Roundup-Ready (herbicide resistant) varieties, then commodity prices would fall. Possibly by a lot. That would be a good thing for consumers around the world and particularly good for the world's poorest. But as with golden rice, I worry that Monsanto recognizes that it's not in their interest to develop and navigate a high-yielding GMO crop through the bureaucratic regulatory maze. Because if they did, they would cannibalize their own profits by driving down commodity prices and thus the amount they could charge farmers for seed.
The most profitable approach for a dominant seed producer is to develop seed that extracts rents from other input providers. It therefore makes sense that they would build pesticides and herbicide resistance into plants rather than boost heat tolerance, for example. The current line of GMO crops increase their share of the seed market, helps them sell more Roundup, but they probably don't do much to boost yield and drive down commodity prices.
I'm not the kind of person who is knee-jerk anti-regulation. But in the case of GMOs, I think the world has gone overboard with safety and process regulation. It's hard to know for certain but it looks like an unintended consequence of this regulation has been to concentrate the seed business. And that concentration, in turn, may be skewing innovation in ways that are lot less socially useful.
Update: Readers may be interested in this article by David Zilberman, who was one of my professors and a great mentor at UC Berkeley. David (I believe) also made a nice comment below. Some may think that this is some kind of paid endorsement of GMO. I can sympathize with that kind of cynicism. And in some contexts there may be an element of truth to it. But I think the reality may be that GMO regulation actually accentuated Monsanto's market power and influence. And people like David Zilberman and Ingo Potrykus really do have the public interest at heart. I'd like to think I do too. And no, I'm not on Monsanto's payroll. Actually, they don't seem real happy about my work.
This has been the complaint of Ingo Potrykus, who in 1999 invented "golden rice," a genetically modified crop fortified with vitamin A. Potrykus has been working ever since to get the product approved internationally. He would like to help some of the millions that die or become afflicted with blindness due to vitamin A deficiency. Clearly, there is not much money in selling seeds to poor people, so this is not a business Monsanto would get into. And despite overwhelming evidence that golden rice is safe, it could still be another year or more--13+ years in total--before Potrykus gets his seed to market.
Coming back to Monsanto and their market power: The key thing here that worries me is that commodity demand is very inelastic. Prices are super sensitive to quantities. Thus, if Monsanto comes up with a higher-yielding seed and sells it on the same scale it currently sells its various Roundup-Ready (herbicide resistant) varieties, then commodity prices would fall. Possibly by a lot. That would be a good thing for consumers around the world and particularly good for the world's poorest. But as with golden rice, I worry that Monsanto recognizes that it's not in their interest to develop and navigate a high-yielding GMO crop through the bureaucratic regulatory maze. Because if they did, they would cannibalize their own profits by driving down commodity prices and thus the amount they could charge farmers for seed.
The most profitable approach for a dominant seed producer is to develop seed that extracts rents from other input providers. It therefore makes sense that they would build pesticides and herbicide resistance into plants rather than boost heat tolerance, for example. The current line of GMO crops increase their share of the seed market, helps them sell more Roundup, but they probably don't do much to boost yield and drive down commodity prices.
I'm not the kind of person who is knee-jerk anti-regulation. But in the case of GMOs, I think the world has gone overboard with safety and process regulation. It's hard to know for certain but it looks like an unintended consequence of this regulation has been to concentrate the seed business. And that concentration, in turn, may be skewing innovation in ways that are lot less socially useful.
Update: Readers may be interested in this article by David Zilberman, who was one of my professors and a great mentor at UC Berkeley. David (I believe) also made a nice comment below. Some may think that this is some kind of paid endorsement of GMO. I can sympathize with that kind of cynicism. And in some contexts there may be an element of truth to it. But I think the reality may be that GMO regulation actually accentuated Monsanto's market power and influence. And people like David Zilberman and Ingo Potrykus really do have the public interest at heart. I'd like to think I do too. And no, I'm not on Monsanto's payroll. Actually, they don't seem real happy about my work.
1. Much of you observations could be taken as an argument that we haven't regulated enough (or wisely enough). Certainly one of the generic defects of regulations in our system are that large corporations are invited to the table, where they happily endorse regs where economies of scale favor them. This has been ameliorated on an ad hoc basis by exemption of the small. (e.g., on farm slaughter of poultry, whose benefits I enjoy every week...)
ReplyDelete2. Golden rice is not a slam-dunk good thing. Many nutritionists and others have problems with it. It's been years since I read the detailed critique, but it had to with making the vitamin bio-available via the rest of the diet, cultural acceptability/viability and the critique that golden rice is a distraction from the real problems of food availability and purchasing power. Sorry for the lame summary..
I have no doubt that bans and extra regulation killed the industry. Venture capitalists will not invest in technologies that have uncertain regulatory future and immense regulatory costs. There are many useful innovations "on shelfs" at universities and small companies that can improve yield, address biotic stresses, improve shelf life and storability etc and the scientists have given hope of commercialization. I agree excess regulation lead to monopolization and retard innovations- and the poor and the planet pay
ReplyDeleteOff topic, but I thought it would be useful to revisit your cotton and apparel price post of February.
ReplyDeleteThe apparel cpi for the past there months:
1.2%, 1.4%, 1.2%
I post this because it shows what I notice about a lot of economists: they miss one of the most important trends occurring in the global economy today, which is accelerating China/India real wage growth. This is why apparel will continue to rise, not demand, and not cotton prices.