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IV - FUTURE OUTLOOK

(i) size of markets for non-GM vs GM;

(ii) relative prices for which GM and non-GM goods can be sold;

(iii) expectation of future size of markets and prices.

Since non-US human food markets for soya and maize are relatively small (see above - p.5), the most significant changes in demand for non-GM would be in animal feed usage (in Europe and elsewhere), and in the US market (in food and feed).

Second, supply-side economics are explored below. Third, the companies will be influenced by what their rivals do, as none wants to lose market share. If eventually the non-GM market does get large enough, there will be an obvious strategic advantage to whichever company prepares itself first.

However, there are limits to its ability to do this. For example, as the market for non-GM food grew, Cargill was forced to retreat from its initial position (that non-GM supply was impossible). And the more the non-GM market does grow, the more concessions Cargill will be forced to make.

Several Cargill businesses have been forced by market demand to switch to non-GM crops. For example, Cargill's UK poultry subsidiary Sun Valley has switched to using non-GM feed well ahead of its competitors [114]. While this has sent out entirely the wrong political message for Cargill, Sun Valley had no choice because its customers - including McDonald's, Marks & Spencer and Iceland, were asking for non-GM-fed chicken, and Sun Valley could not afford to their custom.

As further examples, during summer 2000 Cargill will crush 70-80,000 tonnes of non-GM soyabeans from Brazil in the Netherlands [115]. Another Cargill subsidiary, Illinois Cereal Mills, is increasing its contracts for non-GMO crops, as it supplies maize to Kellogg's and Frito Lay, both of which require non-GM [116]. In late 1999, Cargill Soja France announced it was considering an identity-preserved system. Shortly afterwards, Cargill announced that this may be extended Europe-widE [117]. Cargill supplies clients in Britain with non-GM maize products from France, such as glucose, starch and maize oiL [118].

ADM

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A few weeks later, StarLink was found in shipments of maize arriving in Japan. There have been conflicting reports on whether there has been an impact on US maize exports. In mid-November, US Agriculture Secretary stated that US maize imports had suffered as a result of StarLinK [119]. USDA data revealed that two major importers of US maize, Japan and South Korea, both decided to use different sources, for fear of StarLink contamination. But a Reuters report cited traders from the Chicago Board of Trade as saying that South Korea and other parts of Asia had reacted little, with the exception of Japan [120]; Cargill and ADM claimed their Japanese sales were unaffected [121].

Cargill remained characteristically unphased by the issue. Said Cargill's Bob Kohlmeyer, "StarLink probably is not going to change US export prospects in any noticeable way. For people who want to buy corn, there really isn't much choice but to come to us" [122]. And certainly, the USA controls by far the majority of world maize trade.

AE Staley made the most radical announcement in response to the problem: "just as StarLink corn has changed our corn purchasing operation this year to, among other things, require testing, nothing can be assumed or taken for granted as seed choices are made for spring planting... The only truly safe seed selection will be seed corn free of any genetic modification" [123]. Staley is a subsidiary of British company Tate & Lyle, and is far smaller than Cargill or ADM. It was Staley that had been the first (in April 1999) to publicly announce that it would not take maize unapproved for marketing in Europe, followed immediately by ADM.

This time, ADM did not follow. While it would not accept StarLink, it stated that it remained supportive of biotechnology. In fact, while ADM was one of the first hit by the problem - it co-owns Azteca Milling, which runs the mill in Texas from which maize for the first discovered Kraft taco shells was produced. Azteca's other co-owner, Mexican Gruma SA, also spent millions of dollars on recalling contaminated taco shells [124]. Gruma is 22% owned by ADM [125]. But ADM (also characteristically) saw opportunity in the crisis. Within three weeks of the first discovery of StarLink in food, ADM had employed dozens of extra staff to test harvests as they arrive at all its facilities, and it was the first company to achieve this. It will demand compensation from Aventis to cover its costs, estimated at tens of thousands of dollars a day [126], and failing that will sue Aventis [127]. But it also beat its competitors to supply guaranteed non-StarLink-contaminated maize to Japan, achieving this well before even USDA had its testing regime in place [128].

ConAgra was hit by StarLink contamination. Its only corn mill, in Kansas, was forced to close for a week in October for cleaning and testing, and in November it had to recall large quantities of baking ingredients (including bags of flour, grits, polenta, cornmeal and binders) from restaurants and institutions.

The whole StarLink problem has really undermined confidence in the agricultural distribution system. Following all the recalls, an opinion poll found 33% of Americans thought farmers should not be allowed to grow GM crops at all [129] - a massive swing in opinion. This feeling, combined with further fears of collapsing markets and of being turned away at elevators, may lead farmers to reduce their GMO plantings again next spring. And according to Bob Zelenka, executive director of the Minnesota Grain and Feed Association, the experience could set back identity preservation due to lack of trust [130].

Elevators too have been hit hard, with costs of up to tens of thousands of dollars, including testing and segregation costs, plus loss of markets and customers [131]. They too will hope to be reimbursed by Aventis; and the experience may push them towards non-GM supply in future.

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So, in summary, there are three possible ways in which each company could supply non-GM, and each has its advantages and disadvantages for the company:

 • Identity preservation: the company uses the same infrastructure for GM and non-GM varieties, with cleaning in-between; batches of a crop are traced through the supply chain, to preserve their identity.

 • Segregation: the company uses two entirely separate sets of supply-chain infrastructure for each crop, one for GM and one for non-GM varieties, so no cleaning is required.

 • Non-GM bulk stream: the company only has one set of infrastructure, through which is puts non-GM crops.

Obviously, as the market for non-GM expands, options 2 and eventually 3 become more appealing to the companies. The economics of each are summarised below; for more detail, see Appendix 2.

The costs of cleaning equipment are removed, as is the supply chain rigidity currently incurred in avoiding commingling. In the segregation case, the 2 major factors differentiating cost of GM supply from non-GM would be:

With a segregation system, the non-GM market would be allowed to grow freely, rather than being tied to the GM market. As the production of non-GM crops increases, their price will fall. (Meanwhile, GM crops will conversely increase in price).

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George Henni, Cargill's Protein Manager for Europe, estimated that about 500,000 tonnes of non-GM soyabeans using strict IP systems were expected to be available worldwide in summer 2000 from Brazil, and up to 2 million tonnes from the United States in winter 2000/01 [134](out of total US soyabean exports of 20 - 25 million tonnes).

One block to separation of non-GM in 1999 was confusion over testing procedures and tolerance standards [135]. Cheap test kits have now become widely available, and the US Agriculture Department has said it will open a special laboratory in its Kansas City office to evaluate and standardise the procedures [136].

As we have shown, companies like ADM and Cargill are quite determined to supply the non-GM market using identity preservation, rather than segregating the supply channels. As long as the demand for non-GM remains only for the human food market, which uses relatively small quantities of soya and maize, this will continue to be the case. But the industry acknowledges that if the animal feed market also goes non-GM it may not be possible [137].

According to PG Economics, an agricultural consultancy, "it is highly likely that to make [separation of GMOs] practicable, some degree of specialisation of growing, storage and processing facilities will develop--either within or between firms and between regions. Thus particular plants (maybe at particular times) may only accept GM or non-modified crops" [138]. In Canada too, agricultural analysts believe eventual segregation is inevitable [139].

Indeed, segregation has now started to be applied. A survey of the 2000 harvest, commissioned by seed company Pioneer Hi-Bred, found that 12% of elevators would not accept GM soya, and 20% would not accept GM maize [140]. In other words, these elevators are being dedicated to non-GM (a clear segregation approach). A later survey, by the American Corn Growers Foundation, found that 42% of elevators require on-farm separation, and 31% separation at the elevator gate [141] - some of these will be employing segregation (using separate facilities within the elevator for GM and non-GM), although the majority will be IP (using the same facilities, and cleaning in-between). [see appendix 2]

Japanese customers are prepared to pay a premium price for non-GM crops [see appendix 2] - and this could be what shifts the strategic position. At present, the Japanese non-GM market is showing strong growth; the human food market is significant (unlike Europe), due to consumption of tofu and other soya products, and there are some signs of animal feeds shifting too. What's more, the Tokyo Grain Exchange this year started trading in non-GM soyabeans, a move which gives non-GM a large degree of price independence from GM. As the Japanese market grows, the economics can only favour further segregation, as against IP. Once a segregation system is in place for supply to Japan, it becomes easier to expand this to meet European demand, rather than having to make the (costly and risky) first step.

There may still be a problem with short-term pricing of non-GM crops, which could undermine growth in demand. If the current increase in demand for non-GM coincides with a decrease in available supply (as more countries licence the growing of GM varieties), the relative price of non-GM could be pushed higher. In this scenario, ADM's and Cargill's strategy of refusing to offer non-GM crops other than as expensive IP specialist products could succeed in killing the demand.

But much depends on what the big traders say. A survey by the American Corn Growers Association in June 2000 found that 64% of farmers said their decisions on how much GMO corn to plant would be influenced if the grain industry requires segregation [142].

On the other hand, there have been efforts by the big biotech interests to reassure the American agricultural market. Seed companies such as Monsanto are obviously committed to the success of GMOs, and they can have a significant influence on farmers by dropping the price of GM seed, or offering better terms.

Perhaps the most important factor is the competitive dynamic between the grain traders, especially from the smaller players - ie the advantage of selling non-GM more cheaply, by using segregation.

Thus there are many factors at play. What is clear is that for campaigners to have any hope of defeating GM, they have to win the animal feeds market, and at least part of the US food and feed market. If this is combined with some of the other factors we have discussed going in campaigners' favour, we could see a move from IP into segregation in one or more of the companies, and if that happens, competition will force other companies to follow.

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The discussion above attempts to show how as markets for non-GM increase; and as distribution companies move from IP to segregation, and possibly to non-GM bulk supply, the non-GM supply price will fall relative to the GM supply price. With ADM and Cargill controlling the market, and both resistant to expanding their non-GM supply too far, economies of scale could still rest with the GM varieties. But if the smaller rivals start supplying non-GM more cheaply than Cargill and ADM, the two larger companies might be forced to get more involved, to avoid losing market share. This is where the price differential would really start to swing.

We have noted that both Cargill and (especially) ADM have more interest in the second generation of GMOs than in the first - ie in crops modified to have different properties in use, rather than in production. These 'output traits' will have a profound effect on the crop distribution system, as the production of many different varieties of each crop to meet the needs of different end users will cause a move away from handling of single, homogenous bulk commodities.

This future scenario has helped anti-GM campaigners in relation to the first generation of GM crops, in that it gives companies like ADM and Cargill an incentive to set up differentiated and identity preserved distribution streams in preparation.

However, the considerations above - outlining how campaigners could defeat the first generation crops through markets campaigning - do not apply to the second generation. Our argument relies on the key fact that if first generation GM crops become more expensive than non-GM, no-one will buy them. This is not the case for crops with consumer-friendly output traits. The battleground will be very different here: while to date consumer rejection has been because the perceived risks on GM foods outweigh any price advantages, in the future, consumers will reject GM foods if perceived risks outweigh perceived benefits (eg health benefits, as well as price).

Furthermore, the future introduction of GM crops with output traits (and in particular, 'stacking' of input and output traits in the same organism) gives campaigners a race against time - to defeat first generation crops and thereby damage the biotech companies, before they have an easier way of introducing the technology.

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