We maintain the assumption of two applications of grass herbicides, although we increase the treated acreage to 80 and 60 percent with one application composed of 40 percent molinate and 40 percent thiobencarb and the other composed of propanil on 60 percent of the acreage. Broadleaf control was adjusted to one application of triclopyr on 45 percent of the total rice acreage. Material and application costs of the herbicides are updated as well using information provided by UCCE . Finally, all cash operations are assumed to be financed at a nominal interest rate of 10.51 percent in accordance with the UCCE sample-costs document . As such, any change in the cost structure directly affects interest on operating capital, though the magnitude tends to be small. Overall, these updates result in a per-acre cost increase of $17.69 over the 2001 cost study. To more accurately represent the current world rice market , we assume the market price per cwt at harvest is the average price from 1986 through 2002 of $6.50 with average yields at 80 cwt per planted acre.
Government payments are divided into two components: direct payments and counter cyclical income-support payments as described by USDA, ERS . In accordance with the 2002 Farm Bill, square pots direct payments are calculated at 85 percent of average yields at $2.35 per cwt. Williams et al. estimate that growers of approximately 95 percent of planted acres have received this payment in the past, so the total direct payments are multipliedby 0.95. Counter cyclical income-support payments are calculated using the ERS formula, which we can summarize as 85 percent of average yields at $1.65 per cwt. Incorporation of these changes results in a $28.01 increase in gross revenue per acre over the 2001 UCCE sample-costs study. The original and adjusted costs and returns per acre are reported in Table 2. Given the public nature of experimental data on LibertyLink® rice grown in California and the full cooperation of Bayer CropScience through phone interviews and email correspondence, we use this transgenic variety as the basis for our analysis . We assume a price for Liberty® herbicide of $60 per gallon16 and an application rate of 0.446 pounds of AI per acre [500 grams AI per hectare ] in accordance with the company’s projected label recommendations .
To fully represent the fact that weed infestations will differ across plots, scenarios for transgenic cultivation are presented for both one and two applications of the herbicide on 100 percent of the acreage.The latter result is a direct consequence of the cost differential between ground and air applications of herbicides; ground applications of glufosinate cost approximately $12 per acre while air applications range from $6 to $7.25 per acre . The savings in chemical costs, however, drive the overall cost savings associated with transgenic rice and are explained using the information provided in Table 3. While the price of glufosinate per pound of AI is greater than all of the chemicals under consideration with the exception of triclopyr, the application rate per pound of AI is only 6 to 13 percent of the average herbicide control system. This decreases the cost of herbicide materials per acre by almost 62 percent as shown in the last column Table 2. When these results are combined, net returns over operating costs increase in the range of $45.89 to $74.90 per acre depending on the herbicide application rate, or $0.57 to $0.94 per cwt. Thus, this baseline scenario, which assumes perfect substitutability between medium-grain transgenic LibertyLink® rice and conventional varieties in terms of market acceptance and yields, predicts considerable economic incentives for rice growers to adopt transgenic varieties with similar characteristics due to their increased profitability. It is important to recognize, however, that these results are based on average costs over the entire Sacramento Valley ricegrowing region and utilize aggregate data to estimate the conventional herbicide weed-management regime.
Individual growers, of course, will most likely differ in regime from these averages depending on the characteristics of the specific operation. Those growers with “superior” land, as defined by lower aggregate weed-management costs, would benefit the least from adoption of transgenic rice while those with marginal land or serious weed-resistance problems tend to benefit more from the herbicide-management cost savings offered by the transgenic system and are hence most likely to adopt. To further investigate these issues, the assumption of perfect chemical substitutability, which essentially drives the assumption of identical yields, can be relaxed. A severely infested plot with a large, resistant seed bank of watergrass or some other weed would likely experience yield increases with adoption of a transgenic control system. Such yield gains have been observed in practice for HT soybeans and HT canola in the range of 0 to 20 percent . However, yields are not necessarily guaranteed to increase for all plots. Under generally ideal conditions, a yield drag of between 5 and 10 percent for medium-grain cultivars of LibertyLink® rice relative to conventional varieties has been observed in California rice field trials. This is consistent with similar field trials of HT soybeans. Such losses would decrease revenues and would thus reduce the increased profitability of adoption of this new technology. Yield drag should not be an issue with most growers given the advanced, widespread state of weed resistance to currently licensed chemicals for rice weed control in the Sacramento Valley. However, it is important to note that, in the short run, a few producers could actually experience a slight yield drag if the new technology was adopted; this is not expected to persist in the long run. A fall in demand for California rice due to consumer concerns, coupled with increased supply as a result of productivity gains, could cause rice prices to decline over time and decreasing net returns in the presence of yield changes. Similarly, a price premium for non-transgenic rice varieties could erode net-returns differences between traditional and HT cultivars but benefit conventional rice producers. Decreased yields or prices for transgenic rice, ceteris paribus, would reduce the gross rents from the technology. Furthermore, the seller of the transgenic seed is likely to charge a premium of up to 60 percent of total per-acre seed costs, depending on the pricing structure of the technology. Roundup Ready® and Bt seed for commercially produced transgenic crops has historically been priced from 30 to 60 percent higher than non-transgenic varieties, and price premia for LibertyLink® corn seed range from 0 to 30 percent, although average chemical costs per acre are typically greater . Furthermore, growers will likely pay at least part of the burden of the fees assessed by the CRCA. Assuming that these effects are constant per cwt of output, they can all be represented as a unit increase in costs in terms of net returns. Increased unit costs of this form, ceteris paribus, would alter the distribution of the rents between stakeholders but not dissipate gross rents. As points of reference, base assumptions on price and yields are $6.50 per cwt and 80 cwt per acre, large plastic pots so gross revenues from sales of rice output are assumed to be $520. A price premium of $0.25 per cwt for conventional rice as compared to transgenic rice with no associated change in yields would thus have the equivalent effect on net returns to the grower of a fee of about $20 per acre. Note that changing output prices does not affect the cost structure of the average farm operation and, thus, there is a direct, linear relationship between net returns and price. To calculate the impact of these effects, simple subtraction of the product of the price change and yield from the baseline scenario is appropriate. On the other hand, both a technology fee and the CRCA assessments directly enter the cost structure and, as such, affect interest costs as well. Tables 4 and 5 lay out these effects.
A 30 to 60 percent technology fee, assuming a seeding rate of 1.5 cwt per acre and price of conventional seed of $14 per cwt, is equivalent to $6.30 to $12.60 per acre. Total fees assessed as a result of the CRCA would currently be $8.50 per acre at identical seeding rates and yields of 80 cwt per acre, although it is unlikely that 100 percent of these assessments would be passed to the grower. Table 4 assumes no pass-through to growers of the legislated fees while Table 5 assumes the maximum pass-through, thus bounding the estimates. Both conservatively assume two applications of glufosinate per growing season. Without the CRCA legislation, adoption of LibertyLink® rice is profitable for a technology fee of $6.30 regardless of any realistic yield assumptions and profitable at a technology fee of $12.60 per acre so long as yield drag is no greater than 8.9 percent . With zero yield gains, net returns per acre in this range of seed price premium increase by between 21 and 25 percent over conventional rice returns with even greater benefits for those experiencing positive yield gains. If we assume a small price premium of, say, $0.25 per cwt, the technology is profitable for either yield losses of 7 percent with no technology fee or no yield change with an unrealistic $25.89 technology fee. This highlights the importance of yield and price assumptions on the calculation of net benefits. However, it is clear that, even with a small output price premium and a seed price premium at the upper end of the observed range, the most likely adopters will benefit from increased returns over costs. Allocation of maximum CRCA assessments to the grower slightly changes the per-acre benefits but does not affect the qualitative conclusions . Net returns over the baseline scenario with a $6.30 technology fee are no longer positive with an 8.6 percent yield drag nor for a $12.60 technology fee and a 6.7 percent yield drag. However, identical yields still result in net benefits of between $24.50 and $30.80 per acre, more than enough to cover a $0.25 price premium for conventional rice. To bound the per-acre benefits, we assume a lower bound of $0.25 per cwt price premium and an upper bound of no price premium with no CRCA pass-through. Under these assumptions, we conclude that the per-acre benefits of the transgenic HT technology are between –$7.22 and $58.10 for any given California rice grower with a midpoint estimate of $21.90. However, if we restrict attention to those producers most likely to adopt, as defined by at least zero difference in net returns, yield drag at the lower end of the range can be as high as 1.2 percent and they will still adopt.The preceding deterministic sensitivity analysis accounts for heterogeneity in land, weed infestation, and management ability as well as for the distribution of the rents generated by the technology. However, the magnitude of these rents is determined primarily through assumptions regarding yield and the price of rice as well as base assumptions on the price of alternative herbicide systems. While these point estimates are based on the best information available, another approach is to parameterize the distributions of those variables, which can be perceived as stochastic, and use Monte Carlo simulations to estimate the distribution of the surplus benefits of the transgenic rice technology. We take the specification in the equation and estimate distributions for a transgenic yield premium, the transgenic-rice price, and a conventional-rice price premium. Yields for the HT cultivar are assumed to vary according to a symmetric triangular distribution centered around 80 cwt per acre with a minimum value of 72 cwt and a maximum value of 88 cwt . This distribution allows for the possibility of yield gains and losses and, with symmetry, tends to be very conservative given the state of weed infestation and resistance across the state. Prices for California rice are essentially determined on the world market and thus are not influenced by the individual producer. Using historical data from USDA for 1986 through 2002, we assume a lognormal distribution for output price with a mean of $6.50 per cwt and a standard deviation of 1.67. Finally, the price premium for conventional rice is assumed to be distributed as a skewed triangular with a most-likely value of $0.25 , a minimum value of zero, and a maximum value of $0.52 or about 8 percent. These values are consistent with experience with corn, soybeans, and canola cited previously .