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Market and industry consolidation issues regarding GMO crops

Editor's note on Sept. 22, 2004: In the 8th paragraph of his speech, Dan McGuire inadvertently referred to GMO contamination of corn in Nebraska. In actuality, soybeans were contaminated, not corn. The appropriate changes have been made to the text. -- RS

(Tuesday, Sept. 21, 2004 -- CropChoice guest commentary) -- Dan McGuire is giving the following presentation, part of the Farmer Choice - Customer First educational program of the American Corn Growers Association (ACGA) and American Corn Growers Foundation (ACGF), September 20-24 in California.

by Dan McGuire, CEO
American Corn Growers Foundation

Itís a real pleasure to be here with you today to talk about world markets. Usually, my annual trip to California is for a check-up with my rheumatologist at the Arthritis Center of Riverside. I prefer this reason for being here. First, I will state that I was not invited here to speak or give any advice or opinions on whatever ballot initiatives you might have going on out here. I wonít be dealing with those issues.

The 320-acre farm in Nebraska that I grew up on has been in my family for over 100 years. At 320 acres, itís a bit smaller than the U.S. average farm size of 441 acres. Nearly 200 of my acres are split in a corn and soybean rotation. I have mechanized center pivot irrigation, which is needed in Nebraska to get nearly the yields that Iowa and Illinois farmers get without irrigation. My most recent irrigation bill was $3,526.21, just for one month. I have two grain-drying bins for on-farm storage. We usually store the corn at harvest and market it during the coming year. As a farm owner, my investment is in the land, the irrigation system, the grain storage bins and of course the annual crop. I expect I would be farming it myself had I not developed rheumatoid arthritis in 1992. So, another farmer provides the equipment and labor to plant and harvest the crops. We split the annual crop production on a 50-50-share basis. We use a crop consultant to do soil testing and to monitor the crop progress throughout the growing season. He provides weekly crop status reports via email.

I was asked to come here and speak about how GMOs have impacted markets for corn. Let me first point out that the American Corn Growers Association does not advise farmers on what varieties of corn to plant or not to plant. However, we certainly provide information on marketing concerns that are directly related to the corn price impact that farmers feel from GMOs, so they can make informed decisions. Thatís why our information/educational program on GMOs is called Farmer Choice Ė Customer First.

Like all of you, Iím a consumer. As a farm owner, grain marketer and a farm organization leader itís in our best interests to know and respect what consumers around the world are thinking about genetically engineered crops. If they have concerns about the ingredients that go into the food chain and products that they purchase for themselves and their families, we have to know it. That would seem like a "no-brainer" if U.S. farmer intend to compete.

Iím here today to share the export market impacts we have documented and to provide a market and price context in terms of what farmers are experiencing relative to GMOs. I hope you donít mind my using quite a few export statistics and numbers. Theyíre necessary to make important points.

First, some specific market impact examples from GMOs. Then, the larger analysis! Many of you may recall a few years ago when a GMO corn variety by the name of StarLink was detected in taco shells. It had not been approved for human consumption. That disrupted both the domestic U.S. market as well as the U.S. export market, especially in Japan. Japan does not want any corn shipments that contain even a trace of StarLink corn. Keep in mind that Japan is the single largest export market for U.S. corn and purchased over half a billion bushels this past year. I expect the rice industry here in California can relate to such concerns. The U.S. Department of Agricultureís (USDA) export data shows that Japan is also the second largest market for U.S. rice exports.

Regarding StarLink, recent reports indicate that corn farmers received a settlement for the estimated damage done to markets and corn prices from the manufacturer of StarLink. Iíve seen the damage settlement number reported at $3.00 per acre. Thatís only about 2 cents per bushel with a 150 bushel per acre yield. Thatís not much and I expect the multi-year loss was considerably larger than that.

Other impacts have come from a so-called "pharma" corn variety that was found a couple of years ago in a Nebraska field. It then contaminated a large amount of soybeans in storage. Again, that situation had considerable publicity and certainly had a negative impact on the market. Itís my understanding that the contaminated soybeans were shipped out of state for incineration. Itís not difficult to understand why consumers would not want to inadvertently ingest food that was processed from a "pharma-commodity" intended for use as a pharmaceutical crop to produce antibiotics or some other medication. I suppose that might be like taking an un-prescribed drug. Regarding a similar situation, a September 10, 2004 article by Philip Brasher of The Des Moines Register, reported that ProdiGene, Inc. has withdrawn requests for government approval to grow its pharmaceutical corn crops in Texas. The company is commercializing two medical products made from its bioengineered corn. According to the Brasher article the companyís application to the U.S. Department of Agriculture drew opposition from the Grocery Manufacturers of America, which said the government is not providing adequate oversight of such crops.

Just last Friday a national news program reported that shrimp being imported into the United States from Asia are being tested for an unapproved antibiotic. The news report stated that nine percent of the imported shrimp tested in Louisiana contained the banned drug. U.S. shrimp farmers say that this type of cheap imported shrimp devastates their livelihoods. I mention these examples to illustrate that various agencies and consumer groups do monitor the food supply and people do have concerns about the food they and their families consume, overseas as well as right here in the United States. A federal judge recently ordered the USDA to identify where four biotechnology companies are conducting open-air field tests of genetically modified "pharma" crops in Hawaii, where 4,000 test sites exist.

Iím no scientist and I donít claim to be, but as commodity producers we have to be tuned-in to such concerns or we stand to lose U.S. and global consumer confidence in our food supply. Recent consumer research by two universities in Italy found that 84% of the respondents favor continued research on medical biotechnologies, whereas fewer (57%) thought such research should continue on food. A new report from the U.S. National Academy of Sciences says GMO foods could cause unintended health consequences and recommends that the federal government and industry increase efforts to identify potential hazards in GM foods before they reach the marketplace. That seems reasonable.

It appears that the American Corn Growers Association is on the same page with the majority of U.S. corn farmers on these and other important GMO marketing issues. A 2003 random nationwide, scientific and statistically valid survey of U.S. corn farmers by RMA Research, Inc. found that:

  • 69% agree that itís important to take the concerns of U.S. consumers and foreign markets into consideration when deciding whether or not to plant GMO varieties.
  • 80% agree that if keeping their customers satisfied and keeping world markets open to U.S. corn means planting traditional, non-GMO corn varieties, instead of biotech, GMO varieties, they are willing to do that.
  • 77% agree that the U.S. should not file a World Trade Organization lawsuit against Europe regarding GMOs.
  • And, the same national survey revealed that 91% of corn farmers believe that the U.S. Department of Agriculture should follow the law as passed by Congress and its intent by requiring Country of Origin labeling on imported meat from foreign countries.

Does this show that, when asked, farmers believe in the age-old marketing premise that, "the customer is always right?" I think so. I shared this perspective last week with a biotech agribusiness reporter. I made the point that while many agribusiness and "free trade" types in the U.S. might not choose to believe that the Ďcustomer is always right for the right reasons,í we must not ignore the fact that world customers have other corn suppliers. Thatís why the U.S. is not in a position to tell them what they have to buy and what their customers have to eat. Indeed, that is the reality of the global market. China and Brazil are competitors for world corn markets as is Eastern Europe. And lets not forget that U.S. taxpayers and U.S. institutions have helped create our competition by transferring agricultural production technology overseas, even helping our competitors upgrade their grain marketing and shipping infrastructure in countries such as Brazil. I call that, "financing the competition." Then, those same so-called world trade "experts" tell U.S. farmers they must compete in such a hypothetical "free market" that doesnít exist.

We also compete with corn substitutes such as feed wheat, barley and other feed grains for available global demand. Do we need to care what world buyers and consumers think about GMOs? Should the U.S. strive to give them choice in the types of commodities we offer for export? Absolutely! Why? Because an arrogant U.S. export policy does not work! Unless of course, U.S. farm and agribusiness leaders really donít care which of our export competitors supply the world export market for corn. If thatís the case, and it seems to be, then the U.S. needs to completely rethink its existing farm and trade policy. The current strategy of threatening the world with WTO lawsuits if they donít buy GMOs is not the way to make friends and keep customers.

More on the GMO corn price impact. The most direct market impact that U.S. farmers have experienced from GMO corn varieties is lower corn prices. Lower prices result from corn sitting in U.S. storage because it wasnít exported. Those excess inventories weigh over the U.S. corn market. Thatís a basic market principle. Too much supply lowers the price of most commodities and products. Other industries cut back production when that happens. Corn farmers donít have that option because current farm policy stripped those tools away.

The recent and current record of low and flat U.S. corn exports is a substantial farm and trade policy issue. Why? Since the 1980s, a number of so-called "free market" farm and commodity organizations were soldÖand then sold the promise that the U.S. could export its way to farm prosperity by entering a new U.S. farm policy era of "market orientation." Beginning with the 1985 farm law, the federal government, at the behest of agribusiness, including large biotech companies, began reducing and then eliminating commodity price supports. Price supports were the equivalent of a minimum wage for farmers and a way to get a fair price from the market. The 1996 so-called "Freedom to Farm" law went further in that direction, as did the 2002 farm law. The centerpiece of this farm policy is the global export market. Farmers were told that they have to be more "market-and-export oriented." They would get their income from the "market." That message was used over and over again with the U.S. Congress. Those so-called "experts" who preached the overly optimistic and unrealistic export projections have since been proven wrong but the damage is done. Of course, very few farmers actually export anything anyway. Multinational trading and exporting companies do the exporting. Those very same companies donít lose an export sale just because the U.S. loses sales. They simply fill the order from exporting countries that compete with the United States.

In any case, U.S. farmers primarily sell locally. So, while exports are not the "holy grail" of total corn demand compared to domestic ethanol and feed markets, the export market is currently a very important determinate of U.S. corn prices. Greater export demand reduces corn supplies. That piece of the corn supply and demand balance sheet impacts the price I and other corn producers receive.

For example, in the 1995/96 marketing year, prior to the introduction of GMO/biotech corn varieties, U.S. corn exports reached 2.228 billion bushels. That was 30% of the smaller-than-normal 7.4 billion bushel 1995 U.S. corn crop. On average farmers received $3.24 per bushel that year, near the full cost of production. In the 2003/2004 marketing year that ended August 31st, U.S. corn exports reached only 1.898 billion bushels, only 19% of the 2003 10.114 billion U.S. corn crop. Farmers were paid only $2.40 per bushel for their corn during that period. A lower $2.20 is the projected price in this new marketing year.

The average farm price of U.S. corn has been a lot lower than $2.20 since biotech, GMO corn varieties were introduced. In the 2000/2001 marketing year corn prices only averaged $1.85 per bushel. U.S. corn exports to the European Union had dropped from 109 in million bushels in 1995/96 to only about half a million bushels. That represents the loss of a major market. We estimate that the cumulative (year-over-year) export loss to that market is as high as 600 million bushels since 1997. Using a University of Illinois U.S. Corn Balance Sheet and Price Tool we calculate that such a large amount of unsold corn caused corn prices to be as much as $2.00 per bushel less than would be the case had the U.S. held on to that valuable, cash-paying, EU-25 export customer. Keep in mind that a corn price reduction of $1.00 per bushel costs U.S. farmers $11 billion on the farm value of the 2004 crop alone. And itís not like Europe stopped importing corn. According to the USDA, the EU-25 imported 5.7 million metric tons of corn (excluding intra-EU trade) in the just-ended marketing year. Thatís 225 million bushels that the U.S. missed out on almost completely. But other countries didnít miss out. Hereís a quote from an April 2004 USDA report, "Brazil has emerged as a leading corn exporter, with 2003/04 exports projected to reach 5 million tons. Brazil has received a price premium in some markets for "GM-Free" corn. Brazil has found significant niche markets for its corn in the EU and among South Koreaís starch manufacturers."

So, Europe is certainly not the only market at risk. Hereís a quote from a news wire from last week, "South Koreaís Major Feed Mill Group bought 105,000 MT of optional-origin corn from trading houses Cargill and Bunge in an invitation-only tenderÖ.Cargill sold the first cargo, while Bunge supplied the second, from either the U.S. or South America. Cargill and Bunge can also choose to provide corn from ChinaÖ" I use this report to further emphasize my point that just because the U.S. loses a sale, it doesnít mean that Cargill or Bunge lost the business.

Referring back to one of my earlier points about the export market, consider this. Overly optimistic export projections have been used to sell the U.S. Congress on current farm and trade policy since 1985. Neither I, nor the American Corn Growers Association believed those numbers, which is one reason we opposed those farm laws. However, if the February 1997 baseline projections that USDA published for U.S. corn exports for this year that just ended on August 31st had been realized, 2.750 billion bushels of U.S. corn would have exported and U.S. farmers could be getting closer to $4.00 per bushel for their corn instead of below $2.00. The farm-level price right now is near $1.80 in many locations. A $4.00 price would have resulted from much lower corn inventories. Supply and demand might have been allowed to work for change. But that was prevented from happening. We blame GMOs as the cause for much of that missed export projection and those lower prices.

Rice and wheat are the worldís major human food grains. Iíll talk about what would likely happen if GMO wheat were introduced in the U.S. My professional background includes a combined eighteen years as agency director of the Nebraska Wheat Board and then executive director of the Interstate Agricultural Grain Marketing Compact Commission. Iíve done quite a lot of market research and analysis regarding world wheat markets. The United States exported nearly 1.8 billion bushels of wheat in 1981/82. In more recent years those exports have been less than one billion bushels. Wheat farmers from all over the country have spent fifty years paying wheat check-off (excise taxes) to fund wheat research to improve wheat quality and marketability and to develop world markets. Substantial resources were used in a "Clean, High Quality Wheat Initiative" which I led, in order to compete for the high quality market in Europe. It worked. However, the same U.S. farm policy that I described earlier has not served the wheat industry well. Wheat production, exports and prices have been damaged by that policy. The elimination or lowering of wheat price supports in the farm program has turned cheap wheat into a feed grain. GMO wheat will cause wheat to compete with corn. I consider GMO wheat to be "export market development in reverse."

The good news is that both U.S. wheat and rice producers have the luxury of learning from the experience of corn producers concerning GMOs and export markets. What should be considered? First, they should know that world corn buyers were not contacted and surveyed to determine their acceptance or rejection of that new technology known as genetic engineering. That could have and should have been done given the multi-million dollar foreign office network that the U.S. government and the grain industry have around the world. In the case of the U.S. wheat industry, they have learned a little from the corn experience and done some foreign customer surveying. They have found that a large majority of foreign buyers do not want anything to do with GMO, Roundup Ready wheat. Many of those buyers have stated emphatically that if either the U.S. or Canada introduces GMO wheat they will quit buying North American wheat all together. Last Friday CropChoice.com, an excellent alternative agricultural news source, reported on secret field tests of transgenic (GMO) wheat in Canada that were discovered and that were supposed to be listed on the Canadian Food Inspection Agency website but were missing. Darrin Qualman of the National Farmers Union of Canada said the transgenic wheat trials should stop, stating, "It is undoubtedly a net loss proposition when you look at 80 to 90 percent market rejection and then add in the higher cost of patented seed."

Egypt, England, Italy, Japan and other major export markets have repeatedly said that they will reject genetically modified wheat from Canada (or the U.S.). My own estimates, done in 2002 and 2003, are that GMO wheat would lower wheat prices by up to $1.55 per bushel in future years. My analysis is supported by a more recent report, done by Robert Wisner of Iowa State University. Yet, even with such information, coupled with the strong message from world importers, some biotech companies and some of their farmer allies in the U.S. wheat industry keep trying to push GMO wheat into production. Why? I expect that just as with corn, soybeans or cotton the driving force is the fact that biotech companies are now seed companies. They are also chemical companies and in some cases they use farmers as their dealers. Of course biotech companies push this new regime of seed products and convince farmers to buy them. Those companies now hold the patents on the seed. They charge farmers exorbitant prices for the same seed that millions of farmer check-off dollars and government funds paid for in the first place. Then they sell the chemicals that the farmer is required to use on those patented crops. Through such concentrated market power some of those biotech companies are using those patents to sue hundreds of farmers for the age-old practice of saving wheat and soybean seed for the next yearís crop. The bulk of the seed industry is now in the hands of very few biotech companies. That is the kind of corporate concentration that puts the worldís genetic resources and ultimately the global food supply in a few corporate hands. The worldís food germplasm should rightfully be under the control of the farmers and the public institutions that have invested in it through Land Grant University and federal government research projects.

My presentation began by mentioning that my 320-acre farm is not considered large by todayís standards. Iíll conclude my remarks by using the example of a Nebraska farmer whose family farming operation is about 2,000 acres. His name is Gale Lush and heís the chairman of the American Corn Growers Foundation. He grows a combination of GMO and conventional corn varieties. He shared his seed and chemical costs with me so that I could share them with you. I put together a spreadsheet using USDAís May 2004 cost of production estimates for corn for this yearís crop. In the spreadsheet I substitute his conventional seed corn costs and GMO seed corn costs for comparison to determine the breakeven price he needs at the estimated USDA projected 2004 average corn yield of 149.4 bushels per acre. The lowest cost conventional seed corn that Mr. Lush used this year was $45 per bag. His GMO (Roundup Ready and Bt) seed corn cost was $97 per bag, including his discounts for the volume of his business. The chemical cost for his conventional corn was $26 per acre compared to $30 per acre for the chemicals used on his GMO variety. Even though the GMO hybrid included both the Roundup Ready gene, along with the Bt gene, Mr. Lush also used a combination of the herbicides: (Balance, Atrazine, Define and Roundup) for weed control. The total cost per acre (using just whatís in the USDA formula) was $328.28 for his conventional corn, meaning he would need to get $2.20 per bushel to cover only those production costs. The total cost per acre for his RR/Bt GMO corn variety is $351.61 per acre, so he needs to get $.15 cents per bushel more at the same yield to cover those same production costs for that GMO variety. If he had used the highest priced stacked-variety GMO that Iíve seen he could have paid $150 per bag for the seed and at the same yield would need to get $.26 to $.30 more per bushel for his corn to cover those costs. Bottom line: At the same yield and $2.20 ave. price per bushel for his corn that USDA projects for this year he will lose more money on the GMO variety.

I use this example to once again emphasize why the American Corn Growers are so concerned about the impact the GMOs have on export markets and corn prices. Itís been a pleasure sharing this information with you today.