abare.gov.au - research report 08.04

3	Potential economic impacts of GM crops in Australia

In this chapter, the economic impacts of two alternative GM crop adoption scenarios for Australia are discussed and quantitatively assessed for key grain-growing states, and for illustrative purposes, a key region within New South Wales. The first scenario (the canola-only scenario) provides an estimate of the economic effects of a full adoption of GM canola. The second scenario (the five-crops scenario) provides an estimate of the economic effects of the full adoption of three GM crops commercially grown in other countries — canola, soy bean and maize and two other GM crops not yet available for commercial production but have undergone field trials, wheat and rice.

Analytical framework

ABARE’s Ausregion model — a dynamic multiregional computable general equilibrium model of the Australian economy — is used to assess alternative GM adoption strategies in Australia. The model incorporates the interactions and financial flows between sectors and economic agents, including consumers, governments and foreign buyers, and projects the economic impacts into the future, both at regional and national levels.

For the purposes of this report, Ausregion industry coverage has been aggregated to cover 29 industries including 16 agricultural industries. The regional representation includes the New South Wales Murray Catchment Management Area, which is separated out from New South Wales, the Rest of NSW and the other key grain growing states — Victoria, South Australia, Western Australia and Queensland. The New South Wales Murray Catchment Management Area is a region of significant crop production (see map 1). It is separated out as a case-study region to highlight the estimated impact of GM crop cultivation for such an area.

The reference case represents the case where the only GM crop produced is cotton. It assumes that no other GM crops will be adopted in Australia. To analyse the effects of the introduction of new GM crop technologies in Australia, the reference case is used as a point of comparison for each alternative GM adoption scenario. A change of economic activity arising from implementing scenarios is represented as the deviation from the reference case.

Assumptions

Productivity gains

The potential economic impacts of GM crops on industries and the economy are simulated in Ausregion using changes in productivity. Increases in yield are represented by increases in overall output productivity, producing more with the same level of inputs. Similarly, savings in material, labour and capital inputs are implemented in the modelling.

Chapter 2 highlights that yield and cost savings attributed to GM crop adoption vary in different countries. Owing to the paucity of data available from field trials in Australia for the GM crops considered in the scenarios, proxy assumptions for yield changes, and material and labour/capital input cost savings have been drawn from international experience and used for the analysis (table 2). In particular, experiences of countries likely to have agricultural technologies most similar to Australia’s, (namely Canada and the United States) are selected where available.

The potential yield increases in table 2 lie within the range of yield improvements from international literature (see table 1). The potential canola yield increase of 10 per cent is based on field trials and commercial production in Canada (Serecon Management Consulting Inc and Koch Paul Associates 2001) and field trials in Australia (ACIL Tasman 2007). In countries where it is currently grown, GM soy bean varieties were found to have little yield impact (Qaim and Traxler 2005). For maize, US experience has shown an average yield increase of 6.5 per cent (Stone et al. 2002; Marra et al. 2002). A yield increase of 9 per cent was reported from experimental field trials of wheat in Canada (Berwald et al. 2006). A yield increase of 5 per cent for GM rice was obtained from results of individual farm trials in China (Huang et al. 2002; Huang et al. 2005).

There are also cost reduction benefits for GM canola and GM soy bean production (see table 2). These cost reductions are net of increases in GM seed cost. The cost reductions for the two crops are estimated from Canadian and United States commercial production experiences respectively (Serecon Management Consulting Inc and Koch Paul Associates 2001; Brookes and Barfoot 2006). The cost reduction estimates are based on reduced herbicide application and consequently less herbicide, labour and machinery use. Less machinery use implies reduced use of fuel and associated materials and also less machinery time. The combined savings in herbicide, fuel and associated materials make up material cost reduction. Savings in labour and machinery time make up labour/capital cost reduction.

Like farmers in the United States, Australian maize farmers have only a small window of time in which to spray maize pests. Therefore the cost offset from using less pesticide by adopting pest-resistant GM maize will be smaller when compared to those for other GM crops. Positive values for material inputs in maize production in table 2 indicate increases in material costs resulting from higher costs of GM seeds which are not fully offset by reductions in other material costs.

2	Assumed yield and cost changes with GM adoption by scenario a

GM crop

yield

material cost

labour/capital cost

canola-only scenario

canola b

–2.4

–3.8

Five-crops scenario

canola b

–2.4

–3.8

soy bean b

–13

–11

maize b

6.5

–

wheat

–

rice

–

a Percentage change for GM crop compared with non-GM crop; b In Ausregion, canola is aggregated into the ‘oilseeds’ sector and soy bean and maize are aggregated into the ‘other grains’ sector. Hence, in each simulation, the yield improvements and cost savings shown in table 2 for canola are adjusted for each region to reflect the relative contribution of canola to each region’s oilseeds sector. Similarly, the yield improvements and cost savings for maize are adjusted to reflect the relative contribution of maize to each region’s ‘other grains’ sector.

Adoption rate

Both the ‘canola-only’ and ‘five-crops’ scenarios assume full adoption of the GM crops in Australia starting in the first year of adoption. This assumption is designed to be purely illustrative. In reality GM crops are likely to be adopted progressively and not by all farmers. As a result, some form of identity preservation, or the ability to trace products back to their origin, for non-GM and GM crops may be required. The assumption of 100 per cent adoption of GM crops in the current analysis means identity preservation costs are not necessary and hence not incorporated.

Discount rate

The overall potential impacts of cultivating GM crops for the state and regional economies are measured as the sum of changes in gross regional product of these economies, from the year of adoption to 2017-18. In order to convert future income flows to present value terms, an assumed discount rate of 5.0 per cent has been used for the analysis.

Adoption scenarios

Two alternative adoption time lines are considered for the scenarios; adopting early (from 2008-09) and adopting late (from 2013-14). The economic effects in both scenarios are evaluated from the assumed adoption year in each respective scenario to 2017-18.

Results

Regional/state income impacts

The estimated present values highlight the difference in economic gains under the early and delayed adoption scenarios. They also illustrate the comparative benefits of adopting GM canola only and the five prospective crops. Economic impacts for the respective states are presented to illustrate the relative importance of GM crop adoption to a particular state.
Under all scenarios economic activity increases most in the Rest of New South Wales region (that is, NSW excluding the Murray Catchment Management Area) and Western Australia.

Substantial increases in GRP in Victoria and South Australia are also projected. These increases are attributable to the large potential for GM crop adoption in these region/states. However, the Murray Catchment Management Area gains the most relative to the size of its economy, as the cropping sector forms a substantial proportion of the regional economy.

‘Canola-only’ scenario

Under the ‘canola-only’ scenario, gross regional product is projected to increase in all canola producing regions/states. The highest cumulative increase is projected in the Rest of New South Wales region, at around $273 million (in 2006-07 dollars) under the assumption of early adoption and $121 million (in 2006-07 dollars) under the delayed adoption assumption (figure a). The difference between the gains under the two scenarios indicates that the Rest of New South Wales would lose substantially by delaying GM canola adoption.

Significant economic benefits of adopting GM canola are also projected for other states. For example, the cumulative economic benefit for Western Australia to adopt canola from 2008-09 for the next 10 years would be around $180 million in 2006-07 dollars. Similarly, the benefit for South Australia to adopt canola over the next 10 years would be around $115 million in 2006-07 dollars. Delaying canola adoption for five years would lead to forgone benefits of $97 million (in 2006-07 dollars) for Western Australia and $66 million (in 2006-07 dollars) for South Australia.

The cumulative benefit of adopting GM canola for the economy of the Murray Catchment Management Area is projected to be $76 million (in 2006-07 dollars) under earlier adoption and $34 million (in 2006-07 dollars) under delayed adoption. However, compared with other regions/states, adopting GM canola in the Murray Catchment Management Area has the largest gain relative to the size of its economy.

‘Five-crops’ scenario

Under the scenario that GM canola is adopted alongside four other GM field crops — soy bean, maize, wheat and rice — the cumulative economic gains to states/regions are projected to range from $174 million (in 2006-07 dollars) in Queensland to $2.9 billion (in 2006-07 dollars) in the Rest of New South Wales over 2008-09 to 2017-18 (figure b). The cumulative economic benefit for Western Australia to adopt the five GM field crops from 2008-09 for the next 10 years would be around $2.4 billion in 2006-07 dollars. Similarly, the benefit for South Australia to adopt the five GM crops over the same period would be around $1.4 billion in 2006-07 dollars.

The benefits reduce where the adoption of these crops is delayed. If the adoption is delayed to 2013-14, the benefits to states/regions would range from $115 million in Queensland to $1.3 billion in the Rest of New South Wales. Under this scenario, significant benefits for major field crop producing states/regions are foregone through delaying adoption. For example, the Murray Management Catchment Area gains a cumulative $243 million (in 2006-07 dollars) under delayed adoption compared with a cumulative $551 million (in 2006-07 dollars) from earlier adoption.

Delaying adoption for five years would lead to foregone benefits totalling $1.3 billion (in 2006-07 dollars) for Western Australia and $814 million (in 2006-07 dollars) for South Australia.