Early in the 20th century, agricultural productivity growth came
primarily from innovations in mechanical inputs that replaced farm
labor. Starting in the 1930s, increases in land productivity were
driven largely by high-yielding crop varieties in concert with
fertilizers and chemical pesticides. Average U.S. corn yields rose
sevenfold from 20 bushels per acre in 1930 to 140 bushels by the
mid-1990s, while wheat, soybean, and cotton yields increased 2-4
times. This unprecedented growth in U.S. agricultural productivity
owes much to a series of biological innovations embodied in major
crop seeds—in particular corn, cotton, soybeans, and wheat.
Such innovations resulted from investments in crop variety research
and development (R&D), including plant breeding. However, the
seed sector has changed substantially in recent years, raising
questions about whether the intensity
of research effort on improved seeds and the contribution to productivity
growth are being sustained.
Crop variety R&D over the past 30 years has moved from being predominantly
public to predominantly private. Private sector firms have evolved from small
operations to large integrated enterprises capable of variety development and
seed production, conditioning, and marketing (see “Seed
Production,
Marketing, and Distribution”). Greater protection of intellectual property
rights for crop-seed innovations through patents and
certificates has spurred private investment in general and may increasingly stimulate
private R&D, even on such crops as soybeans where farmers have often saved
part of the current crop for use as seed the following year. Still, ERS analysis
shows that consolidation in the private seed industry over the past decade may
have dampened the intensity of private research undertaken on crop biotechnology
relative to what would have occurred without consolidation, at least for corn,
cotton, and soybeans.
Seed Production,
Marketing, and Distribution
While different types of seed have distinct
production processes and markets, the following description
of how seeds are developed, produced, and distributed is
generally applicable.
Plant breeding, including genetic
engineering and other biotechnology, constitutes
the foundation of the modern seed industry. By
using science to create a unique and marketable
product, plant breeders develop varieties embodying
such improvements as higher crop yields, better
crop quality, greater resistance to disease and
pests, or traits aligned with regional agroclimatic
conditions. Because of high costs, large-scale
research and development (R&D) is limited
to a few large companies, Federal agencies, and
land-grant colleges and universities. High R&D
costs require that varieties developed by the
private sector be commercially viable, highly
competitive, and well protected by intellectual
property rights. Given the size of their R&D
investments, plant breeders seek a central role
in managing seed production, distribution, and
marketing. The result has been extensive vertical
integration of the industry.
Seed production. Seed firms
with a marketable product typically contract
out the production
and multiplication processes to farmers, farmers’ associations,
and private firms. Breeders provide contract growers
the foundation seed to produce either more foundation
seed for continued R&D purposes, or registered
seed for larger scale production purposes. Registered
seed, in turn, is used to produce certified seed
sold commercially to farmers. Certified seed conforms
to standards of genetic purity and quality established
by State agencies. The production of both registered
and certified seed through contract growers is closely
managed by seed firms to ensure that the desirable
plant characteristics are carried through to subsequent
generations, and to prevent open pollination, disease
or pest infestation, or other problems that could
affect product quality.
Seed conditioning and inspection.
Once harvested, certified seed is conditioned for
sale to farmers, a process that typically includes
drying, cleaning, sorting, treating with insecticides
and fungicides, and packaging for distribution and
sale. Seed is also subject to inspection under various
State programs to ensure that the final product meets
quality standards. This may include tests for purity,
germination, presence of noxious weed seeds, and
moisture content.
Seed marketing and distribution.
Large seed firms actively distribute their end product
to regional, national, and international markets.
Many firms also license or outsource marketing and
distribution to private firms or individuals to improve
access to local markets. Farmer-dealers, farmers’ associations,
company salespeople, and private wholesalers and
retailers typically oversee local distribution. Different
distribution channels are used in different regions
and markets. In the Midwest, most corn seed is sold
to farmers by farmer-dealers trained by the seed
company. In the South, corn seed sales are channeled
through agricultural supply stores. Also, seed companies
often sell directly to large operations.
In addition to large integrated seed firms, the seed industry includes
hundreds of companies operating under licenses and marketing agreements
with the seed developers. Many firms are also involved in the production
and distribution of public seed varieties. The absence of patents or
plant variety protection (PVP) certificates on some seed varieties
developed in the public domain allows individuals or firms to freely
reproduce the seed.
Private Spending on R&D Has Jumped
Both public and private research contributed to new agricultural
technologies and productivity growth after World War II. However,
the relative importance
of the public and private sectors has been changing. Private sector spending
on overall agricultural R&D in the U.S. jumped from $2 billion in 1970
(expressed in 1996 dollars) to $4.2 billion in 1996, while Federal and State
spending has flattened out at around $2.5 billion since 1978.
Expenditures on crop variety R&D alone show similar trends. Extensive private
funding has been directed to research on marketable input and output traits
of corn, soybeans, and cotton. In contrast, the focus of public research (as
shown by USDA’s Current Research
Information System) is shifting to
minor crops and to public goods such as environmental protection and food
safety,
areas less attractive to the private sector because of lower profit potential.
Private spending on crop variety R&D increased 14-fold between
1960 and 1996 (adjusted for inflation), while public expenditures
changed little. With the introduction in the 1930s of commercially
viable hybrid seeds (higher yielding but degenerative, so farmers
have to purchase new seed every year), R&D expenditures on
corn began to shift from mainly public to mainly private. Private
R&D expenditures on soybeans grew from almost zero to 25 percent
of the total R&D on that crop between 1960 and 1984. In contrast,
private R&D on wheat and many minor field crops, such as oats
and barley, has been limited due to well-accepted public varieties
and less profit potential.
Protection of Innovations Has Spurred R&D
Behind the growth in private R&D on crop varieties has been the legal protection
of intellectual property rights in seed innovations. Two principal forms of
legal protection are plant variety protection (PVP) certificates issued by
the Plant Variety Protection Office of USDA and patents issued by the U.S.
Patent and Trademark Office of the U.S. Department of Commerce. Both grant
private crop breeders exclusive rights to multiply and market their newly developed
varieties. However, patents provide more control since PVP certificates have
a research exemption allowing others to borrow the new variety for research
purposes.
Ag biotech patents, mostly dealing with some aspect of plant breeding, have
outpaced the general upward trend in patenting throughout the U.S. economy.
During the 1996-2000 period, 75 percent of over 4,200 new ag biotech patents
went to private industry (see “Ag Biotech Patents: Who’s Doing
What?” in Amber Waves, November 2003).
ERS analysis indicates that patent protection in particular increased private
research during the 1990s on soybeans. However, patent protection seems to
have been used less for hybrid corn and cotton, likely because firms perceive
less need to protect their investments in these crops. Hybrid corn produces
high yields with the first crop, but yields on homegrown seed decline quickly,
discouraging use of crop output for seed. In the case of cotton, seeds are
removed from the cotton lint at a mill and are not generally returned to farmers.
Purpose of the 1970
Plant Variety Protection Act
“To encourage the development of novel
varieties of sexually produced plants and to make them
available to the public, providing protection to those
individuals who breed, develop, or discover them, and thereby
promoting progress in agriculture in the public interest.”
The number of PVP certificates issued has grown rapidly since
the 1970 Plant Variety Protection Act, suggesting that certification
has a positive effect
on private sector crop variety R&D. The increases were most marked for
soybeans and corn, which together accounted for more than half of all certificates
issued for field crops. Many of the certificates have been for genetically
engineered (GE) varieties (see “GE Varieties
Are the Latest Innovation in Seed Development”).
By the end of 2002, USDA had issued 2,584 PVP certificates (excluding certificates
of foreign origin) for the four major field crops: 1,078 for soybeans, 648
for corn, 568 for wheat, and 290 for cotton. The private sector holds nearly
all of the certificates for corn, 84-87 percent of those for cotton and soybeans,
and two-thirds of those for wheat. In addition to new varieties protected by
certificates, USDA and some land-grant universities have developed and released
varieties that are freely available.
GE Varieties Are the Latest Innovation in Seed Development
In the past two decades, U.S. companies
embraced agricultural biotechnology research, as evidenced
by the jump in USDA-approved applications for field testing
of genetically engineered (GE) varieties. The number of
applications received by USDA’s Animal and Plant
Health Inspection Service for GE varieties increased from
9 in 1987 to a high of 1,206 in 1998. By mid-2001, over
7,600 applications had been received and 6,700 (88 percent)
had been approved.
Most applications were for field testing new GE varieties of major crops:
corn (over 3,300 applications), potatoes (761), soybeans (601), tomatoes
(532), cotton (481), and wheat (209). Applications for field testing
between 1987 and 2000 included GE varieties with herbicide tolerance
(27 percent); insect resistance (25 percent); improved product quality,
such as flavor, appearance, or nutrition (17 percent); virus resistance
(9 percent); and agronomic properties, such as drought resistance (6
percent).
After extensively field testing a GE variety, an applicant may petition
USDA to deregulate (grant permission to produce and sell) the product.
If, after extensive review, USDA determines that the new variety poses
no significant risk to agriculture or the environment, permission is
granted. As of mid-2001, USDA had received 79 petitions for permission
to produce and sell GE varieties and granted 53 (18 for corn, 12 for
tomato, 5 for soybean, 5 for cotton, and 13 for other crops). Thirty-six
percent of the released varieties have herbicide-tolerance traits, 20
percent have insect-resistance traits, and 19 percent have product-quality
traits.
Adoption of GE varieties in the U.S. has occurred rapidly despite consumer
resistance in some other countries. Farmers planted herbicide tolerant
(HT) soybeans on 75 percent of U.S. soybean acres in 2002, up from 17
percent in 1997. HT cotton, at 58 percent of planted acres in 2002, was
up from 10 percent in 1997. Use of insect resistant Bt cotton expanded
from 15 percent of cotton acreage in 1996 to 35 percent in 2002. In contrast,
adoption of GE corn varieties has been much slower: farmers planted HT
corn on only about 10 percent of corn acreage in 2002 and Bt corn on
24 percent.
Seed Industry Consolidation
The U.S. commercial seed market totaled $5.7 billion in 1997, making it the
world’s largest, followed by China’s ($3 billion) and Japan’s
($2.5 billion). Moreover, the U.S. seed market is growing, mainly from farmers
increasing purchases of seed from seed firms and reducing the planting of homegrown
seed. Growth in the seed market has been particularly rapid for major field
crops—corn, soybeans, cotton, and wheat—that together constituted
two-thirds of the seed market value in 1997.
Until the 1930s, most commercial seed suppliers were small, family-owned
businesses lacking the financial resources to pursue their own
research. Plant breeding research was conducted primarily by the
public sector (USDA, State agricultural experiment stations, and
other cooperating institutions). The primary role of the private
seed business was to multiply and sell seeds of varieties developed
in the public domain.
With the development and rapid producer acceptance of hybrid corn in the first
half of the 20th century and with greater protection of intellectual property
rights, the amount of private capital devoted to the seed industry and the
number of private firms engaged in plant breeding grew rapidly until peaking
in the early 1990s. Subsequently, seed industry consolidation prevailed, with
fewer firms capable of investments in research sufficient to develop new seed
varieties. The share of U.S. seed sales controlled by the four largest firms
providing seed of each crop reached 92 percent for cotton, 69 percent for corn,
and 47 percent for soybeans in 1997 (see “Four
largest firms...”).
One contrast to this general trend was wheat, with more than 70 percent of
the planted wheat in 1997 coming from varieties developed in the public sector.
However, herbicide-tolerant varieties of wheat developed by the private sector
are on the horizon, so the private proportion could increase.
Four largest firms
dominated sales of seed for cotton and corn in 1997, and
to a lesser extent for soybeans
Crop and largest
seed providers
Share of seed sales
Percent
Corn seed:
Pioneer Hi-Bred
42
Monsanto
14
Novartis
9
Dow/Mycogen
4
Four largest total
69
Cotton seed:
Delta & Pine Land
73
Monsanto
11
CPSD1
6
All-Tex
2
Four largest
total
92
Soybean seed:
Pioneer Hi-Bred
19
Monsanto
19
Novartis
5
Dow/Mycogen
4
Four largest total
47
1California Planting
Seed Distributors.
Source: Corn and soybean shares are from Hayenga, M., AgBioForum, 1(2)(1998):43-55.
Cotton shares are ERS estimates based on volume of seeds planted as reported
by USDA's Agricultural Marketing Service.
Is Consolidation Dampening Research Intensity?
An indicator of research output (as opposed to expenditures, which is an input
measure) is the number of applications to USDA for field testing of GE crop
varieties. All newly developed GE crop varieties have to go through USDA-authorized
field trials and receive USDA permission before being produced and sold (see “GE Varieties Are the Latest Innovation
in Seed Development”).
The annual number of field-trial applications for GE crops increased from 9
in 1987 to 1,206 in 1998. Dividing the annual number of field-trial applications
from private firms by private industry sales of seed for each major crop provides
a measure of research intensity (applications per million dollars of sales)
comparable across crops.
Calculations for corn, soybeans, and cotton indicate that as the seed industry
became more concentrated during the late 1990s, private research intensity
dropped or slowed. Was there a connection between the concentrating industry
and the slowing intensity? Further ERS analysis, using econometric methods,
found a simultaneous self-reinforcing relationship. Those companies that survived
seed industry consolidation appear to be sponsoring less research relative
to the size of their individual markets than when more companies were involved.
This finding runs counter to the hypothesis that dominant firms in consolidated
industries conduct more new product research than they otherwise would in order
to expand the size of their markets (because of less risk of being outcompeted
during the long time periods required to bring new products to market). Also,
fewer companies developing crops and marketing seeds may translate into fewer
varieties offered. On the other hand, some multinational firms have recently
spun off their agricultural divisions, in effect creating smaller new firms
doing agricultural research. This reduction in concentration, after a time
lag, could offset some of the prior dampening of research intensity.
Public Research Could Stimulate Private Research
Total spending on crop variety R&D will continue to increase
and to contribute to agricultural productivity growth, but possibly
dampened relative to what
might otherwise exist in the absence of seed industry consolidation. One factor
that could offset the dampening is additional public investment in crop variety
R&D. ERS analysis indicates that public research on corn, soybeans, and
cotton has a stimulative effect on private biotech research. Thus, increasing
public research on these crops would not only sustain the oft-documented high
rates of return to public research, but could also promote additional private
research.
This article is drawn from...
The Seed Industry in U.S. Agriculture,
by Jorge Fernandez-Cornejo, with contributions from Jonathan Keller,
David Spielman, Mohinder Gill, John King, and Paul Heisey, AIB-786,
USDA/ERS, January 2004.
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