Giving an Inch and Keeping a Mile: Why the Corn Lobby Let the Ethanol Tax Credit Expire
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V. 15 no. 5 • May/Jun 2012
Giving an Inch and Keeping a Mile:
Why the Corn Lobby Let the Ethanol Tax Credit Expire
Aaron Smith
With growing concerns about gridlock The RFS mandates that a minimum
in Washington and greed on Wall quantity of ethanol be blended into
Ten percent of motor gasoline in the Street, Americans are wondering gasoline each year. It was first intro
United States is comprised of ethanol whether anyone with a stake in public
duced in the U.S. Energy Policy Act of
produced from corn. This production policies is willing to sacrifice their
short-term advantage for a greater 2005, and then expanded in the U.S.
level is required by law, a requirement
that confers large benefits on corn good. Well, someone just did. Without Energy Independence and Security Act
producers by keeping corn demand any opposition from the biofuels sector, of 2007. Under the expanded RFS, corn
and prices high. In comparison, the
the tax credit for ethanol blenders (the ethanol now comprises 10% of finished
Volumetric Ethanol Excise Tax Credit motor gasoline in the United States,
recently expired ethanol tax credit was
–VEETC) expired on January 1.
a small perk. up from 3% in 2005. In a recent paper,
Bob Dinneen, President and CEO, Colin Carter, Gordon Rausser, and I
Renewable Fuels Association,
estimate that the 2007 expansion in the
1/5/12. RFA press release.
RFS caused a persistent 30% increase
O
n January 1 of this year, defi in the price of corn. Moreover, the RFS
Also in this issue cit hawks, environmentalists, has created a vulnerable corn market
livestock producers, and food in which even the slightest production
The Logic and Consequences of processors celebrated the expiration of disturbance in 2012 will have devastat
Labeling GMOs the Volumetric Ethanol Excise Tax credit ing consequences for the world’s poor.
(VEETC). This federal program, which In 2011, about 15% of global corn
David Zilberman..............................5
had existed in various forms since 1978, production, or about 5% of global grain
The Alpaca Bubble Revisited gave $0.45 to ethanol producers for every production, was used in U.S. corn-
gallon they produced and cost taxpay ethanol production. One-third of this
Tina L. Saitone and ers $6 billion in 2011. So why did the quantity returns to the food system in
Richard J. Sexton.............................9 corn-ethanol lobby let it expire without the form of ethanol by-products that
an apparent fight? Did they really “sac can be used as animal feed, so the net
rifice their short-term advantage for the loss to the food system is 3.3% of global
public good” as suggested by the above grain production. Figure 1 shows that
quote from the CEO of the national trade this volume of grain is substantial: it
association for the U.S. ethanol industry? exceeds total corn consumption on
In this article, I argue that the the African continent. It also exceeds
VEETC generated small benefits relative total rice consumption in all coun
to the benefits the ethanol industry tries other than China and India.
reaps from legislation known as the Re The price effects from turning food
newable Fuel Standard (RFS). As such, into fuel have particularly devastating
the industry was willing to let the consequences for consumers in less-
VEETC expire so as to earn political developed countries, where a relatively
points in its fight to preserve the RFS. large percentage of income is spent onto look to ethanol as an alternative
Figure 1. Grain Consumption in 2011/2012
market for their crops. However, the
500 attempt to make ethanol profitable failed
450 Rice
because newly discovered oil reserves
Wheat
400 in the U.S. Southwest kept petroleum
Corn for Animal Feed
350 production high and prices low.
Corn for Food
300 After 50 years of low oil prices, the
Ethanol by-products
250
Arab oil embargo and the associated
Ethanol (net)
oil price spikes in the 1970s gave new
200
hope to ethanol advocates. However,
150
ethanol production remained far from
100
cost effective; even when oil prices
50 peaked in 1980, the cost of producing
0 ethanol was double that of gasoline.
U.S. Africa EU China India
Data Source: USDA FAS, PS&D Database. Outside the U.S., the corn-for-food category includes The 1978 Energy Tax Act marked
industrial use. the beginning of the current wave of
food, and where grains, rather than combustion engine and the automobile. federal programs to support ethanol
processed foods, constitute the major In the mid-1800s, some early internal production; it included a subsidy that
portion of the diet. According to the combustion engines were fueled by etha exempted ethanol/gasoline blends from
Food and Agriculture Organization nol, and ethanol was used extensively the gasoline excise tax. This subsidy
(FAO) of the United Nations, grains for lighting. One may wonder whether existed until the end of 2011, although
comprised 57% of calories consumed ethanol could have established itself as a its magnitude and form changed
in least-developed countries in 2007 viable motor fuel if it had not been sub somewhat. In its last four years, the
but only 22% in the U.S. and 27% ject to the alcohol excise tax. However, subsidy took the form of a 45 cent per
in the European Union. World Bank after industrial alcohol was made exempt gallon tax credit to firms that blend
economists Maros Ivanic and Will from the excise tax and the price of etha ethanol with gasoline (the VEETC).
Martin estimate that when the World nol consequently dropped by at least This program cost taxpayers about
Bank’s food-price index jumped by 75%, it still remained double the price of $30 billion between 2005 and 2011.
approximately 30% in 2010, 44 million gasoline. Abundant petroleum supplies, Although the RFS was not enacted
people were forced below the extreme especially in Pennsylvania, made gaso until 2005, bills containing variants
poverty line of $US 1.25 per day. line inexpensive and it seems unlikely of the RFS entered the U.S. Congress
that ethanol could have established regularly between 1978 and 2004. In
History itself as a motor fuel even if it had not chronological order, these bills were
Ethanol, also known as ethyl alco been subject to the alcohol excise tax. the Gasohol Motor Fuel Act of 1978
hol, is the type of alcohol in alcoholic By 1920, the picture looked differ (S.2533), the Ethanol Motor Fuel Act
beverages. It became a significant ent. The Pennsylvania oilfields were of 1987 (H.R.2052, S.1304), Amend
motor-fuel ingredient in the United in decline and the U.S. Geological ment to the Energy Policy Act of 1992
States only recently, but it has a long Survey estimated that peak petroleum (H.AMDT.554), Renewable Fuels Acts
history as a prospective motor fuel. production would be reached within of 2000 and 2001 (S.2503 and S.670.
This history has been punctuated by a few years. This assessment raised IS), and the Energy Policy Acts of
government action. The first such expectations that ethanol distilled from 2003 and 2004 (H.R.4503, S.2095).
action came in 1862, when the Lincoln grains and potatoes would become the However, declining oil prices through
administration imposed a large excise dominant motor fuel. Articles express out the 1980s meant that large-scale
tax on alcohol to help fund the Civil ing this expectation appeared regularly ethanol production remained unprofit
War. This tax quadrupled the price of in major newspapers such as the Los able. Ethanol comprised less than 1%
both drinkable and fuel alcohol and Angeles Times and the New York Times. of finished motor gasoline in 1990.
persisted until 1906, when the Free At about this same time, European The 1990 amendments to the Clean
Alcohol Act made industrial alcohol agricultural production recovered from Air Act provided the next opportunity
exempt from the alcohol excise tax. World War I, which led U.S. agricul for the corn ethanol industry to lobby
The 1862–1906 period coincided tural prices to drop. These lower prices for favorable legislation. The amend
with the development of the internal motivated U.S. agricultural producers ments required that, in regions prone
2 Giannini Foundation of Agricultural Economics • University of Californiato poor air quality, oxygenate additives
Figure 2. Actual and Predicted Corn Price
be blended into gasoline to make it
7
burn more cleanly. When the amend Actual Price
6
ments were first introduced to Congress Ethanol Frozen at 2005 Level
5
in 1987, ethanol and methyl tertiary
Price $/bu
4
butyl ether (MTBE), a natural-gas
3
derivative, were the main contenders
2
to fulfill the oxygenate requirement.
1
Johnson and Libecap documented
0
the lobbying battle between advocates 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
for ethanol and those for MTBE. MTBE Note: The price is the average daily cash bid in Central Illinois during March of each year.
Counterfactual prediction taken from Carter, Rausser, and Smith (2012).
became the dominant additive because
it was less expensive, but subsequent capacity existed and 1.8 billion gallons implies a loss of 2.3 billion bushels to
leaks in underground storage tanks of capacity was under construction. the food system, equivalent to about
caused MTBE to contaminate drink One year later capacity under construc 16% of the total U.S. supply of corn.
ing water supplies and it was conse tion had tripled and represented more If these 2.3 billion bushels were
quently banned in at least 25 states. production than existed at the time. returned to the food system, users
The demise of MTBE allowed etha The ethanol construction boom would increase consumption and farm
nol to establish itself as a fuel additive gave the corn market fair warning of ers would reduce production until
in the 2005 Energy Policy Act, which an impending increase in demand and prices had declined enough to absorb
essentially replaced the oxygenate enabled it to absorb the initial onslaught. the excess supply. A simple calcula
requirement with the Renewable Fuel Inventories accumulated and a record tion can give a ballpark estimate of how
Standard. Legislation to increase the number of corn acres were planted in much prices would decline. In recent
RFS entered Congress even before the 2007. However, production has not kept research, Michael Adjemian and I esti
2005 Energy Policy Act had passed, up with demand. According to the most mate that in recent years corn users
and more bills followed in 2006 recent USDA estimates, carryover stocks would be willing to consume 2% more
(the 20/20 Biofuels Challenge Act of into the 2012 crop year will be only corn for every 10% reduction in price.
2005 (S.1609), BOLD Energy Act of 6.7% of annual use. Carryover stocks Nathan Hendricks, a 2011 UC
2006 (S.2571.IS, H.R.5331.IH)). have only been this low once since Davis graduate, estimated in his PhD
These proposals led to the 2007 1950. In 1995 poor weather caused low dissertation that U.S. farmers would
expansion of the RFS, which specified crop yield and low inventory, but the plant 3% fewer acres to corn for every
minimum renewable-fuel production effect was temporary because inventory 10% reduction in price. Summing these
each calendar year from 2007 through was replenished by the next harvest. In effects implies that the market could
2022. It required 9 billion gallons in contrast, the market shock that caused absorb 5% more corn for every 10%
2008, with annual increases to 15.2 bil low inventory this year is a legislated price reduction. Thus, returning 16%
lion gallons in 2012 and 36 billion gal permanent increase in demand. of supply to the food system would
lons in 2022. However, no more than The current price of corn on the reduce corn prices by about 32%
13.2 billion gallons of corn ethanol Chicago Mercantile Exchange is about This simple calculation is consistent
may be used to satisfy the RFS in 2012, $6.00 per bushel—almost triple the with the dynamic analysis in my recent
and no more than 15 billion gallons pre-mandate levels. What would the work with Colin Carter and Gordon
of ethanol may be used after 2015. price be if ethanol production had been Rausser. In that paper, we isolate three
frozen at 2005 levels? In the 2005–06 main effects of the 2007 RFS expansion,
Effect of the RFS on Corn Prices crop year, 1.6 billion bushels of corn each of which are apparent in Figure
The 2007 RFS expansion caused etha were used to produce ethanol; in the 2. First, the corn market anticipated
nol plants to sprout across the coun 2011–12 crop year, 5.0 billion bushels. the forthcoming ethanol boom and
try and especially in the Midwest. When corn is processed into ethanol, increased inventory demand accordingly.
Firms could enter the ethanol industry approximately one third of its caloric As a result, prices increased in 2006 in
secure in the knowledge that the gov value is retained in a by-product known advance of the ethanol-production jump
ernment had guaranteed demand for as distiller’s grains that is fed to animals. in 2007 and 2008. Second, we estimate
their product. At the end of 2005, 4.3 Thus, an increase of 3.4 billion bushels that corn prices would have been, on
billion gallons of ethanol-producing of corn used for ethanol production average, 30% lower from 2006 through
Giannini Foundation of Agricultural Economics • University of California 3rise even further and plunge millions
Figure 3. Ethanol Operating Margin
more people into extreme poverty. If
1.00
they weren’t constrained by mandates,
0.75
then ethanol producers would respond
to high prices by reducing their use of
$/gal
0.5 corn. Jim Costa (D-Fresno) and Bob
Goodlatte (R-Va.) recently introduced
0.25
legislation that would allow such a
0.00
response; under their proposal the
2007 2008 2009 2010 2011 2012 mandate would be reduced when corn
Note: Data from the Center for Agricultural and Rural Development, Iowa State University, stockpiles are low. This proposal is a
www.card.iastate.edu/research/bio/tools/hist_eth_gm.aspx.
small step in the right direction, but any
2010 had no increase in the demand for ethanol producers over operating costs proposed weakening of the RFS will be
corn from ethanol producers occurred. declined by the amount of the tax credit met by strong opposition from lobbying
Our third finding is that a below-average at the end of 2011. This drop erased organizations such as Renewable Fuels
harvest in 2010 caused inventory to be the large operating margins that etha Association, the National Corn Grow
run down and prices to be about 50% nol refiners had enjoyed in the last half ers Association, and Growth Energy.
above where they would have been if of 2011 when strong export demand An abbreviated version of this article ap
ethanol production had been frozen at kept ethanol prices high. Moreover, peared in American.com magazine on
2005 levels. These results show that it explains why ethanol production January 4, 2012. See www.american.com/
archive/2012/january/children-of-the
the effect of ethanol on corn prices gets has not declined in 2012: after remov corn-the-renewable-fuels-disaster.
magnified when inventory is low. ing the tax credit, ethanol production
at 2011 levels remains profitable. Suggested Citation:
Effect of Removing the Tax Credit Smith, A. 2012. "Giving an Inch and
At most, removing the VEETC could Outlook for the Future Keeping a Mile: Why the Corn Lobby
Let the Ethanol Tax Credit Expire.” ARE
have caused ethanol production to drop Removal of the ethanol tax credit has Update 15(5):1-4. University of California
to mandated levels. In 2011, ethanol had a negligible effect on corn prices Giannini Foundation of Agricultural
production exceeded the mandate by 1.3 because high export demand is hold Economics.
billion gallons. Most of this excess was ing up ethanol prices, which makes
exported to Brazil, Canada, the United above-mandate ethanol production Aaron Smith is an associate professor in the
Kingdom, and the Netherlands to meet profitable. Even if export demand Department of Agricultural and Resource
biofuel mandates in those countries. declines, the RFS guarantees that etha Economics at UC Davis. He can be reached by
A bushel of corn produces about 2.7 nol production could only drop by a e-mail at adsmith@ucdavis.edu.
gallons of ethanol, so above-mandate small amount this year and would have
For further information, the
ethanol production used 0.48 billion to increase in the next few years as the
author recommends:
bushels of corn and, after accounting for RFS increases to its long-term level of
Adjemian, M.K. and A. Smith. “Using
distiller’s grains, it removed 0.32 billion 15 billion gallons per year. By keeping
USDA Forecasts to Estimate the
bushels from the food system or 2.2% of ethanol production high, the RFS places Price Flexibility of Demand for
total U.S. supply. Thus, if all above-man a high floor under the corn price; corn Agricultural Commodities.” Ameri
date ethanol production became unprof prices will remain high as long as the can Journal of Agricultural Eco
itable upon removal of the tax credit, RFS is in place. It is for this reason that nomics 94(4)(2012): 978-995.
the calculations above imply that corn Jon Doggett, vice president of public Carter, C.A., G.C. Rausser, and A.
prices would have dropped by only 4.4% policy for the National Corn Grow Smith. “The Effect of the U.S.
However, ethanol production has ers Association, commented recently Ethanol Mandate on Corn Prices.”
2012. Working paper, available
declined little, if at all, since the removal that his members “view the RFS as
from http://asmith.ucdavis.edu.
of the tax credit. In the first quarter of more important than the farm bill.” Johnson, R.N. and G.D Libecap.
2012, the United States exported about The RFS has caused carryover “Information Distortion and
a quarter of a billion gallons of ethanol, stocks to be run down and has placed Competitive Remedies in Gov
and so it is on pace to produce about the corn market in a perilous posi ernment Transfer Programs: The
the same amount of ethanol as last tion. If the 2012 crop is even slightly Case of Ethanol.” Economics of
year. Figure 3 shows that the return to smaller than expected, then prices will Governance 2(2001): 101–34.
4 Giannini Foundation of Agricultural Economics • University of CaliforniaThe Logic and Consequences of Labeling Genetically Modified Organisms
David Zilberman
informational needs of people who want radiation or other chemicals. The
to avoid GMOs. Anyone who is strongly discovery of DNA and advances
The choice facing California is not
opposed to buying GM products is free in modern molecular biology have
whether consumers should have
to do so, as USDA “certified organic” allowed the development of more
information regarding consuming
GMOs because non-GM food can be products do not contain GMOs. refined and precise crop breeding
labeled as such, but what will be the The real issue of the proposition is techniques where varieties are slightly
benchmark for labeling requirements. the benchmark required for mandatory modified by adding specific traits.
Scientific research findings have not labeling. Right now, the benchmark is Obviously, GMO technologies are
found GM food to be riskier to health proven toxicity or meaningful health still in their infancy, but the cost of ob
or the environment than other foods. effects; thus, the government has rightly taining genomic knowledge is declining
Furthermore, there is evidence that required the labeling of cigarettes and exponentially and new techniques for
GM food improves both human and caloric contents. GM products are not taking advantage of this knowledge are
environmental health, increases yield required to be labeled because regula improving. Researchers have already
and significantly reduces food prices. tory research has found them to be discovered a wide array of genetic ma
as safe as conventional foods. People nipulations that can improve pest
who have additional requirements control, enhance nutritional quality, ex
about food intake rely on voluntary tend shelf life, and advance other
labels such as “kosher” and “halal.” aspects of crop quality and productivity.
But society does not use ‘kosher’ as The early commercial applications
G
MOs (genetically modified the benchmark and require all “non of GMOs, namely traits to control
organisms) in agriculture have kosher” foods to be labeled as such. pests, are the “low hanging fruits” of
been a source of controversy From an economic perspective, label research efforts and, as experience with
since their introduction in the mid ing GMOs makes sense if the net ben transgenic tools is accumulated, it is
1990s. On the one hand, the planting efit from having it outweighs the cost. likely that more appealing traits (i.e.,
of GM varieties has spread rapidly. In While some people may feel strongly drought tolerance, nitrogen fixation,
the case of soybeans, more than 70% against GMOs and may vote for the etc.) will be developed. The applica
of total acreage used for their cultiva proposition because their perceived tion of genetic engineering techniques
tion is of some type of GM variety. benefits from labeling are very high, in agriculture has been advancing more
However, GM varieties have not been I suspect that there are many others slowly relative to that of medicine, but
adopted in major crops like wheat, rice, who are indifferent or only slightly as we will show, even the existing traits
and potatoes, and are banned in the EU concerned about GM varieties, yet have made an immense difference.
and most African countries. There has may be unaware of the environmental
been continuous debate over the regu and social benefits of GMOs and the How Have GMOs Made
lation of GM varieties, and California potential negative consequences of a Difference?
voters now face a proposition that will labeling. The purpose of this article is A large body of literature has been accu
require the labeling of food that con to provide research results on the ben mulated to assess the impact of GMOs
tains genetically modified ingredients. efits of GM products and some of the on agricultural productivity and food
On the surface, the main argument implications of constraining the growth prices. The major applications thus far
behind the proposition is the right of and development of this technology. (Bt varieties or Round-up Ready variet
individuals to know the true makeup ies) reduce insect and weed damage.
of the food they eat. I agree with this On GMOs and Crop Breeding The impact on yield depends on
in principle, but in the case of this Most of the food we eat today has whether the specific pest damage was
particular proposition, the crux of been bred for humans and modified controlled by an alternative method.
this issue has little to do with freedom through a variety of techniques. They In many cases, Bt varieties are replac
of choice. In fact, voluntary labeling include traditional selective breeding, ing toxic pesticides, and the main gain
of GMO-free products can meet the as well as induced mutations through is not in yield, but in improved health
Giannini Foundation of Agricultural Economics • University of California 5among farmers, consumers, and the
Table 1. Yield, Costs, and Profitability Effects of Adopting Bt Cotton and Maize
technology provider. Studies in other
Insecticide Increase in Increase countries also confirm these results.
Reduction Effective in Gross
Country (%) Yield (%) Margin (%) References Studies that investigated the benefits
Bt Cotton of adoption of GMOs around the world
Argentina 47 33 23 Qaim & de Janvry 2003, 2005 have identified a wide variety of ben
efits, from increased yield and reduced
Australia 48 0 66 Fitt,2003
cost as mentioned above, reduced finan
China 65 24 470 Pray et al. 2002
cial risk associated with farming, as well
Qaim et al. 2006,
India 41 37 135 as non-monetary benefits like reduced
Sadashivappa & Qaim2009
pesticide exposure for farm workers and
Mexico 77 9 295 Traxler et al. 2003
reduced effort associated with monitor
Thurtle et al. 2003,
South Africa 33 22 91 ing pests and application of pesticides.
Gouse et al. 2006
United Falck-Zepeda et al. 2006, GM varieties also have significant
36 10 58 environmental and health impacts, and
States Carpenter et al. 2002
Bt Maize a recent National Research Council
Argentina 0 9 20 Brookes & Barfoot 2005 (NRC) report found them to be at least
Brookes & Barfoot 2005, as safe as conventional food. Studies
Philippines 5 34 53 from India and China suggest that adop
Yorobe & Quicoy 2006
Brookes & Barfoot 2005, tion of Bt cotton led to a reduction in
South Africa 10 11 42
Gouse et al. 2006 the application of pesticides and actually
Spain 63 6 70 Gomez-Barbero et al.2008 saved a significant number of lives of
United Naseem & Pray 2004, individuals who otherwise would have
8 5 12
States Fernandez-Cornejo & Li 2005 been exposed to toxic chemicals. Stud
Source: Qaim 2009.
ies suggest that Bt traits in cotton reduce
and environmental sustainability. On and, as a result, prices tend to decline vulnerability to toxins that emerge in
the other hand, in cases where trans which makes consumers better off. storage, and thus improve food safety.
genic varieties address pest problems While farmers may have received lower The use of herbicide tolerant variet
that haven’t been treated before, yield prices, they also experience lower costs ies led to increased use of Round-up,
tends to increase. As a rule, adoption and higher yields. Thus, seed compa which the EPA considers to be low
of Bt varieties tends to have a higher nies, farmers, and consumers may all in toxicity. But at the same time, it
yield effect in developing countries share the economic benefit resulting enabled reduced tillage practices that
that face severe pest problems and have from the adoption of GM varieties. in turn led to reductions in soil ero
relatively limited access to technolo Several studies address the distri sion, as well as runoff of water and
gies than in developed countries. bution of benefits from GM varieties chemicals. These GM varieties also
Table 1 represents outcomes of during the early stages of the adoption contribute to soil carbon sequestration.
multiple studies that demonstrate this of different traits in various crops from
point for Bt cotton and Bt maize. The 1999 to 2005 in the United States, and Aggregate Impacts
results suggest that yields may grow the results are presented in table 2. Most of the existing literature on
by more than 30% in developing coun These findings suggest that the overall the impacts of GMOs considers spe
tries such as India and the Philippines, gains from these early stages was very cific case studies and documents
while pesticide use may decrease up high. For example, the annual gain increasing yields, reduction in costs,
to 70%. Furthermore, the studies also from adoption of herbicide tolerant and some environmental benefits.
compute that under plausible price soybean varieties in 1999 was between Recently, there have been attempts
ranges, farmer profitability per hect $500 million and $1.1 billion and to assess the aggregate effects of
are is increasing and the range of gain the gain in 2001 was $1.25 billion. GMOs on agricultural supplies and
varies across countries and crops. In some cases, the consumer share agricultural commodity prices.
One of the main concerns about GM was found to be greater than 50%, while Estimates based on aggregate data
varieties was that they mostly benefited in others, the innovator or the farmer (annual national output of corn, cotton,
technology providers, like Monsanto. share was very high. Altogether, the soybeans and rapeseed, as well as acre
However, GM varieties increase supply table shows that the benefits are shared age of GM and non-GM varieties for
6 Giannini Foundation of Agricultural Economics • University of CaliforniaTable 2. Benefits of the Adoption of Genetically Engineered Crops and Their Distribution
Total Benefits Share of Total Benefits (%)
Study Year ($ Million) U.S. Farmers Innovators U.S. Consumers Net ROW
Bt Cotton
Falck-Zepeda et al. 1999 1996 134 43 47 6
Falck-Zepeda et al. 2000a 1996 240 59 26 9 6
Falck-Zepeda et al. 2000b 1997 190 43 44 7 6
Falck-Zepeda et al. 1999 1998 213 46 43 7 4
Frisvold et al. 2000 1996-98 131-164 5-6 46 33 18
a
U.S.-EPA 2001 1996-99 16-46 NA NA NA NA
Price et al. 2003 1997 210 29 35 14 22
Herbicide-Resistant Cotton
Price et al. 2003 1997 232 4 6 57 33
Herbicide-Resistant Soybeans
Falck-Zepeda et al. 2000b 1997-LEb 1,100 77 10 4 9
c
1997-HE 437 29 18 17 28
Moschini et al. 2000 1999 804 20 45 10 26
Price et al. 2003 1997 310 20 68 5 6
d
Qaim & Traxler 2005 1997 206 16 49 35 NAe
Qaim & Traxler 2005 2001 1230 13d 34 53 NAe
c
NA= Not applicable HE= High elasticity; assumes a U.S. soybean supply elasticity of 0.92
d
ROW= Rest of the world (includes consumers and producers Includes all soybean producers
a e
Limited to U.S. farmers Included in consumers and producers
b
LE= Low elasticity; assumes a U.S. soybean supply elasticity of 0.22 Source: NRC 2010.
different countries over time) confirmed led to increases in the demand for meats suggest that if the European nations
that GM varieties tend to have higher and, as a result, increased demand for (and the African countries influenced
yield increases in developing rather feed grains. This, combined with the by them) had adopted GMOs in their
than developed countries. The average introduction of biofuel, led to significant production of corn, soybeans and other
per acre yield increase associated with pressure on food prices and the rising crops, the prices of these commodities
GM cotton in developing countries is prices of food after 2006 had adversely would have been substantially lower.
above 50%, and it is above 35% for GM affected the well-being of the poor. The Moreover, existing regulations
corn varieties. Conversely, the impacts food price inflation would have been have prevented the introduction of
of GM varieties on cotton and corn in even more severe without GMOs. GM varieties in the production of rice
developed countries are around 15%. Biotechnology has been one of the and wheat. Field studies suggest that
The impacts of GMOs on soybean most dominant sources of the increase their impact, especially in rice, can be
yields are smaller; however, the avail in supply of agricultural commodities as impressive as in corn—increasing
ability of herbicide tolerant soybean and thus has contributed to a reduc yield and saving lives. Thus, the intro
varieties has contributed to a near dou tion in agricultural commodity prices. duction of GM varieties to these crops
bling of the total acreage of soybeans The increase in supply of soybeans in would further reduce the pressure on
globally in the last twenty years. Much Argentina was of the same order of mag agricultural commodity prices and
of this increase can be attributed to nitude as the increased consumption of improve economic well-being globally.
double-cropping of soybeans with corn soybeans in China after 2004, thereby
and wheat, so the increase in the agri neutralizing potential price hikes. GMOs and the Environment
cultural footprint was much smaller. Using the same methodologies that The increase in agricultural produc
The increase in agricultural produc assessed the impact of biofuel on food tivity and reduction in toxic pesticide
tion due to the introduction of GMOs prices, it was found that GMOs have use associated with GM varieties can
has significantly affected food prices. reduced food prices by the same order make a difference in addressing the
The growing population and growing of magnitude (25% or more for corn challenges of climate change. Higher
incomes in the developing world has and soybeans). Furthermore, studies yields mean that less land is required
Giannini Foundation of Agricultural Economics • University of California 7than other foods. Furthermore, there is
Figure 1. Contractions in Agricultural Biotechnology R&D Associated with European
GMO Restrictions of 1999 evidence that GM food improves both
human and environmental well-being.
350
Labeling of GMOs will make GM
Publications Regulatory Filings food less attractive to some consumers,
300
Field Trials Innovations in R&D reduce demand, and make investment in
Projections 2003-04
250 this technology less appealing. We have
the experience of the European ban of
200 GM varieties in 1999, which was asso
Annual Count
ciated with significant contraction in
150
investment and patenting of GM traits.
As Figure 1 shows, publica
100
tions, innovations, and investment
50 in GMOs were growing throughout
the 1990s but peaked just before
0 the ban was implemented. This has
9
7
1
3
7
1
3
5
9
0
8
2
4
8
2
4
6
0
slowed advancement of the technol
200
199
198
199
199
199
200
199
199
198
199
199
200
200
198
199
200
199
Source: Graff, G. et al. 2009 “The Contraction of Agbiotech Product Quality Innovation.” ogy in an era when we need it most.
Nature Biotechnology 27(8). Introduction of policies that require
for agricultural production; thus, the technology is the key to keeping up labeling and add any other obstacles
increase in output due to GMOs has and improving welfare. Of course, bio to the evolution of GMOs may have
already contributed to reduced con technology is one of many agricultural a similar effect. Voters will have to
version of non-agricultural land for technologies that can play a pivotal role ask whether the potential gain associ
agricultural use, e.g., deforestation. in our future. Integrating agricultural ated with labeling is worth the cost
Furthermore, through soil carbon biotechnology with ecological farming associated with technological stagna
sequestration and the reduction in use as well as precision agriculture can lead tion and the resulting losses in eco
of inputs, production with GMOs has to a much stronger and more stable nomic and environmental welfare.
contributed to significant decreases system that will allow more sound
Suggested Citation:
in greenhouse gas emissions. utilization of agricultural resources
Zilberman, D. 2012. "The Logic and
The ability of transgenic technolo with less environmental damages.
Consequences of Labeling GMOs.” ARE
gies to identify traits that can address Many may be concerned that tech Update 15(5):5-8. University of California
disease and other issues suggests that nological developments are frequently Giannini Foundation of Agricultural
these technologies can play a major subject to human error, and thus reas Economics.
role in adaptation to climate change sessment and improvement of these
and development of crop systems that technologies are essential. Yet, stud David Zilberman is a professor in the Department
respond to changes in weather condi ies suggest that while there are cases of Agricultural and Resource Economics, at the
tions. Thus, transgenic technologies of under-regulation, there are also University of California, Berkeley. He can be
have contributed and can contribute frequent cases of over-regulation that contacted by e-mail at zilber11@berkeley.edu.
even further to improved economic may hamper technological change and
and environmental well being. innovation. Thus, design of efficient For further information,
GMOs are a new technology and regimes for biotechnology is a challenge. the author recommends:
they have their own limitations. Obvi
ously, pest resistance has and will Conclusion “Impact of Genetically Engineered
Crops on Farm Sustainability in the
continue to emerge with the use of The main question is not whether con United States.” National Research
GM varieties. The only way to sustain sumers should have a choice regarding Council Report 1 (2010): 270.
and improve agricultural productivity their own consumption of GMOs, but
is to continue to conduct research and rather whether GM foods will be the Qaim, M. “The Economics of Geneti
cally Modified Crops.” Annual Review
stay ahead of emerging challenges. norm and non-GM food labeled, or vice
of Resource Economics 1(2009): 665
Sustainability is not a state of nir versa. Mainstream scientific research 694.
vana; rather, evolution occurs and findings have not found GM food to be
advanced scientific knowledge and riskier to health or the environment
8 Giannini Foundation of Agricultural Economics • University of CaliforniaThe Alpaca Bubble Revisited
Tina L. Saitone and Richard J. Sexton
I
n the January/February 2006 issue “factor price equalization theorem”
of ARE Update, we published an indicated that, in equilibrium, prices
We revisit the U.S. alpaca industry six article on the burgeoning U.S. alpaca for live alpacas in the United States
years after having conducted a study industry entitled “Do Alpacas Rep and Peru should equalize apart from
suggesting the industry was in the some minor differences due to fiber
resent the Latest Speculative Bubble
midst of an unsustainable speculative
in Agriculture?” The research was quality and fiber shipping costs.
bubble. We show that in the aftermath
motivated by the dramatic growth of That point was important to our
the bubble has largely burst. We also
offer some lessons intended to prevent the industry in the United States, the argument because industry proponents
the recurrence of such bubbles in curious marketing practices (such claimed that the market for alpaca
agriculture. as advertising the benefits of rais fiber was poised to grow rapidly. Thus,
ing alpacas on cable television), and the case could be made that the high
the remarkable prices paid for alpaca alpaca prices observed at the time of
stock. We reported rapidly escalat our study were the product of rational
ing prices at several alpaca auctions, investments in a high-growth industry.
with mean auction prices in 2004 of Our analysis showed that an annual
$26,000 and $31,000 for the two major sustained growth rate in fiber prices
breeds, Huacaya and Suri, respectively. of at least 20% was needed to justify
Our analysis strongly suggested the live-animal prices observed at the
that these prices were unsustainable time. The demand growth needed to
and that alpacas represented the latest sustain such a rate of price increase
example of a speculative bubble in would be almost unprecedented for
agriculture. The economic basis for an agricultural product. Moreover,
our conclusion was rather straightfor the potential for fiber exports from
ward. First, fiber, the single marketable the dominant Peruvian herd and pro
product produced by an alpaca, was in duction from a rapidly growing U.S.
most cases valued at less than the vari herd meant that supply could respond
able costs of maintaining an alpaca. to rising prices to preclude dramatic
Second, alpacas are native to Peru, and sustained price increases.
which is home to the world’s larg
est alpaca herd of roughly 3.5 million The Story Six Years Later
animals. In contrast, by 2009 there Our purpose in this paper is to exam
were about 150,000 registered alpacas ine what has happened in the inter
in the United States. Although pre vening years since this study was
Prices for alpacas sold at auction between
cise statistics on the value of alpacas published and to distill the lessons that
2005 through 2011 declined each year by
several thousand dollars, with the largest in Peru were difficult to obtain, nev can be learned. We recently gathered
annual decline of $8,000 occurring between ertheless it was abundantly clear auction price data (1,493 observations)
2007 and 2008. that Peruvian alpacas sold for, at for alpacas, similar to those analyzed
most, a few hundred U.S. dollars. in the original study, for the interven
Trade in live animals between the ing years since that study. The prices
U.S. and Peru was prohibited because from alpaca auctions between 2005
of concerns about animal disease and 2011 are likely not representa
transmission. But there were and still tive of all alpaca prices because the
are no barriers to trade for alpaca sampled auctions tend to attract the
fiber. Thus, a straightforward appli alpacas considered to be of the high
cation of what economists call the est quality. The reported prices also
Giannini Foundation of Agricultural Economics • University of California 9per animal in our 2006 study. Those
Figure 1. Average Decline in Alpaca Price, Relative to 2005
costs are likely modestly higher today.
0
2006 2007 2008 2009 2010 2011 An informal examination of fiber
sales offers on the Internet in a variety
-5,000 of locations revealed a wide range of
Average Auction Price Difference Relative to 2005 ($)
offered sales prices, with $10–12 per
-10,000 lb. roughly representing the upper end
of the sales price distribution. Thus, if
-15,000
the entire 6.5 lbs. of fleece yielded by
a typical alpaca could be sold for this
price (an unlikely proposition), its mar
-20,000
ketable product would be worth at most
$65–78 per year, less than half the con
-25,000 servatively estimated maintenance costs.
-30,000
Lessons to Be Learned
History suggests that speculative
-35,000
bubbles come along relatively regularly
in agriculture, and they can cause
overstate actual sales values because while the female price declined by a much financial hardship to those who
owners can set a minimum reserve factor of 3.5—leading to a near con get caught up in them. In a longer
price in the auction; if no price is vergence of male and female prices by version of our ARE Update paper (see
offered above the reserve, the auction 2011. The uptick in male prices in 2007 the Further Reading box), we provide
records a sale at the reserve price to is due largely to two sales recorded a brief history of such bubbles and
the original owner. Nonetheless, trends in excess of $200,000 in that year. some telltale warning signs. Bubbles
in prices in these auctions will reflect If indeed the 2011 figures repre are common for products that can be
overall trends in the alpaca market. sent actual sales and not just pro produced on relatively small parcels.
Our approach was to specify a spective sellers’ hopes in the form In addition to alpacas, ostriches,
simple statistical model that expressed of reserve prices, then they indicate chinchillas, Shetland ponies, emus,
an alpaca’s price as a function of its type that although most of the air has Berkshire hogs, and Merino sheep
(Huacaya or Suri), gender, the specific escaped from the alpaca bubble, some are examples of livestock that have
auction at which the animal was sold remains. Purchases at these prices experienced speculative bubbles.
(Alpaca Owners and Breeders Asso must reflect the actions of those who The bubbles are also marked by a
ciation, Breeder’s Choice, America’s hold out hope for the industry’s recov paucity of outside, objective informa
Choice, and Futurity), and the year in ery and are acquiring what they con tion and a group of investors who com
which the animal was sold. The primary sider to be prime breeding stock. municate primarily among themselves.
focus of our interest was the effect of A poignant story can also be told For example, when we first began work
the sales year on auction price. All of from perusing commercial websites on the alpaca industry, we were sur
these results were statistically signifi such as Craigslist. Here, one can find prised to find no objective economic
cant at the 90% level or greater and are offers to give away alpacas or to sell studies, even though the U.S. alpaca
summarized in the chart in figure 1. entire herds for a tiny fraction of what herd was growing rapidly and was
Figure 1 shows that prices declined a single animal would have fetched present to a degree in every state.
in every year (relative to the base year several years ago. For an owner who Bubbles are also characterized by
of 2005). The decline in price in each doesn’t attach an intrinsic value to the absence of what economists who
year is several thousand dollars, with owning alpacas as pets or “rural lawn study the phenomena refer to as the
the largest annual decline of $8,000 mowers,” the offer to give them away “smart money,” i.e., sophisticated inves
occurring between 2007 and 2008. is economically rational, given that tors. In agriculture, among the “smart
Figure 2 shows the mean annual male their marketable fiber is typically worth money” investors would be experi
and female alpaca price in our dataset. less than their maintenance cost. For enced agriculturalists or agribusiness
The figure shows the male price fell example, we reported annual mainte firms, none of whom became involved
by a factor of five between 2005–2011, nance costs in the range of $169–$308 in the alpaca industry. Inability to
10 Giannini Foundation of Agricultural Economics • University of California“short” an asset also makes it more
Figure 2. Average Auction Prices for Male and Female Alpacas, 2005–2011
vulnerable to a speculative bubble
because informed investors have no 80,000
way to arbitrage a price that is objec 70,000
Average Auction Price ($)
tively too high through short sales. Females Males
60,000
Our own experience in the after
math of conducting the first alpaca 50,000
study is also instructive. Not surpris 40,000
ingly, it caused a considerable stir
among alpaca owners but there was 30,000
little attempt to address the economic 20,000
content of our work. Instead, various
10,000
“theories” abounded that served in the
minds of many to debunk our work 0
2005 2006 2007 2008 2009 2010 2011
and discredit us. For example, one
of us was claimed to be a disgruntled themselves, and they were driven to
alpaca inseminator from Florida. In find whatever devices they could to For further reading,
another case we were asserted to be discredit the work in their minds and the authors recommend:
UC Davis undergraduate students who restore consonance among their beliefs. Saitone, T.L. and R.J. Sexton. “Alpaca
conducted the study as part of a mar Had more heeded the warnings early Lies? Speculative Bubbles in Agricul
keting class. Yet another claim is that on, they could have salvaged much of ture: Why they Happen and How to
our study was UC Davis’ revenge for their investments but of course, in the Recognize Them.” Review of Agricul
the Alpaca Registry no longer using UC process of doing so they would have tural Economics 29(2007): 286-305.
Davis to conduct alpaca DNA tests. collapsed the bubble even sooner.
An alternative form of critique was Finally, as we noted, there is some
to focus on a single fact or assumption evidence from the auction sales that a
employed in the study, such as the price bit of air remains in the bubble. The
of a bale of hay, argue that it was incor harsh reality is that, whereas some may
rect, and thereby claim that the entire want to hold alpacas as pets or lawn
study and its conclusions could be sum mowers, an animal should not fetch
marily dismissed. Because there was more than a few hundred dollars, and
considerable variability reported in pro they should not be held as investments.
duction costs and fiber prices, we erred
Suggested Citation:
on the side of conservatism throughout
the process of conducting the original Saitone, T.L. and R.J. Sexton. 2012. "The
Alpaca Bubble Revisted." ARE Update
study, conducting simulations for a 15(5):9-11. University of California
wide range of values for fiber, alpaca Giannini Foundation of Agricultural
costs of production, and discount Economics.
rates. The inescapable conclusion
was that no set of market conditions
could sustain the alpaca prices pre Tina L. Saitone is a post-doctoral scholar in
vailing at the time. Some of this inter Agricultural and Resource Economics (ARE) at
change among industry participants, UC Davis. She can be reached at saitone@primal.
ucdavis.edu. Richard J. Sexton is professor and
now several years old, is preserved on
department chair in ARE at UC Davis. He can be
this website: www.alpacanation.com/ reached at rich@primal.ucdavis.edu.
forum/topic.asp?TOPIC_ID=2327.
Such reactions are readily predicted
by the theory of cognitive dissonance
from psychology. Our study’s conclu
sions were dramatically at odds with
beliefs alpaca owners held among
Giannini Foundation of Agricultural Economics • University of California 11Department of Agricultural and Resource Economics
UC Davis
One Shields Avenue
Davis CA 95616
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Agricultural and ARE Update is published six times per year by the
Resource Economics Giannini Foundation of Agricultural Economics, University of California.
UPDATE
Domestic subscriptions are available free of charge to interested parties.
Co-Editors To subscribe to ARE Update by mail contact:
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Sofia Berto Villas-Boas
Giannini Foundation of Agricultural Economics
David Zilberman
Department of Agricultural and Resource Economics
Managing Editor University of California
and Desktop Publisher One Shields Avenue, Davis, CA 95616
E-mail: julie@primal.ucdavis.edu
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